We recently discussed the settlement Warner Chilcott reached with the Department of Justice, which also announced criminal charges against the former president of the company’s pharmaceutical division. This former executive, however, is not the only individual swept into the criminal charges, as three lower level Warner Chilcott sales force members and a physician who served as a speaker for the company have previously been charged or pled guilty. The details in the charging materials may provide insight into the government’s post-Yates memo approach to targeting and using individuals to build a criminal case against corporations.
Yesterday, the DOJ announced a settlement with the U.S. sales subsidiary of Warner Chilcott PLC. The company has agreed to plead guilty to criminal charges and to pay $125 million to resolve both criminal and civil liability. At the same time, the DOJ announced that it had indicted a former president of Warner Chilcott’s pharmaceutical division with conspiracy to violate the Anti-Kickback Statute. As the DOJ emphasized in its press release, the individual criminal charges in this matter represent an effort to hold “responsible individuals accountable” in enforcement actions. The DOJ’s pursuit of individual criminal liability in this case represents a high profile application of the DOJ’s intent to focus on the liability of individual corporate employees, recently set forth in the Yates memo (as further discussed here). The parallel civil settlement also provides insight into potential future enforcement activities around manufacturer support of prior authorization programs.
Last week, the United States Department of Justice and Tuomey Healthcare System announced a settlement of the $237 million verdict against Tuomey. As we previously reported (see here, here, and here), the suit involved allegations that Tuomey violated the Stark Law and, after a trial by jury, the district court entered judgment in October 2013 for $237,454,195 plus post-judgment interest. The Fourth Circuit affirmed the judgment in July 2015. According to DOJ’s and Tuomey’s press releases last week, Tuomey will pay the United States $72.4 million and will become part of Palmetto Health, which is a multi-hospital healthcare system based in Columbia, South Carolina.
It appears from related court filings that, absent a settlement involving a substantial reduction in the award, Tuomey was prepared to file for bankruptcy. The United States had recently requested a delay in payment of the $40 million appeal bond posted by Tuomey, stating that “Tuomey has informed the United States that if a settlement is not reached, it intends to file for protection in the Bankruptcy Court.”
The DOJ press release can be found here.
The Fourth Circuit has agreed to hear an interlocutory appeal from a case in the District of South Carolina (discussed here), regarding the now hotly-debated role of statistical sampling in establishing liability and damages in FCA cases. See United States ex rel. Michaels v. Agape Senior Cmty., Inc., No. 15-238 (4th Cir. Sept. 29, 2015). The Fourth Circuit will be the first appellate court to weigh in on the issue. The district court initially ruled that the relator could not use sampling for purposes of extrapolating damages, but it ultimately certified the question for interlocutory appeal, alongside a second question as to whether the government has unfettered veto authority over settlements resolving non-intervened qui tam suits. As we discussed here, the government and the defendant in the qui tam suit both filed briefs opposing appellate review of the district court’s ruling on statistical sampling, while the relator urged the Fourth Circuit to rule on the question. We will continue to monitor and provide updates on the appeal.
A copy of the Fourth Circuit’s order can be found here.
As we previously reported here, a district court in South Carolina recently certified to the Fourth Circuit two questions for interlocutory appeal: 1) whether courts can review and reconsider the government’s rejection of a settlement in a non-intervened qui tam suit, and 2) whether and when statistical sampling can be used to prove liability and damages in FCA actions. Both the government (which did not intervene in this case, but which has opposed settlement) and the defendant hospice chain, Agape, recently filed briefs urging the Fourth Circuit to pass on the statistical sampling question. The government also argued that the Fourth Circuit should adopt the majority rule recognizing the government as having unfettered veto authority.
A judge in the District of South Carolina has invited the Fourth Circuit to become the first appellate court to rule on when statistical sampling can appropriately be used to establish FCA liability. The district court also certified for interlocutory appeal the question of whether the Attorney General’s decision in a non-intervened qui tam suit to reject a proposed settlement is subject to judicial review, an issue on which the circuit courts are split. See United States ex rel. Michaels v. Agape Senior Cmty., Inc., No. 12-3466 (D.S.C. June 25, 2015). Both issues became intertwined in this case when the government rejected a $2.5 million settlement agreed to by the defendants and the relator, citing its own extrapolated calculations (based on an undisclosed statistical sampling) as the basis for concluding that damages to the government were $25 million, and that the settlement was therefore inadequate. The resolution of these questions has the potential to significantly impact bargaining dynamics when investigating and negotiating resolutions to qui tam suits.
As we have written about on this blog previously, Lance Armstrong’s former teammate, Floyd Landis, filed a qui tam suit alleging that Armstrong’s and his team’s use of performance enhancing drugs and practices violated their sponsorship agreement with the United States Postal Service and thereby defrauded the government of approximately $40 million over six years. Landis brought suit against Armstrong individually, as well as Armstrong’s management company, Tailwind Sports, and his talent agent, Capital Sports & Entertainment Holdings (CSE). The government joined in the claims against Armstrong and Tailwind Sports in February 2013, but declined to intervene against CSE.
Landis and CSE subsequently negotiated a settlement, which was presented to DOJ for approval. However, after DOJ declined to approve the settlement – or to explain why it would not approve the settlement – CSE moved the Court to accept the settlement notwithstanding DOJ’s opposition. However, on April 9, the district court denied the motion. The court held that the False Claims Act affords DOJ essentially unfettered power to veto settlements, even in cases in which it has not intervened. While the D.C. Circuit has not expressly ruled on whether the government’s right to veto a settlement in a non-intervened case is unfettered, several appellate courts that have ruled on the issue have held that it is. Both the Fifth and Sixth Circuits have held explicitly that settlements in non-intervened cases are subject to government approval. See, e.g., Searcy v. Philips Elecs. N. Am. Corp., 117 F.3d 154, 159-60 (5th Cir. 1997) (cited by the District Court here, and reasoning that the government is allowed to “stand on the sidelines and veto a voluntary settlement”). The Ninth Circuit, by contrast, has held that the government’s decision to veto a settlement is reviewable when the government has declined to intervene. See, United States ex rel. Killingsworth v. Northrop Corp., 25 F.3d 715 (9th Cir. 1994) (reasoning that the government’s settlement veto power exists only while the case is under seal, prior to an intervention decision).
In its opposition to the motion, the government noted that it is willing to continue negotiations to reach settlement terms on which all parties agree. For now, however, Landis and CSE must continue their litigation.
Posted by Scott Stein and Allison Reimann
A recent case provides an interesting example of one company citing a business partner’s settlement of an FCA case, without admitting liability, as a basis for terminating the parties’ contract for cause. CareMed Pharmaceutical Services (“Caremed”), a specialty pharmacy, filed a complaint against pharmacy benefit managers Express Scripts, Inc. and MedCo Health Services, Inc. (collectively, “Express Scripts”). The complaint alleges that Express Scripts improperly cited CareMed’s recent settlement of a qui tam action as a pretext to cancel CareMed’s participation agreement with Express Scripts for the purpose of diverting CareMed’s business to Express Scripts’s own specialty pharmacy. CareMed asserts claims under federal and state antitrust law, ERISA, and common law, including a breach of contract claim.
According to government press releases, a whistleblower filed a qui tam complaint against CareMed in 2012 under the federal False Claims Act and the New York False Claims Act alleging that CareMed made false statements in securing prior authorization for the coverage of certain drugs and submitted false claims for payment for prescriptions that were not received by patients. In early October 2014, following a government investigation, CareMed entered into a $10 million settlement agreement with the federal government and State of New York. In connection with the settlement, CareMed made limited admissions, including that some CareMed representatives falsely stated that they were calling from physician offices in obtaining prior authorizations for Medicare beneficiaries; that CareMed failed to adequately oversee and train responsible staff; and that CareMed had inadequate procedures and auditing processes in place relating to certain prescription drug claims submitted to Medicare and Medicaid. However, no criminal charges were brought against CareMed, and CareMed made no admissions of fraud or intent to deceive in connection with the settlement.
CareMed claims that soon after it notified Express Scripts of the settlement, Express Scripts notified CareMed that it was terminating the participation agreement. According to CareMed, the claimed bases for the termination were that CareMed’s owner pled guilty to fraud and that CareMed failed to notify Express Scripts of the plea – both of which CareMed claims are untrue. CareMed promptly informed Express Scripts that there had been no guilty plea. However, Express Scripts allegedly issued CareMed a second termination letter based on the new justification that CareMed’s admissions in connection with the settlement established that it had violated Express Scripts’s Network Provider Manual, which, among other things, requires all information submitted to Express Scripts to be accurate and complete, prohibits providers from knowingly making false claims, and obligates providers to comply with the False Claims Act. CareMed claims these grounds are baseless, reflect selective enforcement of the Manual against CareMed, and are a pretext to divert CareMed’s customers to Express Scripts’s own specialty pharmacy. CareMed claims that termination of the agreement will cause CareMed to lose approximately $100 million in annual revenues overnight and force it to close its doors.
Along with the complaint, CareMed also filed a motion for a temporary restraining order, which the court denied. The court reasoned that at this stage of the proceedings, it could not predict which party was likely to prevail, and that CareMed had failed to show that any harm from the termination could not be addressed with an award of money damages. While this suit is in the very early stages and the truth of CareMed’s allegations has yet to be proven, the lawsuit is notable because it highlights the collateral consequences that the terms of an FCA settlement can have even where the settlement disclaims liability.
Posted by Nicole M. Ryan and Ryan G. Fant
In United States ex. rel. Lisitza v. Par Pharmaceutical Cos., Inc., No. 06 C 06131 (N.D. Ill. July 31, 2014), a federal district court in Illinois rejected a drug manufacturer’s argument that the doctrine of res judicata barred an FCA suit based on many of the same underlying false claims involved in a previously-settled FCA suit. The Court held that res judicata did not apply because the fraudulent schemes alleged in each case were different and there were elements of damage available in the second suit that were not resolved by the first suit.
In 2005, Ven-A-Care, a Florida-based pharmacy, in its capacity as relator, sued Par Pharmaceutical Companies, Inc. (“Par”) and other generic drug manufactures under the FCA, with the case ultimately becoming consolidated as part of a much larger multidistrict litigation, In Re Ven-A-Care Cases, No. 06 CV 11337 (D. Mass.). The suit alleged that Par had manipulated and falsely reported pricing benchmarks so as to cause Medicaid to set higher reimbursement amounts for its drugs than would have been set if Par had published accurate benchmarks. Par ultimately settled these claims in 2011 for $154 million, and the case against it was dismissed.
In 2006, another relator, Bernard Lisitza, filed an FCA suit against Par alleging that Par had engaged in an illegal prescription-switching scheme that substituted its own higher-priced products in place of the specific drug that the doctor had prescribed in order to evade Medicaid price limits on generic drugs.
After the settlement and dismissal of the Ven-A-Care case, Par asserted the affirmative defense of res judicata in the Lisitza case. Par argued that res judicata applied because both lawsuits accused Par of “taking advantage of increased Medicaid reimbursements,” involving the “very same false claims for the very same prescriptions.” Although the Court acknowledged that some of the claims submitted were the same in both cases, it rejected the application of res judicata. It found that were very few common facts between the two complaints regarding “what Par allegedly did—how it defrauded the government.” The Ven-A-Care case accused Par of manipulating price benchmarks, whereas the Lisitza complaint accused it of a prescription-switching scheme. As a result of this difference, the Court determined that the “material factual allegations in the two complaints are simply not the same except at an extreme level of generality” and thus were insufficient to establish res judicata. In particular, the Court noted that in the original case, the damages at issue were the difference between what Medicaid paid and Par’s “inflated” prices, while in the second case, the court held, “the damages might be the entire amount of the reimbursement (less any portion already paid as damages), if the plaintiffs prove that claims for the particular drug forms and dosages at issue should not have been submitted at all because they were not authorized by a physician or were not the most cost-efficient option.” “Par should not have to pay the same damages twice,” the court continued, “but if the plaintiffs prove liability in this case, they will be entitled to damages for false claims that are unique to this case as well as whatever additional damages they can prove are owing on the false claims that were also at issue in Ven-A-Care.”
The Court also rejected Par’s argument that the scope of the release in the Ven-A-Care case covered all false claims submitted within the applicable time period and thus was broad enough to bar the Lisitza complaint. The Court held that the release encompassed only claims “based upon or arising out of” the conduct alleged in the Ven-A-Care complaint regarding false reporting of pricing benchmarks and therefore did not apply in the Lisitza case.
A copy of the opinion can be found here.
Last week, in Fresenius Medical Care Holdings, Inc. v. United States, No. 13-2144, __ F. 3d __ (1st Cir. Aug. 13, 2014), the Court of Appeals for the First Circuit affirmed a district court opinion that had allowed a defendant in an FCA action to deduct for federal income tax purposes amounts in excess of both single damages and relator payments. This affirmance is of considerable import because, in a well-reasoned opinion, the First Circuit expressly rejected the government’s “Catch-22” argument that the ability of a taxpayer to deduct at least a portion of this excess was precluded by the absence of an agreement between the parties.
For some time, the law had been relatively clear that, for federal income tax purposes, a taxpayer could deduct amounts in excess of single damages to the extent that the taxpayer could prove the excess represented compensatory rather than punitive damages. See, e.g., Cook County v. United States ex rel. Chandler, 538 U.S. 119, 130-31 (2003). However, the Internal Revenue Service has traditionally taken the position that, at least apart from amounts paid the relator, a taxpayer cannot carry its burden of proof as to the compensatory nature of any part of the excess absent agreement with the government on this point. This was a Catch-22 argument because, in settling FCA cases, the Department of Justice procedures generally proscribe any agreement as to the deductibility of amounts paid.
The First Circuit would have none of the government’s argument. Stating that, in tax matters, “[s]ubstance matters,” the court refused to give the government “a whip hand of unprecedented ferocity” that would enable it to “always defeat deductibility by the simple expedient of refusing to agree . . . to the tax characterization of a payment.” The Court then held that, so long as a taxpayer like the one before it had proven that a portion of the excess was compensatory, that portion was deductible.
While important and helpful, the First Circuit opinion is not a panacea. First, a Ninth Circuit opinion distinguished by the court, Talley Industries Inc. v. Commissioner, 116 F.3d 382 (9th Cir. 1997), arguably is to the contrary – a point the First Circuit expressly conceded. Second, the First Circuit’s opinion reiterates that the burden lies with the taxpayer to establish the compensatory nature of the excess. Third, the First Circuit said that one argument by the government – that reductions to the government’s original compensatory and punitive claims in a settlement should be done proportionally rather than first to punitive claims – had a “patina of plausibility.” (The court did not need to contend with this argument in the case before it because the government had raised it too late in the proceedings.)
Thus, while the First Circuit’s decision in Fresenius is very good news, careful planning and analysis are still necessary to maximize the deductibility of FCA payments for federal income tax purposes.