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.
Posted by Kristin Graham Koehler and Monica Groat
On February 26, 2014, the Departments of Justice and Health and Human services released the annual Health Care Fraud and Abuse Control Program report (HCFAC Report).
In fiscal year 2013, the government recovered $4.3 billion through its health care fraud prevention and enforcement efforts, up from the $4.2 billion that was recovered in fiscal year 2012. The government also entered into many significant False Claims Act (FCA) settlements with healthcare companies and providers; nearly $325 million of the $4.3 billion recovered was paid to qui tam relators. Several of the significant recoveries involving pharmaceutical and device manufacturers, hospitals, physicians, and other healthcare companies are highlighted in the report.
According to the report, the Justice Department opened 1,083 new civil health care fraud investigations in fiscal year 2013, suggesting that FCA actions will continue to represent a significant percentage of the government’s healthcare fraud enforcement activity.
Posted by Ellyce Cooper and Patrick Kennell
In May of 2009, DOJ and HHS partnered to establish the Health Care Fraud Prevention and Enforcement Action Team (HEAT) to “focus efforts to reduce and prevent Medicare and Medicaid financial fraud through enhanced cooperation.” The latest settlement to come out of this partnership was for $26 million against a network of hospitals in Florida — Shands Healthcare. (United States of America and the State of Florida ex rel. Terry L. Myers v. Shands Healthcare, et al., No. 3:08-cv-441-J-16 (M.D. Fla. Apr. 30, 2008).
Six of Shands Healthcare’s Florida hospitals were defendants in a qui tam FCA lawsuit filed by the president of a healthcare consulting firm. The crux of Relator’s fraud based claims was that the hospitals billed Medicare, Medicaid and TRICARE “for inpatient procedures that should have been billed as outpatient services.”
The settlement will be split between federal agencies and the State of Florida, with the vast majority going to federal agencies. The realtor’s portion of the recovery has yet to be determined.
DOJ and HHS took the opportunity to again emphasize their “tireless” effort to “seek justice” in healthcare fraud cases. The DOJ Press Release providing more details on the settlement is available here. Note that since January 2009, DOJ has recovered $10.8 billion from cases involving alleged fraud against federal health care programs.
Posted by Kristin Koehler, Lauren Roth and Elizabeth Kolbe
On March 5, 2013, Par Pharmaceuticals (“Par”) became the latest pharmaceutical company to settle allegations of off-label promotion. Specifically, Par resolved criminal misbranding allegations by pleading guilty to a one-count misdemeanor violation of the Federal Food, Drug, and Cosmetic Act. The company also settled related civil allegations that its conduct violated the False Claims Act. In total, the company agreed to pay $45 million in criminal fines, forfeiture, and civil penalties.
The government alleged that Par promoted the use of Megace ES—an appetite stimulant approved for the treatment of patients with significant weight loss as a result of AIDS—for non-AIDS-related geriatric wasting. The government’s alleged evidence of misbranding included actions such as: (i) setting sales goals that exceeded the current sales trends for on-label use, (ii) creating call plans that included long-term care facilities and practitioners who treated geriatric patients, and (iii) adopting a strategy to convert physicians to Megace ES without regard for whether the physicians had been prescribing the competitor product for on- or off-label purposes. As part of this effort, Par’s marketing allegedly failed to acknowledge risks unique to elderly patients and made inaccurate or misleading comparative effectiveness claims between Megace ES and the competitor product, such as suggesting that practitioners “upgrade” their patients to Megace ES and falsely claiming that Megace ES worked faster than the competitor product.
As part of the global resolution of these claims, Par executed a Corporate Integrity Agreement (“CIA”) with the Office of the Inspector General of the Department of Health and Human Services (“OIG”) and the company accepted compliance-related obligations in its plea agreement with the Department of Justice. Among notable aspects of its CIA, Par must adopt restrictions on how incentive compensation is calculated for Megace ES sales professionals and it must institute a clawback mechanism for compensation previously paid to senior executives—two provisions that first appeared in the GlaxoSmithKline CIA (June 2012), but have not been required by OIG since then. Pharmaceutical executives, compliance professionals, and industry advisors had been waiting to see whether these requirements would be unique to GSK (which, to-date, remains the largest single settlement in history), or whether OIG would seek to impose them under other circumstances as well. Interestingly, although intervening settlements with Boehringer Ingelheim (October 2012) and Amgen Inc. (December 2012) were resolved for far higher dollar amounts than Par’s case, related CIAs had not included the incentive compensation provisions. Thus, going-forward, although it is now clear that OIG will seek to extend these provisions to other companies, predicting when it will do so remains a challenge.
The Par settlement concludes three qui tam suits filed in the District of New Jersey: U.S. ex rel. McKeen and Combs v. Par Pharmaceutical, et al., U.S. ex rel. Thompson v. Par Pharmaceutical, et al., and U.S. ex rel. Elliott & Lundstrom v. Bristol-Myers Squibb, Par Pharmaceutical, et al.
Posted by HL Rogers and Loui Itoh
Although the federal FCA specifically exempts tax fraud, New York is one of over 30 states and four municipalities that have enacted separate FCA laws. These state FCA laws generally follow the federal FCA but vary in certain specifics. For instance, New York’s state FCA law specifically exempted tax fraud, similar to the federal FCA, when it was passed in 2007. However, it was expanded in 2010 by amendments that allowed, among other things, whistleblower claims related to tax fraud. This expanded provision had not been successfully used until this month when New York announced its first FCA tax recovery. The settlement marks the first time that an FCA has been used to penalize tax fraud. Critics and experts will be watching closely to see if this recent recovery will lead to a new national trend.
On March 5, 2013, New York Attorney General Eric T. Schneiderman announced that tailor Mohanbhai “Mohan” Ramchandani and his business corporation, Mohan’s Custom Tailors, Inc., pled guilty to a ten-year tax evasion scheme and agreed to pay a $5.5 million civil settlement for claims filed under New York State’s False Claims Act. The civil claims were first raised by a whistleblower who offered insider information and will receive a $1.1 million award under the New York FCA’s relator award provisions.
The Attorney General’s investigation concluded that since 2002, Mohan and his business had knowingly failed to pay at least $1.7 million in state and local sales taxes, and that Mohan himself owed at least $256,000 in state and local personal income taxes. Mohan confessed to these charges before the New York County Supreme Court, admitting that he and his business had knowingly failed to pay nearly $2 million in taxes. In addition to the civil settlement, Mohan faces up to three years in prison for the felony charges.
Although it specifically exempted tax fraud when it was passed in 2007, New York’s FCA was expanded in 2010 by amendments authored by Attorney General Schneiderman, who was then a state senator. Schneiderman called the newly expanded state FCA, a “False Claims Act on Steroids.” The revised FCA allows a whistleblower to bring a qui tam suit against an individual or business that makes more than $ 1 million net income and defrauds the state by more than $350,000 in taxes. The relator may keep up to 25 to 30 percent of the recovery, depending on whether the government joins the suit. The question remains whether this will become a national trend and another consistent tool in state governments’ arsenals to penalize tax fraud.
Posted by Kristin Graham Koehler and Amy Markopoulos
Relators may be able to recover on claims additional to those they originally brought if the additional claims are closely related and would not otherwise have been discovered. The Eighth Circuit held on March 1, in Rille et al. v. Accenture, LLP et al., No. 11-2054 (8th Cir. 2013), that two whistleblowers were entitled to 15 percent of the federal government’s settlement with Hewlett-Packard Co. (“HP”) even though the claim was not part of the original suit they filed. The relators initially alleged that HP engaged in unlawful kickback and defective pricing schemes in its sale of computer equipment to the federal government. The United States intervened in the action and reached a $55 million settlement with HP, allocating $9 million of the settlement to the kickback scheme and $46 million to the defective pricing scheme. The district court awarded the relators a 21% share of the kickback settlement and a 15% share of the defective pricing settlement.
The government then sued to prevent the two whistleblowers from receiving part of its recovery from the qui tam action. The government claimed, inter alia, (1) that the relators’ defective pricing claim was a different defective pricing claim than the one settled, and (2) that the government learned about the conduct through HP’s voluntary disclosure and not from the relators’ qui tam. The trial court found that the government would have had no knowledge of the defective pricing scheme other than from the whistleblowers’ suit. The Eighth Circuit upheld the trial court’s decision, finding that the whistleblower’s defective pricing claim was sufficiently related to the original action to justify the relators’ share of the settlement. The dissent argued, however, that the False Claims Act allows the relator to “recover only from the proceeds of the settlement of the claim that he brought.”
Although, as here, very similar facts would be required for a whistleblower to recover on a claim different from the one actually brought, this case illustrates an expansion of the statute in favor of relators, which will likely only serve to embolden the whistleblowers’ bar.
Posted by Michael D. Mann
Kimberly A. Dunne, co-chair of Sidley’s White Collar: Government Litigation and Investigations practice in Los Angeles, participated in a Q&A session with Law360 and shared some thoughts on reform of the FCA: “Where the government — for resource or other reasons — chooses to decline quickly and defer to a whistleblower the responsibility for investigating and litigating, then the whistleblower litigation is justified for all the reasons why the government encourages whistleblowers to raise alarm bells when fraud is suspected. But when the government has spent the time and energy to investigate, I think giving a whistleblower a second bite at the apple when the mere fact of litigation gives him huge leverage to extract a settlement is unfair.” Click here to read the full article (subscription required).
This week DOJ and HHS issued a joint report on the enforcement efforts in fiscal year 2012 of the Health Care Fraud and Abuse Program. This now-sixteen year old program has recovered over $23 billion for the Medicare Trust Funds according to the report, $4.2 billion of which was recovered by the government in 2012. Notably, that represents a significant return on investment for the government, which allocated approximately $600 million to the Program in 2012. The report provides a summary of each of the civil, criminal, and administrative actions concluded in 2012 against providers, manufacturers, and other health care providers. The report also highlights the trend of increased enforcement activity and settlements of health care fraud claims in recent years, noting that over the last four years alone the government has recovered almost $15 billion as a result of the Program efforts – more than double the amount recovered during the prior four year time period. That trend will almost certainly continue; according to the report, federal prosecutors had 2,032 health care fraud criminal investigations and 1,023 civil health care fraud matters pending at the end of 2012.
Add two more settlements to the long list of federal and state suits targeting off-label promotion during recent years.
Although promotion of drugs for uses not approved by the FDA continues to be a controversial issue in the industry, the Department of Justice shows no sign of abating enforcement activity. In the last week, we saw settlement announcements in off-label cases against Pfizer (Wyeth) and Boehringer Ingelheim.
On Nov. 1, 2012, Pfizer disclosed in its third-quarter earnings announcement that it was taking a $491 million charge to settle allegations that Wyeth (which Pfizer purchased in 2009) promoted Rapamune for off-label purposes and incentivized prescriptions by providing kickbacks to doctors. The settlement will resolve a long-standing qui tam case that two former Wyeth employees brought in 2005, which the Department of Justice intervened in 2010. The suit alleged that “Wyeth trained and encouraged its sales representatives to market Rapamune”—an immunosuppressant used to prevent the body from rejecting organs after transplant—”for uses outside those listed on the FDA-approved label and to misrepresent and withhold clinical information regarding the safety and efficacy of Rapamune.”
Because Pfizer’s disclosure was based on an “agreement in principle” with the Department of Justice, no further details are available at this time.
Likewise, on October 25, 2012, the Department of Justice announced that it had reached a $95 million agreement with Boehringer Ingelheim Pharmaceuticals Inc. to resolve off-label promotion allegations concerning four of its drugs: stroke-prevention drug, Aggrenox, COPD drugs Atrovent and Combivent, and hypertension drug Micardis. According to the DOJ’s press release, “the settlement resolves allegations that Boehringer promoted Aggrenox for certain cardiovascular events such as myocardial infarction and peripheral vascular disease; that Combivent was marketed for use prior to another bronchodilator in treating COPD; and that Micardis was marketed for treatment of early diabetic kidney disease.” Additionally, the DOJ alleged that Boehringer knowingly promoted treatment with Atrovent and Combivent at doses that exceed those covered by federal healthcare programs, paid kickbacks to doctors to incentivize prescriptions, and made unsubstantiated claims about the efficacy of Aggrenox.
The settlement also concluded a qui tam suit filed by a former Boehringer sales representative in the District of Maryland in 2005. Under the settlement, the federal government obtained approximately $78.5 million and state Medicaid programs obtained $16.5 million. As part of the settlement, Boehringer agreed to enter into an expansive Corporate Integrity Agreement and the relator was awarded more than $17 million under the qui tam provisions of the False Claims Act.
Follow these links to read the DOJ’s press release and Boehringer’s settlement agreement and corporate integrity agreement:
In 2011, Maxim Healthcare entered into a settlement agreement with DOJ under which it paid $121 million plus interest to resolve civil claims arising under the False Claims Act based on allegations that it had fraudulently billed Medicaid and the VA for services not provided or at inflated rates. The company also entered into a deferred prosecution agreement and nine individuals pled guilty to criminal charges related to the same conduct. On October 29, 2012, Maxim filed suit against DOJ under the federal FOIA to obtain the details of how the government apportioned its $121 civil settlement in order to allow Maxim accurately to claim the single damages “compensatory” portion of its settlement payment as a deduction, in accordance with applicable U.S. tax laws. When DOJ enters into FCA settlements it prepares a Civil Fraud Disposition Report, in which it describes how it has calculated single damages and penalties and how it has allocated the settlement funds. As companies that have entered into civil FCA settlements with DOJ know, DOJ routinely refuses to share the specific details of those calculations and allocations with defendants, making it difficult to determine the deductible portion of the settlement for income tax purposes.
Maxim’s complaint alleges that DOJ produced a copy of the Civil Fraud Disposition Report related to its settlement in response to Maxim’s FOIA request that was redacted of the information necessary to determine the amount attributed to compensatory damages, claiming that information was protected by the government’s attorney work product and pre-deliberative process privileges. Maxim argues that the Report was drafted two weeks after the settlement was finalized and is routinely shared with the IRS, preventing the application of the claimed privileges. In response to a separate FOIA request, DOJ produced a copy of a receipt detailing the financial breakdown of one of the 34 separate payments scheduled under the settlement agreement, which Maxim argues further undercuts the government’s privilege claims. If granted, Maxim’s request that DOJ be ordered to disclose the Civil Fraud Disposition Report would significantly assist defendants seeking to fully avail themselves of the tax benefits of future FCA settlements.
The case is pending in the U.S. District Court for the District of Columbia.