According to an article in yesterday’s Bloomberg News, a federal district judge has rejected a proposed guilty plea by Orthofix International NV in connection with a long-standing civil and criminal investigation of alleged false claims relating to the alleged payment of kickbacks to doctors and off-label use of bone-repair products.
Orthofix previously agreed to pay a $34.2 million settlement of civil qui tam claims based on alleged kickbacks to physicians, and five individual Orthofix employees have pleaded guilty to various criminal violations, including violations of the Anti-Kickback Statute. According to the article, Orthofix was prepared to plead guilty to a felony count of obstructing a government audit and to pay a $7.8 million fine. But Judge William Young of the District of Massachusetts rejected the proposed plea on the ground that it unduly restricted his sentencing power, stating that he had “extreme unease of treating corporate criminal conduct like a civil case.”
It remains unclear what impact if any the court’s rejection of the criminal plea will have on the proposed civil settlement, or how the parties plan to address the Court’s concerns. But the development is noteworthy in light of the controversy earlier this year regarding another district court’s rejection of a civil settlement between the SEC and a defendant based on concerns that it was too lenient. It remains to be seen whether Judge Young’s rejection of the proposed Orthofix settlement is an aberration, or evidence that the willingness of judges to take a closer look at settlements of corporate fraud allegations in the securities context may be extending to other courts and contexts.
Last week, the federal district judge presiding over the AWP litigation invited relators Linnette Sun and Greg Hamilton to move to reopen the judgment in another, related case that had been previously settled and closed. In re Pharm. Indus. Average Wholesale Price Litig., 2012 WL 3263922 (D. Mass. Aug. 7, 2012). The order requires some parsing of procedural history. A few months earlier, the court granted defendant Baxter Healthcare’s motion for partial summary judgment of Sun and Hamilton’s claims based upon a broadly worded settlement agreement in another matter brought by a different relator (Ven-A-Care of the Florida Keys). In re Pharm. Indus. Average Wholesale Price Litig., 2012 WL 366599 (D. Mass. Jan. 26, 2012). Although Ven-A-Care had sued ten years before Sun and Hamilton, the cases concerned similar allegations—that Baxter fraudulently inflated the prices of drugs and caused overpayments—and the court thus read the Ven-A-Care settlement’s release to cover, and bar, Sun and Hamilton’s cause of action. In response to concerns about construing releases too broadly, the court placed the onus on the government to police such risks through its statutory authority to withhold consent on expansive settlements. Id. at *3-4 (citing 31 U.S.C. § 3730(b)(1)).
Fast forward a couple of months and the picture muddies. Sun and Hamilton moved for reconsideration, arguing that they were entitled to a fairness hearing on the Ven-A-Care settlement that apparently covered their claims, and to a share of the proceeds. The government, for its part, maintained that it did not understand or intend the Ven-A-Care release to cover Sun and Hamilton’s suit, into which it had declined to intervene. Caught in this “procedural pretzel,” 2012 WL 3263922 at *5, the court maneuvered as follows. First, it held that, by consenting to the Ven-A-Care settlement, the government had “effectively settled” Sun and Hamilton’s claims against Baxter and thus pursued an “alternate remedy” for those claims despite declining to intervene. Id. at *1-4 (citing 31 U.S.C. § 3730(c)(5)). Relying primarily on authority from the Sixth and Ninth Circuits, the court reasoned that a broad reading of § 3730(c)(5) to include the settlement was consistent with FCA’s goal of encouraging relators and would avoid the potential for government abuse. Id. Next, the court found that, because Sun and Hamilton’s rights do not change when the government pursues an “alternate remedy,” the FCA requires that they receive a hearing to determine the fairness of the Ven-A-Care settlement that had extinguished their claims. Id.; 31 U.S.C. § 3730(c)(2)(B). But, because that settlement had been approved and judgment entered, the court was forced to suggest an atypical path—that relators move to reopen the Ven-A-Care judgment (to which they were not parties) pursuant to Fed. R. Civ. P. 60(b)(6). Id. at *5.
In the end, this decision may prove inconsequential—the first-to-file bar lurks and the court noted that it will ultimately “have to determine whether it has jurisdiction.” Id. at *5. But, especially for now, it signals a serious solicitousness for the relators and a willingness to pack much (perhaps too much) into § 3730(c)(5)’s “alternate remedy” language. That could carry significant implications for FCA defendants around the country, who are routinely subject to overlapping FCA claims, because it gives fodder to relators in other cases to wreak havoc on completed settlements and to disturb what the government and the parties all think has been … well, settled.
Posted by Kristin Graham Koehler and Amy Markopoulos
On July 28, 2012, McKesson Corporation entered into a national settlement with 29 states and the District of Columbia adding to the growing list of drug companies who have settled with the federal and state governments for allegations of reporting inflated prices to the databases used to set Medicaid and Medicare prices.
In April, the federal government settled the federal portion of this lawsuit for over $187 million. When announcing the federal settlement with McKesson, U.S. Attorney Paul Fishman said that over $2 billion has been recovered by state and federal governments from drug companies that have reported inflated prices to databases.
Under the July 28 settlement, McKesson agreed to pay more than $151 million to the states for violations of the false claims act. The settlements resolve a 2005 whistleblower case that charged McKesson with inflating the average wholesale prices that it reported to First Data Bank, a publisher of drug prices, by as much as 25% between Aug. 1, 2001, and Dec. 31, 2009. Medicaid relied upon First DataBank’s price lists to calculate the reimbursement amounts Medicaid paid pharmacies, physicians and clinics for prescription drugs it covered. As a result, it is alleged that State Medicaid programs had to overpay for a variety of drugs. The settlement covered more than 1,400 brand name prescription drugs, including commonly prescribed medications such as Adderall, Allegra, Ambien, Celexa, Lipitor, Neurontin, Prevacid, Prozac and Ritalin.
On May 7, the Department of Justice announced that Abbott Laboratories has agreed to plead guilty to a criminal charge of misbranding and agreed to pay $1.5 billion to resolve criminal and civil claims for alleged off-label promotion. In an agreed statement of facts, Abbott admitted that from 1998 through 2006, it maintained a specialized sales force trained to market the drug Depakote in nursing homes for the control of agitation and aggression in elderly dementia patients, despite the absence of credible scientific evidence that Depakote was safe and effective for that use. Abbott also admitted that from 2001 through 2006, it marketed Depakote in combination with atypical antipsychotic drugs to treat schizophrenia, even after its clinical trials failed to demonstrate that adding Depakote was any more effective than an atypical antipsychotic alone for that use.
The $1.5 billion settlement is the second largest ever by a pharmaceutical manufacturer. Over half ($800 million) of the amount is being paid to settle FCA claims by the federal and state governments that the challenged conduct caused false claims to be submitted as a result of the conduct underlying the criminal plea (to which Abbott stipulated) and allegations of unlawful kickbacks (which Abbott denied). Four relators will receive a total of $84 million from the federal government’s share of the settlement. The remaining $700 million consists of a criminal fine of $500 million, a forfeiture of assets of $198.5 million, and a payment of $1.5 million to the Virginia Medicaid Fraud Control Unit. Among the conditions of its probation are that Abbott must report any “probable” violation of the Food, Drug, and Cosmetics Act to the probation office, and is prohibited from compensating sales representatives for off-label sales.
Documents relating to the settlement can be found here:
We recently posted here regarding a Tenth Circuit decision affirming the government’s unilateral dismissal of a qui tam complaint – before it was served on the defendant – over the objection of the relators. In that case, the Tenth Circuit noted a circuit split regarding the standards governing dismissal pursuant to 31 U.S.C. § 3730(c)(2)(A), with the D.C. Circuit holding that the government has a virtually unfettered right to dismiss a case pursuant to that statutory provision. On April 20, 2012, the D.C. Circuit issued another decision on the subject, Océ N.V. v. Schweizer, — F.3d –, 2012 WL 1372219 (D.C. Cir. April 20, 2012), this time holding that the court’s expansive view of the government’s power pursuant to § 3730(c)(2)(A) does not extend to § 3730(c)(2)(B), which requires a district court to determine “after a hearing, [whether] the proposed settlement is fair, adequate, and reasonable under all the circumstances.”
In Océ, relator Schweizer sued her former employer for various FCA violations related to GSA contract provisions and regulations governing product pricing and country-of-origin requirements. She also sued Océ based upon the FCA’s retaliation provisions, § 3730(h). The government moved to dismiss the qui tam claims based upon a settlement agreement the government reached with Océ. The district court granted the motion over the relator’s objection.
On appeal, the relator argued that the government may not invoke § 3730(c)(2)(A) because the government never intervened in the case. The D.C. Circuit rejected that argument because the government’s intervention is necessary only if it wishes to proceed with the action. Here, however, “the government did not seek to proceed with the qui tam portion of the case; it sought to end it.” Nevertheless, the court held that “[t]he settlement agreement here falls squarely within § 3730(c)(2)(B)” because that provision covers dismissals arising from a settlement, whereas § 3730(c)(2)(A) covers unilateral dismissals. The court thus rejected the government’s position that because it may unilaterally dismiss a complaint pursuant to § 3730(c)(2)(A) – i.e., absent a hearing and judicial approval – the government may similarly dismiss a qui tam complaint without judicial approval of the settlement upon which the dismissal is based. The D.C. Circuit explained that “[t]hat the language of § 3730(c)(2)(B) leaves no space for [the government’s] interpretation” and that “allowing dismissal without judicial review of the settlement would render § 3730(c)(2)(B) a nullity and thus contravene” the canon of statutory construction disfavoring any interpretation which renders a provision meaningless or superfluous.
The D.C. Circuit also rejected Océ’s argument that § 3730(c)(2)(B) violated the separation of powers and is therefore unconstitutional, and also reversed the district court’s grant of summary judgment to Océ on the relator’s retaliation claims.
Posted by Meghan Delaney Berroya and Gordon D. Todd
The Obama Administration’s subprime lending task force, as well as U.S. Attorney’s Offices, are turning to the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”) (12 U.S.C. § 1833a) as a complement to the False Claims Act to prosecute claims arising out of the 2007-2009 financial crisis. Congress enacted FIRREA in 1989 in response to the Savings and Loan crisis, but until recently the statute has been used only sparingly. In the past year prosecutors have begun adding FIRREA allegations to FCA cases during settlement. In addition, the twenty five billion dollar settlement resolving FCA claims against a number of banks in connection with the servicing of mortgages and processing of foreclosures included FIRREA allegations.
FIRREA’s ten year statute of limitations period and the possibility of imposing civil penalties of up to one million dollars per violation and five million dollars for continuing violations make it an attractive tool for prosecutors. FIRREA may be able to reach a wide range of fraud offenses, including mail and wire fraud, bribery and embezzlement, and requires only that the government establish the right to recovery by a preponderance of the evidence. Facing challenges in bringing criminal charges associated with the subprime mortgage crisis, prosecutors view FIRREA as a potentially useful tool.
The Defense bar is pushing back. For instance, this past November, the Southern District of New York filed a civil mortgage fraud lawsuit against Allied Home Mortgage seeking penalties under the False Claims Act and FIRREA. At the end of March, Allquest Home Mortgage Corporation (formerly known as Allied Home Mortgage Corporation) and Americus Mortgage Corporation moved to dismiss the FIRREA claims on the basis that: (1) one of the provisions of the statute plead by the government, 18 U.S.C. §1006, applies only to individuals; (2) the government failed to allege an intent to defraud, and ; (3) the statute does not prohibit false or fraudulent statements to the FHA prior to July 30, 2008. View the motions to dismiss here and here. As additional defendants are forced to respond to FIRREA actions, the scrutiny it receives by the defense bar will undoubtedly increase.
At least one aspect of FIRREA has already had had a tour through the federal courts. In United States v. Winstar Corporation, 518 U.S. 839 (1996), the Supreme Court held that the United States breached contracts with defendant financial institutions when, pursuant to FIRREA, the government stripped thrifts of the ability to book “regulatory goodwill” as an asset.
On March 23, 2012, DOJ issued a press release, announcing that Lockheed Martin has agreed to pay $15,850,000 to settle allegations under the False Claims Act that the government was overcharged as a result of a seven-year pricing scheme by Tools & Metals Inc. (TMI), a subcontractor that sold perishable tools to Lockheed Martin for use on military aircraft. In the civil claims the government brought against Lockheed, the government alleged that “Lockheed Martin acted recklessly by failing to adequately oversee TMI’s charging practices and by mishandling information revealing these practices.” Because so many FCA claims are fact-driven, we reviewed the government’s complaint for details related to Lockheed Martin’s alleged recklessness.
In its complaint, the government alleged, in part, that Lockheed Martin violated three provisions of the federal False Claims Act, 31 U.S.C. §§3729(a)(1), (a)(2), and (a)(7). (The compliant, which was filed in November 2007, predates 2009 revisions to the statute that correspond to the current 31 U.S.C. §3729(a)(1)(A); 31 U.S.C. §3729(a)(1)(B); and 31 U.S.C. §3729(a)(1)(G), respectively.) All three provisions require that false claims be made “knowingly.” Under the FCA, the terms “knowing” and “knowingly” mean that “a person, with respect to information, (i) has actual knowledge of the information; (ii) acts in deliberate ignorance of the truth or falsity of the information; or (iii) acts in reckless disregard of the truth or falsity of the information.” 31 U.S.C. §3729(b)(1)(A). For each of the FCA claims, the government alleged generally that “Lockheed acted knowingly in connection with the falsity of its claims for payment, [Forward Pricing Rate Agreement] (FPRA) cost proposals, FPRA’s and certifications of final, year-end manufacturing overhead costs, among other Lockheed omissions and submissions.”
By way of background, the government alleged that Tools & Metals, Inc. (TMI) and Lockheed executed a five year, sole source, integrated supply contract for TMI to supply perishable tools (the Master Agreement). Lockheed allegedly knew that the cost of tools to be purchased by Lockheed would be passed on, in whole or in part, to the United States under Lockheed’s contracts with government agencies. TMI inflated its reported costs, which Lockheed paid. In August 2005, TMI admitted to Lockheed that TMI had intentionally inflated its costs in the total amount of $17.735 million since January 1, 1998. Lockheed’s own subsequent calculations indicated that TMI had unlawfully inflated costs to the tune of $18.9 million.
The crux of the recklessness allegation is the government’s claim that Lockheed Martin could have and should have prevented TMI’s practice of unlawfully inflating its costs but failed to do so. The Master Agreement gave Lockheed’s buyer extensive audit rights to inspect TMI’s books and records. Nonetheless, while the Master Agreement was in effect, according to the government, Lockheed agreed to a severely restricted review of TMI costs. Although Lockheed’s buyer audited TMI twice a year, the audits were allegedly predictable and superficial , with TMI allegedly pre-selecting the small, predetermined number of hard copy vendor invoices that Lockheed’s buyer reviewed. The government also alleged that occasionally TMI provided altered invoices. The government claimed that Lockheed never inspected TMI’s actual books and records or its financial reports until late 2004 – and then only when TMI and Lockheed had learned that a federal prosecutor was investigating TMI’s costs. The government also claimed that Lockheed did not contact any of TMI’ s suppliers to verify the costs that TMI had reported to Lockheed even though Lockheed had purchased perishable tools from many of these suppliers before TMI and Lockheed’s Mater Agreement. Lockheed allegedly never requested audit assistance from DoD’s Defense Contract Audit Agency. Instead, Lockheed allegedly repeatedly used the same auditor, who had a long relationship with TMI. The government also alleged that several of Lockheed’s manufacturing managers had complained about price gouging by TMI.
In sum, the government’s case for recklessness was based on Lockheed’s alleged lack of oversight of TMI, such that Lockheed allegedly knowingly created false records and presented false claims to the United States for payment or approval.
Posted by Amy Markopoulos and Kristin Graham Koehler
Companies that enter into FCA settlements may face follow on shareholder liability for breach of fiduciary duty in the settlement process itself.
On March 22, 2012, Shareholder Jordan Weinrib sued Oracle Corporation directors, including Chief Executive Officer Larry Ellison, in Delaware Chancery Court for failing to mitigate damages when the company agreed to a $200 million whistle-blower settlement with the U.S. government.
The Complaint alleges that current and previous directors violated their fiduciary duties by forcing the government into extensive litigation even though the directors knew the government’s allegations were “grounded in fact.” According to the Complaint, “[r]ather than attempt to settle all claims at that time by the institution of appropriate corporate therapeutics and the paying of what would have been a small fine, the board insisted on digging in and litigating the matter extensively.” By litigating the case, the Complaint contends, Oracle drove up the ultimate settlement price, harming taxpayers and shareholders alike.
The underlying settlement, announced in October, resolved a lawsuit brought by a former Oracle employee, claiming Oracle induced the General Services Administration to buy $1.08 billion in software from 1998 to 2006 by falsely promising the same discounts offered to favored commercial customers. The payout was the largest ever obtained by the GSA under the False Claims Act.
Weinrib said in his Complaint that he initially asked the company to investigate his claims in September 2010. However, board members “surreptitiously” abandoned an investigation and instead focused on negotiating a settlement with shareholders who had filed similar complaints in federal court in San Francisco. According to Weinrib, Oracle is attempting to “derail any inquiry into the wrongful acts.” Weinrib is seeking unspecified damages on behalf of the company.
Posted by Robert J. Conlan
In an opinion providing a view of the interactions between DOJ and a qui tam relator during the Government’s investigation of the relator’s claims, the U.S. District Court for the District of Columbia last week ordered the Government to pay the relator more than DOJ had argued the relator was entitled to receive as a share of the Government’s recovery pursuant to 31 U.S.C. 3730(d). The case, U.S. ex rel. Shea v. Verizon Communications, Inc., No. 07-111(GK) (D.D.C. Feb. 23, 2012) (reported at 2012 U.S. Dist. LEXIS 22776), is one of relatively few judicial decisions addressing relator’s-share issues in detail.
The relator in Shea filed his qui tam action in 2007, alleging that MCI/Verizon had submitted false claims for improper surcharges on invoices submitted under two telecommunications contracts with the United States. The case remained under seal for several years while the Government conducted its investigation. In February 2011, the Government intervened and settled the case. The Government and the relator were not able to agree on an appropriate relator’s share, so the parties litigated the issue.
Conducting its analysis under factors identified in the Senate Report accompanying the 1986 amendments to the FCA (S. Rep. No. 99-345, at 28 (1986)), as well as in accordance with a set of “Relator’s Share Guidelines” that DOJ issued in December 1996 (11 FCA and Qui Tam Quarterly Review, at 17-19 (Oct. 1997)), the Shea court ultimately concluded that the relator in the case before it was entitled to 20% of the settlement. The court focused much of its analysis on the extent to which the relator was involved in the Government’s investigation, and it thereby provided a fairly detailed account of the interactions between DOJ and the relator in this case. Among other things, the court noted the following:
- The relator “participated fully in all aspects of the Government’s investigation and settlement discussions with Verizon,” and estimated “he spent hundreds of hours each year on the case.”
- The relator hired a “leading” telecommunications attorney to assist in the effort.
- Early in the case, the Government requested that the relator provide a memorandum stating relator’s position on why each surcharge relator identified was prohibited under the Federal Acquisition Regulation and the contract in issue. The Government also asked the relator to rank the charges in priority for investigation. The relator and his counsel provided an “exhaustive” chart and a legal memorandum setting forth the factual and legal bases for the allegations about each surcharge. The court stated that the relator’s and his counsel’s work “sav[ed] the Government enormous resources” and “helped the Government’s auditors to identify relatively quickly the ad valorem charges in Verizon’s back-up billing data.”
- The relator, through counsel, worked with the Government to draft proposed categories for subpoenas to be issued.
- The relator, “[o]n numerous occasions, . . . discussed with the GSA auditors the methods they were using to identify illegal surcharges.”
- The relator signed a non-disclosure agreement so “he could have access to the findings of the GSA audit team and analyze their usefulness to the litigation.”
- The relator reviewed a PowerPoint presentation Verizon had used to present its defenses to the Government. The relator thereafter made a “multi-hour presentation” to DOJ addressing Verizon’s positions.
- The relator “was forced to ask [the] Court to enter an Order, which was granted, directing GSA and [DOJ] to share the Government’s underlying damages estimate with him so he could analyze the methodology used.”
While each FCA qui tam case is, of course, different, the recent opinion in <lt;EM>Shea demonstrates the significant involvement that relators can have, behind the scenes, in the Government’s investigation of qui tam allegations.
Posted by Brad Robertson and Scott Stein
A recent decision explains how one relator, in an effort to plead around a release of FCA claims in favor of his former employer, managed to plead himself right out of court. U.S. ex rel. McNulty v. Reddy Ice Holdings, Inc., No. 08-cv-12728 (E.D. Mich.), December 7, 2011 Slip Op. The relator alleged that his former employer, Arctic Glacier, and two other manufacturers of packaged ice, overcharged the government. These same companies are also currently defending a series of antitrust lawsuits alleging that they conspired to allocate markets. The increased prices resulting from the alleged market allocation form the basis of the relator’s FCA claims in this action.
The plaintiff alleged that he discovered the market allocation conspiracy while employed with Arctic Glacier, and that he was terminated after refusing to participate in the conspiracy. As part of his severance package, he signed a broad release waiving any and all claims against the company for the time period prior to the release.
The defendants moved to dismiss on public disclosure/original source grounds and for failure to plead with sufficient particularity. The relator filed a cross-motion to dismiss Arctic Glacier’s counterclaim that he breached his release agreement. In an attempt to plead around the scope of release, the relator alleged that he learned that the alleged market allocation scheme resulted in overcharges to the United States government from a discussion with a former co-worker only after his termination from Arctic Glacier and after signing the release. Accordingly, he contended that his FCA claims were outside the scope of the release. Ruling on the defendants’ motion to dismiss, the court found the allegations of the discussion with his former co-worker particularly crucial to its 12(b)(6) analysis, as “the only allegations that relate in any way to the FCA claim itself” as opposed to the market allocation conspiracy. The court dismissed the complaint, finding that the allegations of market allocation had been publicly disclosed through the antitrust lawsuits, and that the relator was not an original source of the FCA allegations, as he “was no longer employed by Arctic Glacier at the time and could not possibly have ‘observed’ or ‘learned’ this information firsthand.”
Adding insult to the relator’s injury, the court then proceeded to declare the release that the relator had been attempting to plead around unenforceable, dismissing Arctic Glacier’s counterclaim. Without evidence that the government knew of the claims prior to the execution of the release, the court held, public policy concerns barred enforcement of the agreement as to the FCA claims.