A recent decision by the Court of Appeals for the Fourth Circuit limiting the reach of the False Claims Act demonstrates how relators who pursue cases in which the government declines to intervene can end up making law that is unfavorable to the government’s enforcement of that statute.
United States ex rel. Rostholder v. Omnicare, Inc., et al., No. 12-2431, a qui tam case alleging violations of the False Claims Act (FCA), 31 U.S.C. §§ 3729, arose from a whistleblower’s claim that defendants violated certain Food and Drug Administration (FDA) safety regulations requiring that penicillin and non-penicillin drugs be packaged in complete isolation from one another. The violation of these regulations resulted in a legal presumption of penicillin cross-contamination. The relator asserted that the contaminated drugs were not eligible for reimbursement by Medicare and Medicaid and, therefore, claims presented to the government for reimbursement of these drugs were false under the FCA.
In affirming the district court’s grant of Omnicare’s motion to dismiss, the Court of Appeals focused on the specific requirement of the FCA that there be a claim that is, indeed, false. The Court noted that the statutes providing for reimbursement require that the drug in question be approved by the FDA but these statutes do not require compliance with FDA safety regulations as a precondition for reimbursement.
The Court therefore held that, while the cross-contamination might be a violation of safety regulations, it did not transform Omnicare’s requests for reimbursement into false claims. The Court observed statements in its own earlier cases that “the correction of regulatory problems is a worthy goal, but is ‘not actionable under the FCA in the absence of actual fraudulent conduct.’” (citing Mann v. Heckler & Koch. Def., Inc., 630 F.3d 338, 346 (4th Cir. 2010)). If it were “to accept relator’s theory of liability based merely on a regulatory violation,” the Court noted, “we would sanction use of the FCA as a sweeping mechanism to promote regulatory compliance, rather than a set of statutes aimed at protecting the financial resources of the government from the consequences of fraudulent conduct.” Given the FDA’s “broad powers to enforce its own regulations,” to permit the FCA to be used in this manner “could ‘short-circuit the very remedial process the Government has established to address non-compliance with those regulations.’” (citing U.S. ex rel. Wilkins v. United Health Grp., Inc., 659 F.3d 295, 310 3d Cir. 2011)).
Based on these principles, the Court of Appeals found that the relator had failed adequately to allege the existence of a false statute or fraudulent conduct, and that he could not plausibly allege that Omnicare acted with the requisite scienter when submitting the claims in question to the government.
This Court of Appeals decision could offer support for companies in highly regulated industries that face qui tam cases under the False Claims Act that arise from violations of safety regulations. In industries such as pharmaceutical manufacturing and packaging in which payment reimbursements are not expressly tied to compliance with safety rules, those companies may face regulatory enforcement for those violations, but will not also face assertions that they have also violated the False Claims Act.
Fiscal year 2013 marked the fourth consecutive year in which the Department of Justice has recovered at least $2 billion from cases involving charges of healthcare fraud. Make no mistake: these record-setting yields were no accident. The Obama Administration has prioritized busting healthcare fraudsters since it took office, and for good reason. A 2009 analysis by the AHIMA Foundation, estimated that only 3 to 10 percent of healthcare fraud was being identified. To help crackdown, Attorney General Eric Holder and Human Services Secretary Kathleen Sebelius formed the Health Care Fraud Prevention and Enforcement Action Team (HEAT) in 2009.The Government also launched www.stopmedicarefraud.org in an effort to curb ongoing fraud. From January 2009 through the end of the 2013 fiscal year, the Justice Department used the False Claims Act to recover an unprecedented $12.1 billion in federal healthcare dollars.
In this past year alone, DOJ successfully recovered $2.6 billion. More than half of that amount related to alleged false claims for drugs and medical devices under federally insurance health programs, including Medicare, Medicaid and TRICARE.
Many of the DOJ settlements involved allegations that pharmaceutical manufacturers engaged in “off-label marketing” –that is, promoting sales of their drug products for uses other than those for which the Food and Drug Administration (FDA) approved them. A notable “off label” settlement was with Abbott Laboratories, which paid $1.5 billion to resolve allegations that it illegally promoted the drug Depakote to treat agitation and aggression in elderly dementia patients and schizophrenia – neither of which was the use for which the FDA had approved the drug as safe and effective. Abbott’s settlement included $575 million in federal civil recoveries, $225 million in state civil recoveries and nearly $700 million in criminal fines and forfeitures. DOJ also reached a settlement in 2013 with biotech giant Amgen, Inc., which paid $762 million (including $598.5 million in False Claims Act recoveries) over allegations that included promotion of Aranesp, approved to treat anemia, in doses and for purposes not approved by the FDA.
DOJ settlements in the past year also addressed allegations of the manufacture and distribution of adulterated drugs. For example, in May, Ranbaxy USA Inc. paid $505 million, including $237 million in federal civil claims, $118 million in state civil claims and $150 million in criminal fines and forfeitures, due to adulterated drugs from its facilities in India.
Kickbacks were the subject of other DOJ enforcement in 2013. DOJ obtained a $237 million judgment against Tuomey Healthcare System Inc. after a four week trial. Tuomey was accused of violations\ the Stark Law (which prohibits hospitals from submitting Medicare claims for patientsreferredto the hospital by physicians with a prohibited financial relationship with the hospital) and the False Claims act. Tuomey’s appeal is pending; if upheld, the judgment will be the largest in the history of the Stark Law. DOJ’s $26.3 million settlement with Florida dermatologist Steven J. Wasserman M.D., arising from allegations of illegal kickbacks from a pathology lab, was one of the largest with an individual in the history of the False Claims Act.
DOJ Civil Division’s Consumer Protection Branch was likewise active during 2013, obtaining 16 criminal convictions and more than $1.3 billion in criminal fines, forfeitures and disgorgement under the Federal Food, Drug and Cosmetic Act.
These numbers make clear that DOJ continues to view healthcare fraud as a priority. Providers and others who operate in this highly regulated space ignore this law enforcement focus at their peril in 2014.
A qui tam case that was recently dismissed on summary judgment may signal the next front in the legal enforcement war arising from off-label use of prescription medications.
In United States ex rel. Watson v. King-Vassel et al., filed in the U.S. District Court for the Eastern District of Wisconsin, the complaint alleged that defendant Dr. Jennifer King-Vassel violated the Federal False Claims Act and Wisconsin False Claims Law by prescribing medications to a minor patient receiving Medicaid assistance for off-label purposes – that is, for purposes other than the specific ones for which the Food and Drug Administration has authorized use. The complaint also alleged that the company that employed Dr. King-Vassel was liable under a theory of respondeat superior.
On October 23, 2012, the court granted summary judgment to the defendants on the ground that there was no specific allegation that Dr. King-Vassel had submitted a Medicaid claim (or made any other false claim) specifically arising from the prescription of the medication in question, and on the ground that Dr. King-Vassel was actually an independent contractor, and not an employee, of the corporate defendant.
The Watson case was clearly resolved in the way it was because of specific deficiencies in the pleadings and proof in that case, and the court’s order dismissing the case was also highly critical of ethically questionable behavior committed by the relator as a means of creating and supporting the qui tam case. Nevertheless, the case raises the specter of a whole new series of legal actions that appear likely to arise from off-label use of FDA-approved medications.
We have written before about the massive fines paid by pharmaceutical companies for promotion of off-label use of medications. The Watson case focuses on a whole other universe of potential deep-pocket defendants: medical professionals and institutions involved in the prescription of the medications in question. Notwithstanding the dismissal of the Watson case, its operative theory – that a Medicaid claim relating to off-label use of a medication may constitute a false claim – may still be viable, though it is largely untested. Going forward, in any case in which a medical professional or institution faces civil or criminal legal action based on such a theory, counsel will have to scrutinize carefully whether the claims on which liability purports to be based truly fall within the scope of the false claims statute.
Companies should make vigorous efforts to unseal civil False Claims Act complaints against them earlier in the process in an effort to achieve better results, argues Michael K. Loucks, a former acting U.S. attorney for the District of Massachusetts who is currently a Boston-based partner in a major law firm. Loucks also co-authored a post on his firm’s website, further explaining why companies should take on an aggressive strategy to unseal complaints.
The False Claims Act permits individual whistleblowers to file cases on behalf of the United States government against those who have allegedly defrauded the government. All complaints under the act must be filed under seal for 60 days and must be served on the government rather than on the defendant. The Department of Justice has the option of intervening in the suit or declining to do so. If it formally makes either a “yes” or a “no” decision, the case is unsealed. However, the government can extend the 60-day seal for “good cause” while it is making its decision. A whistleblower can recover a substantial portion of a settlement or verdict under the FCA – up to 30 percent of the final value.
DOJ recently reported to Congress that there are 885 pending False Claims Act cases involving health care fraud alone, with about 200 prosecutors to handle all health care fraud cases. On average, a case is sealed for more than a year, and at times, much longer.
Loucks contends that unsealing complaints earlier in the process would be advantageous to the companies. The extra time would allow the companies to learn the scope of the complaints earlier, allowing time to identify potential witnesses, develop a more comprehensive defense strategy, and engage in all the discovery that civil litigants are entitled to. Increased openness would also permit companies to correct any problems that the complaint may have highlighted.
There is nothing of course objectionable about Loucks’ suggestions. But someone as experienced as him also knows how difficult it is for a company to learn of the existence of a sealed complaint filed against it in the first place, and then to successfully unseal the complaint. Not surprisingly, the New York Times suggested that Loucks was able to be so successful as a prosecutor because he was able to operate in secret through the prolonged use of sealed complaints. (The case that the New York Times called his “crowning achievement” was a $2.3 billion settlement with Pfizer that was the result of a four-year secret investigation.)
Defendants have no tried and true solution of determining whether a sealed complaint has been filed against them. Indeed, many whistleblowers often continue to work for their employers long after they have filed a sealed complaint against that employer. Often there is nothing to suggest to a company that it is a target of an investigation. Accordingly, defendants will not know to ask the court to unseal a complaint that they do not know exists.
Even if a company were to learn of the existence of a sealed complaint, dozens of published cases – some of which Loucks himself participated in – confirm that when confronted with the objections of the government, courts rarely, if ever, unseal FCA complaints. (The National Law Journal is now reporting on a novel development: Some judges, notably including some in the U.S. District Court for Massachusetts, are now unsealing many FCA cases. It appears that the judges are doing this because they want to increase the visibility of the judicial system to the public.) In general, however, the “good cause” language in the FCA is often an easy standard for prosecutors to meet and allows them to keep cases under seal – even over defendant’s objections – for extended periods of time.
We are surprised by the lack of attention on Loucks’ part to the question of whether a defendant necessarily wants a complaint to be unsealed. Loucks built his reputation on obtaining huge settlements from publicly traded health care companies. Traditionally, those entities announce the existence of a complaint on the same day that the complaint is unsealed and the matter is settled. It is not surprising that organizations would seek to keep the complaint sealed from the public eye and only unseal the complaint when the announcement of a settlement is believed to mitigate the impact of that case on that company’s share value. (For more on the role of company disclosure, see our Web site here. )
While we certainly agree that companies confronted with complaints under the False Claims Act complaints may want to consider asking courts to unseal complaints against them, there are a host of issues that must be analyzed and considered, including the effect of disclosure on the market and the practical ability to successfully argue for disclosure under the FCA and existing case law interpreting that statute.