EDNY Judge Brian Cogan recently addressed the False Claims Act public disclosure bar and original source rule in a decision based on a qui tam Relator’s claims that defendants marketed a test to measure the levels of a certain hormone knowing that the test was flawed. In United States ex rel. Patriarca v. Siemens Healthcare Diagnostics, Inc., Relator alleged that Medicare suffered significant losses because medical professionals ordered treatments based on the test’s inaccurate results.

The Background of PTH Testing

Judge Cogen started his opinion with a lengthy discussion of the medicine that led to Relator’s complaint. Patients with chronic kidney disease may have high levels of parathyroid hormone (“PTH”), which can lead to bone disease. Vitamin D analogs are used to treat high levels of PTH, but overdosing of these analogs can lead to serious health consequences. Accurate diagnosis of PTH levels is therefore critical.

In 1987, Nichols Diagnostics produced a PTH test, the “IRMA Test,” that was performed manually and required a several-hour long incubation period. The test was approved by the FDA and became the industry standard.

The Siemens Test, used to measure PTH levels, was a Second Generation PTH test, measuring the whole PTH molecule and large fragments of the molecule. The Siemens Test was purportedly aligned with the IRMA test. Third Generation tests report only the level of whole PTH molecules and omit the fragments, so Second Generation tests report PTH levels roughly twice that of Third Generation tests.

Later versions of the Nichols Tests “drifted” upward, consistently overstating patient’s PTH levels, leading to medically unnecessary prescriptions and surgeries. After a qui tam action relating to the tests’ inaccuracy and a substantial settlement with the government, Nichols withdrew its tests from the market.

In his qui tam complaint, filed in 2011, Relator alleged the Siemens Test had materially “drifted” from the IRMA test. Relator based his allegation primarily on separate parallel experiments he conducted. Relator compared the Siemens Test to the PTH test developed by his own company, the Scantibodies Test, a Third Generation test.

Public Disclosures of PTH Testing Issues

In the 2006 Souberbielle Study, European scientists studied various PTH tests, including the Siemens Test, compared them to the IRMA Test, and published their findings. The study concluded, among other things, that the values yielded by Second Generation tests varied widely. The study also determined that clinicians should monitor a patient’s PTH levels over a series of tests, as opposed to making clinical decisions on the basis of a single finding. The study also showed a significant differential between the Siemens and Scantibodies Tests.

An article published in 2007 noted that: (1) industry guidelines were based on the IRMA Test; (2) the absolute results obtained from various PTH tests varied from those of the IRMA Test; and (3) the 2006 Souberbielle Study documented this variability. Based on these observations, the author recommended that nephrologists use a single laboratory for results and look at trends in PTH as opposed to single values.

A 2009 study published by the relator who brought the successful Nichols qui tam action disclosed the results of parallel testing of various PTH tests. The study concluded that the Siemens Test generated results that were on average 36% higher than the Scantibodies Test. This was nearly the same differential as that disclosed in the 2006 Souberbielle Study.

Relator argued in his qui tam complaint that the upward drift he observed in the Siemens Test caused physicians to prescribe hundreds of millions of dollars of medically unnecessary Vitamin D, and to conduct untold numbers of medically unnecessary parathyroidectomies. Relator also alleged that Medicare paid for a portion of the cost of the Siemens Test, for prescribed Vitamin D and its analogs, and for surgeries related to elevated PTH levels.

The Public Disclosure Bar

Judge Cogan first addressed the FCA’s public disclosure bar, which bars claims for conduct that has already been made public. The bar discourages “opportunistic plaintiffs” with no significant information of their own who may bring “parasitic lawsuits.”

Prior to the 2010 FCA amendments, the public disclosure bar applied where a qui tam action was “based upon the public disclosure of allegations or transactions.” The Second Circuit and the majority of circuits had held that a relator’s claim was “based upon” the public disclosure if the allegations in the complaint were “substantially similar” to the publicly disclosed information. The 2010 FCA amendment generally followed this majority approach and identified the inquiry as whether “substantially the same allegations or transactions as alleged in the action or claim were publicly disclosed.”

The Second Circuit has applied a broad view of the public disclosure bar. Under that standard, earlier disclosures will bar a relator’s claim if they were sufficient to set the government squarely upon the trail of the alleged fraud. The bar is triggered if material elements of the fraud have been publicly disclosed, and does not require that the alleged fraud, itself, have been disclosed. Also, merely providing more specific details about what happened or translating technical information into digestible form does not negate substantial similarity. Public disclosures under the FCA include the news media and disclosures in scientific and scholarly journals.

After summarizing this caselaw, the Court held that before the Relator filed his complaint: (1) the variation between PTH tests was widely known; (2) physicians were advised to adjust their course of treatment accordingly; (3) Second Generation tests, such as the Siemens Test, were known to yield higher absolute results than Third Generation tests, such as the Scantibodies Test; and 4) the average difference between the Siemens and Scantibodies tests had been published in several studies. As a result, the public disclosure bar applied to Relator’s claims.

The Original Source Rule

Having decided that the public disclosure bar applied, the Court examined whether Relator qualified as an “original source” despite the earlier public disclosures. The FCA definition of “original source” was amended in 2010.

Under the pre-amendment version of the FCA, an original source was “an individual who has direct and independent knowledge of the information on which the allegations are based and has voluntarily provided the information to the Government before filing an action under this section which is based on the information.” Under the 2010 version, an “original source” is an individual who “has knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions, and who has voluntarily provided the information to the Government before filing an action under this section.”

Judge Cogan outlined various approaches Courts have taken in deciding whether a Relator is an original source: the new information “materially adds to what has already been revealed through public disclosures” (First Circuit); the Relator’s “key facts” are not “already thoroughly revealed” (Eighth Circuit); Relator’s information must “add value” (D.C. Circuit); Relator must bring “more than expertise or a novel analysis to the table” (S.D.N.Y.).

The Court determined that Relator was not an original source. First, over the course of years, the Siemens and Scantibodies tests had been repeatedly compared to each other in a number of published studies. Second, Relator’s findings did not materially depart from earlier ones and were not sufficiently or qualitatively different from the publicly disclosed information. The Court dismissed Relator’s complaint.

The last several years have brought increasing numbers of qui tam actions brought by Relators who are aware of the potentially significant recoveries those actions can bring. The public disclosure bar and the original source rule provide qui tam defendants with arguments to fend off these cases if they are brought by opportunistic relators who are seeking to trade on public information.

A hospital victimized by the sale of adulterated and mislabeled drug products successful obtained a Court order imposing restitution of over $825,000 earlier this month. EDNY Judge I. Leo Glasser’s decision in United States v. Tighe provides a helpful summary of restitution standards, and applies them to the response efforts of Yale-New Haven Hospital (“YNHH”) to protect patients from potential harm from mold-contaminated IV bags.

Defendants Pled Guilty To Selling Mold-Contaminated IV Bags

In Tighe, the two defendants were the owner and the director of pharmacy at Med Prep Consulting, Inc., a medical drug repackager. They pled guilty to wire fraud for failing to comply with professional standards for drug sterility and by introducing adulterated and misbranded drugs into the marketplace. YNHH sought restitution as one of the healthcare provider victims to whom Med Prep sold drug products.

The allegations of the superseding information were alarming. YNHH discovered visible floating particles in four IV bags of magnesium sulphate that were sold and labeled as sterile by Med Prep. The four IV bags were found to be contaminated with mold. Med Prep had sent YNHH four shipments of contaminated magnesium sulphate drug product. The defendants and Med Prep failed to meet acceptable industry standards in handling sterile drugs, including:

  • Air filters in Med Prep’s cleanroom repeatedly failed inspections over five years.
  • A cart was regularly pushed from Med Prep’s unsanitary warehouse (which contained mold) into the purportedly sterile cleanroom without being sterilized.
  • Med Prep continued to clean surfaces with non-sterile isopropyl alcohol, which is inadequate to kill mold spores.
  • Med Prep replaced expiration dates set by manufacturers with unsupported dates.

Mandatory Restitution for Health Care and Other Fraud

The Mandatory Victim Restitution Act (“MVRA”), 18 USC § 3663A, provides that, for all offenses against property, including fraud, the Court shall order that the defendant make restitution to the victim. Restitution under the MVRA is only available to a statutorily defined victim of the offense, and only for losses that were directly and proximately caused by the offense for which the defendant has been convicted.

Also, where the victim has not suffered injury or death, the MVRA only allows restitution for (1) “damage to or loss or destruction of property,” and (2) “necessary … expenses incurred during participation in the investigation or prosecution of the offense or attendance at proceedings related to the offense.” Although the necessary expenses category lacks definition, Judge Glasser quoted the Second Circuit admonition in United States v. Maynard that it “takes a broad view of what expenses are ‘necessary.’”

Yale-New Haven Hospital’s Restitution Claim

In addressing YNHH’s restitution claim, the Court first recognized that the MVRA applied to the fraud claim and that YNHH was a statutory victim entitled to restitution. While defendants asserted that YNHH’s losses were not proximately caused by the offense, the Court rejected this argument because it was made after the 14-day time period to object to the presentence report. The presentence report had found that the defendants’ conduct directly and proximately caused the contamination at YNHH and the financial losses YNHH incurred. The Court also determined that the defendants’ failure to timely object was strategic, because a timely objection could have undercut their arguments that they were remorseful and accepted responsibility.

The Court next addressed whether YNHH’s losses were (i) “damages to or loss or destruction of property” and (ii) “necessary … expenses incurred during participation in the investigation or prosecution of the offense or attendance at proceedings related to the offense.”

Damages to Property

The Court first determined that YNHH’s “straightforward” losses to property were recoverable, including:

  • The cost of drug products returned to Med Prep; and
  • The cost of terminating all consigned medication housed at Med Prep.

The Court accepted YNHH’s undisputed assertions as to the value of the recalled drug products and the consigned products that were terminated.

Legal Fees and Costs

YNHH also sought recovery of legal fees and costs associated with the collection, review and preservation of documents requested by the government. The Second Circuit has held that “necessary expenses” for restitution can include attorney fees and accounting costs. Here, the Court found these expenses were recoverable because they related to YNHH’s responses to various subpoenas issued by the Department of Justice in connection with the case.

Responses to the Discovery of Contaminated Drug Products

The most interesting question addressed by the Court was whether expenses incurred as a result of YNHH’s responses to the discovery of the contaminated drug products were subject to restitution. These included:

  • Patient and physician notification
  • Purchase of anti-fungal prophylactic medication
  • Patient disease surveillance
  • Hospital administrative time responding to the contamination
  • Pharmacy in-house admixture services and additional staffing
  • Pharmacy response to the contamination

The District Court first noted the Second Circuit’s “broad view” of necessary expenses for restitution, and held that these were necessary expenses for restitution. YNHH needed to sequester and inventory the contaminated drug product from Med Prep, examine the sequestered drug product for mold, and notify patients potentially affected by the contamination. The expenses were necessary to protect YNHH’s ongoing, legitimate interest in the health of its patients and its duty to protect that interest. In addition, YNHH had a need to purchase anti-fungal medication and an obligation to monitor potentially exposed patients. YNHH’s interest in its patients’ health also required it to participate in various regulatory responses, and it needed to replace the drugs that had been contaminated. 

Fraud Victims Should Take the “Broad View” in Seeking Restitution for Losses and Expenses Due to Fraud

Judge Glasser’s decision in United States v. Tighe provides a strong basis for victims of fraud to seek restitution for a broad array of monetary losses arising out of fraud and their involvement in addressing the consequences of the fraud and assisting in the government’s prosecution.

The Department of Justice issued two memoranda at the start of 2018 that may have important effects on health care fraud investigations and prosecutions under the False Claims Act.

The first, Factors for Evaluating Dismissal Pursuant to 31 U.S.C. 3730(c)(2)(A), was issued by Michael Granston, Director of the DOJ Commercial Litigation Branch, Fraud Section, and encourages DOJ attorneys to seek dismissal of a relator’s complaint if the government is declining to intervene in the case.  The memorandum describes the statute authorizing dismissal as “an important tool to advance the government’s interests, preserve limited resources, and avoid adverse precedent”, and it provides a non-exhaustive list of factors that DOJ attorneys should use as a basis for dismissal:

  • Does the qui tam complaint lack merit, whether based on an inherently defective legal theory or frivolous factual allegations?
  • Does the qui tam action duplicate a pre-existing government investigation and add no useful information?
  • Does the qui tam action threaten to interfere with an agency’s policies or the administration of its programs?
  • Is dismissal necessary to protect the government’s litigation prerogatives?
  • Is dismissal necessary to safeguard classified information?
  • Are the government’s costs in monitoring or participating in a qui tam action continued by the relator likely to exceed any expected gain?
  • Do the relator’s actions frustrate the government’s efforts to conduct a proper investigation?

The government has sought to dismiss declined qui tam complaints in the past, but more often has allowed the relator to go ahead with the case.  The Granston Memorandum emphasizes the advantages to the government in ending non-intervened qui tam cases early, particularly for saving government resources and avoiding adverse decisions from the Court.  If aggressively followed, this policy may result in less False Claims Act cases proceeding to litigation.

The second memorandum, Limiting Use of Agency Guidance Documents In Affirmative Civil Enforcement Cases, was issued by former Associate Attorney General Rachel Brand, and follows a November 2017 memorandum from Attorney General Sessions that prohibited DOJ components from issuing guidance documents that would effectively bind the public without undergoing the rulemaking process.  The Brand Memorandum extends this concept to government False Claims Act theories based on a failure to follow agency guidance documents.  “Department litigators may not use noncompliance with guidance documents as a basis for proving violations of applicable law” in affirmative civil enforcement cases.  The policy seeks to avoid allowing guidance documents to create binding requirements that do not exist by statute or regulation.  The government must prove noncompliance with the statute or regulation, and cannot use noncompliance with an agency guidance document as a substitute.  The Brand Memorandum will limit government theories of False Claims Act liability that are based on the violation of agency guidance documents as opposed to the relevant statute or regulation.

It’s flu season again. Your PCP at WPMG is thinking of you!

So began the health care provider’s text message that prompted this month’s Second Circuit decision applying the Telephone Consumer Protection Act to a flu shot reminder, Latner v. Mount Sinai Health System, Inc.

Plaintiff had gone to defendant West Park Medical Group (WPMG) in 2003 for a routine health examination. While there, he provided contact information including his cell phone number, and signed, among other forms, a notification record that consented to defendants using his health information “for payment, treatment and hospital operations purposes.”

In 2011, defendants hired a third party to send mass messages, including flu shot reminder texts for WPMG. In 2014, plaintiff received the text message above, which also stated: Please call us at 212-247-8100 to schedule an appointment for a flu shot. Defendants had sent flu shot reminder texts to all active patients of WPMG who had visited the office within the prior three years. Plaintiff had visited the office in 2011, declining immunizations.

Plaintiff alleged a violation of the Telephone Consumer Protection Act (TCPA), which makes it unlawful to send texts or place calls to cell phones through automated telephone dialing systems, unless the recipient consents or an exemption applies.

The Second Circuit engaged in a two-step process to decide that the defendants did not violate the TCPA. First, the Court held that the flu shot reminder text message was within the scope of an FCC Telemarketing Rule providing that written consent was not needed for text messages that deliver a health care message made by, or on behalf of, a HIPAA covered agency.

The Court next determined that, although the FCC Telemarketing Rule exempts written consent, text messages within the healthcare exception are still covered by the TCPA’s general consent requirement. The Court held, however, that plaintiff had given his prior express consent by providing his cell phone number, acknowledging receipt of privacy notices, and agreeing that defendants could share his information for treatment purposes and to recommend possible treatment alternatives or health-related benefits and services.

The lesson of this case: the pile of forms you sign on the clipboard in the waiting room may lead to texted health care messages down the road.

Last week, in United States v. Scully, the Second Circuit vacated the conviction of a distributor of pharmaceutical products on misbranding charges due to evidentiary issues surrounding his advice-of-counsel defense at trial.

The Rise and Fall of Pharmalogical

William Scully and Rodi Lameh founded Pharmalogical, Inc,, planning to acquire pharmaceutical products from manufacturers and sell them to doctors, hospitals and clinics. Eventually, Scully set the company on the course of “parallel importing,” importing foreign versions of FDA-approved products into the United States from European distributors. The company purchased these drugs at reduced prices and sold them to customers in the United States at under-market prices. The product labels for the products did not contain a National Drug Code, so Scully and Lameh obtained an attorney opinion that Pharmalogical had no reason to believe it was in violation of any statute or regulation.  This initially satisfied purchasers that Pharmalogical was authorized to sell.  Later, when Pharmalogical was advised by the FDA that foreign-made versions of FDA-approved drugs were considered unapproved, it obtained a second legal opinion that the importation of the product would not violate United States criminal laws. After the FDA executed warrants to search Pharmalogical’s offices, Scully and Lameh each retained individual lawyers, and Pharmalogical ceased selling products.

Scully and Lameh were indicted for using Pharmalogical to import foreign versions of prescription drugs and medical devices for use in the United States. Lameh pleaded guilty to conspiracy to distribute misbranded drugs and cooperated with the government. Scully went to trial.

At trial, Scully introduced an advice-of-counsel defense, contending that he relied in good faith on the advice of attorneys concerning the legality of his conduct. Scully called the attorney who provided opinions to Pharmalogical on the legality of the sales.  After the government effectively undermined the defense based on that testimony, Scully sought to testify himself that his individual attorney advised him the business was legal, rather than calling the second attorney to testify.  EDNY Judge Arthur Spatt ruled that such testimony, while not hearsay as it went to state of mind, was inadmissible under the balancing inquiry of FRE 403, particularly where the second attorney was available to testify.  The jury ultimately found Scully guilty. On appeal, Scully challenged the exclusion of evidence of his attorney’s legal advice and the jury instructions on the advice-of-counsel defense.

Evidence of Legal Advice

The Second Circuit held that the district court erred in balancing the probative value and prejudicial effect of the evidence of Scully’s testimony as to his individual attorney’s legal advice under FRE 403. The statement was not hearsay as it was offered to prove the defendant’s state of mind and not for its truth. Moreover, the Second Circuit held that it was not appropriate to require Scully to call his attorney as a witness, as the government had ample means to challenge Scully’s testimony, including by cross-examining Scully or by calling the attorney as a rebuttal witness. The Court determined that Scully was not legally required to call his attorney, but was competent to testify about his own state of mind, and the question of his credibility should have been up to the jury. Scully was therefore entitled to a new trial.

Advice-Of-Counsel Jury Instruction

While Scully waived arguments concerning the jury instruction on advice-of-counsel, the Second Circuit provided guidance on the jury instruction as the case was being remanded for a new trial.

The Circuit noted that, in a fraud case, the advice-of-counsel defense is not an affirmative defense, but is instead evidence that, if believed, can raise a reasonable doubt on whether the government has proved the required element of the offense that the defendant had an “unlawful intent.” The jury instruction must therefore advise the jury that the government at all times bears the burden of proving beyond a reasonable doubt that the defendant had the state of mind required for conviction. The district court should therefore not instruct the jury that the defendant “has the burden” of establishing the defense or must “satisfy” the elements of the defense. Instead, the Court referenced model jury instructions from Judge Leonard Sand and the Seventh Circuit, demonstrating that the defendant need not establish good faith, but that the government must carry its burden of proof to establish the intent element of the crime.

False Claims Act whistleblowers expose themselves to significant risks by coming forward and asserting claims of fraud against the government. Often, the whistleblowers, called relators under the False Claims Act, would prefer to maintain their anonymity for personal or professional reasons, but their options to do so are limited.

A False Claims Act case is initially filed under seal, and remains under seal while the government investigates. However, once the government either intervenes in the action or declines to intervene, the seal is lifted, and the False Claims Act complaint is publicly filed. The complaint, and the identity of the relator, become public knowledge, even if the relator does not intend to go forward with the case.

In United States ex rel. Nash v. UCB, Inc., SDNY District Judge Thomas Griesa addressed a relator’s multi-pronged effort to remain unknown. The relator alleged that his former employer, UCB, Inc., had defrauded the federal government out of millions of dollars in Medicaid funds. The Government declined to intervene, however, and the relator intended to not proceed and to dismiss the action. The relator feared that his current employer might retaliate against him when it became known that he had filed an FCA case against his former employer. The relator sought to permanently maintain a seal on all documents in the case, or alternatively, to allow use of the pseudonym “John Doe” and to remove any information from the complaint that could reveal his identity.

The Court first noted the “firmly rooted” presumption of public access to judicial documents, which applies to pleadings such as a complaint. As to relator’s fear of retaliation, the Court did not find this risk to outweigh the presumption of public access to judicial documents. Moreover, the Court pointed to the False Claims Act retaliation provision, 31 USC § 3730(h), which protects a relator from discrimination or retaliation based on acts taken under the False Claims Act. The Court determined that this provision would protect against what it considered a “speculative fear” of employment retaliation. The Court denied the application to keep the case under seal.

Next, relator sought to have the complaint filed under a “John Doe” pseudonym, with the elimination of any identifying information. Federal Rule of Civil Procedure 10(a), however, states that “The title of the complaint must name all the parties.” Courts have discretion to allow a pseudonym in special circumstances, where the need for anonymity outweighs prejudice to other parties and the public interest, but the bar is high. Factors courts consider include:

  • Highly sensitive and personal matters
  • Risk of retaliatory physical or mental harm to the party or innocent non-parties
  • Likely severity of alleged harms
  • Particular vulnerability of party to possible harms of disclosure
  • Whether challenge is to Government or private actions
  • Possible mitigation of prejudice by the Court

Judge Griesa found that the relator’s articulated need for anonymity was based on “attenuated and speculative risks of harm,” particularly where the concern was not with the former employer that the relator had sued, but with the current employer that he had not. The Court declined to allow a pseudonym, stating that the public “has a right to know who is using their courts.”

The Court did allow relator’s final request, that references to his current employer be redacted from the filed version of the complaint. The Court found the weight of presumption of public access to the identity of relator’s current employer to be low. Moreover, redactions would not affect the public interest, as the substance of the fraud allegations would be clear from the unredacted portions of the complaint.

Once a case is filed under the False Claims Act, the relator loses control over remaining anonymous. A resort to yet another lawsuit if there is retaliation may provide cold comfort, but the Courts are very reluctant to permit a relator to remain anonymous, even where the government has declined and the case will be dismissed.  Balancing this risk is one of the many considerations for relator and relator’s counsel in commencing a False Claims Act case.

Trypanophobia—the fear of needles—played a significant role in a case brought against Rite Aid Pharmacy under the Americans with Disabilities Act (ADA). In Stevens v. Rite Aid Corp., the Second Circuit overturned a jury verdict awarding substantial damages to a Rite Aid pharmacist who was terminated after he said he could not perform immunization injections because of a needle phobia.

In 2011, Rite Aid and other large pharmacy chains started requiring pharmacists to perform immunizations to fill an unmet need for vaccinations in the healthcare market. Rite Aid revised its pharmacist job description to include immunizations as one of the essential duties and responsibilities for pharmacists and required that each pharmacist hold a valid immunization permit.

Pharmacist Christopher Stevens asserted that his needle phobia was a disability under the ADA and sought a reasonable accommodation so that he would not have to perform immunizations.  Rite Aid responded that the ADA did not apply to trypanophobia, no reasonable accommodation was required, and he would be fired if he did not complete immunization training. When Stevens advised Rite Aid he could not complete the training, he was terminated for refusing to perform customer immunizations, an essential function of his job.

The Second Circuit first noted that, under the ADA, an employee must be qualified to perform the essential functions of his job, with or without reasonable accommodation. Even viewing all evidence in the light most favorable to Stevens, the Court held that immunization injections were an essential job requirement for Rite Aid pharmacists. The company made a business decision to require pharmacists to perform immunizations, revised its job description to require immunization certification and licensure, and included immunizations in the list of “essential duties and responsibilities” for Rite Aid pharmacists. The Court found jury sympathy for Stevens’s phobia to be understandable, but held that “his inability to perform an essential function of his job as a pharmacist is the only conclusion that could be drawn from the evidence.”

The Court next determined that Stevens had not established that Rite Aid could have provided a reasonable accommodation, emphasizing that the issue was whether a reasonable accommodation would have allowed Stevens to perform the essential function of immunization, not whether he could perform his other non-immunization duties as a pharmacist.

The Second Circuit reversed the judgment in favor of Stevens, holding that performing immunization injections was an essential job requirement, and Stevens presented no evidence of a reasonable accommodation that would have allowed him to do them.

The Stevens case highlights two important points under the ADA. An employer’s written job description including the essential duties and responsibilities of a position can be strong evidence to support an ADA argument concerning the essential functions of the job. Moreover, a reasonable accommodation is directed to allowing the employee to perform the essential functions of the job, not simply finding other things that the employee can do.

The Second Circuit recently agreed to accept an interlocutory appeal to decide the question whether a violation of the False Claims Act’s “first-to-file” rule compels dismissal of the complaint or whether it can be cured by the filing of an amended pleading.

In United States ex rel. Wood v. Allergan, Inc., Relator John Wood brought FCA claims against Allergan, a pharmaceutical company that develops and manufactures eye care prescription drugs. Wood alleged that Allergan violated the FCA and the Anti-Kickback Statute by providing free drugs and other goods to physicians in exchange for them providing the company’s brand name drugs to Medicare and Medicaid patients.  SDNY District Judge Jesse Furman denied most of Allergan’s motion to dismiss in an 89-page decision, deciding several FCA first-to-file issues and certifying two for interlocutory appeal to the Second Circuit.

The Initial Qui Tam Complaint Violated the “First-to-File” Bar

The FCA’s “first-to-file” rule states that once a qui tam action has been brought, no person other than the Government may intervene or bring a related action based on the same facts. The primary purpose of the first-to-file rule is to help the Government uncover and fight fraud. The rule encourages prompt disclosure of fraud by creating a race to the courthouse among those with knowledge of the fraud.

Wood was not the first relator to bring FCA claims against Allergan for the alleged conduct. Two prior actions had been brought and were pending when the Wood qui tam complaint was filed. Therefore, at the time Wood’s qui tam complaint was filed, it ran afoul of the first-to-file bar and was subject to dismissal.

The Prior-filed Actions Were Dismissed Before Wood’s Action Was Unsealed and the Third Amended Complaint Was Filed

The Wood complaint, however, was under seal for several years, and Wood amended his complaint twice before the seal was lifted. While the Wood complaint remained under seal, the two prior actions were dismissed.  When the Government declined to intervene in the Wood action and the case was unsealed, there were no longer any prior-filed pending actions. Wood thereafter filed a third amended complaint. Allergan moved to dismiss on several grounds, including the “first-to-file” bar, arguing that when Wood’s initial qui tam complaint was filed, there were two pending actions alleging the same factual allegations.

The “First-to File” Bar Is Not Jurisdictional

Judge Furman first addressed whether the “first-to-file” bar is jurisdictional. Although the majority of circuit courts have held that it is, the district court’s holding in its March 31, 2017 decision that the bar is not jurisdictional foreshadowed the Second Circuit’s similar holding four days later, in United States ex rel. Hayes v. Allstate Insurance Co.  The Circuit in Hayes stated that the first-to-file rule provides that “no person other than the Government” may bring an FCA claim that is “related” to a claim already “pending.” The Court noted that the statutory language did not speak in jurisdictional terms or refer to the jurisdiction of the courts, in contrast to other sections of the FCA. As Congress is presumed to act intentionally when it includes jurisdictional language in one statutory section but omits it in another, the Court held the a court does not lack subject matter jurisdiction over an action barred on the merits by the non-jurisdictional first-to-file rule.

An Amendment After Dismissal of the Prior Action Can “Cure” a First-to-File Violation

The district court next addressed the question of whether the first-to-file bar required dismissal of Wood’s qui tam complaint. In Kellogg Brown & Root Services, Inc. v. United States ex rel. Carter, the Supreme Court had held that “an earlier [FCA] suit bars a later suit while the earlier suit remains undecided but ceases to bar that suit once it is dismissed.”  Wood therefore would be able to bring a new FCA claim as the two prior actions had been dismissed.

However, during the years that the case had been sealed, the statute of limitations had expired on most of Wood’s claims, so a dismissal without prejudice and a re-filing of his complaint would result in a dismissal of the claims on limitations grounds. The district court was therefore faced with a question the Supreme Court did not decide: whether a violation of the first-to-file bar can be “cured” by amending or supplementing the complaint in the later-filed action after dismissal of the earlier actions.

The district court held that first-to file violation can be cured by an amended or supplemented pleading.  The court noted that most courts answering this question in the negative had relied in large part on a conclusion that the first-to-file bar is jurisdictional. The district court in Wood, and later the Second Circuit, held that the bar is non-jurisdictional. The district court noted that courts routinely allow plaintiffs to cure violations of non-jurisdictional rules by amendment under Fed. R. Civ. P. 15. Also, allowing an amendment to cure a violation advances the primary purpose of the FCA, to permit the government to recover for fraud. The court opined that barring a relator in Wood’s position from curing his violation of the rule would undermine, rather than advance, the purposes of the FCA.

The Amendment Relates Back to the Date of the Original Complaint

The parties also disputed whether, for purposes of the statute of limitations, the relevant complaint was the initial complaint, filed when the prior actions were pending, or the third amended complaint, the first one filed after they had been dismissed. The court recognized that the “touchstone” of Rule 15 is whether the original pleading put the defendant on notice of the relevant claims, and that an FCA defendant is often not on notice of a qui tam complaint because it is under seal. Nevertheless, the court concluded that any such delay is beyond the relator’s control, and an otherwise diligent relator should not have claims stripped away when the government and not the relator is to blame for the defendant not receiving notice. The district court therefore held that the third amended complaint related back to the original complaint for limitations purposes.

The Second Circuit Will Address The First-to-File Issues

In August, the Second Circuit accepted the interlocutory appeal of two issues:

  1. Whether a violation of the FCA’s “first-to-file” rule requires dismissal or can be “cured” through the filing of a new pleading after the earlier-filed action has been dismissed; and
  2. If a violation of the first-to-file bar is curable, whether the FCA’s limitations period is measured from the date of the relator’s curative pleading or the original complaint.

Last week, the Second Circuit held that a False Claims Act relator does not have to plead details of specific alleged false billings or invoices to the government, as long as he can allege facts leading to a strong inference that specific claims were submitted and that information about them are peculiarly within the defendant’s knowledge.

In United States ex rel. Chorches v. American Medical Response, Inc., Paul Fabula was an emergency medical technician for AMR, the largest ambulance company in the United States. He alleged that AMR falsely certified ambulance transports as being medically necessary and submitted claims it knew were not medically reimbursable under Medicaid. He alleged that AMR routinely made EMTs and paramedics revise or re-create reports to include false statements demonstrating medical necessity in order to qualify for Medicaid reimbursement. Fabula subsequently declared bankruptcy, and the bankruptcy trustee became the relator.

Qui tam complaints, which allege fraud, are subject to Fed. R. Civ. P. 9(b)’s particularity requirement. The Second Circuit determined that relator had adequately alleged a scheme to defraud. Relator, however, admittedly did not have personal knowledge of exact billing numbers, dates, or amounts for claims submitted to the government.

The focus of the Second Circuit’s inquiry, therefore, was whether every qui tam complaint must allege specific identified false billings or invoices. The Court answered in the negative, holding that “a complaint can satisfy Rule 9(b)’s particularity requirement by making plausible allegations creating a strong inference that specific false claims were submitted to the government and that the information that would permit further identification of those claims is peculiarly within the opposing party’s knowledge.”

In Chorches, the Court found that the relator had met this standard by pleading sufficient facts, on personal knowledge, to demonstrate that billing information was peculiarly within the knowledge of AMR and that he was unable, without the benefit of discovery, to provide billing details for claims submitted by AMR to the government. Relator had also sufficiently alleged facts on personal knowledge supporting a scheme to defraud and a strong inference that false claims were actually submitted to the government.

This issue had been addressed by several other circuits, and in 2016, the Second Circuit noted a seeming circuit split on whether an FCA relator must allege the details of specific examples of actual false claims. In Chorches, however, the Court concluded that “reports of a circuit split are, like those prematurely reporting Mark Twain’s death, ‘greatly exaggerated.’” The Court then engaged in an extensive analysis of cases in other circuits, concluding that its pleading standard is fully consistent with both the emerging consensus in other circuits and its own precedents.

Several district courts in the Second Circuit have required a strict pleading of specific facts concerning individual billings or invoices to the government. Those decisions will now have to be re-examined in light of the pleading standard set by the Second Circuit in Chorches: “Rule 9(b) does not require that every qui tam complaint provide details of actual bills or invoices submitted to the government, so long as the relator makes plausible allegations . . . that lead to a strong inference that specific claims were indeed submitted and that information about the claims submitted are peculiarly within the opposing party’s knowledge.”

The Second Circuit also held in Chorches that the FCA’s public disclosure bar is not jurisdictional, and that an alleged refusal to falsify a patient report is sufficient at the pleading stage to qualify as protected activity for an FCA retaliation claim.

Health care fraud prosecutions in the Second Circuit and throughout the country have typically sought forfeiture money judgments against all defendants for the proceeds of the fraud obtained by all members of a health care fraud conspiracy.  The Supreme Court recently curtailed these efforts in Honeycutt v. United States.  In Honeycutt, the Court held that the forfeiture statute only permits a forfeiture money judgment for property a defendant actually acquired as part of the crime, not all proceeds of the conspiracy.

In Honeycutt, defendant Terry Honeycutt managed sales and inventory at his brother’s hardware store.  The brothers were prosecuted for conspiring to sell iodine with the knowledge that it was being used to manufacture methamphetamine.  The government sought a forfeiture money judgment of $269,751.98, constituting the hardware store’s profits.  The defendant’s brother pled guilty and agreed to forfeit $200,000.  The government sought and obtained a forfeiture money judgment against defendant Terry Honeycutt for $69,751.98, even though he did not personally benefit from the hardware store’s profits.  The Sixth Circuit held that the conspiring brothers were “jointly and severally liable for any proceeds of the conspiracy,” joining several circuits, including the Second Circuit, in an expansive view of criminal forfeiture.

Justice Sotomayor’s decision in Honeycutt strictly followed the language of the statute, 21 U.S.C. § 853, which mandates forfeiture of “any property constituting, or derived from, any proceeds the person obtained, directly or indirectly, as the result of” certain crimes.  The Court concluded that the provisions of the statute limit forfeiture to property the defendant himself actually acquired, not property obtained by other conspirators.  The Court held that the plain text of the statute and the limitation of forfeiture to property acquired or used by the defendant “foreclose joint and several liability for co-conspirators.”

Prosecutors have routinely sought to forfeit all proceeds of health care fraud and other conspiracies from all co-conspirators.  Thus, minor players in a conspiracy with significant assets could find themselves liable for a forfeiture money judgment well in excess of the proceeds they actually received from their crime.  In Honeycutt, the Supreme Court refused to apply the tort concept of joint and several liability to the forfeiture statutes, and has taken a sweeping tool away from the government.