Jeffrey S. Bucholtz, Jamie Allyson Lang, Matthew V.H. Noller, King & Spalding LLP
This week’s top False Claims Act (FCA) developments include: a Seventh Circuit decision applying the Safeco scienter test to dismiss an FCA claim; an Eleventh Circuit decision addressing how to apply the FCA’s first-to-file bar; and a district court decision dismissing FCA claims based on alleged mislabeling of prescription drugs.
1. Seventh Circuit affirms summary judgment in favor of FCA defendant based on application of Safeco scienter test
Overview: On April 5, the Seventh Circuit affirmed summary judgment in favor of the defendant in United States ex rel. Proctor v. Safeway, Inc., holding that the relator had not proved that the defendant acted with scienter. Applying the scienter test from the Supreme Court’s decision in Safeco Insurance Co. of America v. Burr, 551 U.S. 47 (2007), the Seventh Circuit held that the relator could not prove that the defendant “knowingly” violated the FCA where the defendant’s conduct was consistent with an objectively reasonable interpretation of federal law and no authoritative guidance from the government had “warned it away from that interpretation.”
The Decision: The relator alleged that Safeway, Inc., violated the FCA by misreporting its “usual and customary” prices for prescription drugs when seeking reimbursement from government programs. The usual and customary price of a prescription drug generally refers to “the cash price charged to the general public.” The complaint alleged that Safeway fraudulently overstated its usual and customary prices by not reporting discounted prices that it provided to some customers.
A divided panel of the Seventh Circuit affirmed the district court’s grant of summary judgment to Safeway, holding that the relator did not submit evidence showing that Safeway “knowingly” overstated its usual and customary prices. The Seventh Circuit followed its previous decision in United States ex rel. Schutte v. SuperValu Inc., which had applied the Supreme Court’s decision in Safeco to the FCA’s scienter requirement. Under Safeco and Schutte, a relator cannot show scienter if (1) the defendant acted consistent with an “objectively reasonable” interpretation of the underlying statute, and (2) no “authoritative guidance” warned the defendant away from that interpretation.
Applying the Safeco test, the Seventh Circuit held that, at the time of Safeway’s conduct, Safeway’s interpretation of “usual and customary price” was one of “multiple reasonable interpretations” of that term. The court also held that no “authoritative guidance” warned Safeway away from its interpretation, rejecting the relator’s reliance on a footnote in a Centers for Medicare and Medicaid Services (CMS) Manual discussing the meaning of “usual and customary price.” To qualify as “authoritative,” the court held, guidance must both “come from a source with authority to interpret the relevant text” and “be specific enough to put a defendant on notice that its conduct is unlawful.” The court held the CMS Manual footnote was not sufficiently “authoritative” because it appeared in a section of the Manual that was not about usual and customary pricing and was deleted from the Manual two years before Safeway ended its discount programs. The court held that imposing “treble damages liability” based “on a single footnote in a lengthy manual that CMS can, and did, revise at any time” would “raise serious due process concerns because defendants may not receive adequate notice of the agency’s shifting interpretation.”
Our Take: Other circuits have also held that Safeco’s scienter test applies to FCA claims. The relator in Schutte has filed a petition for certiorari asking the Supreme Court to review the Seventh Circuit’s application of Safeco to the FCA.
2. Eleventh Circuit affirms dismissal of qui tam action under first-to-file bar
Overview: On April 1, the Eleventh Circuit affirmed the dismissal of Cho v. Surgery Partners, Inc., under the FCA’s first-to-file bar. In so doing, the court resolved two questions about the first-to-file bar that the Eleventh Circuit had not previously addressed. First, the court held that the first-to-file bar applies when a complaint is filed while a related action is pending, even if the complaint is amended after the related action is dismissed. Second, the court held that two qui tam actions are “related” for purposes of the first-to-file bar if they “incorporate the same material elements of fraud.”
The Decision: The relators alleged that the defendants, H.I.G. Capital, LLC, and H.I.G. Surgery Centers, LLC, violated the FCA by billing Medicare and other government payors for medically unnecessary urine drug tests. The relators’ initial complaint alleged claims against dozens of defendants, including the H.I.G. entities. At the time the relators filed their complaint, another FCA action related to the same alleged fraudulent scheme was already pending, though it did not name the H.I.G. entities as defendants. The first-filed action settled four years later. After the first-filed action settled, the relators amended their complaint to name only the H.I.G. entities as defendants.
The district court dismissed the relators’ amended complaint under the FCA’s first-to-file bar, and the Eleventh Circuit affirmed. Under the first-to-file bar, “when a person brings an action under [the FCA], no person other than the Government may intervene or bring a related action based on the facts underlying the pending action.” 31 U.S.C. § 3730(b)(5). The Eleventh Circuit held that the first-to-file bar applied because the relators’ action was “related” to the settled first-filed action.
The court first held that whether the first-to-file bar applies depends on whether a related action is pending when a relator files his initial complaint, not when the relator files an amended complaint. The court held that the “settled customary meaning” of the statutory phrase “to ‘bring’ an ‘action’” is “the initiation of legal proceedings in a suit.” Under that interpretation, the first-to-file bar applied in this case because the first-filed action was pending when the relators “initiated legal proceedings,” even though the first-filed action was no longer pending when the relators “amended their complaint.” The relators could not “evade the first-to-file bar by amending their pleading after the [first-filed] action was dismissed.”
The court next held that two actions are “related” under the first-to-file bar if they “incorporate the same material elements of fraud.” This test for relatedness asks whether the cases “rely on the same essential facts.” A court should “compare the complaints side-by-side and ask whether the later complaint alleges a fraudulent scheme the government already would be equipped to investigate based on the first complaint.” If so, the first-to-file bar applies.
Under this test, the court held that the relators’ action was related to the first-filed action because both actions alleged the same fraudulent scheme. The court rejected the relators’ argument that the actions could not be related because the H.I.G. entities were not defendants in the earlier action. The court held that naming an additional defendant can avoid the first-to-file bar only if “the introduction of a new defendant amounts to allegations of a different or more far-reaching scheme than was alleged in the earlier-filed action,” which was not true here. The court also rejected the relators’ argument that their action was different because it added a claim for conspiracy, finding that the relators’ “conspiracy claim [wa]s based on the same fraudulent scheme that was alleged” in the first-filed action.
Our Take:This decision provides useful guidance on how courts should apply the FCA’s first-to-file bar and will make it more difficult for relators to avoid the bar through strategic pleading.
3. New Jersey federal court dismisses qui tam action alleging misbranding of prescription drugs
Overview: On March 31, a federal district court in New Jersey dismissed a qui tam complaint alleging that pharmaceutical companies violated the FCA by mislabeling two prescription drugs and allegedly causing physicians to improperly prescribe the drugs and seek reimbursement from Medicare and Medicaid. The court held that the relator had not alleged any material false statement with particularity.
The Decision: The relator alleged that Bayer Corporation mislabeled its drug Cipro, and that Johnson & Johnson mislabeled its drug Levaquin, by failing to include adequate warnings on the drugs’ labels, thereby causing the submission of false claims to the government because doctors, relying on the labels, inappropriately prescribed the drugs and then sought reimbursement from Medicare and Medicaid.
The district court dismissed the relator’s complaint without prejudice, holding that the relator had not alleged any false statement with particularity under Rule 9(b). First, the court held that the relator failed to distinguish between Bayer and Johnson & Johnson, “two distinct entities who sold different drugs and cannot be held accountable for the actions of each other.” Second, the court held that the relator did not identify with particularity any “false statement of fact Bayer and J&J” made to the government or any “specific information Bayer and J&J failed to disclose and why they were under a duty to disclose that information.”
The court also held that the relator had not plausibly alleged that any false statement was material to the government’s decision to pay for the defendants’ drugs. The relator did not specify any information related to the drugs’ safety of which the government was not aware, nor did he identify any material statutory, regulatory, or contractual requirement that Bayer or Johnson & Johnson violated. The court also noted that, despite having full knowledge of the facts underlying the relator’s proposed labeling changes, the Food and Drug Administration did not require either company to amend the drugs’ labels in the way the relator claimed was necessary, and CMS continued to pay for the drugs. Under those circumstances, the court found that the relator improperly sought to “second-guess” the FDA’s labeling decisions.
Our Take: This decision enforces the strict requirements imposed on FCA claims by Rule 9(b) and the FCA’s materiality requirement.
In the News:
DOJ files FCA complaint against laboratory and hospital CEOs for alleged kickbacks - On April 4, the government filed a lengthy complaint against two laboratory CEOs, one hospital CEO, and others alleging violations of the FCA. The government alleges that the defendants paid kickbacks, disguised as investment returns, to induce doctors to refer patients for laboratory testing. This complaint relates to an investigation that has already led to several settlements that we covered in previous blog posts.
Telecommunications carrier agrees to pay $13.4 million to settle FCA allegations related to Federal Communications Commission’s Lifeline Program - On April 4, the government announced a $13.4 million settlement of allegations that TracFone Wireless, a telecommunications carrier, improperly signed up more than 175,000 ineligible customers to the FCC’s Lifeline Program, which provides free cell phones and cellular services to low-income consumers. The government alleged that third-party sales agents exploited a software glitch in TracFone’s software that allowed ineligible consumers to apply for the Lifeline Program and that the company did not properly review the applications or investigate reports of ineligible subscribers. According to the government, TracFone eventually discovered the glitch and repaid the government more than $10.9 million, which was credited as part of the $13.4 million settlement.
Clinical laboratory agrees to pay $11.6 million to settle allegations of fraudulent billing for drug testing - On March 31, the government announced a $11.6 million settlement with Radeas, a clinical laboratory, related to allegations that Radeas had regularly performed and billed Medicare for expensive and medically unnecessary urine drug testing. The government also alleged that Radeas paid kickbacks in exchange for testing referrals.
Jeffrey S. Bucholtz is a partner in the Trial and Global Disputes Practice Group in the firm’s Washington, D.C. office, Jamie Allyson Lang is a partner in the Special Matters and Government Investigations Group in the firm’s Los Angeles office, and Matthew V.H. Noller is a senior associate in the Trial and Global Disputes Practice Group in the firm’s San Francisco office.