Qui Tam Actions Against Pharmaceutical Companies
By Kathy B. Weinman and Jennifer M. Ryan
Dwyer & Collora, LLP
Boston, Massachusetts
A. Introduction
Pharmaceutical companies have been the favorite targets for federal health care enforcement actions over the past decade. The vast majority of these matters were initiated by private persons filing actions on behalf of the United States under the False Claims Act, 31 U.S.C. §§ 3729-3732. Although commenced as purely civil cases, many of the investigations prompted by these lawsuits have concluded with criminal pleas or deferred prosecution agreements as well as civil settlements. The civil settlements themselves have yielded millions of dollars for the private parties who are generously rewarded for their efforts under the law. Not surprisingly, publicity about those awards has motivated others to file their own lawsuits. Each successful case has led to many others.
This article describes the proliferation of private False Claims Act actions against pharmaceutical companies in recent times. In addition, it focuses on new developments affecting those lawsuits. In some instances, courts have interpreted the False Claims Act to restrict the rights of private parties to prosecute such matters. As discussed further, Congress has responded with proposed legislation to reverse the effects of some of those decisions. Although awards to private persons in pharmaceutical cases have cost the government hundreds of millions of dollars, these are expenses the government has (mostly) willingly paid. Indeed, the government views the payments to private parties not as costs but as investments, with returns in multiples to the public coffers.
B. The False Claims Act
Under the False Claims Act (the “FCA”), the United States may recover damages and penalties from persons who have presented, caused others to present or conspired to present, false or fraudulent claims to the United States, including federal health care programs such as Medicare and Medicaid. Private persons, referred to as relators, are permitted to file actions on behalf of themselves and the United States under the qui tam provisions of the FCA. Those actions are filed under seal to afford the government an opportunity to review the matter and decide whether to intervene and assume primary responsibility for prosecuting the action. If the government elects to proceed with a relator’s claims, the relator is entitled to receive at least 15% but not more than 25% of the proceeds of the action or the claim depending on the extent to which the relator substantially contributed to the prosecution of the action. If the government elects not to proceed with the action, the relator is entitled to not less than 25% and not more than 30% of any proceeds. In both cases, the relator is also entitled to an award of reasonable expenses, and reasonable attorney’s fees and costs against the defendant.
C. The Proliferation of Qui Tam Actions Against the Pharmaceutical Industry
In fiscal year 2007 alone (ending September 30, 2007), the United States obtained $2 billion in settlements and judgments based on allegations of fraud against the federal government. Of that $2 billion, $1.45 billion is associated with suits initiated by whistleblowers under the qui tam provisions of the FCA. In FY 2007, relators received approximately $177 million or approximately 12 % of the proceeds of those cases.
The U.S. Department of Justice very much relies on qui tam relators in prosecuting claims under the FCA. In discussing the 1986 amendments to the False Claim Act, which significantly enhanced the qui tam provisions of the FCA, the Assistant Attorney General for the Civil Division recently stated, “[w]ithout this important legislation strengthening the Act, and, in particular, the qui tam provisions which give ordinary citizens the courage and protection to blow the whistle on those who defraud the government, such recoveries would not be possible.”
The government benefits from the inside information regarding the fraudulent scheme that qui tam relators provide. As Professor Dyna Bowen Matthew observed, the information provided by the relators often enhances the government’s chance of success and the size of the recoveries. She noted that the government is able to pursue a larger number of investigations as a result of the contributions of qui tam relators than it would without the aid of private enforcement assistance. According to Jack A. Meyer, the President of the Economic and Social Research Institute, the federal government receives about $15 for each dollar spent investigating and prosecuting health care fraud in civil cases. Cases involving qui tam relators provide over fifty percent of all United States health care fraud recoveries. Thus, the government has lauded the work in this area as a “tremendous return on investment.”
Health care cases accounted for $1.54 billion of the $2 billion in FCA settlements and judgments in FY 2007. Health care cases initiated by whistleblowers accounted for $1.08 billion or approximately 70% of that total. Relators received approximately $153 million in awards -- 14 % of the proceeds -- for their involvement in health care cases in FY 2007. Of the 484 new FCA matters filed in FY 2007, 356 were filed as qui tam cases. Of the 356 new qui tam matters, 196 were health care-related; only 22 new health care cases were filed directly by the government.
It is not surprising that health care cases, and in particular health care cases initiated by qui tam relators, constitute such a large share of recent FCA matters. By 2000, the Department of Justice and the Department of Health and Human Services had established that “the detection and elimination of health care fraud and abuse is a top priority of federal law enforcement.” Health care costs continue to increase nationally. Total healthcare expenditures reached $2.1 trillion in 2006, which translates to roughly 16 percent of the United State’s Gross Domestic Product (GDP). National health care spending is more than four times the amount spent on the national defense. In 2007, the federal government spent $627 billion on the Medicaid and Medicaid programs; that spending is expected to increase to $662 billion this year.
Prescription drugs account for approximately ten percent of all health care expenditures n the United States. As a result, the investigation of the pharmaceutical industry has been a “part of a Department [of Justice]-wide effort.” Andy Schneider, the Principal of Medicaid Policy LLC, noted that “[c]ases involving drug manufacturers have been the single largest source of FCA recoveries in whistleblower cases involving Medicare, Medicaid, and other programs administered by the Department of Health and Human Services. Indeed, during the fiscal years 2001-2006, “nearly $3.9 billion has been recovered from drug manufacturers . . . as the result of cases brought by whistleblowers.” Thus, of the $4.5 billion in recoveries from pharmaceutical companies during the same six fiscal years, 85% is directly attributable to actions brought by whistleblowers.
The government has recognized that relators have played an especially important role in FCA actions against pharmaceutical companies. In describing the whistleblower Ven-A-Care of the Florida Keys, Inc. (“Ven-a-Care”), a former health care company that provided in-home intravenous drug treatments and now specializes in qui tam litigation, the government uses adjectives such as “invaluable,” and “a breed apart.” The former President of the National Association of Medicaid Fraud Control Units who worked with the Ven-A-Care relators on a case resulting in a $14 million settlement with Bayer Corporation commented that the Ven-a-Care relators did one hundred percent of the investigation. An Assistant United States Attorney in Miami, noted, “The Ven-a-Care boys . . . served both as whistleblowers and expert consultants . . . and explained what was going on to us.” A former prosecutor in the Maryland Medicaid Fraud Control Unit credited Ven-a-Care with launching the government’s scrutiny of pharmaceutical companies, commenting, “without [the Ven-A-Care] lawsuit [filed in 1995 in federal court in Florida against more than 20 different pharmaceutical companies], [the pharmaceutical industry] would not be such a high priority government enforcement issue. In the world of pharmaceutical litigation, Ven-a-Care has been likened to Erin Brokovitch. Ven-a-Care’s efforts have not gone unrewarded. As of 2006, Ven-a-Care’s four owners had already earned over $70 million in shared fees.
Relators have contributed to substantial government recoveries against pharmaceutical companies even when their contentions are of dubious credibility. The settlement and subsequent prosecution of employees in the TAP Pharmaceutical Products Inc. (“TAP”) matter is particularly illustrative. In 2001, TAP and the United States reached a settlement in which TAP agreed to pay $875 million to resolve criminal charges and civil liabilities. Of the total, TAP paid $559,483,560 to settle claims under the FCA. As the first relator, Douglas Durand received $77.9 million of the proceeds. Tufts Health Plan and its medical director, Dr. Joseph Gerstein, received another $17 million of the FCA settlement with TAP.
The relators’ claims fell apart during the trial of eleven executives and employees of TAP. Before the conclusion of the case, Judge Douglas P. Woodlock entered a judgment of acquittal for one defendant, ruling that the government had not proved its case regarding the Tufts Health Plan allegations, because an offer of payment to the health maintenance organization was protected under a safe harbor to the federal antikickback statute. After a three-month trial and over twenty hours of deliberations, the remaining TAP defendants were acquitted. A star witness for the government was none other than Douglas Durand, the relator who had previously received $77.9 million from the FCA settlement with the company. A juror interviewed after the case stated that the jurors “all thought he was a greedy son-of-a-gun who was out there for himself. He was being cagey.” Jurors went on to say that the two key government witnesses (one being Durand) did not seem credible and that a lot of the evidence about gifts and perks provided to doctors was anecdotal and frequently not tied to the defendants at trial but to other TAP employees or even the doctors that did business with TAP. Indeed, Durand’s story at trial fell apart -- kickbacks that Durand allegedly paid to doctors never happened; price hikes that he had accused the firm of imposing to overcharge Medicare also did not take place; and a fancy conference that Durand described as a way to bribe doctors into buying TAP’s drugs was in fact paid for by the participant doctors themselves.
The slight embarrassment to some relators has not outweighed the potential windfall of millions in deterring others from initiating their own qui tam actions against the pharmaceutical industry. In FY 2007, settlements with five companies, Bristol-Myers Squibb Co., Aventis Pharmaceuticals, Inc., Medco Health Solutions, Inc., Purdue Pharma L.P. and Purdue Frederick Co., and InterMune, Inc., accounted for more than $800 million of the $1.5 billion in health care related settlements and judgments. In addition to the amounts recovered by the federal government, resolutions involving pharmaceutical companies resulted in the return of over $264 million dollars to state Medicaid programs. The following chart details the largest pharmaceutical settlements and the shares received by relators in FY 2007 to the present.
Pharmaceutical Company Overall Settlement Federal FCA Share Federal Relator Share
Bristol-Myers Squibb Co. ~$499 Million ~$328 Million ~$52 Million
Aventis Pharmaceuticals, Inc. ~$190 Million ~$180 Million ~$32 Million
Medco Health Solutions, Inc. ~$155 Million ~$155 Million ~$23 Million
Purdue Pharma L.P. and Purdue Frederick Co. ~$600 Million ~$101 Million
---------
Intermune, Inc. ~$37 Million ~$30 Million ~$6 Million
Merck, Co. ~$650 Million ~$360 Million ~$55 Million
D. Recent Developments in Qui Tam Actions Under the Federal Claims Act
In the past year, the courts have decided a number of cases interpreting the qui tam provisions of the False Claims Act. Additionally, Congress has introduced legislation that would strengthen the rights of qui tam relators, in some cases reversing the impact of those court decisions. In a bipartison effort, Senators Charles Grassley, Richard Durbin, Patrick Leahy, Arlen Specter and Sheldon Whitehouse, and Representatives Howard Berman and James Sensenbrenner sponsored the new legislation in response to “recent federal court decisions that threaten to limit the scope and applicability intended by Congress with its highly successful 1986 update of the False Claims Act, which has recovered $20 billion for the U.S. Treasury that would otherwise be lost to fraud.” Those cases, as well as the proposed legislation intended to address them, are discussed below.
1. “Public Disclosure” and “Original Source”
The FCA discourages what is referred to as “parasitic” lawsuits, in which relators file FCA claims based on information that is already in the public realm. Section 3730(e)(4)(A) of the FCA provides that:
“[n]o court shall have jurisdiction over an action under this section based upon the public disclosure of allegations or transactions in a criminal, civil or administrative hearing, in a congressional, administrative or Government Accounting Office report, hearing audit or investigation, or from the news media, unless the action is brought by the Attorney General or the person is an original source of the information.”
An “original source” is defined as “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 [the FCA] which is based on the information.” In the past year, several cases have clarified the meaning and significance of these provisions.
a. Rockwell International: In Rockwell International Corporation v. the United States ex rel. Stone, the U.S. Supreme Court interpreted various provisions related to public disclosure and the original source exception. In that case, there was no dispute that the allegations had been publicly disclosed in the media before the lawsuit was filed. In holding that the district court lacked jurisdiction to enter judgment for the relator, Rockwell International addressed a number of important issues in interpreting this provision.
First, the Court made clear that Section 3730(e)(4) is jurisdictional. Accordingly, it was irrelevant whether or not Rockwell had conceded the relator’s status as an original source; the district court lacked subject matter jurisdiction over the matter without proof that the relator in fact established that he was an original source for the claims. As the Court concluded, “[w]hether the point was conceded or not, therefore, we may, and indeed must, decide whether Stone met the jurisdictional requirement of being an original source.”
Second, the Court clarified the requirements for original-source status. Original source is defined in the FCA as requiring that the relator have “direct and independent knowledge of the information on which the allegations are based.” The Court held first that “information on which the allegations are based” refers to the information on which the relator’s allegations are based, not the information on which the allegations that triggered the public disclosure bar are based. The Court then determined which of the relator’s allegations are relevant for this analysis in light of the changing allegations over the course of the litigation. The Court found that the term “allegations” is not limited to the allegations asserted in the original complaint but also includes allegations at every stage in the lawsuit. In this case, the Court found that the final pretrial order, which superseded all prior pleadings and controlled the course of the subsequent action, also contained the allegations from which to determine “original source” status. In the context of this appeal, the false claims found by the jury were controlling, “the only ones to which our jurisdictional inquiry is pertinent to the outcome.” As the Court observed, focusing only on allegations in the original complaint “would leave the relator free to plead a trivial theory of fraud for which he had some direct and independent knowledge and later amend the complaint to include theories copied from the public domain or from materials in the Government’s possession.”
The Court also held that original source status as to one claim would not and could not serve to provide jurisdiction with respect to all the claims. “Claim smuggling” was denounced by the Court; joining all of a plaintiff’s claims in one lawsuit does not rescue claims that would have been doomed by the jurisdictional requirements of the FCA if they had been asserted in a separate action. The Court’s decision thus provides a basis for seeking to strike various claims from a Complaint and thus significantly narrow both the issues, and the potential damages and penalties.
Finally, the Court soundly dismissed the respondents’ contention that the government’s intervention in the relator’s case provided an independent basis of jurisdiction for the relator’s case. Section 3730(e)(4)(A) permits jurisdiction over an action based on publicly disclosed allegations if the action is “brought by the Attorney General.” The Court rejected the respondents’ argument that intervention by the government converted the case into an “action brought by the Attorney General.” It reasoned that the statute sharply distinguishes between actions brought by the Attorney General under Section 3730(a) and actions brought by a private person under Section 3730(b) and concluded that “[a]n action brought by a private person does not become one brought by the Government just because the Government intervenes and elects to ‘proceed with the action.’” However, the Court held that an action brought by a relator and joined by the government becomes an action brought by the government if the relator has been determined to lack the jurisdictional prerequisites for suit. Accordingly, the judgment in favor of the government – but not the relator -- in Rockwell International survived.
b. Sun Healthcare Group: The Tenth Circuit’s decision in United States ex rel. Boothe v. Sun Healthcare Group, Inc., provides guidance on the inverse of the issue presented in Rockwell International, whether the prior public disclosure and absence of original source status for some but not all of the relator’s claims requires dismissal of the entire lawsuit for lack of subject matter jurisdiction. In November 2003, the relator, a former employee of Sun Healthcare Group, Inc. (“Sun”), filed a qui tam complaint alleging that Sun overbilled the United States in ten distinct ways. She was not the first former employee to point the finger at Sun, however; no fewer than eleven other qui tam complaints had been filed against Sun between October 1996 and June 1999. An extensive nationwide government investigation culminated in a settlement agreement among Sun, the government and various relators in 2002, the year before Ms. Booth filed suit. Three of the fraudulent schemes alleged in the complaint were strikingly similar to those of the previous complaints. The government declined to intervene and the district court granted Sun’s motion to dismiss on the basis that “it lacked subject matter jurisdiction over [the relator’s] suit because three of her claims were based upon publicly disclosed qui tam complaints and [the relator] was not the original source for the public disclosures in the prior [qui tam] suits.”
The court first reviewed the three claims that were similar – but not identical -- to the claims made in the previous qui tam complaints. The court, following the precedent established in the Tenth Circuit, found that these claims were barred because they were at least partly derived from the prior public disclosures and the relator was not an original source.
The court declined, however, to affirm dismissal of the entire lawsuit based on the defendant’s argument that “any claim in a complaint ‘based upon’ information already publicly disclosed . . . spoils the entire pleading.” The court held, instead, that the district court should have assessed jurisdiction for each separate claim, analyzing whether “the public disclosure bar applies to each reasonably discrete claim of fraud.” Noting the Supreme Court’s reference in Rockwell to a Third Circuit’s decision addressing the same situation, the court confidently proclaimed that joinder with barred claims should not result in the dismissal of claims that otherwise would survive.
c. Pfizer: In United States ex rel. Rost v. Pfizer, Inc., the First Circuit held that the defendant’s voluntary disclosure of wrongdoing to federal law enforcement authorities did not constitute “public disclosure” for purposes of the jurisdictional bar under the FCA. In that case, Pfizer initiated an internal investigation of complaints about off-label promotion lodged by the relator and other employees who had been employed by Pharmacia Corporation, which Pfizer acquired in April 2003. Pfizer then moved quickly in May 2003 to report its findings to the U.S. Department of Health and Human Services and the U.S. Department of Justice. Pfizer did not make any public announcement of the matter until March 10, 2004, when it disclosed a DOJ investigation in materials appended to a Form 10-K filed with the Securities and Exchange Commission. In the meantime, the relator had filed his qui tam complaint on June 5, 2003. After investigating the allegations for two years, the government declined to intervene.
Pfizer argued that its communication with the government in May 2003 was a public disclosure triggering the jurisdictional bar, and that the relator was not an “original source” so as to exempt his claims from the bar. In particular, Pfizer contended that self-disclosure to HHS and DOJ, the appropriate investigative bodies, “constitutes ‘public disclosure of allegations’ in an appropriate government investigation setting under § 3730(e)(4)(A) and thus bars the action.”
The court disagreed, holding that a public disclosure requires some act of disclosure to the public outside of the government. In so finding, the court noted that the “mere fact that the disclosures are contained in some government files someplace, or even that the government is conducting an investigation behind the scenes does not itself constitute public disclosure.” The court first looked to the plain language of the statute, referring to its earlier decision holding that “the logical reading is that the [public disclosure] section serves to prohibit courts from hearing qui tam actions based on information made available to the public during the course of a government hearing, investigation, or audit or from the news media.” The court criticized Pfizer for equating the government with the public when the statute uses both terms numerous times and does not equate them once. The court also relied on the legislative history of the 1986 amendments, which reflected Congress’ intent to encourage private enforcement actions. The court noted in particular that Congress eliminated a provision that barred jurisdiction where the government had knowledge of the allegations or transactions in the relator’s complaint because in practice the “government knowledge” bar proved too restrictive and resulted in under-enforcement of the FCA. The First Circuit thus joined the Tenth, Ninth, and Eleventh Circuits in holding that information disclosed to the government has not been publicly disclosed. Accordingly, companies who find wrongdoing in their midst may consider reporting it to The New York Times—or at least in SEC filings—simultaneously with voluntary disclosure to HHS or DOJ.
2. Federal Rule of Civil Procedure 9(b)
Rule 9(b) of the Federal Rule of Civil Procedure requires that “[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity.” That particularity requirement generally means that “a complaint must specify ‘the time, place, and content of an alleged false representation.’” Rule 9(b) ensures that defendants have the specific notice necessary to prepare a response, prevents prospective plaintiffs from filing lawsuits in the anticipation of conducting fishing expeditions to uncover wrongs, and protects defendants’ reputations against damage stemming from accusations of immoral conduct.
(a) Community Health Systems: The Sixth Circuit engaged in an interesting and thoughtful analysis of the application of Rule 9(b) in the context of the FCA in United States ex rel. Bledsoe v. Community Health Systems. The relator’s first amended complaint was dismissed with prejudice because it did not plead fraud with particularity as required by Rule 9(b). The court of appeals affirmed the dismissal, but concluded that the district court abused its discretion by dismissing the complaint with prejudice. In his second trip to the Sixth Circuit, the relator again appealed the dismissal of his complaint, this time the second amended complaint.
In its Rule 9(b) discussion, the court held that a relator, at a minimum, must “allege the time, place, and content of the alleged misrepresentation on which he or she relied; the fraudulent scheme; the fraudulent intent of the defendants; and the injury resulting from the fraud.” Rejecting the relator’s contention that the complaint was adequate if it pleaded a false scheme with particularity, the court held that “pleading an actual false claim with particularity is an indispensable element of a complaint that alleges a FCA violation in compliance with Rule 9(b).” The court stated that under the FCA the “circumstances constituting fraud” must include an averment that a false or fraudulent claim for payment or approval has been submitted to the government. Thus, a relator cannot meet the standard of Rule 9(b) requiring allegations of time, place, and content of the alleged misrepresentation without alleging which specific false claims constitute a violation of the False Claims Act.
The court also made clear that the relator need not plead every specific false claim where the allegations “encompass many allegedly false claims over a substantial period of time.” Rather, in those instances the relator must plead “a complex and far-reaching fraudulent scheme with particularity” and provide examples of specific false claims that are, in all material respects, representative of all the false claims submitted as part of that scheme. Stated differently, in order to meet the particularity requirements of Rule 9(b), the relator must provide characteristic examples that are illustrative of the class of claims; the examples “should, in all material respects, including general time frame, substantive content, and relation to the allegedly fraudulent scheme, be such that a materially similar set of claims could have been produced with a reasonable probability by a random draw from the total pool of all claims.” In so doing, the court concluded, an appropriate balance is struck “between affording the defendant the protections that Rule 9(b) was intended to provide and allowing relators to pursue complex and far-reaching fraudulent schemes without being subjected to onerous pleading requirements.”
b. Pfizer: Despite finding that the relator had satisfied the jurisdictional requirements of the FCA, the First Circuit affirmed the dismissal of his case, holding that he had failed to plead his fraud claims with sufficient particularity. The court’s analysis of the application of Rule 9(b) to claims against pharmaceutical companies – which do not themselves submit claims to the government -- is particularly relevant. In Rost v. Pfizer, the false claims were allegedly submitted by doctors “who were allegedy induced and seduced” by the defendants into prescribing a drug off-label for their patients, including federally insured patients. The court held that the complaint failed to meet the particularity requirements of Rule 9(b). As to the claims under 31 U.S.C. § 3729(a)(1) for false claims, the relator’s “ample description” of Pfizer’s allegedly illegal practices did not suffice, because those practices “do not involve claims for government reimbursement.” In fact, there were no allegations establishing a causal link between the alleged wrongdoing and claims submitted to the federal government. According to the First Circuit, it was not sufficient to allege that a substantial number of the sales were off-label, because there were no specific allegations that those prescriptions were federally reimbursed. As to the claims under 31 U.S.C. § 3729(a)(2) for making false records or statements to obtain payment on a claim, the allegations that the defendants made statements in violation of federal law were inadequate. The court found that what was required were particularized allegations that the statements made were false. As a result, the court affirmed the district court’s dismissal of the action, remanding for a decision on the relator’s motion for leave to amend the complaint.
Without providing much direction, the court nevertheless suggested that there was “flexibility” in Rule 9(b) requirements for FCA actions involving allegations that the defendant caused false claims, but did not submit them to the government itself. The court’s suggestion eroded its previous guidance in United States ex rel. Karvelas v. Melrose-Wakefield Hospital, 360 F.3d 220 (1st Cir. 2004), decided just three years before. In Karvelas, the First Circuit held that the particularity requirements of Rule 9(b) meant that relators “must provide details that identify particular false claims for payment that were submitted to the government,” such as facts concerning:
“the dates of the claims, the content of the forms or bills submitted, their identification numbers, the amount of money charged to the government, the particular goods or services for which the government was billed, the individuals involved in the billing, and the length of time between the alleged fraudulent practices and the submission of claims based on those practices.”
The Rost court suggested that some -- but did not identify which -- specifics could be eliminated from a complaint and still meet the particularity requirements under Rule 9(b) in pharmaceutical cases. That issue may be clarified by the decision on the motion to dismiss the relator’s first amended complaint, which is now pending.
3. Statute of Limitations; “Relation Back”
The FCA’s statute of limitation has two tiers. It provides that an action may not be brought:
“(1) more than 6 years after the date on which the violation of section 3729 is committed, or
(2) more than 3 years after the date when facts material to the right of action are known or reasonably should have been known by the official of the United States charged with the responsibility to act in the circumstances, but in no event more than 10 years after the date on which the violation is committed, whichever occurs last.”
In United States v. Baylor University Medical Center, the Second Circuit held that the dates on which the government filed its complaints-in-intervention constituted the date on which the government commenced its lawsuit for purposes of the statute of limitations. Since the alleged violations occurred more than six years before the filing of the complaints, the government’s claims were barred by the six-year statute of limitation. The court also found that the government’s claims were barred by the three-year statute of limitation, because it had knowledge of the qui tam complaint filed in 1994. Most significantly, the Second Circuit decided that the government’s claims could not relate back to the time in which the relator’s complaint was filed under Rule 15(c)(2) of the Federal Rules of Civil Procedure, which states, “[a]n amendment of a pleading relates back to the date of the original pleading when . . . the claim or defense asserted in the amended pleading arose out of the conduct, transaction, or occurrence set forth or attempted to be set forth in the original pleading.” The court held that the government’s complaint-in-intervention cannot be considered an amended complaint pursuant to Rule 15(c)(2) because the confidentiality and secrecy required by Section 3730(b) of the FCA is incompatible with the touchstone for relation back pursuant to Rule 15(c)(2), notice to the defendant.
At least three lower courts that have analyzed Baylor University Medical Center in 2007 rejected this holding:
- In re Pharmaceutical Indus. AWP Litig., 498 F. Supp. 389 (D. Mass. 2007): The court concluded that the government’s complaint in intervention would be treated as an amended complaint and would relate-back to the relator’s original complaint for the purposes of computing the statute of limitations.
- United States ex rel. Miller v. Harbert Int’l Construction, Inc., 2007 WL 851855 (D.D.C. 2007): The court rejected the reasoning of the Second Circuit, contending that its recent decision that Rule 15(c) relation-back applies to FCA claims in United States ex rel. Ortega v. Columbia Healthcare Inc., was correct.
- United States ex. rel. Parikh v. Premera Blue Cross, 2007 WL 1031724 (W.D. Wash. 2007): The court noted that “Baylor does not stand for the proposition that the limitations period is tolled on the date that the case is unsealed, and that there is substantial case law to the contrary.” The court goes on to state that the language of the FCA suggests that the statute of limitations is tolled when the original complaint is filed and that the Ninth Circuit favors this interpretation rather than the reasoning set forth in Baylor.
4. False Claims Correction Act of 2007
Both the U.S. Senate and the House of Representatives have proposed versions of the False Claims Act Correction Act of 2007, which substantially change many provisions of the FCA. Significantly, the legislation strengthens the rights of qui tam relators, sometimes reversing the effects of recent court decisions. The False Claims Act Correction Act of 2007 would make the following changes, among others, to the FCA:
- Amends the FCA to clarify the jurisdictional bar for claims based on publicly disclosed information. This change addresses the holding in Rockwell Int’l Corp. et al. v. United States, 127 S.Ct. 1397 (2007), that the public disclosure bar requires a qui tam relator to be an original source for all claims that are ultimately settled or upon which a verdict is rendered. The proposed statutory language redefines the term “public disclosure” as only those disclosures “made on the public record or that have otherwise been disseminated broadly to the general public.” The proposed statute further provides that there is no bar unless the allegations are “based exclusively” on the public disclosure. Finally, the new legislation grants the government, not the courts, the exclusive right to dismiss relator claims on public disclosure grounds. This forecloses the defendant from raising public disclosure as grounds for dismissing the claims.
- Changes the statute of limitations to ten years for both the government and for relators, and provides that the government pleading shall relate back to the filing date of the complaint of the person who originally brought the action to the extent that the claim of the government arises out of the conduct, transactions, or occurrences set forth, or attempted to be set forth, in the prior complaint. This proposed change addresses the holding in United States v. Baylor Univ. Med. Ctr., 469 F.3d 263, 268 (2nd Cir. 2006).
- Removes the requirement that false claims be presented directly to government employees. The legislation defines “government money or property” and “claim” to avoid the necessity of presentment under the statute. The proposed legislation would essentially result in the application of the False Claims Act to all invoices paid with government funds. This change addresses the D.C. Circuit Court of Appeals decision in U.S. ex rel. Totten v. Bombardier Corp, 380 F.3d 488 (2004), which held that false claims to government grantees (in this case, Amtrak) were not “presented” to a government employee and barred government recovery of government funds lost to fraud. The Supreme Court recently heard oral arguments in Allison Engine Co. Inc. v. United States, 07-214 (U.S. petition for cert. filed Aug. 17, 2007) (argued on February 26, 2008), on the same issue. In the case below, the Sixth Circuit held that a plaintiff asserting a cause of action under 31 U.S.C. § 3729(a)(2) or § 3729(a)(3) need not establish that a false claim was submitted to the government or that the defendant participated in a conspiracy to submit such a claim. Thus, the proposed change would moot the Supreme Court’s decision in that case.
- Provides that government employees may act as qui tam relators in the limited circumstances when they have reported activities up the chain of command, to the Inspector General, to the Attorney General, and only after twelve months have passed since the disclosure without action by the Attorney General.
• Provides strengthened employment protections for whistleblowers. The Senate Judiciary Committee conducted a hearing on the legislation on February 27, 2008. According to the testimony of Assistant Attorney General Michael Hertz, the Administration objects to certain provisions of the proposed legislation. He specifically noted that:
“[w]hile the Administration is sympathetic to some of the proposed amendments, it cannot support the bill in its current form. Among our concerns are the proposals narrowing the public disclosure bar to permit those with no first hand knowledge beyond that available in the public domain to serve as relators, and permitting government employees to serve as relators in certain circumstances, which is unsound public policy as all government employees have an obligation to report fraud.”
His comments notwithstanding, the Senate Judiciary Committee voted the Senate version to be “reported with an amendment in the nature of a substitute favorably” on April 3, 2008. The House version was referred to the House Committee on the Judiciary in December 2007.
E. Conclusion
The federal share of prescription drug expenditures is increasing dramatically. In late 2003, President Bush signed the Medicare Prescription Drug Improvement and Modernization Act (“MMA”). Pursuant to the statute, Medicare now includes a prescription drug benefit available to all 40 million seniors and disabled Americans. The introduction of the part D benefit accelerated Medicare spending: Medicare spending grew by 9.3% in 2005 but increased by 18.7% in 2006. Medicare spending totaled $401.3 billion in that year. Some projections suggest that the cost of the Medicare prescription drug benefit could be as much as $1.2 trillion through 2015. It is clear that the MMA will exponentially increase government payments for prescription drugs. Given the enormous financial incentives, new private relators undoubtedly will join the ranks of the many who have already filed qui tam actions against pharmaceutical companies. Litigation against the industry under the FCA likely will continue well into the future.