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Ninth Circuit Applies Escobar to Assess Materiality in False Claims Act Case

By Jonathan DeSantis

The Ninth Circuit recently applied the materiality requirement for claims under the False Claims Act (“FCA”) and provided guidance for the application of the Supreme Court’s seminal decision on the FCA’s materiality requirement in Universal Health Servs., Inc. v. United States ex rel. Escobar.[1]

The False Claims Act’s Materiality Requirement

Under the FCA, “a misrepresentation about compliance with a statutory, regulatory, or contractual requirement must be material to the Government’s payment decision in order to be actionable under the False Claims Act.”[2]   Put differently, a defendant’s misrepresentation must actually affect or be likely to affect the Government’s payment decision to be actionable under the FCA.

In 2016, the Supreme Court issued its seminal decision on the materiality requirement in Esocbar. As we addressed in a previous blog entry, while Escobar did not necessarily change the law on materiality, it did provide important guidance for relators and lower courts moving forward.  For example, the Supreme Court explained that “proof of materiality can include, but is not necessarily limited to, evidence that the defendant knows that the Government consistently refuses to pay claims in the mine run of cases based on noncompliance with the particular statutory, regulatory, or contractual requirement.”[3]

The Materiality Requirement in Campie

In United States ex rel. Campie v. Gilead Scis., Inc.,[4] the Ninth Circuit recently clarified the FCA’s materiality requirement in light of Escobar.  In Campie, the Government purchased large quantities of anti-HIV drugs from a drug manufacturer.  Two relators filed a lawsuit under the FCA alleging that the manufacturer made misrepresentations to the Food and Drug Administration (“FDA”) in connection with its application to get the drugs approved.

Specifically, the relators alleged that the manufacturer told the FDA that it would procure one of the main ingredients for the drugs from Canada, Germany, the United States, and South Korea, when in reality it was obtaining the ingredient from an unapproved facility in China.

The relators also alleged that the manufacturer eventually obtained FDA approval to obtain the ingredient from the facility in China, but in doing so misrepresented to the FDA that testing established that the ingredient performed just as well when acquired from China as from the other countries.  In reality, the relators alleged that the manufacturer’s internal testing revealed substantial problems when using the ingredient from China.

Many of the relator’s allegations suggested that the FDA did not withdraw its approval of the drugs even after it learned of the manufacturer’s alleged misrepresentations. Thus, in relevant part, the manufacturer moved to dismiss the relators’ claims on the basis the misrepresentations to the FDA were not material to the FDA continued approval of the drugs.

Before the Supreme Court issued Escobar, the district court granted the manufacturer’s motion to dismiss upon concluding (in relevant part) that the manufacturer’s misrepresentations to FDA were immaterial to the Government’s decision to purchase and pay for the drugs.[5]

On appeal and with the benefit of the Supreme Court’s intervening decision in Escobar, the Ninth Circuit reversed.  The Ninth Circuit rejected the manufacturer’s argument that the FDA’s apparent continued approval of the drugs after learning of the manufacturer’s alleged misrepresentations conclusively precluded a finding of materiality for two reasons.

First, the court noted that this reasoning “would allow [the manufacturer] to use the allegedly fraudulently-obtained FDA approval as a shield against liability for fraud.”[6]  Second, the court explained that “there are many reasons the FDA may choose not to withdraw a drug approval, unrelated to the concern that the government paid out billions of dollars for nonconforming and adulterated drugs.”[7]

In sum, the Ninth Circuit concluded that “the issues raised by the parties here are matters of proof, not legal grounds to dismiss relators’ complaint.”[8] Accordingly, the Ninth Circuit reversed the district court’s dismissal of the relators’ claims.

Conclusion

In conclusion, decisions like the Ninth Circuit’s decision in Campie will continue to provide guidance to lower courts, relators, and attorneys as to the proper application of the FCA’s materiality requirement in light of Escobar.

[1] 136 S. Ct. 1989 (2016), available at https://www.supremecourt.gov/opinions/15pdf/15-7_a074.pdf.

[2] Id. at 2002.

[3] Id. at 2003.

[4] 2017 WL 2884047 (9th Cir. July 7, 2017), available at http://cdn.ca9.uscourts.gov/datastore/opinions/2017/07/07/15-16380.pdf.

[5] United States ex. rel. Campie v. Gilead Scis., Inc., 2015 WL 3659765 (N.D. Cal. June 12, 2015), rev’d and remanded sub nom. United States ex rel. Campie v. Gilead Scis., Inc., No. 15-16380, 2017 WL 2884047 (9th Cir. July 7, 2017).

[6] 2017 WL 2884047 at *11.

[7] Id.

[8] Id.

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Employees and Competitors Should Be on the Lookout for Violations of “Buy American” Laws in Federal Procurement, Part II

By Susan Schneider Thomas

We previously wrote about the adverse inference permitted by the court in United States ex rel. Scutellaro v. Capitol Supply, 2017 WL 1422364 (D.D.C. Apr. 19, 2017).  That inference allowed the whistleblower and the government to prove the falsity element of their claims against a supplier of office products to various federal agencies based on the defendant’s blatant failure to have maintained required documentation concerning its products’ country of origin (“COO”).

This blog post covers the court’s analysis of the materiality requirement under the False Claims Act, basically whether the violations alleged were significant enough and sufficiently related to the government’s determination whether it would pay on particular claims or purchases.

Materiality Under Escobar

Basically, “if the Government regularly pays a particular type of claim in full despite actual knowledge that certain requirements were violated, and has signaled no change in position, that is strong evidence that the requirements are not material.” Id. at *7, citing the Supreme Court’s 2016 opinion in United Health Services v. United States ex rel. Escobar. In the Capitol Supply case, the court reviewed defendant’s contention that the government both regularly paid the allegedly tainted claims and signaled no change in position on account of the wrongdoing.  As the court explained:

[F]or more than a decade, the GSA gave the defendant mixed signals. On the one hand, the GSA’s regional office gave the defendant not just “satisfactory” or “very good,” but “exceptional” ratings on its report cards…. Ms. Springer, the assigned IOA out of the Atlanta Regional Office who conducted the defendant’s [Contractor Assistance Visits] CAVs, never once marked the defendant down for TAA non-compliance despite the defendant’s complete lack of retention of historical COO information until at least June 2009, testifying that she ‘didn’t see anything wrong with their process or their understanding of the Trade Agreements Act.’ …  Moreover, during the pendency of this seven-year litigation, the defendant received two additional GSA contracts and seven renewals of prior contracts.”

2017 WL 1422364 at *21.

The court denied both defendant’s and the relator/government motions for summary judgment, ruling that there were disputed facts and inferences that could be drawn from the evidence. Basically, the court held that the mixed signals discussed above defeated a ruling on summary judgment for either side.

Should One Side Have Won on Summary Judgment?

The court’s decision to deny summary judgment to defendant was clearly appropriate. There were obvious violations both in terms of non-compliant products and grossly insufficient and non-compliant record-keeping.  Barring some prior specific determination by the relevant agency about the particular conduct at issue, based on full and complete information about the challenged conduct, it should be an extremely high burden for a defendant to prevail on summary judgment regarding materiality, basically a ruling that defendant’s violative conduct simply didn’t matter.  It is also helpful for whistleblowers that the court did not accept the defendant’s evidence of ongoing and additional contracts as being sufficient, on its own, to defeat a showing of materiality.

It seems to be a closer question whether the evidence introduced by Relator and the government was sufficient to support summary judgment in their favor.  The court’s citation of facts that ostensibly could allow a jury to reach a conclusion of non-materiality is a bit weak, because there is only vague indication of whether the “signals” of a lack of concern were sent by people with a full understanding of the totality and egregiousness of the facts. Indeed, the primary evidence cited of “mixed signals” had earlier been described by the court as report cards issued by one GSA employee based on Contractor Assistance Visits in which “the defendant controlled the scope of the CAVs by selecting three small samples of data.” U.S. ex rel. Scutellaro v. Capitol Supply, Inc., 2017 WL 1422364, at *4.

Similarly for the contract renewals, it is hard to see that the government’s ongoing relationship with a contractor signals acquiescence in the contractor’s misconduct absent a clear demonstration that those ongoing or new contracts were awarded in the face of full and accurate information about the alleged violations.

Impact of Executive Order and Related Promulgations Concerning Enforcement of Buy American Laws

It will be interesting to see if the President’s Executive Order about Buy American requirements and the related memorandum that came out of the Office of Management and Budget and the Secretary of Commerce, right at the end of June, will have any impact on future evaluations of materiality. The memo focused on enforcing the Buy American laws and cutting back on waivers.  Assuming federal agencies actually comply–and there are some fairly strict reporting obligations to suggest that will happen–the impact of those efforts might provide evidence of materiality and will possibly prompt agencies themselves to define their regulations in this area as material.

Finally, if an employee or competitor realizes that a company has discovered that it is out of compliance with Buy American laws, self-reporting is likely required. A knowing failure to self-report can itself constitute a False Claims Act violation, and such claims will likely bypass the materiality determinations altogether.

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Employees and Competitors Should Be on the Lookout for Violations of “Buy American” Laws in Federal Procurement, Part I

By Susan Schneider Thomas

Earlier this year, the D.C. District Court denied cross-motions for summary judgment in a False Claims Act (“FCA”) case alleging that defendant Capitol Supply sold document shredders manufactured in China through the General Services Administration (“GSA”) website, in violation of the Trade Agreements Act (“TAA”). United States ex rel. Scutellaro v. Capitol Supply, 2017 WL 1422364 (D.D.C. Apr. 19, 2017).

We will discuss two significant aspects of the court’s opinion: materiality, and the availability of adverse inferences against a company that fails to maintain required records.  This post will address the adverse inferences, and a subsequent post will discuss materiality.

Factual Background of the Capitol Supply Lawsuit

The defendant entered into a Multiple Award Schedule contract with GSA in January 2003. The contract allows the defendant to advertise and sell office supplies to various federal agencies through the GSA Advantage! website.  Various provisions of the Federal Acquisition Regulation (“FAR”) were incorporated, requiring that all vendors selling products to federal agencies retain records regarding the country-of-origin (“COO”) of their products. Defendant Capitol Supply certified that each “end product” it listed and sold was TAA compliant.  Id. at *2.

In fact, defendant had an automated system in place to identify and track the COO for its merchandise, but for a period of time it utilized a system that overwrote the COO data as new data came in from different suppliers.

After various efforts to forestall discovery, defendant admitted that it did not have any information on the COO for products sold prior to June 2009, had incomplete COO information for products sold between July 2009 and November 2010, and only had complete COO information for products sold after December 2010.  The unavailability of that information potentially presented a critical obstacle in the FCA case, because there was no direct way to prove that many of the defendant’s products were non-compliant.

Impact of Defendant’s Failure to Retain Records Showing Country of Origin

The relator and government, which had intervened in part of the case, filed motions requesting an “adverse inference” ruling – to wit, that the court “exercise its inherent power to draw the adverse inference that, for all products for which COO is unknown because the defendant failed to retain that information, the COO is non-designated.”

The court readily concluded that the failure to maintain records violated Capitol’s regulatory and contractual obligations to retain COO data and proceeded to analyze whether the requested adverse inference ruling was appropriate.

Key factors in the court’s analysis were:

  • the overwriting of the data was not accidental or unknowing, but was a company practice notwithstanding the regulatory and contractual requirements to retain the information;
  • the government was within the class of persons sought to be protected by the tracking and retention regulations; and
  • the missing information was critical to a determination of the COO violations alleged in the case.

Based on its analysis of its inherent powers and the circumstances at hand, the court concluded that the relator and government were entitled to an adverse inference that the unavailable COO information would show that Capitol’s products came from non-designated countries.  Essentially, the adverse inference demonstrated the falsity element of the FCA claims.

Implications for Whistleblower Litigation

A company’s willful failure to comply with the Buy American laws and the Buy American terms in their contracts or subcontracts with U.S. government agencies presents a viable False Claims Act case.  The adverse inference permitted by the Capitol Supply court is a powerful tool against a company that might believe it can blow past a government investigation or litigation simply by claiming that the government cannot prove all the claims, and the company did not retain all of the relevant documentation.

This ruling could have consequences beyond the GSA supply or Buy American context.  Contractors have any number of contractual requirements to retain documents, including standard audit clauses.  If a contractor cannot produce such documents, the Capitol Supply decision could be invoked in support of an adverse inference that the contractor violated the obligation in question.  That could be a huge step towards success in FCA cases challenging various types of regulatory violations where there are corresponding record-retention requirements.

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Can a Promulgated Court Opinion in a Qui Tam Case be Vacated Upon the Parties’ Request in Order to Facilitate a Settlement? Part II

By Sherrie Savett

In Part I of this blog series, we established that Courts have discretion to vacate, but it should not be used “absent exceptional circumstances.”  Amaefule v. Exxonmobil Oil Corp., 630 F. Supp. 2d 42, 43 (D.D.C. 2009) (quoting U.S. Bancorp Mortg. Co. v. Bonner Mall P’ship, 513 U.S. 18, 26 (1994)).

Courts Evaluate Whether There is Public Interest Involved in Resolving Legal Issues

The 7th, D.C. Circuit, 10th and Second Circuits, and many district courts have addressed this issue and come out against vacatur of opinions.

Various courts have recognized that opinions serve an important public interest in resolving legal issues, i.e. that opinions have significance beyond the relationship between the private litigants.  As the Supreme Court describes, “[j]udicial precedents are presumptively correct and valuable to the legal community as a whole. They are not merely the property of private litigants and should stand unless a court concludes that the public interest would be served by a vacatur.” U.S. Bancorp Mortg. Co. v. Bonner Mall P’ship, 513 U.S. 18, 26 (1994) (internal quotation marks omitted).  Put differently, there is a substantial public interest in “the development of decisional law” given “the importance of published opinions to other courts and future litigants.” United States v. Reid, 2000 WL 1843291, at *3 (E.D.N.Y. Oct. 31, 2000).

The seminal case on this issue is the Seventh Circuit’s decision in Matter of Mem’l Hosp. of Iowa Cty., Inc., 862 F.2d 1299 (7th Cir. 1988). In it a bankruptcy court held a party in contempt of court, and the district court affirmed the bankruptcy court’s decision in a published opinion.  The losing party appealed to the Seventh Circuit.  During the pendency of the appeal, the parties reached a settlement agreement, and the parties filed a motion asking the Seventh Circuit to vacate the district court’s opinion.   The Seventh Circuit denied the parties’ request in explaining:

Litigants who settle their dispute while an appeal is pending often file a joint motion asking us not only to dismiss the appeal but also to vacate the opinion and judgment of the district court. We always deny these motions to the extent they ask us to annul the district court’s acts, on the ground that an opinion is a public act of the government, which may not be expunged by private agreement. History cannot be rewritten. There is no common law writ of erasure. . . .  When a clash between genuine adversaries produces a precedent, however, the judicial system ought not allow the social value of that precedent, created at cost to the public and other litigants, to be a bargaining chip in the process of settlement. The precedent, a public act of a public official, is not the parties’ property. We would not approve a settlement that required us to publish (or depublish) one of our own opinions, or to strike a portion of its reasoning . . . The opinions written in this case record two judges’ solutions to a legal problem. These opinions may be valuable for other litigants and judges . . . They will be left as they are. The parties may be free to contract about the preclusive effects of these decisions inter se . . . [but] they are not free to contract about the existence of these decisions.

Id. (emphasis added). Notably, in In re U.S., 927 F.2d 626 (D.C. Cir. 1991), the D.C. Circuit adopted the reasoning of Matter of Mem’l Hosp. and denied the parties’ request to vacate an opinion after the parties reached a settlement agreement.

In Oklahoma Radio Assocs. v. F.D.I.C., 3 F.3d 1436, 1436 (10th Cir. 1993), the Tenth Circuit issued an opinion, and the losing party filed a motion for rehearing en banc.  Before the Tenth Circuit ruled on that motion, the parties reached a settlement agreement; one of the conditions of the settlement agreement was the parties would ask the Tenth Circuit to vacate its opinion.  Thus, the parties filed a joint motion asking the Tenth circuit to “vacate its . . .  opinion and remand the case to the District Court with instructions to vacate the Judgment.”  Id. at 1436.   The Tenth Circuit rejected the parties’ motion on public policy grounds:

The furthering of settlement of controversies is important and desirable, but there are significant countervailing considerations which we must also weigh. A policy permitting litigants to use the settlement process as a means of obtaining the withdrawal of unfavorable precedents is fraught with the potential for abuse. Moreover, the reasoning in the published opinion “may be helpful to other courts to the extent that it is persuasive. . . . [T]he instant case the joint motion and joint memorandum clearly indicate that vacatur of our . . .  opinion . . .  was an important consideration in the settlement. For the reasons we have given, we are unwilling to vacate our opinion to accommodate the parties in accord with their settlement.

Id. at 1444-45 (internal quotation marks and citation omitted).

In Fed. Ins. Co. v. Hanover Ins. Co., 2013 WL 6403189 (N.D. Tex. Nov. 27, 2013), a district court explained that “[i]n connection with the parties’ settlement of this lawsuit, they have filed a . . .  motion to withdraw opinion, in which they request that the court withdraw its . . . memorandum opinion and order.”  The court agreed with the request: “Although the court is not obligated to withdraw an opinion, it has done so to facilitate settlement and where matters of public interest were not involved.” Id. at *1 (emphasis added).

Vacatur is Not Appropriate to Serve a Private Litigant’s Interest to Remove Adverse Precedent

In a somewhat similar public policy vein, courts have also been cognizant of large corporate parties’ attempts to eliminate adverse precedent by “buying off” a smaller party. For example, in Manufacturers Hanover Trust Co. v. Yanakas, 11 F.3d 381, 382 (2d Cir. 1993), the Second Circuit affirmed in part and reversed in part a district court’s decision and remanded the case to the district court for further proceedings.  The parties then reached a settlement agreement, which was conditioned upon the Second Circuit’s agreement to vacate its opinion. The parties consequently filed a joint motion asked the Second Circuit to vacate its opinion.  The Second Circuit denied the parties’ motion:

Nor do we view the granting of such a motion as a wise exercise of discretion, for vacatur of the appellate court’s judgment would facilitate two abuses. First, it would allow the parties to obtain an advisory opinion of the court of appeals in a case in which there may not be, or may no longer be, any genuine case or controversy; the federal courts of course have no jurisdiction to render such opinions. Second, even where there was a genuine case or controversy, it would allow a party with a deep pocket to eliminate an unreviewable precedent it dislikes simply by agreeing to a sufficiently lucrative settlement to obtain its adversary’s cooperation in a motion to vacate. We do not consider this a proper use of the judicial system.

Id. at 384 (emphasis added).

Likewise, a district court explained that “[v]acatur is requested almost exclusively by repeat-player litigants who have the greatest incentive to remove adverse precedent from the books. The repeat player, as opposed to the one-shot litigant, is principally concerned with the long-range effects of the judgment.”  McMellon v. United States, 528 F. Supp. 2d 611, 614 (S.D.W. Va. 2007).

Vacatur is Not Appropriate Where the Decision Addresses Significant or Novel Legal Issues

Courts appear more willing to grant a parties’ request to vacate an opinion where the opinion did not address novel or important legal issues.  For example, in granting a request to vacate a previously-issued order, one court noted that the opinion “d[id] not involve novel or controversial applications of the law.” BMC, LLC v. Verlan Fire Ins. Co., 2008 WL 2858737, at *2 (W.D.N.Y. July 22, 2008).  Similarly, vacatur is more appropriate when a decision presented “a fact-specific inquiry” rather than threshold legal issues, i.e. vacatur is more appropriate when the decision addressed factual issues that only affect the parties rather than legal issues that could be significant to non-parties. McKinney v. Philadelphia Hous. Auth., 2010 WL 2510382, at *2 (E.D. Pa. June 16, 2010).

On the other hand, courts have rejected parties’ requests to vacate decision that address important or novel legal issues. See e.g. Obrycka v. City of Chicago, 913 F. Supp. 2d 598, 602 (N.D. Ill. 2012) (describing the decision as addressing “a novel situation”); Barry v. Atkinson, 193 F.R.D. 197, 200 (S.D.N.Y. 2000) (addressing the “significance” of a decision in deciding whether to grant the parties’ request to vacate the decision to facilitate a settlement agreement); In re Aden, 2013 WL 4513838, at *2 (D. Idaho Aug. 23, 2013) (similar); Bashkin v. Keisler, No. 06 C 2518, 2008 WL 4866352, at *4 (N.D. Ill. June 13, 2008) (“While we agree with plaintiffs that other courts and litigants are interested in the matters addressed in our September 20, 2007 opinion, this only strengthens our view that our decision should be left intact.”) (footnote omitted).

Vacatur is Not Appropriate Simply to Facilitate a Settlement Agreement

Courts have also rejected parties’ arguments that vacatur of a decision to facilitate a settlement agreement is necessary to promote the important interests served by settlement agreements.  For example, in Amaefule v. Exxonmobil Oil Corp., 630 F. Supp. 2d 42, 43 (D.D.C. 2009), the only case that research reveals in the District of the District of Columbia to address this issue, the parties reached a settlement agreement, and in connection with that settlement agreement, asked the district court to “vacat[e] the oral rulings issued . . . in connection with the preliminary injunction and . . . on the parties’ summary judgment motions such that the rulings could not be cited as precedent and would carry no precedential value.”  Id. at 42.  The district court denied the parties’ motion.  The district court rejected the parties’ argument that vacatur was necessary to promote a policy of encouraging settlements:

The parties argue that “vacatur is necessary to uphold this District’s longstanding policy of encouraging the amicable termination of litigation.” They cite to no precedent, though, establishing any longstanding practice in this District of encouraging settlement by vacating court decisions.1 Indeed, a court encourages settlement by ruling on parties’ dispositive motions so that parties know where they stand when they engage in settlement discussions about surviving claims. Similarly, a court encourages settlement by making available its reasoning for litigants in similar actions to rely upon when assessing whether settlement is the preferable resolution to a dispute. Nevertheless, neither party has demonstrated any exceptional circumstances justifying deviating from longstanding policy in this circuit against vacatur following settlement. Nor have the parties argued that the previous rulings in this action were erroneous. Having expended the time and effort to resolve the parties’ motions and create precedent which may be of value to other courts and litigants, this court finds no basis for vacating the previous rulings in this action. (Emphasis added)

Id. at 43-44.

Put differently, as another district court explains, “[t]he policy in favor of settlement did not vest in the parties to this case the authority to decide which judicial orders they wish to remain good law.” Predator Int’l, Inc. v. Gamo Outdoor USA, Inc., 2014 WL 4057118, at *3 (D. Colo. Aug. 14, 2014); see also McMellon v. United States, 528 F. Supp. 2d 611, 614 (S.D.W. Va. 2007) (denying a motion to vacate a decision and explaining that “[s]ettlements are desirable, yet are not the sole concern of the judicial system”); Allen-Bradley Co., LLC v. Kollmorgen Corp., 199 F.R.D. 316, 320 (E.D. Wis. 2001) (similar).

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Can a Promulgated Court Opinion in a Qui Tam Case be Vacated Upon the Parties’ Request in Order to Facilitate a Settlement? Part I

By Sherrie Savett

The Motivation to Vacate

Often the parties in a hotly contested case want to settle, but the removal of a negative opinion affecting one side or the other is even more important than the money involved.  This can be true for defendants who want to remove a bad precedent on a merits or a plaintiff/relator who wants to remove a decision containing a criticism of the Relator or a bad decision on something which could bar future cases, like a public disclosure bar or a seal breach.

The answer to the question of whether an issued opinion can be vacated upon request of the parties is that although the Court has discretion to vacate a previously issued decision, this discretion is rarely exercised. If exercised, it is limited to very few circumstances, and vacation of opinions is frowned upon by numerous appellate courts (e.g. the 7th, 10th, 2nd, and District of Columbia Circuits), as well as most district courts who have considered the issue.

The Court Has the Discretion to Vacate, But it Can Only be Exercised in Exceptional Circumstances

In In re Aden, 2013 WL 4513838, at *1 (D. Idaho Aug. 23, 2013) the Court stated: “A court may vacate an earlier decision if the parties settle, but it is not required to do so.”.   Of course, that does not mean that courts should vacate previously-issued opinions; indeed, “mootness by reason of settlement does not justify vacatur ‘absent exceptional circumstances.”  Amaefule v. Exxonmobil Oil Corp., 630 F. Supp. 2d 42, 43 (D.D.C. 2009) (quoting U.S. Bancorp Mortg. Co. v. Bonner Mall P’ship, 513 U.S. 18, 26 (1994)).

The Factors a Court Must Consider in Deciding Whether or Not to Vacate Upon the Parties’ Request

While courts recognize the importance of settlement agreements, the clear weight of authority counsels against vacatur of a previously-issued opinion to facilitate a settlement agreement.  Courts consider a variety of factors, including (1) the adverse effect on the public interest if a court agrees to a vacate a decision to facilitate an agreement between private parties and (2) whether the decision that the parties seek to vacate addresses significant or novel legal issues. Moreover, courts have rejected an argument that vacatur is appropriate simply to facilitate a settlement agreement, i.e. that the important interests promoted by a settlement agreement necessarily outweigh the adverse effects of vacating a decision.  Overall, the weight of authority has found that vacatur of a previously-issued decision is inappropriate.

In False Claims Act Cases, the Public Interest in the Government Not Paying for False or Fraudulent Claims is Always Present, and the Government Must Approve the Settlement

In Fed. Ins. Co. v. Hanover Ins. Co., 2013 WL 6403189 (N.D. Tex. Nov. 27, 2013), a district court explained that “[i]n connection with the parties’ settlement of this lawsuit, they have filed a . . .  motion to withdraw opinion, in which they request that the court withdraw its . . . memorandum opinion and order.”  The court agreed with the request: “Although the court is not obligated to withdraw an opinion, it has done so to facilitate settlement and where matters of public interest were not involved.” Id. at *1 (emphasis added).

Where there is a False Claims Act case, the public interest is always involved because such cases are concerned with public funds and the improper payment of same due to fraud of some type. Qui tam cases implicate matters of public interest even more than a case with private litigants.  Thus withdrawal of an opinion of the court could almost never be appropriate.  Another reason vacation of an opinion is particularly improper and unlikely in a qui tam case is because ultimately the case, whether the government has intervened or not, belongs to the government, and any settlement requires the government’s approval.  It is highly unlikely that the government would consent to a settlement which would contain a term agreeing that a court should withdraw its opinion.

PART II: TO COME……

Part II will describe in more detail the factors applied by the Court in deciding whether to exercise its discretion to vacate an already released decision.  Part II will set forth the key cases and their reasoning not to allow vacatur of a court’s opinion in order to facilitate a settlement.

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Court Allows False Claims Act Case Involving Janssen’s HIV/AIDS Drugs to Proceed

By Joy Clairmont

On May 31, 2017, the United States District Court for the District of New Jersey allowed relators’ False Claims Act (“FCA”) lawsuit against Janssen to proceed to litigation.  United States et al. v. Johnson & Johnson, et al., Civ. A. No. 12-7758, 2017 WL 2367050 (D.N.J. May 31, 2017).  Although claims against Janssen’s parent company, Johnson & Johnson, were dismissed, the Court denied Janssen’s motion to dismiss the lawsuit in all significant respects.  Id. *8.  The government had previously declined to intervene in the action, and the case will be litigated by relators’ counsel, Berger & Montague, P.C., and Cohn Lifland Pearlman Herrmann & Knopf LLP.

The lawsuit alleges that defendant Janssen purposely misrepresented, misbranded, and illegally marketed two potentially dangerous, expensive AIDS drugs – Intelence and Prezista – and paid kickbacks to certain physicians to influence them and others to prescribe these drugs. Defendant’s misleading marketing of Prezista concealed a dangerous side effect of the drug – elevated lipids – and falsely minimized the very serious risk of cardiovascular disease for HIV and AIDS patients. Defendant also aggressively and knowingly marketed Intelence off-label, for “treatment-naïve” patients, contrary to the label, as well as for once-daily use, which was directly contrary to its limited FDA approval for twice a day use.

In his opinion, Judge Michael A. Shipp held that relators’ complaint adequately pled “falsity” and “materiality,” required elements under the FCA.  2017 WL 2367050, *4-6. Further, the complaint satisfied the heightened pleading requirements for fraud under Rule 9(b) of the Federal Rules of Civil Procedure.  Id. *6-7.

Relying on the Third Circuit’s Petratos decision, the district court upheld allegations that use of a drug within its overall label class could still constitute false claims if the drug was not reasonable and necessary for specific patients:  “FDA approval does not per se render a drug ‘reasonable and necessary,’ but rather a drug ‘must also be ‘reasonable and necessary for the individual patient.’”  Id. *5.

The court found that materiality was satisfied by the allegations that there had been false certifications rendering the claims “ineligible for reimbursement.”  Id. *5-6.

Finally, the court followed established Third Circuit law in holding that a plaintiff need not plead specific false claims if their particularized allegations lead to a strong inference that claims were actually submitted.  Id. *6-7 (citing Foglia v. Renal Ventures Mgmt., LLC, 754 F.3d 153 (3d Cir. 2014)).

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Circuit Court Endorses Tri-Partite Inquiry in Analyzing Medical Necessity Under the False Claims Act

By Joy Clairmont

On May 1, 2017, in United States ex rel. Petratos v. Genentech, Inc., 855 F.3d 481 (3d Cir. 2017), the United States Court of Appeals for the Third Circuit endorsed a tri-partite approach in analyzing the medical necessity theory of liability under the False Claims Act.  While the Third Circuit ultimately affirmed the lower court’s dismissal of the case, the Court’s three-step approach provided clarity as to how to analyze medical necessity under the False Claims Act.

The relator in Petratos alleged that the drug manufacturer, Genentech, suppressed data about the negative side effects of its oncology drug, Avastin, which in turn caused physicians to submit claims to Medicare that were not “reasonable and necessary.”  855 F.3d at 485.  The lower court dismissed the relator’s claim, reasoning that “medically ‘reasonable and necessary’ is a determination made by the relevant [government] agency, not individual doctors.”  Id. at 486.  The Third Circuit disagreed, and held that the medical necessity of an FDA-approved product is a “process involving the FDA, CMS, and individual doctors.”  Id. at 487 (emphasis in original).

Tri-Partite Medical Necessity Analysis

In reaching its holding, the Petratos Court noted the role of each entity involved in the tri-partite medical necessity analysis:

  • FDA – Whether the drug is FDA approved is one important consideration for CMS in determining whether it is “reasonable and necessary.” Id. at 487-88.
  • CMS – “[T]he ‘reasonable and necessary’ determination does not end with FDA approval. The claim at issue must also be ‘reasonable and necessary for [the] individual patient’ based on “accepted standards of medical practice and the medical circumstances of the individual case.” Id. at 487-88 (emphasis in original) (citing Medicare Benefit Policy Manual, ch. 15, §50.4.3).
  • Individual Physicians – Ultimately, CMS relies on the medical judgment of individual physicians in deciding whether to pay claims. Id. at 488.  The Court notes that “the doctors are best suited to evaluate each patient and determine whether a treatment is ‘reasonable and necessary.’” Id. at 489 (citation omitted).

The Court reasoned that from a “practical perspective” this three-part analysis “makes sense” and gave the following hypothetical example of a physician prescribing an FDA-approved drug for an on-label use that would still be considered medically unnecessary:

Avastin is approved by the FDA to treat patients with metastatic colorectal cancer and such prescriptions are reimbursable by CMS.  But if a doctor determined that a colorectal cancer patient had five hours to live and would best be treated with palliative care, then prescribing Avastin in that situation many not be “reasonable and necessary.”

Id. at 489.

The Circuit Court Affirmed Dismissal on Other Grounds

Although the Petratos Court disagreed with the lower court’s interpretation of the medical necessity standard, the Court ultimately affirmed the dismissal of the case on materiality grounds.  Id. at 489.  In Petratos, the relator did not dispute that, had the government known of the defendant’s suppression of adverse safety data, the government still would have paid the claims.  Id. at 489-93.  Consistent with the Supreme Court’s decision in Universal Health Services v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), the Petratos Court held that this concession was dispositive of the materiality analysis and that it doomed the relator’s claims.  Id.

The Precedential Effect of the Circuit Court’s Decision

The Petratos decision serves as binding precedent in the Third Circuit.  For example, on May 31, 2017, the United States District Court for the District of New Jersey denied defendant Janssen’s motion to dismiss, in part by relying on PetratosUnited States et al. v. Johnson & Johnson, et al., Civ. A. No. 12-7758, 2017 WL 2367050 (D.N.J. May 31, 2017).  Citing Petratos, the District Court for the District of New Jersey upheld allegations that use of a drug within its overall label class could still constitute false claims if the drug was not reasonable and necessary for specific patients:  “FDA approval does not per se render a drug ‘reasonable and necessary,’ but rather a drug ‘must also be ‘reasonable and necessary for the individual patient.’”  Id. at *5.

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History and Purpose of the Public Disclosure Bar

By Shauna Itri

Early Public Disclosure Bar

In the early 1940s, some enterprising individuals filed False Claims Act (“FCA”) actions based not on their own independent knowledge of a fraud but on information revealed in criminal indictments. S.Rep. No. 99–345, at 10–11 (1986).  This harmed the government because the FCA required the government to pay these relators, even though the government already knew about the fraud.

1943 Amendment to the Public Disclosure Bar

To counteract these “parasitic lawsuits,” Congress added a provision in 1943 that denied jurisdiction over FCA actions that were “based upon evidence or information in the possession of the United States, or any agency, officer or employee thereof, at the time such suit was brought.” 31 U.S.C. § 232(C) (1946). But this “government knowledge defense” had the unintended effect of also eliminating meritorious lawsuits, because courts strictly interpreted § 232(C) as barring FCA actions even when the government knew of the fraud only because the relator had reported it. U.S. ex rel. Moore & Co., P.A. v. Majestic Blue Fisheries, LLC, 812 F.3d 294, 298 (3d Cir. 2016).

1986 Amendment to the Public Disclosure Bar

“In 1986, Congress sought ‘[t]o revitalize the qui tam provisions,’” U.S. ex rel. Mistick PBT v. Housing Authority of City of Pittsburgh, 186 F.3d 376, 382 (3d Cir. 1999) (quoting U.S. ex rel. Stinson, Lyons, Gerlin & Bustamante, P.A. v. Prudential Ins. Co., 944 F.2d 1149, 1154 (3d Cir. 1191)), in an effort “to strike a balance between encouraging private persons to root out fraud and stifling parasitic lawsuits,” United States ex rel. Zizic v. Q2 Administrators, LLC, 728 F.3d 228, 235 (3d Cir. 2013). As a result, Congress enacted 31 U.S.C. § 3730(e)(4)(A), which provides:

No 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 General Accounting Report, hearing, audit, or investigation, or from the news media, unless the person bringing the action is an original source (31 U.S.C. § 3730(e)(4)(A)).

31 U.S.C. § 3730(e)(4)(A) (the “Public Disclosure Bar”).

2010 Amendment to the Public Disclosure Bar

Congress amended the provisions of the public disclosure bar in 2010 as follows:

(A)  The court shall dismiss an action or claim under this section, unless opposed by the Government, if substantially the same allegations or transactions as alleged in the action or claim were publicly disclosed—

(i)   in a Federal criminal, civil, or administrative hearing in which the Government or its agent is a party;

(ii)   in a congressional, Government Accountability Office, or other Federal report, hearing, audit, or investigation; or

(iii)   from the news media, unless the action is brought by the Attorney General or the person bringing the action is an original source of the information.

(B)   For purposes of this paragraph, “original source” means an individual who either (i) prior to a public disclosure under subsection (e)(4)(a), has voluntarily disclosed to the Government the information on which allegations or transactions in a claim are based, or (2) 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.

See 31 U.S.C. § 3730(e)(4) (2010).

Substantively, the 2010 amendments left the test for application of the public disclosure bar largely unchanged. Under either version, then, the public disclosure bar applies where: (1) information was publicly disclosed via a source listed in § 3730(e)(4)(A); (2) the public disclosure included an “allegation or transaction” within the meaning of the statute; and (3) the complaint is “based upon” or “substantially the same” as those disclosures of fraud. See Moore, 812 F.3d at 301.

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Bringing a False Claims Act Case Without Identifying Specific Claims to the Government

By Susan Schneider Thomas

We wrote earlier about the important holding in one of this Firm’s cases, U.S. ex rel. Groat v. Boston Heart Diagnostics Corp., 2017 WL 2533341 (D.D.C. June 9, 2017), regarding the responsibility of a medical laboratory to ascertain whether lab tests ordered by physicians are medically necessary. That opinion also includes helpful language regarding the degree of specificity and particularization of actual claims required under the False Claims Act (“FCA”).

Allegations of Unnecessary Lab Tests

The case arose when a medical doctor employed at a health insurance company filed a FCA action against a clinical laboratory alleging that the defendant engaged in a systematic scheme to bill Medicare for medically unnecessary tests and to falsely certify that the tests were necessary.  Among multiple other challenges, defendant argued that the case should be dismissed because relator had not alleged her claims with specificity and had not identified even one actual false claim that was submitted to the government.

Defendant, Boston Heart, is a clinical laboratory that provides diagnostic testing related to cardiovascular health.  Relator alleged that Boston Heart conducts laboratory tests that are ordered by doctors and other healthcare providers. More significantly, Relator alleged that Boston Heart facilitated and encouraged the ordering of unnecessary tests by providing doctors with pre-printed test requisition forms that group certain tests together in test panels, allowing the doctor to easily order multiple tests at once simply by checking one box on the form.  According to Relator, a range of genetic and non-genetic tests performed by Boston Heart are not necessary for patients with certain identified diagnostic codes, and therefore should not be performed on those patients. The specific tests at issue were identified in detail in the Complaint.

Screening Tests Must Be Supported by Relevant Diagnostic Codes

As the court summarized the allegations,

“the relator alleges: when any of these four [] diagnostic codes are given to a patient in the absence of other diagnostic codes, the tests set forth above are … known to be medically unnecessary because they (1) do not and cannot predict the patient’s risk of future heart disease, (2) do not and cannot screen for any currently existing heart disease in the patient, and (3) provide no additional information regarding the cardiovascular-related diagnoses sometimes used to justify these tests, such as hypertension, hyperlipidemia, or malaise and fatigue, and ( 4) have no bearing on any potential treatments for those diagnoses.”

Id. at *4-5.

The relator’s allegations that the tests were not medically necessary rested, in part, on national guidelines for dealing with cardiovascular risk in adults without symptoms and on local and national coverage determinations issued by Medicare and its contractors. Those authorities did not support using the challenged testing for mere screening purposes on patients without diagnoses that supported those tests. Id. at *5.

Allegations That Claims for Lab Tests Were Submitted to Insurance Company Can Support Inference That Claims Were Submitted to Government Healthcare Programs

The court found that the relator satisfied Rule 9(b) by supporting her allegations with representative claims for payment that the defendant submitted to her employer, explaining that the relator was not required to provide claims actually submitted to the government.  The court also held that Relator did not need to identify specific individuals involved because she alleged a top-down, company-wide scheme.  The Complaint was found to allege material false claims with sufficient specificity and an acceptable inference that false claims were actually submitted to the government based on the relator’s analysis of the type and volume of testing performed on thousands of patients by hundreds of laboratories that billed to her employer.  Id. at * 9-10.

The court concluded that “the relator ‘corroborated’ her allegation that Boston Heart submitted claims to the government by providing a ‘concrete example’ of a portion of the representative claims submitted to United for Medicare and Medicaid patients….  Accordingly, the relator sufficiently pleaded that Boston Heart submitted claims to the government for payment…. The Court [also] agrees with the relator that because she has sufficiently ‘alleged that Boston Heart was in the business of conducting laboratory tests on patients with all types of health insurance and earned revenue by being paid by those health insurers for the tests in conducted,’ … the Court ‘must grant [the relator] the benefit of [the] reasonable inference,’ … [that] Boston Heart also submitted claims to TRICARE and the Veterans Administration.”  Id. at *11 & n. 6.

Cases Can Proceed Where Specific Claims to the Government Are Not Known in Advance

This case falls within an ever-expanding body of case law that holds that even the specificity required under FRCP 9(b) and the presentment requirement under the FCA can be satisfied without identifying particular false claims to the government.  See, e.g., United States ex rel. Prather v. Brookdale Senior Living Communities, 838 F.3d 750 (6th Cir. 2016)(requirement that a relator identify an actual false claim may be relaxed in circumstances where the relator pleads facts supporting a strong inference that the claim was submitted); United States ex rel. Presser v. Acacia Mental Health Clinic, LLC, 836 F.3d 770 (7th Cir. 2016) (in case involving claims of medically unnecessary billing, allegations the defendant had patients on Medicare was enough to draw a reasonable inference that Medicare was billed for these services); United States ex rel. Heath v. AT & T, Inc., 791 F.3d 112, 123 (D.C. Cir. 2015)(relator not required to plead representative claims actually submitted to the government in part because that would impose a higher pleading standard than what would need to be proved at trial); U.S. ex rel. Nathan v. Takeda Pharm. N. Am., Inc., 707 F.3d 451 (4th Cir. 2013), cert. denied, No. 12-1349, 2014 WL 1271321 (Mar. 31, 2014).

Since healthcare whistleblowers often work in the clinical or marketing areas of a company, they frequently won’t have access to actual billing records.  Recognizing common sense inferences that claims must have been submitted to government payors is a critical step for allowing legitimate cases to proceed past a motion to dismiss.

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The False Claims Act’s Public Disclosure Bar Routinely Results in Windfalls to Fraudsters

By Daniel Miller

In 1986, in an effort “to strike a balance between encouraging private persons to root out fraud and stifling parasitic lawsuits,” United States ex rel. Zizic v. Q2Administrators, LLC, 728 F.3d 228, 235 (3d Cir. 2013), Congress narrowed the the public disclosure bar so that more whistleblowers would file cases.

Despite this significant amendment, many courts throughout the country have continued to dismiss qui tam False Claims Act cases under the public disclosure bar.

Part of the problem is an expansive reading of what constitutes a public disclosure.  The second part of the problem is a narrow reading of the so-called “original source exception” to the public disclosure bar.

Under the original source exception, even if a fraud has been publicly disclosed, a whistleblower can avoid dismissal on public disclosure grounds if he/she has knowledge “that is independent of and materially adds to the publicly disclosed allegations.”  31 U.S.C. § 3730(e)(4)(B).

The contours of the original source exception and the errors made by various courts are discussed below.

Courts Narrowly Define the Original Source Exception to the Public Disclosure Bar

If a public disclosure of a transaction of fraud has occurred, and the complaint is “substantially similar” to information publicly available, the case may nevertheless go forward if the whistleblower is an “original source” of information underlying the action.  31 U.S.C. § 3730(e)(4)(B).

The Pre-2010 Definition of “Original Source”

Under the FCA as it existed prior to being amended on March 23, 2010, a whistleblower is an original source if he “has direct and independent knowledge of the information on which the allegations are based.”  31 U.S.C. § 3730(e)(4) (2009).

The analysis of the “independent” requirement involves a comparison of the whistleblower’s knowledge with “the information readily available in the public domain.” United States ex rel. Moore & Company, P.A. v. Majestic Blue Fisheries, LLC et al., 812 F.3d 294, 305 (3d Cir. 2016).

Regarding the “direct” requirement, the Third Circuit Court of Appeals recently outlined the meaning of direct knowledge:

‘Direct knowledge’ is knowledge obtained without any ‘intervening agency, instrumentality, or influence: immediate. Such knowledge has also been described as “first-hand, seen with the whistleblower’s own eyes, unmediated by anything but [the whistleblower’s] own labor, and by the whistleblower’s own efforts, and not by the labors of others, and … not derivative of the information of others.” Paranich, 396 F.3d at 336 & n. 11 (internal quotation marks and citations omitted); see also Stinson, 944 F.2d at 1161 (citing with approval cases finding information is not direct if learned from “a whistleblowing insider” or by “stumbl[ing] across an interesting court file”).

United States ex rel. Schumann v AstraZeneca Pharmaceuticals, LP, 769 F.3d 837, 845 (3rd Cir. 2014) (internal quotation marks and citations omitted).

This overly narrow reading conflicts with the intent of the 1986 amendments—in  order to have “direct” knowledge of the fraud, the Relator must almost literally witness the fraud occurring.  Fraud is by definition a secretive act.  Shielding fraudsters by allowing secrecy to not only hide the fraud but also to avoid prosecution is inconsistent with the purpose of the qui tam provisions of the False Claims Act.

The Post-2010 Definition of “Original Source”

The FCA was amended on March 23, 2010 as part of the Affordable Care Act.  The amendment removed the “direct” knowledge requirement and  replaced it with a less demanding one, namely, that the whistleblower’s information must “materially add” to any publicly disclosed information.[1]  Hopefully, this amendment will encourage more whistleblowers to come forward and will guide courts toward a more sensible interpretation of the original source exception.

[1] The independent requirement was left largely intact by the ACA.  The only difference is that under the previous version, the comparison was between all information in the public domain and the whistleblower’s evidence, Moore, 812 F.3d at 305, whereas under the current version, the comparison is between all information disclosed through the statutorily enumerated sources and the whistleblower’s evidence.  Id.

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