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Fraudulent Inducement as a Legal Theory Under the Qui Tam Provisions of the False Claims Act

Posted by on Monday, March 20th, 2017

By Daniel Miller

While many defendants may assert that fraudulent inducement is not a viable theory of liability in a qui tam case under the False Claims Act (“FCA”), the truth is that the plentiful and better-reasoned authorities to consider this issue support FCA liability for defrauding the FDA.  See United States  v. Pfizer, Inc., 2016 WL 807363, at **8-10 (E.D. Pa. Mar. 1, 2016) (relator’s allegations that defendant submitted a false and misleading application to the FDA were upheld as sufficient under the False Claims Act); United States ex rel. Krahling v. Merck & Co., 44 F. Supp. 3d 581, 593 (E.D. Pa. 2014) (denying defendant’s motion to dismiss relator’s FCA case alleging fraud-on-the-FDA related to the efficacy of its mumps vaccine); United States’ Statement of Interest, at 3 (Krahling, No. 2:10-cv-4374 (E.D. Pa. May 20, 2013)) (“[T]he False Claims Act expressly authorizes private citizens to bring suits on behalf of the Government, and carving out an exception for suits arising from allegations of fraud on the FDA or conduct in violation of FDA regulations is not supported by the statutory text or case law and is inconsistent with the purposes of the False Claims Act”).

Liability under the FCA for fraud in the inducement is established when eligibility to receive funds under a government program was procured by misstatements or other misleading actions.  See United States ex rel. Miller v. Weston Educ., Inc., 840 F.3d 494, 498 (8th Cir. 2016); Baycol, 732 F.3d at 876.  In these cases, “FCA liability attaches to each claim submitted to the government under a contract so long as the original contract was obtained through false statements or fraudulent conduct.” Miller, 840 F.3d at 498 (internal quotation marks omitted).[1]

In Miller, relators alleged that a college fraudulently induced the Department of Education to provide funding by falsely promising to keep accurate grade and attendance records.  Construing the evidence in favor of relators, the Miller court found that defendant’s promise to keep accurate grade and attendance records influenced the government’s decision to provide funding.  Id. at 503.

The theory has been used in FCA cases with regard to fraudulently inducing a variety of different government agencies’ actions:  the Department of Defense to enter into contracts for the purchase of a drug, see Baycol, 732 F.3d at 876; the Department of Education to obtain federal subsidies, United States ex rel. Hendow v. Univ. of Phoenix, 461 F.3d 1166 (9th Cir. 2006); and the Department of Energy for the award of a subcontract, Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 786-87 (4th Cir. 1999).

Turning back to FDA-specific authorities, courts have held that FCA liability can be predicated based on a defendant’s alleged promotion of a device not approved by the FDA.  United States ex rel. Bui v. Vascular Solutions, Inc., No. 1:10-cv-00883 (W.D Tex. March 7, 2013) (denying motion to dismiss where defendant promoted product for use not approved by the FDA); United States ex rel. Colquitt v. Abbott Labs, 2012 WL1081453, at *31 (N.D. Tex. March 30, 2012) (denying motion to dismiss and finding relator stated FCA claims because defendant promoted devices for non-FDA-approved uses).  Commenting on these two qui tam cases in connection with the fraud-on-the-FDA theory being litigated in the Krahling case cited above, the Department of Justice has observed that “[t]here is nothing unique about a case involving false statements to the FDA that would warrant creating a special rule precluding such cases from going forward.  To the contrary, allowing relators to prosecute such False Claims Act suits (as long as sufficiently pleaded) serves the primary purpose of the qui tam provisions.”

Conclusion

Fraudulent inducement has long been recognized as a viable legal theory in qui tam cases brought by whistleblowers under the False Claims Act.  The evolution of this theory into cases where the FDA has been defrauded is a positive development for whistleblowers.

 

[1] It is well established that fraud at the outset of a series of dealings with the government can render all subsequent claims false under the FCA.  See S. Rep. No. 99-345, at 9, reprinted in 1986 U.S.C.C.A.N. at 5274 (“each and every claim submitted under a contract, loan guarantee, or other agreement with was originally obtained by means of false statements or other corrupt or fraudulent conduct . . . constitutes a false claim”).

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