False Claims Act Focus ~ April 2013
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False Claims Act Focus ~ April 2013 False Claims Act Focus ~ April 2013 Document Transcript

  • NEWSLETTERFALSECLAIMSACTFOCUSApril 2013Presented by: The False Claims Act Focus Group
  • PattonBoggs.comTABLE OF CONTENTSEDITOR’S NOTE 1RECENT DEVELOPMENTS 2PRACTICE ANALYSIS 5CASE ANALYSIS: 7PRACTICE TIP: 12
  • PattonBoggs.com False Claims Act Focus, April 2013 | 1EDITOR’SNOTEThe last few months have not failed to provide interesting False Claims Act (FCA) activity in thecourts. We begin our newsletter by examining a case brought in the energy sector, alleging that agovernment contractor violated the Byrd Amendment, which then rendered every claim submitted tothe Department of Energy false under the FCA. This case is unusual not only for its representationof continued activity in the energy area, but also because it represents one of the very few cases inwhich a Byrd Amendment violation has been brought against any contractor.Turning to the health care sector, the Department of Justice and the Department of Health andHuman Services last month issued their Health Care Fraud and Abuse Control Program AnnualReport for Fiscal Year 2012, in which they reported record recoveries under the False Claims Actand staggering numbers of newly filed and pending FCA cases in the court system.We then take a look at the important topic of retaliation claims brought by whistleblower plaintiffswho attempt to recover against the defendants for allegedly retaliating against them for reporting ortrying to stop FCA violations. Note that although the 2009 amendments to the FCA broadened thecategory of potential claimants under the retaliation provisions, the courts still are reluctant to extendthis right very far.Finally, we examine the potential impact that a recent Second Circuit decision in the criminal off-label drug promotion context may have on FCA cases alleging off-label promotion of drugs, and wewrap up this issue with a practice tip on the potential tax deductibility of FCA settlements.
  • PattonBoggs.com False Claims Act Focus, April 2013 | 2RECENTDEVELOPMENTSENERGY SECTOR:Government Intervenes Against Government Contractor Under Byrd Amendment, Signaling PossibleIncreased Use of Rare Statute to Prosecute FCA ClaimsLate last year, the government intervened in a qui tam action filed in February 2011 against FluorHanford Inc., its parent company, Fluor Corporation, and successor contractors. See United Statesex rel. Loydene Rambo v. Fluor Hanford, LLC, CV-11-5037-WFN (E.D. WA). The governmentintervened in Rambo only against the Fluor parties. The suit alleges that Fluor violated the ByrdAmendment in connection with performance of a Department of Energy (DOE) contract, andtherefore falsely certified compliance with that statute when it billed the government under thecontract. The Byrd Amendment prohibits contractors from using appropriated funds to “pay anyperson for influencing or attempting to influence” agency or congressional personnel in connectionwith, among other actions, the awarding of a federal contract, or “the extension, continuation,renewal, amendment, or modification of a federal contract.” FCA, 31 U.S.C. 1352(a)(1)-(2).The government’s intervention in Rambo is not just significant as a further expansion of the use ofimplied certifications as a basis for False Claims Act (FCA) liability. It is also virtuallyunprecedented, as there have been very few cases seeking to enforce the Byrd Amendment. It hastraditionally been viewed as difficult to prove a Byrd Amendment violation because the statute leavesroom for legitimate lobbying efforts.The DOE contract required Fluor to provide security, maintenance and operational services at theDOE’s Hanford Nuclear Site in southeastern Washington State, including the management andoperations of DOE’s Hazardous Materials Management and Emergency Response (“HAMMER”)Center. HAMMER is a federally funded training facility for hazardous waste and law enforcementpersonnel and first responders. According to the whistleblower’s complaint, Fluor hired two outsideconsulting firms to lobby congress, DOE, and the National Guard Bureau (whose personnel trainedat HAMMER) for more contracts for Fluor, and then passed the consultants’ invoices on to DOE bysubmitting them for payment under the Hanford contract. Rambo, CV-11-5037-WFN at 85, 92.
  • PattonBoggs.com False Claims Act Focus, April 2013 | 3A company with a mixed portfolio of federal government and commercial contracts can avoidviolating the FCA by ensuring any lobbying efforts are funded solely by commercial revenues.Contractors also have traditionally distinguished between lobbying efforts to expandgovernment programs as opposed to creation, expansion or award of a specific contract. Whetherthe government’s intervention against Fluor is an isolated case based on a specific set of facts, orsignals the start of a wave of Byrd Amendment audits and enforcement cases remains to be seen.We may soon know the answer, however: On February 26, 2013, the government filed a motion inthe Rambo case seeking to extend the time to file its complaint in intervention until April 1, andstating that the parties have reached a settlement in principle. In the meantime, energy and othercontractors will do well to examine their own policies and practices for compliance with the ByrdAmendment.For additional information, please contact Mary Beth Bosco.HEALTH CARE SECTOR:DOJ/HHS Claims “Record Recoveries” of $4.2 Billion in Health Care Fraud and Abuse Control ProgramAnnual ReportIn February 2013, the Department of Health and Human Services (HHS) and the Department ofJustice (DOJ) jointly issued their Health Care Fraud and Abuse Control Program (“HCFC”) AnnualReport for Fiscal Year 2012. The report shows that the United States “won or negotiated” a record$3 billion in health care fraud judgments and settlements, and obtained additional, substantial healthcare fraud administrative recoveries.For example, DOJ and HHS reported that they deposited $4.2 billion to Department of Treasury andCMS accounts, and from that amount awarded more than $284 million to relators under the quitam provisions of the FCA. The Medicare Trust Fund received more than $2.4 billion, including$935 million in civil recoveries ($332.5 million of which was “restitution/compensatory,” theremainder in “penalties and multiple damages”), $1.4 billion in criminal fines, and $89.7 million inHHS audit disallowances for the Medicare program. The U.S. recovered $835.7 million of thefederal share of Medicaid, and TRICARE, the Department of Veterans Affairs, and the Office ofPersonal Management obtained $360.1 million in recoveries. That these agencies are continuing topursue such large judgments is clear: according to the report, in FY 2012, DOJ opened 885 new civil
  • PattonBoggs.com False Claims Act Focus, April 2013 | 4health care fraud investigations and had 1,023 civil health care fraud matters pending at the end ofthe fiscal year.The bulk of these recoveries, it appears, are from pharmaceutical and device manufacturers andwholesalers. In July 2012, GlaxoSmithKline paid more than $3 billion to resolve its criminal and civilliability arising from the company’s unlawful promotion of certain prescription drugs, its failure toreport certain safety data, and its alleged false price reporting practices. In November 2011, Merck,Sharp & Dohme paid $950 million to resolve criminal charges and civil claims related to itspromotion and marketing of the painkiller Vioxx. In April 2012, McKesson Corporation paid $190million to resolve claims that it violated the FCA by reporting inflated pricing information for a largenumber of prescription drugs, causing Medicaid to overpay for those drugs.DOJ also reported significant FCA resolutions, often with related criminal prosecutions, withhospitals, such as Beth Israel Medical Center, Lenox Hill Hospital, and Christus Spohn HealthSystem; physician and practice groups; pharmacies and pharmacists; medical equipment suppliers;managed care organizations, including Wellcare; nursing homes; home health providers;transportation providers, including Rural/Metro Corporation; and hospice providers, includingOdyssey Healthcare.HCFAC was established as part of the 1996 Health Insurance Portability and Accountability Act of1996 (“HIPAA”), and annual reporting on the program is required by HIPAA. DOJ and HHSreport that HCFAC appropriations to these agencies in FY 2012 were $604.6 million, in addition toFY 2012 annual appropriations. Using broader measures, DOJ and HHS also reported that the totalamount of HCFAC resources in FY 2012 expended by these departments was $1.6 billion.For additional information, please contact Larry Freedman.
  • PattonBoggs.com False Claims Act Focus, April 2013 | 5PRACTICEANALYSISFCA RETALIATION CASES: EMPLOYERS BEWAREEmployers should be wary of potential exposure not only for substantive False Claims Act (FCA)violations, but also for retaliation violations. The applicable provision in the FCA before it wasrevised in 2009 under the federal Fraud Enforcement and Recovery Act (FERA) prohibitedemployers from discriminating against an employee “in the terms and conditions of employment”“because of lawful acts done by [or on behalf of] the employee . . . in furtherance of an action underthis section.” 31 U.S.C. § 3730(h) (2008). FERA amended this provision to extend those protectionsagainst retaliatory actions to “any employee, contractor, or agent.” Notably, FERA also redefinedthe protected activity to include not only acts in furtherance of an FCA lawsuit but also “otherefforts to stop 1 or more violations of [the FCA].” 31 U.S.C. §3720(h) (2010).Although FCA retaliation cases don’t dominate the headlines of the national media very often, courtshave been considering a number of these cases over the last few months, and the decisions conveyimportant messages to employers and non-employers alike.A Warning to Non-Employers: The Northern District of Florida denied a motion to dismiss aretaliatory discharge claim filed by two defendants who argued that the relator was not an employeeand thus could not bring a retaliation claim. The relator was employed by a professional employmentservice, while one of the defendants was his “jobsite” employer. He alleged that while he wasproviding services to the defendant oncology center, he uncovered significant fraud, brought it to thecenter’s attention, and was fired in 2010 for doing so. Relying on a 2012 ruling from the District ofConnecticut, the court concluded that, while that argument may have had merit before May 2009,FERA has since amended and expanded the FCA’s retaliation provision to reach non-employers byomitting the word “employer” from the statute. See United States ex rel. Koch v. Gulf RegionOncology Ctrs., Inc., No.: 3:12cv504/RV-CJK (N.D. Fla. Jan. 30, 2013) (citing Moore v. Comty.Health Servs., Inc., No. 3:09cv1127, 2012 WL 1069474, at *9 (D. Conn. Mar. 29, 2012) (denyingmotion to dismiss FCA retaliation claim against defendants, CEO and CFO)). Thus, companies andtheir employees may find themselves more exposed to FCA retaliation claims from whistleblowerswho are not their actual employees for events that occurred after May 2009.But FERA Did Not Eliminate Sovereign Immunity Protections for Employers: The relator argued
  • PattonBoggs.com False Claims Act Focus, April 2013 | 6that retaliation claims under the FCA should not be dismissed even if the court considered thedefendant, a state university hospital, “an arm of the state” because FERA removed the term“employer” from the retaliation statute. United States ex rel. King v. Univ. of Texas Health ScienceCenter-Houston, No. H-11-018, 2012 WL 5381714, at *8 (S.D. Tex. Oct. 31, 2012). The districtcourt declined to adopt the relator’s argument, holding the retaliation claim was barred by sovereignimmunity. The court noted that the amendments to the FCA’s retaliation provision under FERA didnot contain a clear statement eliminating state sovereign immunity.Termination Decisionmakers Must Be Aware of Protected Conduct to Trigger CorporateLiability: Section 3730(h)(1) prohibits termination of an employee for conduct in furtherance of aFCA action or for other efforts to stop violations of the FCA, but it also requires that an employee’stermination be “because of” this protected conduct. The Seventh Circuit affirmed summaryjudgment for the corporate defendant, and refused to impute to the corporate defendant anyknowledge that one employee had regarding another employee/relator’s efforts to stop alleged FCAviolations, when there was no evidence that unrelated employees who decided to terminate therelator were aware of those efforts. Halasa v. ITT Educ. Servs., Inc., 690 F.3d 844, 848 (7th Cir.2012). The Seventh Circuit ruled that “[t]he broad (and unprecedented) doctrine of constructiveknowledge that [relator] Halasa urges would defeat the specific statutory requirements that anemployee’s termination be ‘because of’ her protected conduct. The law is clear that it is thedecisionmakers’ knowledge that is crucial…. [C]ompanies are not liable for every scrap ofinformation that someone in or outside the chain of responsibility might have.” Id. This decision isgood news for corporate defendants, because the courts will not impute knowledge of protectedconduct to decisionmakers responsible for terminating the employee.Pre-FERA, Mere Efforts to Stop FCA Violations Not Protected Conduct: In a case involving pre-FERA retaliation allegations, the Tenth Circuit held that a former employee’s claim for retaliatorydischarge under the FCA could not withstand summary judgment where the record contained noevidence that the company believed she was considering bringing a qui tam action. McBride v. PeakWellness Ctr., 688 F.3d 698, 704 (10th Cir. 2012). The court stated that “merely informing theemployer of regulatory violations, without more, does not provide sufficient notice” because thisdoes not indicate the employee was going to report noncompliance to the government or file a quitam action herself. Id. The court said that whistleblowers have to make clear an intention to bring aqui tam action or assist the government in an FCA action “in order to overcome the presumptionthat they are merely acting in accordance with their employment obligations.” Id; see also UnitedStates ex rel. Parks v. Alpharma, Inc., No. 11-1498, 2012 WL 3291705, *7 (4th Cir. Aug. 14, 2012)(dismissing FCA retaliation claims where termination occurred in 2006, and ruling that “Parks’
  • PattonBoggs.com False Claims Act Focus, April 2013 | 7complaints were clearly couched in terms of concerns and suggestions, not threats or warnings ofFCA litigation”). Note that the revised language of FERA likely would compel a different result forterminations occurring post-FERA.Burden-Shifting Test Commonly Used in Civil Rights Discrimination Cases Applicable in FCAContext: The First Circuit reversed summary judgment in favor of a defendant company, holdingthat the relator presented sufficient evidence of retaliation to survive summary judgment where hewas fired for refusal to take a drug test shortly after settling a FCA lawsuit. Harrington v. AggregateIndus. Northeast Region, Inc., 668 F.3d 25, 32 (1st Cir. 2012). To reach this result, the First Circuitapplied the McDonnell Douglas approach (named for the 1973 Supreme Court case that prescribedthe burden-shifting test to be used in Civil Rights Act retaliation cases) to FCA retaliation claimsunder Section 3730(h): (1) a plaintiff must set forth a prima facie case of retaliation; (2) then, theburden shifts to the defendant to articulate a legitimate, nonretaliatory reason for the adverseemployment action; and, (3) then, the plaintiff must show that the proffered reason is a pretext forthe retaliation. See id. at 31. In so holding, the First Circuit was the first federal appeals court toapply the test in an FCA case in a published decision. The D.C. Circuit later agreed with the FirstCircuit and adopted the same approach. United States ex rel. Schweizer v. Oce N.V., 677 F.3d 1228,1241 (D.C. Cir. 2012).For additional information, please contact Susan Baldwin Hendrix.CASEANALYSIS:CORONIA: AFTER A DECADE OF WINDFALL VERDICTS ANDSETTLEMENTS IN OFF-LABEL FCA/FDCA CASES, THE SECONDCIRCUIT HAS CHANGED THE LANDSCAPEFor more than a decade, the federal and state governments have recovered significant money in casesbrought against and settled with pharmaceutical manufacturers based on allegations of off-labelpromotion of their drugs, that is, for marketing their drugs for indications other than those for which
  • PattonBoggs.com False Claims Act Focus, April 2013 | 8the FDA expressly had approved the drug. Many of these cases have involved both civil andcriminal allegations under the Food Drug and Cosmetic Act (FDCA) and civil allegations under theFalse Claims Act (FCA) arising from the alleged FDCA violations. For example, last July,GlaxoSmithKline entered into the largest health care settlement in history, resolving FDCAallegations for $1 million and FCA allegations for $2 million. Abbott Laboratories likewise enteredinto a joint FDCA and FCA settlement for $800 million and $700 million, respectively, last May. Thecriminal and civil resolutions with both companies related to the alleged off-label promotion ofcertain drugs.The FCA, of course, does not itself prohibit the off-label promotion of prescription drugs bymanufacturers or others. The government’s theory for off-label FCA cases, however, is that thedefendants (typically the manufacturers) violated the FDCA by promoting the drug at issue for off-label uses. Although physicians legally may prescribe FDA-approved drugs for off-label uses, theMedicare and Medicaid programs generally do not reimburse for off-label prescriptions, unless thedrugs meet certain criteria. Specifically, the off-label uses must be recognized in statutorily-identifiedcompendia. 42 U.S.C. § 1395x(t); 42 U.S.C. §§ 1396r-8(k)(6), 1396r-8(g)(1)(B)(i). Claims submittedto Medicare and Medicaid for reimbursement for uses not recognized in the compendia aretherefore, under the government’s theory, false claims in violation of the FCA. Thus, by promotingdrugs for an off-label use, the manufacturer causes false claims to be submitted to Medicare andMedicaid, even though the claims are submitted by unwitting pharmacists rather than by themanufacturer. See, e.g., U.S. ex rel. Franklin v. Parke-Davis, 147 F. Supp.2d 39, 53 (D. Mass. 2001).The Second Circuit’s recent decision in United States v. Caronia, 703 F.3d 149 (2nd Cir. 2012), maychange the government’s ability to generate such windfalls, in FCA cases as well as criminal FDCAcases. Caronia held that a drug manufacturer’s off-label promotion of a drug is not prohibited underthe FDCA because such a prohibition would unconstitutionally restrict free speech. At trial, the juryconvicted the sales representative, Alfred Caronia, of conspiracy to introduce a misbranded drug intointerstate commerce, a misdemeanor violation under the FDCA.Coronia argued on appeal that he was convicted in violation of his First Amendment right of freespeech for promoting the FDA-approved drug Xyrem for off-label uses. Xyrem contains the activeingredient gamma-hydroxybutryate (“GHB”), which has been federally classified as the “date rapedrug.” Id. Nevertheless, the FDA approved the drug to treat narcolepsy patients who experiencecataplexy (a condition associated with weak or paralyzed muscles) and excessive daytimesleepiness. Id. Because of concerns about the drug’s safety, however, the FDA required a “blackbox” warning to be placed on the drug’s labels, warning, among other things, that the drug’s safety
  • PattonBoggs.com False Claims Act Focus, April 2013 | 9and efficacy were not established in patients under 16 years of age. The FDA allowed only onecentralized Missouri pharmacy to distribute Xyrem nationally. Id.Caronia and Peter Gleason, M.D. had been hired to promote Xyrem by Jazz Pharmaceuticals, thedrug’s manufacturer and distributor. At trial, the evidence showed that both men had promoted thedrug for off-label uses. For example, Caronia informed physicians the drug could also could be usedto treat insomnia, fibromyalgia, periodic leg movement, Parkinson’s disease, restless leg and othersleep disorders, and instructed the doctor to list the diagnosis code of the actual disease being treatedwith Xyrem. See id. at 156. Caronia and Dr. Gleason also explained to other physicians that Xyremcould be used with patients under age 16 and over 65, though they acknowledged that the drug wasnot approved for those categories of patients. See id. at 156-57.The Second Circuit agreed with Caronia that he had been convicted for his speech, but rejected hisbroad argument that the FDCA’s misbranding provisions prohibit off-label promotion and thusviolate the First Amendment’s free speech protections. See id. at 161-62. The court applied the two-part analysis set forth by the Supreme Court in Sorrell v. IMS Health, Inc., 131 S. Ct. 2653 (2011),which involved a First Amendment challenge to speech restrictions imposed by a state statute onpharmaceutical marketing by manufacturers using prescriber-identifying information. See id. at 163.Under the first prong of Sorrell, the Caronia court held that heightened scrutiny of the issue wasappropriate because the government’s construction of the FDCA’s misbranding provisions imposedcontent- and speaker-based restrictions on speech. Id. at 164-65.Under the second heightened scrutiny prong of Sorrell, the appeals court applied the four-prong testset forth in Central Hudson Gas & Elec. Crop. v. Pub. Serv. Comm’n of N.Y., 447 U.S. 557 (1980).The Second Circuit’s ruling was based on the government’s failure to meet the third and fourthprongs of that test.Specifically, the government’s construction of the FDCA did not directly advance the government’sinterest. Id. Off-label prescription is legal, yet the off-label promotion restriction prohibited the freeflow of information that would inform such legal prescriptions. Id. So long as the off-label use ofdrugs is lawful, prohibiting promotion did not directly advance the stated governmental interest inreducing patient exposure to off-label drugs or in preserving the efficacy of the FDA’s drug approvalprocess. See id. at 166-67.The Second Circuit also held that “a complete and criminal ban on off-label promotion bypharmaceutical manufacturers is more extensive than necessary to achieve the government’s
  • PattonBoggs.com False Claims Act Focus, April 2013 | 10substantial interests.” Id. Instead, the government could simply impose less speech-restrictivealternatives or non-criminal penalties. Id. Indeed, the government even could prohibit off-label useentirely. Id. at 168.The Second Circuit ultimately vacated Coronia’s conviction because the government prosecutedCaronia for “mere off-label promotion” and instructed the jury it could convict on that theory; underthe principle of constitutional avoidance, the FDCA does not criminalize the simple promotion of adrug’s off-label use. In doing so, the appellate court rejected the government’s argument thatCaronia was not prosecuted for his speech but, instead, his off-label promotion of the drug “servedmerely as ‘evidence of intent,’ or evidence that the ‘off-label uses were intended ones [ ] for whichXyrem’s labeling failed to provide any directions.’” Id. at 160 (quoting Govt. Brief at 52). Instead,the court held that argument was “belied by” the government’s “conduct and arguments attrial.” Id. at 161.The Food and Drug Administration (FDA) has reportedly decided not to appeal or retry the caseagainst Caronia. Thus, at least for now, this holding constitutes the law of the Second Circuit withrespect to off-label marketing.The Impact of CaroniaThe impact that the Caronia case will have on FCA cases involving off-label promotion andprescriptions is unclear. On one hand, the government can no longer argue (at least in the SecondCircuit) that the mere off-label promotion of a drug constitutes an FDCA violation. Thus, again atleast in the Second Circuit, FCA liability cannot be predicated on a FDCA violation where theconduct at issue is mere off-label promotion.On the other hand, the government may argue that establishing a FDCA violation is unnecessary forestablishing FCA liability in these cases. Medicare and Medicaid payment do not turn on whether themanufacturer complies with the FDCA, but rather on whether the use for which the drug isprescribed for the particular patient at issue is scientifically accepted so as to be reflected in arecognized compendium. Thus, under this theory, the offending conduct would not be themanufacturer’s truthful speech about the uses of the drug; it would be causing false claims to besubmitted to Medicare and Medicaid for drug usages those programs do not cover. If a manufacturerpromotes a drug for off-label usage, the government may argue, the manufacturer has actual orimplied knowledge that doing so will cause the drug to be prescribed to Medicare and/or Medicaidpatients and that those programs will be asked to reimburse the cost of those drugs. Nevertheless,
  • PattonBoggs.com False Claims Act Focus, April 2013 | 11this approach leaves open the question of whether simply informing physicians of legitimate usage ofthe drug can satisfy the causation prong of the FCA, where the information communicated to thephysicians was both accurate and legal. As a practical matter, it seems easier to establish causationwhen the manufacturer’s speech to the physician is prohibited by the FDCA. If marketing a drug foruses not covered under Medicare and Medicaid can trigger FCA liability, then logically it wouldfollow that marketing any product that is not reimbursable under Medicare and Medicaid couldtrigger liability. It seems unlikely that many courts would be willing to stretch the FCA that far.The government also might limit its focus to FCA cases that involve allegedly false or misleadingpromotion, which the Second Circuit explicitly found that Caronia did not. Id. at 167. False ormisleading promotion, of course, does not warrant protection under the First Amendment and thusprosecution under the FDCA would not appear to be precluded by this decision. The governmentno doubt would argue that it still has a plausible action under the FCA against a manufacturer whoengaged in false or misleading off-label promotion which in turn caused claims for Medicare andMedicaid reimbursement for off-label prescriptions to be submitted and paid.As a practical matter, we expect that some government attorneys will back away from off-labelpromotion FCA cases, but many will continue to bring them, particularly outside of the SecondCircuit, and particularly in situations that appear to involve false or misleading promotion.For questions regarding this article, contact Laura Laemmle-Weidenfeld.
  • PattonBoggs.com False Claims Act Focus, April 2013 | 12PRACTICETIP:THE SILVER LINING? USING FCA SETTLEMENTS TO REDUCE TAXBURDENSIt is important to consider tax implications when settling a False Claims Act (FCA) case. Adefendant generally can deduct compensatory damages paid to a government agency as an ordinarybusiness expense. However, any amount a defendant pays to settle actual or potential liability for acivil or criminal fine or penalty is not deductible. The taxpayer bears the burden of proving whatportion of a lump-sum settlement payment is compensatory and, therefore, deductible. TheDepartment of Justice’s current practice with FCA settlements is to not include provisions in asettlement agreement that characterize the settlement amount or any tax consequences that mayresult. Therefore, the defendant should compile other evidence to support its deduction, and itshould do so at the time it is negotiating the settlement, not when it files its taxes or faces an audit.For additional information, please contact Michael Guiffre.