False Claims Act Focus - April 2013

    5 April 2013


    The last few months have not failed to provide interesting False Claims Act (FCA) activity in the courts. We begin our newsletter by examining a case brought in the energy sector, alleging that a government contractor violated the Byrd Amendment, which then rendered every claim submitted to the Department of Energy false under the FCA. This case is unusual not only for its representation of continued activity in the energy area, but also because it represents one of the very few cases in which 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 and Human Services last month issued their Health Care Fraud and Abuse Control Program Annual Report for Fiscal Year 2012, in which they reported record recoveries under the False Claims Act and 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 plaintiffs who attempt to recover against the defendants for allegedly retaliating against them for reporting or trying to stop FCA violations. Note that although the 2009 amendments to the FCA broadened the category of potential claimants under the retaliation provisions, the courts still are reluctant to extend this 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 we wrap up this issue with a practice tip on the potential tax deductibility of FCA settlements.


    Energy Sector

    Government Intervenes Against Government Contractor Under Byrd Amendment, Signaling Possible Increased Use of Rare Statute to Prosecute FCA Claims

    Late last year, the government intervened in a qui tam action filed in February 2011 against Fluor Hanford Inc., its parent company, Fluor Corporation, and successor contractors. See United States ex rel. Loydene Rambo v. Fluor Hanford, LLC, CV-11-5037-WFN (E.D. WA). The government intervened in Rambo only against the Fluor parties. The suit alleges that Fluor violated the Byrd Amendment in connection with performance of a Department of Energy (DOE) contract, and therefore falsely certified compliance with that statute when it billed the government under the contract. The Byrd Amendment prohibits contractors from using appropriated funds to “pay any person for influencing or attempting to influence” agency or congressional personnel in connection with, 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 of implied certifications as a basis for False Claims Act (FCA) liability. It is also virtually unprecedented, as there have been very few cases seeking to enforce the Byrd Amendment. It has traditionally been viewed as difficult to prove a Byrd Amendment violation because the statute leaves room for legitimate lobbying efforts.

    The DOE contract required Fluor to provide security, maintenance and operational services at the DOE’s Hanford Nuclear Site in southeastern Washington State, including the management and operations of DOE’s Hazardous Materials Management and Emergency Response (“HAMMER”) Center. HAMMER is a federally funded training facility for hazardous waste and law enforcement personnel and first responders. According to the whistleblower’s complaint, Fluor hired two outside consulting firms to lobby congress, DOE, and the National Guard Bureau (whose personnel trained at HAMMER) for more contracts for Fluor, and then passed the consultants’ invoices on to DOE by submitting them for payment under the Hanford contract. Rambo, CV-11-5037-WFN at 85, 92.

    A company with a mixed portfolio of federal government and commercial contracts can avoid violating the FCA by ensuring any lobbying efforts are funded solely by commercial revenues. Contractors also have traditionally distinguished between lobbying efforts to expand government programs as opposed to creation, expansion or award of a specific contract. Whether the government’s intervention against Fluor is an isolated case based on a specific set of facts, or signals 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 in the Rambo case seeking to extend the time to file its complaint in intervention until April 1, and stating that the parties have reached a settlement in principle. In the meantime, energy and other contractors will do well to examine their own policies and practices for compliance with the Byrd Amendment.

    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 Program Annual Report

    In February 2013, the Department of Health and Human Services (HHS) and the Department of Justice (DOJ) jointly issued their Health Care Fraud and Abuse Control Program (“HCFC”) Annual Report 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 health care fraud administrative recoveries.

    For example, DOJ and HHS reported that they deposited $4.2 billion to Department of Treasury and CMS accounts, and from that amount awarded more than $284 million to relators under the qui tam 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,” the remainder in “penalties and multiple damages”), $1.4 billion in criminal fines, and $89.7 million in HHS audit disallowances for the Medicare program. The U.S. recovered $835.7 million of the federal share of Medicaid, and TRICARE, the Department of Veterans Affairs, and the Office of Personal Management obtained $360.1 million in recoveries. That these agencies are continuing to pursue such large judgments is clear: according to the report, in FY 2012, DOJ opened 885 new civil health care fraud investigations and had 1,023 civil health care fraud matters pending at the end of the fiscal year.

    The bulk of these recoveries, it appears, are from pharmaceutical and device manufacturers and wholesalers. In July 2012, GlaxoSmithKline paid more than $3 billion to resolve its criminal and civil liability arising from the company’s unlawful promotion of certain prescription drugs, its failure to report 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 its promotion and marketing of the painkiller Vioxx. In April 2012, McKesson Corporation paid $190 million to resolve claims that it violated the FCA by reporting inflated pricing information for a large number of prescription drugs, causing Medicaid to overpay for those drugs.

    DOJ also reported significant FCA resolutions, often with related criminal prosecutions, with hospitals, such as Beth Israel Medical Center, Lenox Hill Hospital, and Christus Spohn Health System; 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, including Odyssey Healthcare.

    HCFAC was established as part of the 1996 Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), and annual reporting on the program is required by HIPAA. DOJ and HHS report that HCFAC appropriations to these agencies in FY 2012 were $604.6 million, in addition to FY 2012 annual appropriations. Using broader measures, DOJ and HHS also reported that the total amount of HCFAC resources in FY 2012 expended by these departments was $1.6 billion.

    For additional information, please contact Larry Freedman.


    FCA Retaliation Cases: Employers Beware

    Employers 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 was revised in 2009 under the federal Fraud Enforcement and Recovery Act (FERA) prohibited employers 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 under this section.” 31 U.S.C. § 3730(h) (2008). FERA amended this provision to extend those protections against retaliatory actions to “any employee, contractor, or agent.” Notably, FERA also redefined the protected activity to include not only acts in furtherance of an FCA lawsuit but also “other efforts 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, courts have been considering a number of these cases over the last few months, and the decisions convey important messages to employers and non-employers alike.

    A Warning to Non-Employers: The Northern District of Florida denied a motion to dismiss a retaliatory discharge claim filed by two defendants who argued that the relator was not an employee and thus could not bring a retaliation claim. The relator was employed by a professional employment service, while one of the defendants was his “jobsite” employer. He alleged that while he was providing services to the defendant oncology center, he uncovered significant fraud, brought it to the center’s attention, and was fired in 2010 for doing so. Relying on a 2012 ruling from the District of Connecticut, 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 by omitting the word “employer” from the statute. See United States ex rel. Koch v. Gulf Region Oncology 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) (denying motion to dismiss FCA retaliation claim against defendants, CEO and CFO)). Thus, companies and their employees may find themselves more exposed to FCA retaliation claims from whistleblowers who 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 that retaliation claims under the FCA should not be dismissed even if the court considered the defendant, 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 Science Center-Houston, No. H-11-018, 2012 WL 5381714, at *8 (S.D. Tex. Oct. 31, 2012). The district court declined to adopt the relator’s argument, holding the retaliation claim was barred by sovereign immunity. The court noted that the amendments to the FCA’s retaliation provision under FERA did not contain a clear statement eliminating state sovereign immunity.

    Termination Decision makers Must Be Aware of Protected Conduct to Trigger Corporate Liability: Section 3730(h)(1) prohibits termination of an employee for conduct in furtherance of a FCA action or for other efforts to stop violations of the FCA, but it also requires that an employee’s termination be “because of” this protected conduct. The Seventh Circuit affirmed summary judgment for the corporate defendant, and refused to impute to the corporate defendant any knowledge that one employee had regarding another employee/relator’s efforts to stop alleged FCA violations, when there was no evidence that unrelated employees who decided to terminate the relator 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 constructive knowledge that [relator] Halasa urges would defeat the specific statutory requirements that an employee’s termination be ‘because of’ her protected conduct. The law is clear that it is the decision makers’ knowledge that is crucial…. [C]ompanies are not liable for every scrap of information that someone in or outside the chain of responsibility might have.” Id. This decision is good news for corporate defendants, because the courts will not impute knowledge of protected conduct to decision makers 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 retaliatory discharge under the FCA could not withstand summary judgment where the record contained no evidence that the company believed she was considering bringing a qui tam action. McBride v. Peak Wellness Ctr., 688 F.3d 698, 704 (10th Cir. 2012). The court stated that “merely informing the employer of regulatory violations, without more, does not provide sufficient notice” because this does not indicate the employee was going to report noncompliance to the government or file a qui tam action herself. Id. The court said that whistleblowers have to make clear an intention to bring a qui tam action or assist the government in an FCA action “in order to overcome the presumption that they are merely acting in accordance with their employment obligations.” Id; see also United States 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’ complaints were clearly couched in terms of concerns and suggestions, not threats or warnings of FCA litigation”). Note that the revised language of FERA likely would compel a different result for terminations occurring post-FERA.

    Burden-Shifting Test Commonly Used in Civil Rights Discrimination Cases Applicable in FCA Context: The First Circuit reversed summary judgment in favor of a defendant company, holding that the relator presented sufficient evidence of retaliation to survive summary judgment where he was fired for refusal to take a drug test shortly after settling a FCA lawsuit. Harrington v. Aggregate Indus. Northeast Region, Inc., 668 F.3d 25, 32 (1st Cir. 2012). To reach this result, the First Circuit applied the McDonnell Douglas approach (named for the 1973 Supreme Court case that prescribed the burden-shifting test to be used in Civil Rights Act retaliation cases) to FCA retaliation claims under Section 3730(h): (1) a plaintiff must set forth a prima facie case of retaliation; (2) then, the burden shifts to the defendant to articulate a legitimate, nonretaliatory reason for the adverse employment action; and, (3) then, the plaintiff must show that the proffered reason is a pretext for the retaliation. See id. at 31. In so holding, the First Circuit was the first federal appeals court to apply the test in an FCA case in a published decision. The D.C. Circuit later agreed with the First Circuit 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.


    Coronia: After a Decade of Windfall Verdicts and Settlements in off-Label FCA/FDCA Cases, the Second Circuit Has Changed the Landscape

    For more than a decade, the federal and state governments have recovered significant money in cases brought against and settled with pharmaceutical manufacturers based on allegations of off-label promotion of their drugs, that is, for marketing their drugs for indications other than those for which the FDA expressly had approved the drug. Many of these cases have involved both civil and criminal allegations under the Food Drug and Cosmetic Act (FDCA) and civil allegations under the False Claims Act (FCA) arising from the alleged FDCA violations. For example, last July, GlaxoSmithKline entered into the largest health care settlement in history, resolving FDCA allegations for $1 million and FCA allegations for $2 million. Abbott Laboratories likewise entered into a joint FDCA and FCA settlement for $800 million and $700 million, respectively, last May. The criminal and civil resolutions with both companies related to the alleged off-label promotion of certain drugs.

    The FCA, of course, does not itself prohibit the off-label promotion of prescription drugs by manufacturers or others. The government’s theory for off-label FCA cases, however, is that the defendants (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, the Medicare and Medicaid programs generally do not reimburse for off-label prescriptions, unless the drugs meet certain criteria. Specifically, the off-label uses must be recognized in statutorily-identified compendia. 42 U.S.C. § 1395x(t); 42 U.S.C. §§ 1396r-8(k)(6), 1396r-8(g)(1)(B)(i). Claims submitted to Medicare and Medicaid for reimbursement for uses not recognized in the compendia are therefore, under the government’s theory, false claims in violation of the FCA. Thus, by promoting drugs for an off-label use, the manufacturer causes false claims to be submitted to Medicare and Medicaid, even though the claims are submitted by unwitting pharmacists rather than by the manufacturer. 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), may change the government’s ability to generate such windfalls, in FCA cases as well as criminal FDCA cases. Caronia held that a drug manufacturer’s off-label promotion of a drug is not prohibited under the FDCA because such a prohibition would unconstitutionally restrict free speech. At trial, the jury convicted the sales representative, Alfred Caronia, of conspiracy to introduce a misbranded drug into interstate commerce, a misdemeanor violation under the FDCA.

    Coronia argued on appeal that he was convicted in violation of his First Amendment right of free speech for promoting the FDA-approved drug Xyrem for off-label uses. Xyrem contains the active ingredient gamma-hydroxybutryate (“GHB”), which has been federally classified as the “date rape drug.” Id. Nevertheless, the FDA approved the drug to treat narcolepsy patients who experience cataplexy (a condition associated with weak or paralyzed muscles) and excessive daytime sleepiness. Id. Because of concerns about the drug’s safety, however, the FDA required a “black box” warning to be placed on the drug’s labels, warning, among other things, that the drug’s safety and efficacy were not established in patients under 16 years of age. The FDA allowed only one centralized Missouri pharmacy to distribute Xyrem nationally. Id.

    Caronia and Peter Gleason, M.D. had been hired to promote Xyrem by Jazz Pharmaceuticals, the drug’s manufacturer and distributor. At trial, the evidence showed that both men had promoted the drug for off-label uses. For example, Caronia informed physicians the drug could also could be used to treat insomnia, fibromyalgia, periodic leg movement, Parkinson’s disease, restless leg and other sleep disorders, and instructed the doctor to list the diagnosis code of the actual disease being treated with Xyrem. See id. at 156. Caronia and Dr. Gleason also explained to other physicians that Xyrem could be used with patients under age 16 and over 65, though they acknowledged that the drug was not 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 his broad argument that the FDCA’s misbranding provisions prohibit off-label promotion and thus violate 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 on pharmaceutical 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 was appropriate because the government’s construction of the FDCA’s misbranding provisions imposed content- 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 test set 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 fourth prongs of that test.

    Specifically, the government’s construction of the FDCA did not directly advance the government’s interest. Id. Off-label prescription is legal, yet the off-label promotion restriction prohibited the free flow of information that would inform such legal prescriptions. Id. So long as the off-label use of drugs is lawful, prohibiting promotion did not directly advance the stated governmental interest in reducing patient exposure to off-label drugs or in preserving the efficacy of the FDA’s drug approval process. See id. at 166-67.

    The Second Circuit also held that “a complete and criminal ban on off-label promotion by pharmaceutical manufacturers is more extensive than necessary to achieve the government’s substantial interests.” Id. Instead, the government could simply impose less speech-restrictive alternatives or non-criminal penalties. Id. Indeed, the government even could prohibit off-label use entirely. Id. at 168.

    The Second Circuit ultimately vacated Coronia’s conviction because the government prosecuted Caronia for “mere off-label promotion” and instructed the jury it could convict on that theory; under the principle of constitutional avoidance, the FDCA does not criminalize the simple promotion of a drug’s off-label use. In doing so, the appellate court rejected the government’s argument that Caronia was not prosecuted for his speech but, instead, his off-label promotion of the drug “served merely as ‘evidence of intent,’ or evidence that the ‘off-label uses were intended ones [ ] for which Xyrem’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 at trial.” Id. at 161.

    The Food and Drug Administration (FDA) has reportedly decided not to appeal or retry the case against Caronia. Thus, at least for now, this holding constitutes the law of the Second Circuit with respect to off-label marketing.

    The Impact of Caronia

    The impact that the Caronia case will have on FCA cases involving off-label promotion and prescriptions is unclear. On one hand, the government can no longer argue (at least in the Second Circuit) that the mere off-label promotion of a drug constitutes an FDCA violation. Thus, again at least in the Second Circuit, FCA liability cannot be predicated on a FDCA violation where the conduct at issue is mere off-label promotion.

    On the other hand, the government may argue that establishing a FDCA violation is unnecessary for establishing FCA liability in these cases. Medicare and Medicaid payment do not turn on whether the manufacturer complies with the FDCA, but rather on whether the use for which the drug is prescribed for the particular patient at issue is scientifically accepted so as to be reflected in a recognized compendium. Thus, under this theory, the offending conduct would not be the manufacturer’s truthful speech about the uses of the drug; it would be causing false claims to be submitted to Medicare and Medicaid for drug usages those programs do not cover. If a manufacturer promotes a drug for off-label usage, the government may argue, the manufacturer has actual or implied knowledge that doing so will cause the drug to be prescribed to Medicare and/or Medicaid patients and that those programs will be asked to reimburse the cost of those drugs. Nevertheless, this approach leaves open the question of whether simply informing physicians of legitimate usage of the drug can satisfy the causation prong of the FCA, where the information communicated to the physicians was both accurate and legal. As a practical matter, it seems easier to establish causation when the manufacturer’s speech to the physician is prohibited by the FDCA. If marketing a drug for uses not covered under Medicare and Medicaid can trigger FCA liability, then logically it would follow that marketing any product that is not reimbursable under Medicare and Medicaid could trigger 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 misleading promotion, which the Second Circuit explicitly found that Caronia did not. Id. at 167. False or misleading promotion, of course, does not warrant protection under the First Amendment and thus prosecution under the FDCA would not appear to be precluded by this decision. The government no doubt would argue that it still has a plausible action under the FCA against a manufacturer who engaged in false or misleading off-label promotion which in turn caused claims for Medicare and Medicaid 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-label promotion FCA cases, but many will continue to bring them, particularly outside of the Second Circuit, and particularly in situations that appear to involve false or misleading promotion.

    For questions regarding this article, contact Laura Laemmle-Weidenfeld.


    The Silver Lining? Using FCA Settlements to Reduce Tax Burdens

    It is important to consider tax implications when settling a False Claims Act (FCA) case. A defendant generally can deduct compensatory damages paid to a government agency as an ordinary business expense. However, any amount a defendant pays to settle actual or potential liability for a civil or criminal fine or penalty is not deductible. The taxpayer bears the burden of proving what portion of a lump-sum settlement payment is compensatory and, therefore, deductible. The Department of Justice’s current practice with FCA settlements is to not include provisions in a settlement agreement that characterize the settlement amount or any tax consequences that may result. Therefore, the defendant should compile other evidence to support its deduction, and it should 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.