FCA Alert : Lawyers & Attorneys for Whistleblower, False Claims Act & Qui Tam Defense : Kelley Drye & Warren LLP

On January 27, 2011, the United States filed its complaint-in-intervention in United States ex rel. Allen v. Guidant LLC et al. (including Boston Scientific), Case No. 0:11-cv-00022 (D. Minn.). The Guidant case involves the events surrounding medical device manufacturer Guidant’s recall of the Prizm 2 and Contak Renewal 1 and 2 cardiac devices in June 2005. According to publicly available information, Guidant, which was acquired by Boston Scientific in 2006, has already paid more than $550 million in fines and civil settlements to resolve litigation and legal issues concerning this matter in the past several years.

In the new Guidant FCA complaint, the United States alleges that Guidant knowingly sold implantable cardiac devices which contained a potentially life-threatening defect that could cause the devices to short-circuit without warning. In Guidant, the government is seeking to establish FCA liability for a product defect - which has not been a common use of the FCA in health care litigation against drug and medical device manufacturers.

Typically, FCA cases against drug and device manufacturers have focused on the companies’ sales, marketing, or accounting activities, and have involved alleged conduct such as improper government price reporting, kickbacks, best price violations, and off-label marketing. In 2010, we saw an expansion of the FCA in health care litigation involving manufacturers to reach drug quality issues. In the first half of 2010, two drug companies paid the government $3.5 million and $22 million respectively to settle qui tam actions based on the allegation that the companies sought to charge the government for “less than effective" drugs.  In October 2010, GlaxoSmithKline agreed to pay $750 million to settle a qui tam action alleging that the company violated certain current good manufacturing practices at its plant in Cidra, Puerto Rico, causing adulterated products to enter the United States which were then reimbursed by government-funded health care programs.

Product defect cases, however, have been relatively rare in FCA litigation against drug and medical device manufacturers. We know of only six other large-scale FCA suits for product defects; three of those cases settled, two were dismissed, and one is currently pending. The government intervened in three of the cases.

When reading the short case summaries below, it is important to keep in mind that FCA cases often settle before any court decisions addressing the merits of the claims are issued, and many times, settlement occurs before the complaint is even unsealed. The fact that a settlement occurs, therefore, is not necessarily a strong or reliable indicator that the theory of FCA liability alleged by the government in a given case would be able to withstand a dispositive motion for failure to state a claim.
 

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Earlier today, newly elected New York Attorney General Eric Schneiderman announced a two-part initiative that he claims will lead to increased investigations under the New York False Claims Act. Specifically, Attorney General Schneiderman announced:

1. The New York AG's office will establish a New Taxpayer Protection Unit to investigate large scale tax fraud and government contracting fraud. (The federal FCA specifically exempts tax fraud claims. In August 2010, New York became the first state to permit actions for tax fraud under its state False Claims Act.) The new unit will also encourage and work with whistleblowers who make allegations of fraud and abuse perpetrated against the government.

2. The New York AG's office will bolster its Medicaid Fraud Control Unit by adding dozens of new prosecutors, investigators, and auditors to investigate allegations of Medicaid fraud.

A copy of the press release issued by Attorney General Schneiderman can be found here.
 

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On January 11, 2011, a District of Columbia district court dismissed with prejudice a False Claims Act case against a government contractor under Rule 9(b) in a relator-only action. See United States ex rel. Folliard v. Hewlard-Packard Co., Civil No. 07-1969 (D.D.C.). The Relator, a former HP sales rep that sold information technology products and services to federal agencies, alleged that HP sold non-conforming products to the government. Specifically, the Relator alleged that HP's contract with the United States was covered by the Trade Agreements Act, which generally prohibits the United States government from purchasing products that originated in non-designated countries. The Relator contended that, in 2007, he identified 38 HP products that were incorrectly identified as originating in a designated country, when, in fact, the products were from China, a non-designated country. The Relator further alleged that each time HP listed these products on the website for the government contract in 2007, 2008, and 2009, HP knowingly made a material false statement, causing, in turn, the submission of a false claim each time one of the misidentified products was purchased by the United States government.

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On January 11, 2011, in State of California ex rel. Joseph McCann et al. v. Bank of America, N.A. et al, a California Court of Appeal affirmed a trial court’s dismissal of an action under the California False Claims Act based on Bank of America’s alleged failure to return to the State credits resulting from processing errors in Bank of America’s check clearing operations located in San Francisco and Los Angeles. The relators, former employees of Bank of America, claimed that Bank of America collected these credits, held them for a short period of time, and then appropriated the credits as income. Relators claimed that such credits qualified as unclaimed property under the California Unclaimed Property law and that failure to turn over the unclaimed property to the State amounted to a reverse false claim under the California False Claims Act. The Court of Appeal rejected this argument, holding that relators had failed to plead their claims with specificity, the unclaimed credits were not unclaimed property under the California Unclaimed Property Law, and there was no false claim because even if there was an obligation to the State of California, that obligation was not liquidated and certain.

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Kelley Drye & Warren is pleased to announce the launch of a new blog on the Kelley Drye website. The DC Metropolitan Business Law Alert (www.dcbusinesslawalert.com) analyzes the key court decisions, statutory and regulatory developments and other legal trends affecting business in Washington, D.C., Maryland and Virginia. The blog is a joint venture between the Kelley Drye DC Business Law and Litigation Groups. We are excited to provide this service to our friends and clients.

We are happy to entertain any topics that you might be interested in learning more about through the blog. Please contact us at dcbusinesslawalert@kelleydrye.com.

To subscribe to the blog, please email dcbusinesslawalert@kelleydrye.com.
 

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On January 4, 2011, in United States ex rel. Turner et al.v. Michaelis Jackson & Associates, L.L.C. et al., a district court in the Southern District of Illinois denied a defendant’s motion for summary judgment in a False Claims Act case which involves the issue of whether certain ophthalmology procedures performed by the defendant were medically necessary. The court was not persuaded by the lay testimony provided by the relators on the issue of medical necessity, and held that the relator’s testimony that the defendant performed “true” procedures only 5% of the time he billed for it did not present a genuine issue of material fact under the False Claims Act. In arriving at this conclusion, the court noted that the use of probability as the backbone to a False Claims Act suit has been denounced by the Seventh Circuit. The court was influenced, however, by the detailed expert testimony presented by the relator on the issue of medical necessity and held that the expert testimony was sufficient to create a material issue of fact for trial and withstand summary judgment.

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In United States ex rel. Sanchez-Smith v. AHS Tulsa Regional Medical Center, LLC, No. 05-CV-442-TCK-PJC, 2010 WL 4702270 (N.D. Okla. Nov. 10, 2010), a federal district court in Northern Oklahoma held that the failure to provide the minimum number of therapy hours to psychiatric patients required under state health care regulations can provide grounds for an implied false certification claim under the federal False Claims Act.  In this case, the court found that there were triable issues of material fact as to whether the hospital submitted false claims for reimbursement because the minimum therapy hours requirement was a “condition of payment,” and not merely a “condition of participation” in the Medicaid program.  Thus, according to the Oklahoma court, by submitting claims for reimbursement, the defendant was allegedly impliedly certifying compliance with the minimum hours requirement.  Not all courts have adopted the implied certification theory of liability under the FCA.

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The DOJ announced today that it has reached $6.3 million in settlements with seven more hospitals to resolve allegations that the hospitals overcharged Medicare for kyphoplasty procedures. A kyphoplasty is a surgical procedure to treat spinal compression fractures associated with osteoporosis and cancer. As we reported earlier, in 2008, the DOJ settled a qui tam False Claims Act case brought against Kyphon Inc., the manufacturer of a device used in kyphoplasties, for $75 million. The relators in the action, former Kyphon employees, alleged that Kyphon encouraged hospitals to administer kyphoplasties on an inpatient basis, rather than a less costly but clinically appropriate outpatient basis, to maximize the reimbursement they could receive from Medicaid and Medicare.

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