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

FCA Cases for Product Defects Which Settled

1. In December 2000, a medical device manufacturer, Lifescan, paid $30.4 million to settle FCA allegations that it knowingly sold a faulty blood glucose monitoring system to Medicare patients and concealed this defect from the FDA. The U.S. intervened in the action.

2. In July 2002, in another case in which the U.S. intervened, a medical device maker, Agilent Tech., paid $7 million to settle allegations that it knowingly sold faulty medical monitoring devices to the Veterans Administration and Department of Defense and failed to properly investigate product failures even though the company was aware of them.

3. In June 2005, a medical device manufacturer, Boston Scientific, settled an action with the United States for $74 million based on allegations that it knowingly sold defective coronary stents in violation of the FDCA over a seven-week period in 1998.

FCA Cases for Product Defects Which Were Dismissed

4. In 1998, two plaintiffs attorneys who had previously sued the device maker, Medtronic, in a product liability action and lost, filed an FCA case based on information they learned in discovery in the prior action. The attorneys alleged that Medtronic violated the FCA by selling defective pacemaker leads to Medicare recipients. The government declined to intervene in the action in October 2002 and the case was unsealed. In August 2005, the court dismissed the action at the pleading stage on the ground that the suit was barred by the public disclosure bar. Specifically, the court held that the prior product liability lawsuits against Medtronic alleging fraud on the FDA notified the government of potential Medicare fraud and thus precluded the attorney-relators’ FCA claims.

5. In March 2009, the Eighth Circuit - which is the Circuit in which the Guidant case is pending - dismissed a product defect case in a relator-only action at the pleading stage against the device maker, Hypoguard USA. The relator alleged that Hypoguard knowingly sold defective blood glucose monitors and test strips to Medicare patients. In dismissing the action, the Eighth Circuit held that “sales of a defective product do not give rise to FCA liability absent proof that a party knowingly or with deliberate ignorance charged the government for worthless services.”

FCA Case for Product Defects Which Is Currently Pending

6. In May 2007, a relator filed an FCA action against Cardinal Health alleging that it knowingly sold defective and unsafe infusion pumps to the Veterans Administration. The government declined to intervene in the suit in January 2008 and the case was unsealed. The district court dismissed the action under Rules 9(b) and 12(b)(6). In November 2010, the Fifth Circuit remanded the case with instructions to the district court to permit the relator to amend because it was possible the relator could state an FCA claim for defective products based, e.g., on a “worthless services” theory. The case is currently pending.

The Government’s Theory of FCA Liability in the Guidant Case

The government’s theory of FCA liability in the Guidant case is based on medical necessity. Specifically, the government alleges that knowingly implanting Medicare patients with defective devices when non-defective devices were available was not a reasonable and necessary medical treatment. (Complaint, ¶¶ 80, 135). Under § 1395(a)(1)(A) of the Medicare statute, Medicare will only pay for services which are reasonable and necessary:

[N]o payment may be made…for any expenses incurred for items or services which …are not reasonable and necessary for the diagnosis or treatment of illness or injury or to improve the functioning of a malformed body member.” 42 U.S.C. § 1395(a)(1)(A).

Several Problems With The Government’s Theory of FCA Liability in the Guidant Case

1. The Eighth Circuit Has Dismissed FCA Claims Based on Product Defects

Two years ago, in United States ex rel. Roop v. Hypoguard USA, Inc., 559 F.3d 818 (8th Cir. 2009), the Eighth Circuit affirmed the dismissal of an FCA case against a medical device manufacturer for alleged product defects. The relator alleged that Hypoguard blood glucose monitors and test strips were defective, and that Hypoguard knew they were defective, and failed to file reports of defects required by the FDA’s medical device reporting regulations, which caused Medicare to pay countless fraudulent reimbursement claims. The United States declined to intervene in the action. The district court granted Hypoguard’s motion to dismiss the action for failure to comply with Rule 9(b). The Eighth Circuit affirmed the dismissal, and in doing so, held that:

“[S]ales of a defective product do not give rise to FCA liability absent proof that a party ‘knowingly or with deliberate indifference charged the government for worthless services.’” 559 F.3d at 824 (citing United States ex rel. Lee v. SmithKlineBeecham, Inc., 245 F.3d 1048, 1053 (9th Cir. 2001)). “In a worthless services claims, the performance of the service is so deficient that for all practical purposes it is the equivalent of no performance at all.” (citing Mikes v. Straus, 274 F.3d 687, 703 (2nd Cir. 2001)).

In the Guidant case, the government did not plead a “worthless services” claim, but rather has attempted to allege an FCA claim based on medical necessity. However, as demonstrated below, there are problems with the government’s attempt to invoke medical necessity as a viable theory of FCA liability against a medical device manufacturer for alleged product defects.

2. Is Medical Necessity A Viable Theory of FCA Liability Against Manufacturers For Product Defects?

The short answer is no, it should not be, given the precedent on the issue. Courts have held that Medicare’s requirement that a service be reasonable and necessary generally pertains to the selection of a particular procedure and not to the manner - or quality - of its performance. See, e.g., Mikes v. Straus, 274 F.3d 687, 701 (2d Cir. 2001); In re: Cardiac qui tam litigation, 221 F.R.D. 318 (D. Conn. 2004). In Mikes, the Second Circuit held that the medical necessity for a procedure and its quality are distinct considerations. In Mikes, the relator alleged that the defendant doctors did not perform spirometry tests for which they billed Medicare in accordance with the applicable standard of care, and thus sought reimbursement for services which were not reasonable and necessary under the Medicare statute in violation of the FCA. The court dismissed the relator’s FCA claims based on its determination that “[i]nasmuch as Mikes challenges only the quality of defendants’ spirometry tests and not the decisions to order this procedure for patients, she fails to support her contention that the tests were not medically necessary.” 274 F.3d at 699.

The government’s use of a medical necessity theory in the Guidant case is an attempt to fit a square peg in a round hole. The Mikes case demonstrates that whether or not a procedure is medically necessary under the Medicare statute is really a question of a physician’s judgment to perform a certain procedure, rather than a question of the quality of the procedure (or the quality of a device used to perform the procedure). This conclusion is further reinforced by the statutory design of the Medicare statute itself, pursuant to which medical necessity for a procedure - and its quality - are distinct considerations governed by separate sections of the statute.

At issue was a medical device manufactured by Medtronic called the Cardioblate system.  The Cardioblate system is approved by the Food and Drug Administration (FDA) to control bleeding and coagulate cardiac tissue during surgery.  The relators alleged that Medtronic also promoted the Cardioblate system to treat atrial fibrillation, a use which was not specifically approved by the FDA.  Following the United States’ decision not to intervene, the court unsealed the complaint.  The unsealed complaint did not allege that Medtronic itself submitted false claims to the government.  Nor did it allege specific details of any particular claim submitted to the Medicare or Medicaid program or the identity of any individual or entity that submitted such claims.  Rather, it simply alleged that, as a result of Medtronic’s off-label marketing campaign and payment of illegal kickbacks, the Cardioblate system has been widely used for atrial fibrillation, and that the submission of false claims to Medicare was the natural result of this increased utilization.

Medtronic moved to dismiss and the court granted the motion.  While the court’s decision is lengthy, there are two key aspects that will be important in other off-label device cases.  First, the court concluded that a request for reimbursement for an off-label utilization is not necessarily a false claim.  Typically, “off-label” FCA claims deal with drugs, for which, courts have concluded, Medicare and Medicaid will not reimburse if the use is off-label.  In contrast, there is no express prohibition against reimbursement for off-label utilization of medical devices.  Accordingly, the court reasoned, those claims should be reimbursable, provided they are medically necessary. The court rejected the relators’ argument that off-label uses were per se medically unnecessary simply because they had not been approved by the FDA.  The medical necessity determination is a decision made by individual physicians exercising independent medical judgment.  Since the relators had not alleged an independent basis to conclude that reimbursement claims were for non-medically necessary uses, the court concluded there was no basis to presume that false claims had in fact been submitted. 

Second, the court concluded that the relators had failed to satisfy Rule 9(b) by failing to allege details of any specific false claims or the identities of any specific hospitals or doctors who submitted false claims.  Rather than provide these details, the relators simply made allegations regarding Medtronic’s marketing efforts and then pointed to the high number of times the Cardioblate system was used to treat atrial fibrillation.  The court held that this was not enough to satisfy Rule 9(b), which requires the who, what, when, where and how of the false claims.

However, the court granted the relators leave to file an amended complaint, which must be filed by October 29, 2010.  If relators do file an amended complaint, we will post a link to it here.

Landis shocked the cycling world earlier this year when, in a series of a series of interviews with the Journal, he confessed to using performance enhancing drugs throughout his cycling career and alleged that many of his former teammates, most notably Armstrong, did likewise.  Armstrong, who has been dogged by accusations of doping throughout his career, has denied Landis’ allegations and maintains that he has never used banned substances.  Landis’ allegations are currently the subject of a federal criminal investigation lead by Jeff Novitzky of the FDA, who also investigated BALCO and allegations that Barry Bonds and Marion Jones used performance enhancing drugs.

But how can Armstrong’s use of performance enhancing drugs be tied to false claims for payment submitted to the United States government? Because the case is under seal, it is impossible to know for certain the theory of liability underlying Landis’s case, but it seems likely the link is the United States Postal Service, the title sponsor for Armstrong’s cycling team from 1996 to 2004. The Journal reports that the Postal Service paid $30.6 million to the team’s management company between 2001 and 2004, the years Landis and Armstrong were teammates. The Journal also notes that negative publicity associated with allegations of doping on the team and a failure by team management to discipline riders for doping violations would be deemed events of default under the contract governing the Postal Service’s sponsorship. Presumably, Landis will argue that the team’s solicitation of sponsorship money from the Postal Service is the claim for payment, that Armstrong’s repeated claims that he was riding clean were false statements, and that the Postal Service would never have paid the sponsorship money had it known that Armstrong and others on the team were using performance enhancing drugs.

While it may seem odd to rest a FCA claim on allegations of doping in professional sports, Landis’s suit actually fits in to a trend broadening the FCA beyond its original intended targets – unscrupulous government contractors who submit false or inflated invoices to the government – into a general catchall statute to police improper conduct, provided that the conduct can somehow be linked to federal funds. In recent years, for instance, federal prosecutors and qui tam relators have brought FCA cases against medical providers who receive kickback payments for referrals, drug companies who market their drugs for non-FDA-approved uses, engineering firms that improperly dispose of chemical waste, and educational institutions that pay recruiters bonuses based on the number of students they enroll, all of which have survived at least beyond the pleading stage in some courts.  In these cases, there is often no allegation that the misconduct itself caused the government to pay claims it otherwise would not have paid. In some cases, the defendants do not even receive federal funds or have any direct conduct with the federal government. 

It appears that Landis’ case is far-reaching and will likely face a number of legal challenges: 

• First, in an interview with the New York Times this July, Armstrong denied that he had any ownership interest in the team or involvement in the team’s management during the period of the Postal Service’s sponsorship. If that is true, Armstrong may not have had knowledge of the terms of the sponsorship agreement, which would make it difficult for Landis to establish that Armstrong’s denials concerning performance enhancing drugs were made with the purpose of getting the Postal Service to sponsor the team. 

• Second, the FCA’s statute of limitations provides that suits must be brought within either six years of the date of the FCA violation, or three years from the date the violation would have been discovered with reasonable diligence. According to the Journal report, Landis commenced his action earlier this year, but the Postal Service’s sponsorship of the team ended in 2004. Thus, almost the entire time period of Postal Service’s sponsorship falls outside of the FCA’s six year statute of limitations period. Moreover, since allegations of Armstrong’s drug use have been around for many years, and Landis himself was apparently aware of Armstrong’s doping since 2004 at the latest, Landis cannot reasonably argue that the suit was commenced within three years of the date the violations would have been discovered with reasonable diligence.

• Third, it will be difficult for Landis to establish the extent of the United States’ damages, or whether in fact the United States has suffered any damage at all. While Landis will likely argue that the United States would not have agreed to sponsor the team at all had it known of Armstrong’s alleged doping, some courts have held that the appropriate measure of damages in an FCA case is the amount of money the government paid on the false claim, less the value of what was actually received. Presumably, the Postal Service bargained for and obtained something of value when it secured title sponsorship rights to the team, and it may be difficult to demonstrate how the value of that sponsorship was affected by Armstrong’s doping, especially when revelations of doping did not occur until more than five years after the Postal Service’s sponsorship ended.

Plaintiff Michael Smith, a former sales representative for pharmaceutical manufacturer C.R. Bard, Inc., brought claims under the FCA alleging that he had been wrongfully discharged in retaliation for his efforts to bring to light his employer's alleged practice of marketing its product Tegress, a synthetic injectable therapy approved for treatment of incontinence in women, for off-label use. Smith claimed that his employer was engaged in marketing Tegress for use by men, though the FDA had only approved it for use by women. Following a 2008 compliance training where Smith learned for the first time that sales representatives might face individual criminal liability for marketing drugs for off-label use, Smith allegedly raised the issue with his supervisor and with C.R. Bard's president. Smith specifically explained that the reason for his concern over the off-label promotion was the risk of personal liability and his "concern... as a shareholder" of C.R. Bard. 

Under the FCA, an employee who has been fired because of acts taken "in furtherance of" an FCA claim may bring an action for retaliatory discharge. The District Court held that Smith had failed to establish a claim for retaliatory discharge under the FCA because Smith's reason for raising his concerns regarding off-label marketing of Tegress "was based on his concern over possible personal liability, not exposing fraud." The court also concluded that Smith had failed to establish that he had any objective basis to believe that his employer had defrauded the government because he "failed to identify any doctors who prescribed Tegress off-label because of any promotion by a Bard" sales representative.