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 in the Steury case was whether the knowing delivery of defective products to the government violated the FCA.  Leslie Steury, the relator in the action, worked for Alaris Medical Systems as an account consultant.  As an account consultant, Steury marketed medical devices, including Signature Edition Infusion Pumps to hospitals, including children’s hospitals and hospitals operated by the Veteran’s Administration, from March 1996 until her termination in late September 2001.  The infusion pumps were electrical devices designed to regulate the rate at which intravenous fluids flow into patients.  Alaris started selling the infusion pumps nationwide in 1996 but stopped doing so in August 2006 after 1,300 of the products were seized by the FDA for an unrelated problem.  In her FCA complaint, Steury alleged that the infusion pumps had a dangerous defect that could cause air bubbles to accumulate and release into a patient’s intravenous line, potentially causing serious injury or death.  She alleged that she first became aware of this defect in October 2000 when a pediatric anesthesiologist at a children’s hospital in Akron informed another Alaris employee that an infusion pump had injected air into his patient’s intravenous line and that a similar problem had been reported at a children’s hospital in Philadelphia.  Seven months later, in May 2001, Steury allegedly met with Alaris’s area manager and nurses from the Akron children’s hospital to discuss concerns about the infusion pumps.  During this meeting, Alaris’s area manager allegedly discredited a nurse’s report of an infant mortality related to an intravenous air bubble.  One month later, in June 2001, Alaris’s area manager informed Steury that Alaris had temporarily suspended shipments of the infusion pumps while it reviewed the air bubble defect, but nonetheless directed Steury to continue marketing the infusion pumps.  Steury was terminated in September 2001 before she received an answer about the company’s review of the alleged defect.

Almost six years later, in May 2007, Steury filed a qui tam complaint under seal against Cardinal Health (Alaris’s successor) alleging violations of the federal FCA and a number of state FCAs.  In January 2008, the United States filed a notice that it declined to intervene in the suit (which is typically a sign that the government believes the merits of the case are weak, the damages are small, or both). 

In the Fifth Circuit, to state a claim under the FCA, a plaintiff must allege: (1) a false statement or fraudulent course of conduct; (2) made or carried out with the requisite scienter; (3) that was material; and (4) that is presented to the Government.  Two key allegations in Steury’s complaint attempt to establish FCA liability.  First, she alleged that a “claimant submits a false or fraudulent claim within the meaning of the FCA when he submits a claim for payment for the Government for products that contain defective parts.”  (Am. Compl. ¶ 51).  Second, she alleged that by “accepting payment from the federal Government or one of its agencies for the SE infusion pumps, Cardinal Health knowingly misrepresented that the SE infusion pumps were safe, reliable and quality-assured.” (Am. Compl. ¶ 52).

Cardinal Health moved to dismiss the complaint pursuant to Rules 9(b) and 12(b)(6).   The district court agreed and dismissed the case, and for reasons unclear from the opinion, declined to give Steury an opportunity to amend the complaint to try to cure the pleading defects. 

In an effort to “streamline” the appeal, Steury pressed only one substantive contention: that Cardinal Health made a false certification (i.e., a false statement) to the Veteran’s Administration that the infusion pumps complied with the warranty of merchantability.  Steury did not assert that Cardinal Health actually made this certification.  Rather, Steury alleged that Cardinal Health, impliedly, and falsely, certified compliance with the warranty of merchantability simply by requesting payment for the infusion pumps.

A plaintiff may establish a false statement under the FCA (element #1) by alleging that when the government expressly conditions payment of a claim upon a claimant’s certification of compliance with a statute or regulation, a claimant submits a false claim when he falsely certifies compliance with that statute or regulation. This is known as “express certification” and is recognized in many Circuits.  Fewer Circuits (specifically, the Second, Sixth, Ninth, Tenth, and Eleventh Circuits) also recognize something called “implied certification” as a basis for establishing a false statement under the FCA.  The implied certification theory of liability “is based on the notion that the act of submitting a claim for reimbursement itself implies compliance with governing federal rules that are a precondition to payment.”  Mikes v. Straus, 272 F.3d 687, 699 (2d Cir. 2001).

In Steury’s case, the Fifth Circuit observed that it had not yet recognized the implied certification theory, but did not yet have to resolve the issue because the allegations in Steury’s complaint provided no basis for implying a false certification.  The court observed that “a false certification of compliance, without more, does not give rise to a false claim for payment unless payment is conditioned on compliance.”  Applying this principle to Steury’s case, the court found “no indication that the Government conditioned payment for the Signature pumps on a certification that the Signature pumps complied with the warranty of merchantability.”

While the court closed one door on Steury, it opened another when it stated later in the opinion:

We do not suggest, however that a knowing delivery of defective goods to the Government will never implicate the FCA.  Particular government contracts may specifically condition payment on a certification of compliance with the warranty of merchantability.  Other courts have suggested that the knowing provision of ‘worthless’ goods or services to the Government may violate the FCA.  Steury has not yet pursued or briefed these theories, however, so we need not address them here.  Finally, although we have held that a knowing attempt to deceive the Government about the nature of commercial items may violate the FCA, the district court was correct in concluding that Steury has so far failed to allege this type of claim with particularity. 

The Fifth Circuit then remanded the case to the district court with instructions to permit Steury to amend her complaint as “we cannot say that the defects in Steury’s complaint are necessarily ‘incurable’ or that amendment would be futile.”

It will be interesting to see if Steury can follow the Fifth Circuit’s guidance and file an amended complaint that can withstand dismissal under Rules 9(b) and 12(b)(6).  A copy of the amended complaint that was dismissed can be found here.