The United States Court of Appeals for the First Circuit issued an opinion creating a national divide on when a relator is an “original source” of an FCA claim, finding that a relator’s secondhand knowledge of fraud was “direct” knowledge.

Facts of the Case

In United States ex rel. Banigan v. PharMerica, Inc., a former employee of drug manufacturer Organon, James Banigan, alleged that PharMerica, Inc. one of the largest long-term care pharmacy companies in the United States, accepted illegal kickbacks from Organon in exchange for having Medicaid patients switched from their originally prescribed antidepressants to Organon’s antidepressant Remeron.

Banigan had worked in the same department as two Organon executives who conceived the scheme. Though he was not directly involved in the transactions, Banigan received emails about them, and both executives had spoken to him directly about their plot to induce prescription switches through heavy discounting and cost-saving opportunities.

The Court found that Banigan’s lawsuit, filed in 2007, stated claims that were “substantially similar” to those alleged by a New Orleans based long-term care physician in a settled 2002 lawsuit against PharMerica. Consequently, Banigan was barred from bringing suit, unless he was an “original source” of the information.

Notably, the district court previously held that Banigan’s claims were not subject to the first-to-file bar, which is designed to prevent duplicative qui tam actions where the government has already learned of the alleged fraud from a previously filed action. Applying the Supreme Court’s holding in Kellogg Brown & Root Servs., Inc. v. U.S. ex rel. Carter­—that the bar applied only where the first suit was still “pending”—the district court held that because the 2002 lawsuit was settled and dismissed, Banigan’s 2007 suit could proceed.

The Public Disclosure Bar and the Original Source Exception

The public disclosure bar is designed to prevent opportunistic relators, enticed by the financial incentives that the FCA provides, from bringing “parasitic qui tam actions,” that is, suits that are “based upon a prior, public disclosure of fraud” in a civil proceeding. A lawsuit is “based upon” a public disclosure if the relator’s allegations are “substantially similar to” the information already in the public domain and “ultimately target the same fraudulent scheme.”

Prior to 2010, the public disclosure bar no longer applied when “the person bringing the action is an original source” who has “direct and independent knowledge of the information on which the allegations are based.” (Emphasis added). The 2010 amendments to the FCA, which post-date the allegations in this case, removed the word “direct” from the original source exception. The Judiciary Committee’s report on the 2010 amendments reflected frustration with courts interpreting the term too narrowly, creating a chilling effect on potential relators and leading to the dismissal of meritorious cases.

With the benefit of this hindsight, the First Circuit departed from its sister circuits’ narrow construction of “direct” knowledge, finding that Banigan’s secondhand knowledge of the fraud, learned from the executives who concocted the scheme, was sufficient to meet the original source exception. The Court specifically criticized the Eleventh Circuit’s holding in United States ex rel. Saldivar v. Fresenius Med. Care Holdings, Inc., that an employed technician was not an original source because his “firsthand knowledge related to inventory and administration of [medications], not costs and billing[.]” Echoing the Judiciary Committee’s concerns, the First Circuit found that such a narrow interpretation of direct knowledge was “incompatible with a core purpose of the FCA — to incentivize disclosures of fraudulent activity underlying claims for reimbursement from the government.”

Practical Takeaways

• Though this decision interprets the term “direct” in the pre-2010 language of the original source exception to the public disclosure bar, relators with only secondhand knowledge of their alleged fraud may nevertheless assert it as persuasive authority for courts interpreting the relaxed knowledge requirement under the current language.
• The First Circuit’s broad interpretation of the term “direct” may also influence other circuits who have not already construed the term in cases where the pre-2010 language still applies.
• This case further serves as a harsh reminder of the effect of the Supreme Court’s decision in Kellogg,[14]which interpreted the first-to-file rule narrowly. Where a second relator revives previously litigated claims, the Kellogg Court offered defendants cold comfort in the form of ‘issue preclusion,’ applicable only if the first action was decided on the merits rather than the relative norm of settlement, as occurred in this case.

Earlier this week, the Second Circuit in Vierczhalek v. MedImmune, Inc.[1] affirmed the dismissal of a relator’s amended complaint, finding she was not an “original source” of new allegations that piggybacked on a public disclosure.

Facts of the Case

Relator Susan Vierczhalek, M.D., filed a qui tam action in 2009 alleging that drug manufacturer MedImmune, Inc. and two health care service providers, Trinity Homecare, LLC and OptionCare, violated the False Claims Act (“FCA”) by promoting an “off-label” use of MedImmune’s drug Synagis.[2] Synagis is prescribed to prevent lung infections in premature infants. Drug manufacturers and others are generally prohibited by law from marketing their drugs for uses other than what the drug was specifically approved for by the FDA – known as off-label uses.

The United States declined intervention. The State of New York, however, in 2015 intervened in the action as against Trinity Homecare and OptionCare, ultimately settling those claims for $22.4 million—of which the relator’s share was $4 million.[3] As to MedImmune, the state continued and expanded its investigation.

Investigation Leads to New Charges

Two years later, New York state filed a complaint-in-intervention against MedImmune alleging a newly discovered kickback scheme wherein MedImmune gained access to the protected health information (“PHI”) of hospitalized infants who might be candidates for Synagis.[4] MedImmune passed that PHI to Trinity, which then used the data to identify potential patients for its Synagis-related health care services.[5]

After the state filed its complaint, the relator began her own investigation into the new charges. She filed an amended complaint against MedImmune that abandoned her previous off-label claims and instead alleged that MedImmune conducted the same kickback scheme described in New York State’s complaint in other states as well.[6] MedImmune moved to dismiss the amended complaint on grounds that the relator was not an “original source” of her new allegations. The district court and the Second Circuit agreed.

Public Disclosure Bar and Original Source Exception

FCA relators must be an “original source” of the allegations they bring on behalf of the government. In other words, they must have independent knowledge of “core information” regarding “the essential elements of the alleged fraud.”[7]

New York State’s filed complaint against MedImmune was a “public disclosure” of the fraud alleged therein, which by law operated to bar any other person from asserting the same claims—unless that person was an “original source” of such allegations.[8] Both the Southern District of New York and the Second Circuit rejected the relator’s arguments that she was an original source and could avoid the public disclosure bar. They found that her claims pertaining to fraud outside the state of New York were closely related to the claims asserted in the State’s complaint, and her allegations were not “independent of” nor did they “materially add” to the State’s complaint.[9] Based in part on the relator’s investigation beginning after and in response to the State’s filed complaint, the Second Circuit concluded that her amended complaint was impermissibly dependent on the public disclosure and merely expanded the territory of the alleged fraud.[10]

Relying on long-established Circuit precedent, the Second Circuit concluded that “[a] relator who simply ‘conducted some collateral research and investigations’ in response to public allegations, and paired the results of that research with her background information, does not qualify as an original source.”[11] The Second Circuit further affirmed the district court’s refusal to grant the relator leave to amend her complaint because this deficiency could not be cured.

Practical Takeaways

Provider-defendants in FCA actions are vulnerable to claims by the government concerning any fraudulent conduct uncovered during an investigation, and that investigation may not be limited to the specific conduct alleged by a whistleblower. Though the government has the authority to expand the action, the whistleblower’s participation will always be limited to claims for which they are an “original source” of information.

The Tenth Circuit’s recent decision in United States ex rel. Little v. Triumph Gear Sys., Inc. refines its definition of “intervene” in light of the Supreme Court’s decision in United States ex rel. Eisenstein v. City of New York. In doing so, the Tenth Circuit also seems to indicate that the original filing by the initial relator equates to a public disclosure, thus precluding subsequent relators who do not meet the requirements of 31 U.S.C. 3730(e)(4)(A).

Background

The defendant was a government contractor that manufactured aerospace gear systems.^[1] The initial complaint, filed by Joe Blyn and three “John Does,” claimed the defendant violated the False Claims Act.^[2] Before the initial complaint could be served plaintiff’s counsel of record, Donald Little filed an amended complaint that named himself and a third person, Kurosh Motaghed, as the sole relators.^[3] All references to Mr. Blyn and the John Does were inexplicably removed from the complaint.^[4] The new relators amended the complaint twice more, and the defendant filed a motion to dismiss on multiple grounds, including that the district court lacked jurisdiction over the amended complaint under the FCA’s first-to-file rule.^[5]

The district court denied the defendant’s motion to dismiss, citing the Tenth Circuit’s decision in Precision Company v. Koch Industries, Inc.^[6] The district court determined that Little and Motaghed were not considered “interveners” for the purpose of § 3730(b)(5). Because they intervened through Fed. R. Civ. P. 15, and not Fed. R. Civ. P. 24^[7] on appeal, the Tenth Circuit distinguished this case from Precision and reversed the district court’s decision, stating that the first-to-file rule bars the new relators because they were not added by an existing plaintiff.^[8] Rather, Little and Motaghed added themselves and completely removed the initial relator.^[9] The Tenth Circuit’s decision not only clarifies the definition of “intervene” and an intervener’s ability to amend the initial complaint but raises the public disclosure bar that a plaintiff must clear.

Analysis 

Neither the Tenth Circuit, nor the district court, were able to ascertain why Mr. Blyn vanished from the action entirely. In fact, the Tenth Circuit noted that Little, “simply substituted his name for Blyn’s without regard for the resulting incongruities.”^[10] In respect to the second relator, “none of the amended complaint’s substantive allegations pertain to Motaghed, despite his status as a putative relator.”^[11] This wholesale removal of the initial relator required the court to determine how the two new relators could be considered to have “intervened” as contemplated in § 3703(b)(5) of the FCA.

The Tenth Circuit did not have to delineate between addition and intervention Rules 15 and 24.^[12] Little and Motaghed entered the action through no procedural method the court could identify.^[13] The court indicated that, because Fed. R. Civ. P. 15(a)(1) only allows amendments by parties and not non-parties, Little and Motaghed, as non-parties, had no right to amend the complaint.^[14]

Practical Takeaways

The Tenth Circuit’s justification for avoiding a debate between Rule 15 addition and Rule 24 intervention seems to indicate that relators, who attempt to intervene in this rather unique situation, are not an original source of the allegations and therefore cannot survive the public disclosure bar. Additionally, the Tenth Circuit has indicated that, in light of the Supreme Court’s decision in Eisenstein, the Tenth Circuit’s previous decision in Precision may no longer be good law.

If you have any questions, please contact:

• David Honig at dhonig@hallrender.com or (317) 977-1447;
• Matthew Schappa at mschappa@hallrender.com or (317) 429-3604; or
• Your regular Hall Render attorney.

In 2010, the False Claims Act (“FCA”) was extensively amended to limit the public disclosure bar and to expand the ability of whistleblowers to qualify as “original sources” in qui tam litigation. This month, the Fourth Circuit Court of Appeals took an in-depth look at both provisions, in the case US ex rel. Moore & Co. v Majestic Blue Fisheries…. Continue Reading →