By Rachael E. Hunt* & JP Ellison –
Since the Supreme Court’s decision in United Health Services v. United States ex rel. Escobar, we have seen a narrowing of situations in which courts will find liability under the False Claims Act (“FCA”). A district court in Pennsylvania provided yet another example of this shifting trend when it dismissed a case by whistleblowers attempting to enforce a regulatory scheme via the FCA. For another discussion of a court’s decision since Escobar, see this post.
Relators Sally Schimelpfenig and John Segura brought a case under the FCA and other state statutes alleging that Defendants manufactured and dispensed prescription drugs that did not comply with certain federal laws requiring child resistant packaging. Specifically, according to Plaintiffs, Defendants violated the Poison Prevention Packaging Act (“PPPA”), which requires child resistant packaging for orally administered prescription drugs for use by humans. The Consumer Product Safety Improvement Act (“CPSIA”) requires manufacturers of imported goods to certify that their products comply with the rules and regulations enforced by the Consumer Protection Safety Commission (“CPSC”), which includes the PPPA. These alleged violations of the PPPA and CPSC formed the basis of Plaintiffs’ FCA claims.
In an opinion issued on March 27, 2017, the United States District Court for the Eastern District of Pennsylvania found that Plaintiffs failed to plead sufficient facts to allege violations of the FCA. United States ex rel. Schimelpfenig v. Dr. Reddy’s Labs. Ltd., 2017 U.S. Dist. LEXIS 44064, *8 (E.D. Pa. Mar. 27, 2017). After so holding, the Court declined to exercise supplemental jurisdiction over the remaining state law claims.
Defendants in this case can be separated into two categories: the manufacturers who made the allegedly noncompliant prescription drugs and the pharmacies who received the drugs, provided them to customers, and sought reimbursement from government payors. Id. at 3.
Although Plaintiffs brought a total of thirty-four claims, the Court focused on the four concerning violations of the FCA. Id. at 7. The FCA makes it unlawful to knowingly submit a fraudulent claim to the government. A prima facie case requires a showing that (1) the defendant presented or caused to be presented to an agent of the United States a claim for payment, (2) the claim was false or fraudulent, and (3) the defendant knew the claim was false or fraudulent.
First, the Court analyzed the second prong of the FCA analysis: whether or not defendants submitted a claim that was false. A claim can be either factually false or legally false. A claim is factually false when the claimant misrepresents what goods or services it provided to the government. In such an instance, the claimant would misrepresent the types of goods or services provided, or seek reimbursement for goods or services that were never provided. The Court noted that Plaintiffs’ SAC did not allege any facts supporting a factually false claim by Defendants, and thus dismissed any FCA claims based on the factual falsity theory of liability. Id. at 10-12.
A claim is legally false when the claimant knowingly falsely certifies that it has complied with a statute or regulation with which compliance is a condition for payment from the government. This certification can be either express or implied. Here, the Court found that Plaintiffs did not allege that Defendants expressly certified compliance with all federal statutes and regulations, and thus proceeded to analyze liability under an implied certification theory. In this analysis, the Court relied in large part on the recent Supreme Court holding in United Health Services v. United States ex rel. Escobar, 136 S. Ct. 1989, 195 L. Ed. 348 (2016). In Escobar, the Supreme Court held that “the implied certification theory can be a basis for [FCA] liability, at least where two conditions are satisfied: first the claim does not merely request payment, but also makes specific representations about the goods or services provided; and second, the defendant’s failure to disclose noncompliance with material statutory, regulatory or contractual requirements makes those representations misleading half-truths.” 136 S. Ct. at 2001.
Ultimately, the Court found that Plaintiffs did not allege Defendants made any specific representations about the goods it provided for government reimbursement, or that Defendants failure to disclose noncompliance with the PPPA was material to the government’s payment decision. Schimelpfenig, 2017 U.S. Dist. LEXIS 44064 at 14. Importantly, the Court relied on a recent decision in the Third Circuit which it interpreted as changing the Circuit’s approach to the implied certification theory of FCA liability post-Escobar. Id. at 18.
In United States ex rel. Whately v. Eastwick College, the Third Circuit interpreted Escobar as requiring specific representations that, in conjunction with the claimant’s purposeful omissions, renders the ensuring claims legally false. 657 F. App’x 89, 94 (3d Cir. 2016). As such, in the Third Circuit, the only way to succeed in proving an implied certification theory of legal falsity is to provide proof of specific representations made to the government payer regarding the goods or services provided. Id. at 19. Even if the manufacturing defendants made false express representations of compliance to the retail defendants, that, according to the Court, was of no import. The sole question in the FCA analysis surrounded what representations were made to the government.
In analyzing the second prong of the Escobar analysis, the Court found that Plaintiffs failed to allege that this nondisclosure was material to the government’s decision to pay the reimbursements. Importantly, the Court noted that it is not enough that a government or a federal agency found a particular issue important enough to regulate. The relevant inquiry is whether the payment decision was influenced by the claimant’s purported compliance with a particular requirement. Here, however, Plaintiffs’ claim was essentially that misbranding is a basis upon which the government would have the option to refuse payment of defendants’ claims—which the Court found insufficient to show materiality.
In so holding, the Court noted that there are federal agencies equipped with the administrative power to address the Defendants’ statutory and regulatory violations and the FCA is not the vehicle for punishing “garden variety breaches” or regulatory violations. Id. at 26. In fact, the Court went so far as to conclude that allowing for FCA liability in such an instance would undermine the regulatory procedures in place for addressing Defendants’ exact kind of noncompliance.
This case represents another example of how Escobar has changed the landscape of FCA analysis in narrowing the instances where a Court will impose liability. This case also signals an important shift to deference towards regulatory agencies in an effort to minimize situations in which companies experience regulatory consequences and then find themselves involved in litigation over the same conduct. As lower courts continue to interpret and apply Escobar, we will keep you updated on the implications for False Claims Act jurisprudence.
* Not admitted in the District of Columbia.