For several years now current good manufacturing practice (cGMP) violations have been viewed as “the next hot thing” in False Claims Act (FCA) litigation.  The $750 million settlement involving SB Pharmaco (a GlaxoSmithKline subsidiary) and the $500 million settlement involving Ranbaxy USA Inc. (a Ranbaxy Laboratories Limited subsidiary) support this view.  But we’ve always understood that cGMP noncompliance does not necessarily make a FCA case.  And now a circuit court decision confirms that view.

 On February 21, 2014, the United States Court of Appeals for the Fourth Circuit ruled in United States ex rel. Barry Rostholder v. OmnicareInc., that cGMP violations alone are not enough to establish the elements of a FCA claim.  The case involved a former employee of Omnicare alleging that the company violated cGMP requirements when packaging drugs. These violations, the former employee alleged, caused Omnicare to present false claims to the government for adulterated drugs ineligible for reimbursement.  The Fourth Circuit, however, held that the Medicare and Medicaid “statutes do not expressly prohibit reimbursement for drugs that have been adulterated” and “do not require compliance with the cGMPs or any other FDA safety regulations as a precondition to reimbursement.”   Because the relator did not identify any false statements or other fraudulent misrepresentations that were made, the Fourth Circuit held that there was no valid FCA claim.  This was true even though FDA had cited Omnicare for multiple cGMP deficiencies, including a 2007 Warning Letter.

The Fourth Circuit’s decision reaffirms that  the FCA is not meant to promote regulatory compliance; it is meant to protect the government’s financial resources from fraudulent conduct.  The Court stated that allowing FCA claims to promote regulatory compliance would undermine FDA’s enforcement powers – which in this case were exercised through inspections, warning letters, and the threat of seizure or injunction.  Specifically, the Court stated that:

  • “Were we to accept relator’s theory of liability based merely on a regulatory violation, we would sanction use of the FCA as a sweeping mechanism to promote regulatory compliance, rather than a set of statutes aimed at protecting the financial resources of the government from the consequences of fraudulent conduct.  When an agency has broad powers to enforce its own regulations, as the FDA does in this case, allowing FCA liability based on regulatory non-compliance could ‘short-circuit the very remedial process the Government has established to address non-compliance with those regulations.”
  • “Congress did not intend that the FCA be used as a regulatory compliance mechanism.”
  • “We are confident that the FDA’s use of its regulatory enforcement powers may be exercised fully to ensure further compliance with applicable safety standards.”

It is important to note that the government did not intervene in this case.  So a big question that remains is whether this decision weakens the government’s position in pursuing FCA cases for cGMP violations when the violations are significant enough, as was alleged in SB Pharmaco and Ranbaxy, to result in drugs that were so different in strength, purity or quality from that approved by FDA that they are worthless products or not the products for which reimbursement is being sought.  The Fourth Circuit did not feel that it needed to address the “worthless services” theory “[b]ecause adulterated drugs are subject to reimbursement by Medicare and Medicaid and therefore any claim for payment cannot be ‘false’ . . . .”