For more than twenty years, qui tam relators have played a significant role in setting the agenda for enforcement of the Federal Food, Drug, and Cosmetic Act (“FDCA”) through whistleblower lawsuits alleging that violations of the FDCA caused the federal government (the “Government”) to pay for drugs that it should not have paid for, and would not have paid for had it known of the violations. Since a physician and former pharmaceutical company medical liaison filed a False Claims Act lawsuit in 1996 alleging that his former company had illegally driven up sales of the company’s drug by marketing it for off-label uses,1 whistleblowers have prompted investigations into a range of FDCA compliance issues, including promotional activities, current good manufacturing practices2 and reporting violations,3 that have resulted in significant False Claims Act (“FCA”) settlements and criminal fines.
For every FCA complaint that involves allegations that lead to an investigation and settlement with the United States, many more complaints are filed involving alleged violations of the FDCA in which the Government declines to intervene.4 Some of these declined cases proceed to years of civil litigation without the active participation of the Government.5
As the real party in interest in a FCA case, the Government is always entitled to seek dismissal of an FCA complaint under 31 U.S.C. § 3730(c)(2)(A), even in cases in which it does not intervene. The Government exercises this authority rarely. However, the Department of Justice (“DOJ”) does recognize the need to protect Government interests potentially threatened by relator-driven FCA litigation.6 Recent FCA cases highlight several key considerations for FDA-regulated defendants navigating FCA litigation and considering a request for a Government-initiated dismissal under section 31 U.S.C. § 3730(c)(2)(A). This article describes the evolving use of this provision, the recent (c)(2)(a) dismissal of a case against a drug manufacturer,7 and key takeaways for the life sciences industry.
The False Claims Act
The FCA imposes civil liability on a person who knowingly submits a false claim for payment to the Government.8 Importantly, the FCA authorizes a private individual, referred to as the relator, to file suit for violations of the FCA on behalf of the Government, in what is known as a qui tam action.9 After the Department of Justice (“DOJ”) investigates the allegations in a qui tam complaint, it may intervene in the action on behalf of the Government and take the lead in pursuing relief, or it may decline to do so, allowing the relator to lead the case.
Although the relator may continue litigating the case if the Government declines to intervene, the FCA provides that “the Government may dismiss the action notwithstanding the objections of the person initiating the action if the person has been notified by the Government of the filing of the motion and the court has provided the person with an opportunity for a hearing on the motion.”10
The Granston Memo
Historically, DOJ rarely has sought dismissal of non-intervened qui tam cases under 31 U.S.C. § 3730(c)(2)(A) (often referred to as “(c)(2)(A) dismissals”). Rather, in most cases, DOJ has let relators proceed on their own, at times filing Statements of Interest to assert particular Government interests in the ongoing litigation. In January 2018, a DOJ memorandum, commonly referred to as the “Granston memo,” outlined non-exhaustive factors the Government should consider in determining whether to seek dismissal in cases in which it has declined to intervene. The memo describes the FCA’s provision on dismissal as “an important tool to advance the Government’s interests, preserve limited resources, and avoid adverse precedent”11 and advises prosecutors to consider filing a motion for dismissal if such dismissal would:
- Curb meritless qui tam actions;
- Prevent parasitic or opportunistic qui tam actions;
- Prevent interference with agency policies and programs;
- Control litigation brought on behalf of the United States;
- Safeguard classified information and national security interests;
- Preserve Government resources; or
- Address egregious procedural errors.12
The Granston memo also recommends advising relators when the Government is considering a (c)(2)(A) dismissal in order to provide them with the opportunity to voluntarily dismiss their actions.13
Currently, the Circuit Courts of Appeals are split regarding the standard that courts should apply when reviewing Government-requested dismissals under the FCA. In Swift v. United States, the D.C. Circuit held that the Government has an “unfettered right” to dismiss a qui tam action under § 3730(c)(2)(A).14 The Ninth Circuit, on the other hand, adopted a different standard of review in United States ex rel. Sequoia Orange Co. v. Baird-Neece Packing Corp., holding that a two-step analysis applies to test the Government’s justification for dismissal.15 First, the Government must identify a valid Government purpose for dismissal, and, second, it must show a rational relationship between the dismissal and accomplishment of the valid Government purpose. In the Granston memo, the DOJ espoused its view that the appropriate standard for dismissal is the standard adopted by the D.C. Circuit in Swift providing the Government an unfettered right to dismiss a qui tam action.16 Nonetheless, the Granston memo advises the Government to argue that, even where a court applies the higher Sequoia Orange standard, its review should be highly deferential and that the Government satisfies any potential standard for dismissal.17
The principles articulated in the Granston memo are incorporated in the Justice Manual at section 4-4.111.18
Impact of the Granston Memo on DOJ
In late 2018, DOJ sought dismissal of multiple cases brought by professional relators under the FCA alleging that certain patient assistance and support services provided by pharmaceutical manufacturers were unlawful kickbacks in violation of the Anti-Kickback Statute. Generally speaking, DOJ argued that the Government had investigated the relators’ allegations in these cases and concluded that (i) the allegations lacked an adequate factual and legal basis; (ii) ongoing litigation would impose unjustified costs and burdens on the Government, and (iii) the allegations would undermine the Government’s policy and enforcement prerogatives related to industry practices that benefit federal health care programs. Of the 10 patient support cases in which the Government sought (c)(2)(A) dismissals, decisions have been issued in nine cases as of November 15, 2019. The court has dismissed five cases;19 the court denied dismissal in one case,20 and the relator voluntarily dismissed in three cases.21 A decision is pending on the Government’s motion to dismiss in one case.22 These developments illustrate the Government’s ability and willingness to apply the principles of the Granston memo in cases involving the life sciences industry.
In November 2018, in an amicus brief before the Supreme Court in an FCA case involving allegations of current good manufacturing practice (“cGMP”) violations by a drug manufacturer, the DOJ previewed that if the case were remanded to the district court, it would move to dismiss the suit in part because continued litigation would not serve the public interest.23 Based on the Government’s thorough investigation of relators’ allegations, the DOJ explained that dismissal would be appropriate because the burdensome discovery process would distract from the FDA’s public health responsibilities, stating that “allowing this suit to proceed to discovery (and potentially a trial) would impinge on agency decision-making and discretion and would disserve the interests of the United States.”24
On remand, the DOJ—as promised—moved to dismiss under § 3730(c)(2)(A), emphasizing the lack of merit to the relators’ case, FDA’s ongoing oversight, and that “[t]he FCA was never intended to allow a relator to substitute his or her own judgment for that of the Government as to whether the Government received the benefit of its bargain.”25 On November 5, 2019, after months of supplemental briefing and hearings, the court granted the Government’s motion to dismiss.26 The court found a sufficient factual basis to support the governmental purposes for dismissal asserted by the DOJ, which were (1) “to prevent [relators] from undermining the considered decisions of FDA and CMS about how to address the conduct at issue here,” and (2) “to avoid the additional expenditure of government resources on a case that it fully investigated and decided not to pursue.”27 Applying the Sequoia Orange standard, the court found dismissal appropriate because there was a rational relationship between dismissal and accomplishment of the Government’s two purposes, especially as the FDA had taken into account the relators’ claims in its regulatory oversight of the drug manufacturer and had taken the actions it deemed appropriate.28
Takeaways for the Life Sciences Industry
The Granston memo and recent FCA cases implicating FDA’s regulatory authority have the potential to be of great significance to drug and medical device companies fighting qui tam litigation.
Courts have increasingly recognized the potential for qui tam cases, especially meritless ones, to hinder FDA’s mission to promote and protect the public health. The Fourth Circuit in United States ex rel. Rostholder v. Omnicare, Inc. affirmed the district court’s grant of the defendant drug manufacturer’s motion to dismiss, holding that its submission of claims to the Government for payment of drugs allegedly packaged in violation of cGMP did not constitute fraud on the Government under the FCA.29 There, the court stated that relators failed to allege that defendants made a false statement or that they acted with the necessary scienter, as compliance with cGMP was not required for payment by Medicare and Medicaid. The court highlighted FDA’s significant remedial powers, including seizure, injunction, and recommending disapproval of new applications from the manufacturer, and found that 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.”30
In 2016, the First Circuit in United States ex el. D’Agostino v. Ev3, Inc. rejected the relator’s claims that the defendant device manufacturer’s allegedly fraudulent representations to FDA when seeking approval to market its medical devices caused the submission of false claims under the FCA.31 The First Circuit explained that qui tam actions based on claims of fraud on the FDA could undermine FDA’s public health responsibilities and lead to second-guessing of the agency’s decisions by juries. Pointing to the fact that FDA had chosen not to require a recall or relabeling of the devices at issue, and had not sought to withdraw product approval during the six-year period after FDA became aware of the allegations, the court held:
The FDA’s failure actually to withdraw its approval of [the subject device] in the face of D’Agostino’s allegations precludes D’Agostino from resting his claims on a contention that the FDA’s approval was fraudulently obtained. To rule otherwise would be to turn the FCA into a tool with which a jury of six people could retroactively eliminate the value of FDA approval and effectively require that a product largely be withdrawn from the market even when the FDA itself sees no reason to do so. The FCA exists to protect the government from paying fraudulent claims, not to second-guess agencies’ judgments about whether to rescind regulatory rulings.32
Likewise, in United States ex. rel. Petratos v. Genentech Inc., the Third Circuit affirmed the district court’s grant of the defendant drug manufacturer’s motion to dismiss, finding that relator had failed to allege materiality under the FCA.33 The relator had alleged that the drug manufacturer concealed information about the health risks of its drug, but the relator did not dispute that the Government would reimburse claims even with full knowledge of the alleged deficiencies.34 The court described that even after the drug manufacturer’s alleged noncompliance had been disclosed to the Government, FDA maintained approval of the drug, approved additional indications, and did not initiate proceedings to require the manufacturer to change the drug’s label, thereby indicating that relators had failed to meet the high standard for alleging materiality established by the Supreme Court in Universal Health Services, Inc. v. United States ex rel. Escobar.35 In Escobar, the Supreme Court had described the standard for materiality as demanding and rigorous, stating that “[t]he False Claims Act is not ‘an all-purpose antifraud statute,’ or a vehicle for punishing garden-variety breaches of contract or regulatory violations.”36
Since the issuance of the Granston Memo in 2018, the Government has increasingly recognized that meritless qui tam actions are a concern not only for defendants in such cases, but also for the Government itself, and the public. These actions can be a drain on limited Government resources and can interfere with agency expert determinations, priority setting, and policy considerations. They can also divert industry resources away from research and development and investment in manufacturing infrastructure, exacerbate product shortages, or result in increased prices for medical products, thus also undermining important Government interests and the public health generally.37 If the facts of a case are unfavorable to the Government, a ruling could lead to adverse precedent, which could ultimately make it more difficult for an agency to enforce its statutory and regulatory authority in a manner aligned with its policy and enforcement priorities. The Government’s decision to seek dismissal of appropriate FDCA-based FCA cases reflects its understanding that these types of FCA cases could make it harder for the FDA to enforce the FDCA as the agency deems appropriate and that the Government is acknowledging Congress did not intend the FCA as a tool for enforcing the FDCA.
Considerations for Discussions with DOJ during FCA Litigation
In light of the Granston memo and the evolving FCA landscape, defendants in the life sciences industry facing FCA litigation should consider whether and how to engage in discussions with DOJ attorneys regarding the potential for the Government to request (c)(2)(A) dismissal of cases in which the Government has declined to intervene.
As the cases described above illustrate, FCA litigation in the drug and medical device context has the potential to divert scarce resources to non-priority matters. Relators may easily underestimate how onerous FCA litigation can be for the agency, even when the Government has not intervened. For example, the burden accompanying discovery of FDA documents, many of which contain privileged and confidential information, may not be fairly appreciated by relators. Coordinating discovery across multiple FDA centers and offices and ensuring that any materials produced are appropriately redacted can be a challenging task, particularly when production of such materials is not a priority for the agency. As FDA-regulated products account for about 20 cents of every dollar spent by U.S. consumers,38 FDA’s resources are already spread thin. The agency cannot pursue every potential violation of the FDCA.
In addition to the use, or misuse, of scarce resources, there are other issues defendants should consider raising with DOJ. FCA litigation could second-guess agency expert determinations and undermine important FDA and public health policy interests, leading to unfavorable downstream consequences for the FDA and, ultimately, for the public health. Where FDA is aware of particular allegations and has made a determination that agency action is not warranted, or where the agency is already engaged in regulatory compliance activities with respect to a defendant that may be undermined by an FCA action, a request for dismissal may be appropriate and well-received.
In the context of FCA cases premised on alleged violations of cGMP requirements or other quality-related allegations, the threat of enforcement and a potential treble damages award could lead manufacturers to shut down production when faced with minor issues, potentially exacerbating drug shortages and adversely impacting public health. As drug shortages are of great concern to the FDA and the public,39 shortage implications of FCA action should be raised to the Government early in a Government FCA investigation or when urging the Government to seek to dismiss relator-led FCA litigation. In particular, if the issues raised by qui tam relators do not impact product quality in any material respect, a potential drug shortage resulting from FCA litigation could be extremely harmful to the public health.
With respect to FCA cases premised on allegedly off-label promotion of drugs or medical devices, FDA may not wish to pursue such action if it could potentially lead to unfavorable First Amendment precedent. The DOJ and FDA are already cautious about litigating cases raising First Amendment issues because judicial decisions may further expand on prior decisions where the courts have ruled against the Government.40 Further unfavorable precedent in this area could make it more difficult for FDA to pursue enforcement where the conduct at issue does risk patient harm.
Where safety-related labeling is at issue, if a relator continues litigation despite the Government’s objections, a judge or jury could determine that a defendant should have included information in labeling that FDA did not believe was required or prudent. When FDA reviews a potential label for a drug as part of a new drug application or a medical device as part of a premarket approval application, the agency carefully reviews the specific wording and ultimately approves a label based on its expert analysis. The agency does not require approved product labels to list every possible adverse event, as doing so could drown out the more significant risks. Allowing these types of FCA cases to proceed would be tantamount to allowing a judge or jury to second-guess FDA’s decisions, thereby inappropriately substituting agency expertise with the opinions of untrained individuals, potentially to the detriment of public health.
FDA, as the agency responsible for protecting the public health, requires the freedom to regulate the drug and medical device industries in accordance with its expert judgment. DOJ is beginning to recognize the potential risks of continued relator-led qui tam litigation of declined cases, both to Government priorities and the American public. When a DOJ investigation has determined that intervention is not warranted in a qui tam case because the allegations lack merit or FDA or other relevant federal agencies do not support the case for important policy reasons, defendants can and should marshal the evidence and arguments supporting a (c)(2)(A) dismissal by the Government. The recent (c)(2)(A) dismissal of a case against a drug manufacturer illustrates that even under the higher Sequoia Orange standard, dismissal may be appropriate where a relator continues to pursue litigation on its own despite FDA’s extensive oversight of the defendant and involvement in the Government’s decision not to intervene.41
In summary, if a drug or medical device company finds itself subject to a qui tam FCA action, it should highlight the considerations described above, and outlined in the Granston memo, in discussions with DOJ as the Government weighs whether to intervene or move to dismiss. Meritless FCA cases in the drug and medical device fields, where the FDA has powerful regulatory tools and authority, could ultimately lead to a negative impact on the public health. Such cases could also drain already scarce agency resources if FDA is forced to dedicate time and personnel to investigate situations where it has already exercised regulatory oversight. Lastly, discussions should remind DOJ of the purpose of the FCA – to provide a remedy for the Government when defendants submit a false claim to the Government or knowingly make a false record or statement to get a false claim paid by the Government. The FCA was not intended to be a tool for private individuals to seek monetary damages from life sciences companies for violations of the FDCA, especially when the FDA has already decided that regulatory action under that Act is not warranted or when such action has the potential to interfere with ongoing regulatory action or agency priorities.