Last month, Baxter International Inc. and Baxter Healthcare Corporation (collectively “Baxter”) settled a qui tam False Claims Act (FCA) case with the Department of Justice (DOJ) for $18 million. The settlement is not monumental in terms of the amount, but does highlight the unique theory of FCA liability. The government alleged that Baxter submitted false claims for a drug sold to the Department of Veterans Affairs and Department of Defense, as well as reimbursed by the Medicare and Medicaid programs, because the drug was “adulterated,” given Baxter’s alleged violations of the Federal Food, Drug, and Cosmetic Act’s (FDCA) current good manufacturing practice (cGMP) requirements – but not because of any impact on the drug itself.

FDCA Section 501(a)(2)(B) deems a drug to be adulterated if “the methods used in, or the facilities or controls used for, its manufacture, processing, packing, or holding do not conform to or are not operated or administered in conformity with current good manufacturing practice, to assure that such drug meets the requirements of this chapter as to safety, and has the identity and strength, and meets the quality and purity characteristics, which it purports or is represented to possess.” Note that under the FDCA, a drug can be “adulterated”—even when a drug’s quality, strength, and identity meet all established standards—if the drug is not manufactured in conformance with minimum current cGMP standards established by FDA through regulation and guidance.

Baxter’s Alleged Noncompliance

At issue in this case was the presence of visible mold on HEPA filters installed above the clean rooms where Baxter manufactured sterile IV solutions. According to the complaint, Baxter managers prevented the relator and others from removing the moldy filters and from cleaning or sanitizing associated contaminated surfaces. Baxter’s handling of the moldy filters allegedly violated numerous cGMP requirements set forth FDA regulations, including the requirement that a manufacturer establish, and also follow, its own internal standard operating procedures.

The government acknowledged that there was no evidence showing that Baxter’s IV solutions had been impacted by the moldy filters. Nonetheless, the government alleged that the IV solutions violated the FDCA because of Baxter’s failure to comply with cGMP requirements. According to the complaint, because the federal government paid for the “adulterated” IV solutions directly pursuant to contracts between Baxter and VA and DOD, and indirectly pursuant to payments to hospitals that purchased the IV solutions for Medicare and Medicaid beneficiaries, Baxter violated the FCA. Of note, the terms and conditions of sale of Baxter’s IV solutions to the VA and DOD warrantied that the drugs conformed to all Baxter specifications. Although the IV solutions were not impacted, they were manufactured allegedly in violation of Baxter’s process control specifications, a violation of cGMP requirements.

Historically, the DOJ has made no secret of its desire to bring more FCA actions against pharmaceutical manufacturers based on violations of cGMPs under the FDCA. In October 2010, SB Pharmco Puerto Rico, Inc., a subsidiary of GlaxoSmithKline, pleaded guilty and agreed to pay $750 million in criminal fines, forfeitures, and civil damages to resolve charges of misbranding and distributing adulterated products stemming from cGMP violations involving the manufacture of Paxil CR and Avandamet and violations of the FCA. Specifically, the government claimed that the Paxil CR manufacturing process allowed certain two-layer tablets to split, resulting in the distribution of some Paxil CR tablets that lacked any active ingredient, and some that lacked any controlled release mechanism. The government similarly alleged that certain tablets of Avandamet did not contain the FDA-approved mix of active ingredients.

Then, in May 2013, generic manufacturer Ranbaxy Laboratories, Ltd. pleaded guilty and agreed to pay $150 million in criminal penalties, plus $350 million in civil damages and penalties, to resolve charges of misbranding, distributing adulterated products, making false statements, and violations of the FCA relating to significant cGMP violations at several of its Indian facilities. The alleged cGMP violations included, among other things, Ranbaxy’s submission of false stability study data to FDA, “nonexistent” cGMP training, and numerous deficiencies in Ranbaxy’s internal investigations, record keeping, stability assessment program, and cross-contamination prevention controls.

Despite these significant FCA settlements involving alleged cGMP violations, in 2014, the United States Court of Appeals for the Fourth Circuit dealt a major blow to the DOJ’s drive to use cGMP violations as the basis for FCA suits against pharmaceutical manufacturers. In United States ex rel. Barry Rostholder v. Omnicare, Inc., the court ruled that cGMP violations alone are not enough to establish the elements of a FCA claim, at least related to reimbursement for such drugs under the Medicare and Medicaid programs. 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 rejected this claim and 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.

What makes the allegations in the DOJ complaint against Baxter distinct is two-fold:

  1. Baxter allegedly actively misled and concealed the presence of the mold in violation of its own internal Standard Operating Procedures and manipulated inspection records by purposefully selecting HEPA filter locations for inspection where it knew no mold was present; and
  2. Baxter represented in its product terms and conditions of sale, which support every sale of the IV solutions to hospitals and other health care providers, including the VA and DOD, that the products conformed to their accompanying labels and inserts and to Baxter’s specifications for the products, which presumably include its own Standard Operating Procedures for producing the products.

The DOJ also alleged that the product terms and conditions of sales were “material” to the purchase of the IV solutions by the VA and DOD, as well as by hospitals and other health care providers.

What’s Next for cGMP and the FCA?

Will cGMP violations be “revitalized” as a potential basis for FCA claims against pharmaceutical manufacturers? Only time will tell, but it appears that perhaps the DOJ’s case against Baxter was a test to see if DOJ could better highlight the materiality of cGMP compliance to product purchases in support of FCA claims, and thereby avoid the conclusion in the Omnicare case. Nonetheless, potential additional cGMP scrutiny by the DOJ under the FCA provides a sufficient catalyst for pharmaceutical manufacturers to review, audit, and ensure cGMP compliance.