On May 13, 2013, the US Department of Justice (DOJ), together with the US Food and Drug Administration (FDA) and numerous other federal and state agencies, announced the conclusion of a criminal and civil investigation into Ranbaxy’s generic drug manufacturing and distribution practices. In one of the largest Good Manufacturing Practices (GMP) -related settlements to date, Indian firm Ranbaxy Laboratories, Ltd. (RLL) agreed to pay $500 million to resolve civil and criminal liability. As part of the agreement, RLL’s United States subsidiary, Ranbaxy USA, Inc. pleaded guilty to seven felonies stemming from Federal Food, Drug, and Cosmetic Act (FDCA) violations and making false statements to FDA officials. Ranbaxy also entered into civil settlement agreements with federal and state authorities to resolve allegations that the GMP violations led to the submission of false or fraudulent claims -- these agreements are neither admissions of liability by the company, nor are they concessions that the government’s claims are well founded. Ranbaxy denies that it engaged in any wrongful conduct, except as to such admissions as Ranbaxy USA was required to make under the terms of its criminal Plea Agreement.

The civil settlement stems from a qui tam case filed by relator Dinesh Thakur, a former Ranbaxy executive, who first filed a complaint under seal in April 2007 and will receive approximately $46 million of the total recovery. Mr. Thakur is a former director of project and data management at RLL in Gurgaon, India. In 2004, Mr. Thakur alleges he undertook a comprehensive, company-wide investigation and audit of RLL’s anti-retroviral and non-antiretroviral drug manufacturing units with support and direction from the head of RLL Research and Development (Dr. Kumar). Mr. Thakur alleges that this investigation revealed wide-spread and systematic GMP non-compliance as well as a routine practice of concealing or falsifying substandard testing procedures and that he reported these to Dr. Kumar. Mr. Thakur further alleges that Dr. Kumar presented these findings, along with a list of affected drugs, and a risk mitigation plan to senior managers and board members. Dr. Kumar was purportedly told to destroy the evidence of fraud by members of senior management; he allegedly responded by resigning. According to the Mr. Thakur, the critical audit findings were never disclosed to FDA or other US government authorities.

Though it is unclear whether the government’s theory of False Claims Act liability would survive a judicial challenge, the filings in Ranbaxy suggest a theory of liability premised on an implied certification of GMP compliance to government healthcare programs. The enforcement theory at the heart of the Ranbaxy case seems to be that simply by participating in government healthcare programs (including through direct sales to certain agencies), manufacturers are making an implied certification that their products are produced in compliance with GMPs and related FDA requirements. A failure to make truthful reports to FDA or comply with FDA requirements therefore becomes a material omission vis-à-vis government healthcare programs and would lead the government to pay for drugs in reliance upon a false implied certification. Upon discovering that the certification was false, the government could then have statutory grounds to bring a civil action against the

manufacturer for submission of false claims for reimbursement. Further, the government could argue, as it did in the Ranbaxy case, that the products created outside of GMP specifications were actually unapproved new drugs, and therefore not eligible for reimbursement. Submission of claims for those “new” drugs could also be actionable because the government contends that had it known the drugs it was paying for were actually unapproved new drugs, it would not have made such payment, and therefore those claims were false or fraudulent.

While the civil theory in the Ranbaxy case still remains to be “pressure tested” in court, given other recent GMP-related civil settlements, this theory appears to be part of a growing enforcement trend that is unlikely to go away any time soon. This settlement is a reminder of the high regulatory bar that global companies must confront to sell medical products in the US and the importance of proactively implementing US-focused compliance controls around product development, manufacturing, and distribution activities, even if the bulk of those activities occur overseas.