On February 21, 2014, the U.S. Court of Appeals for the Fourth Circuit affirmed the dismissal of a False Claims Act (FCA) case brought against a major supplier of pharmaceutical services to nursing homes.1   The Fourth Circuit rejected the relator’s claim  that his former employer violated the FCA when it sought government reimbursement for drugs that it allegedly packaged in violation of the Food and Drug Administration’s (FDA) Current Good Manufacturing Practices regulations (cGMP), which rendered the drugs presumptively unsafe and therefore adulterated and ineligible for reimbursement under Medicare and Medicaid.

In rejecting the relator’s assertion that cGMP violations alone can give rise to FCA liability, the Court of Appeals concluded that to qualify as a “covered outpatient drug” under the Medicare and Medicaid statutes, a drug must “merely be approved by the FDA.” As such, once a particular drug, “has been approved by the FDA and thus qualifies for reimbursement…,” the court held that “the submission of a reimbursement request for that drug cannot constitute a ‘false’ claim under the FCA” even if the drug is adulterated as a result of having been processed in violation of cGMPs.The Fourth Circuit’s decision is in keeping with a strict reading of the FCA’s statutory elements2, and represents a clear renunciation of attempts to use the FCA as a sweeping mechanism to promote a broader goal of regulatory compliance.

Factual Background

The relator, Rostholder, a licensed pharmacist, was a former employee of Heartland Repack Services LLC (Heartland). Heartland was owned by Omnicare, a major supplier of pharmaceutical services to senior citizens through the operation of hundreds of drug repackaging and pharmacy facilities located throughout the United States. Heartland, operated a facility that repackaged drugs into convenient units for patient use and was housed in the same building where Omnicare processed penicillin products. Rostholder’s job entailed overseeing packaging, quality assurance, and regulatory compliance.  In that capacity, he informed his superiors at Heartland that the company was in violation of FDA’s cGMPs penicillin isolation requirements because a reasonable probability existed that the non-penicillin drugs were exposed to penicillin cross-contamination.

When these concerns were not addressed, Rostholder resigned from the company. In his FCA suit against Omnicare, Rostholder alleged that Heartland’s repackaging of non-penicillin drugs in the same building violated FDA’s cGMPs, which require that the operations relating to the manufacture and packing of penicillin be performed in facilities separate for those used for other drug products. According to Rostholder, these regulatory violations rendered the drugs at issue presumptively adulterated, and any claim for reimbursement for these drugs under government programs was false or fraudulent within the meaning of the FCA.

As a result of Rostholder’s cooperation with the FDA after he resigned from Heartland, FDA conducted an inspection at the Heartland facility and discovered that penicillin was being repackaged in the building where the operations of Heartland and Omnicare occurred. As a result, FDA issued a warning letter to Omnicare, outlining numerous violations of FDA regulations, both related and unrelated to Omnicare’s practices of handling penicillin and charging that Omnicare’s

The U.S. District Court for the District of Maryland granted Omnicare’s motion to dismiss Rostholder’s complaint, holding that Rostholder’s allegations of cGMP violations were insufficient to state an FCA claim because he had failed to allege that Omnicare made a false statement or engaged in any fraudulent conduct.3

The Opinion

The Fourth Circuit applied a strict reading of the prerequisites for bringing a FCA claim and affirmed. In so doing,the court noted that the relator acknowledged that “the Medicare and Medicaid statues do not expressly prohibit reimbursement for drugs that have been adulterated,” and that those statutes “do not” require compliance with the cGMPs “or any other FDA safety regulations as a precondition to reimbursement.” In response to the relator’s assertion that he adequately pleaded a false claim because noncompliance with FDA cGMPS is “material” to the government’s decision to provide reimbursement, the court stressed that the “relator must allege both materiality and a ‘false statement or fraudulent course of conduct’ as distinct elements of an FCA claim.” Thus, the court reasoned that the alleged cGMP violations—even assuming they might be material to the government’s decision to pay for the drugs at issue—were not enough to make out an FCA claim because the relator also had to allege a false statement or course of conduct. On that particular point, the court concluded that because compliance with the cGMPs was not required for drug reimbursement by Medicare and Medicaid, Omnicare could not be held liable under the FCA because it had not asked for reimbursement for drugs that were ineligible for reimbursement (i.e. there was no false claim). The court went a step further in holding that Omnicare lacked the required scienter to be liable under the FCA because it did not “knowingly” seek payment for drugs that it knew or should have known were not eligible for reimbursement.

Of special significance is the Fourth Circuit’s discussion of efforts by relators in qui tam cases to turn regulatory violations into FCA violations. The court’s opinion is consistent with those of other circuit courts in this regard. Indeed, the court emphasized that accepting FCA liability based on allegations of regulatory noncompliance would improperly “sanction use of the FCA as a sweeping mechanism to promote regulatory compliance.” It reasoned that when an agency, such as the FDA in this case, has broad powers to enforce its own regulations, 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.”

Comments and Observations

The Fourth Circuit’s decision provides important lessons about the FCA’s authority and scope and of course, is good news for companies regulated by the FDA. A major takeaway is that courts will carefully review statutes and regulations when relators attempt to use violations of those statutes and regulations to make out an FCA claim, and will hold relators accountable for pleading claims that plausibly meet the distinct elements of the FCA. Moreover, it represents yet another federal court of appeals precedent rejecting attempts to equate regulatory violations with FCA liability. The decision reinforces that once a drug has been approved for safety and effectiveness under the Federal Food, Drug, and Cosmetic Act (FDCA) by the FDA, it qualifies for reimbursement under the Medicare and Medicaid statutes. Consequently, a reimbursement request for that drug cannot constitute a false claim under the FCA on the sole basis that the drug was manufactured, processed, or packaged in violation of FDA’s cGMPs.

Counsel defending FCA cases will see this decision as a forceful instrument for preventing an expansive reading of the FCA.  However, the factual background of the case could be a potential limiting factor should this precedent be asserted as a “knock-out” blow to all future FCA claims involving adulterated or misbranded products − or even those based on alleged regulatory violations. Although the government declined to intervene in the case, it submitted a Statement of Interest in response to Omnicare’s Motion to Dismiss in the district court, arguing that cGMP violations “may be relevant in FCA cases where the violations are significant, substantial, and give rise to actual discrepancies in the composition or functioning of the product.”

This echoes the argument the government advanced in United States ex. rel. Ge v. Takeda Pharm., 737 F.3d 116 (1st Cir. 2013), where although the government had declined to intervene in the case, it filed an amicus brief challenging the district court’s dismissal of the case under Rule 12(b)(6). While the government accepted that [s]imply alleging that a company failed to comply with FDA’s adverse event reporting requirements is in insufficient to state an FCA claim,” it argued that “[a]lthough rare, there are circumstances where such failures could trigger liability under the Act,” including, for example, where “the unreported adverse events are so serious that FDA would have withdrawn a drug’s approval for all indications had these events been properly reported...”

In this case, the cGMP violations at the Omnicare facility were insufficient to support the relator’s assertions that the drugs were ineffective or unsafe at the time reimbursement was sought. Therefore, whether a FCA claim under “implied certification” or “worthless services” theories will be allowed when significant violations of cGMPs or other regulatory requirements result in intrinsic defects in the composition or safe use of the product will need to be decided another day.4 The fact that the government has argued − even in cases where it has declined to intervene − that regulatory violations that are sufficiently serious may give rise to liability under the FCA indicates strongly that the government (and future relators) will continue to interpret these decisions as limited to their facts, rather than as limiting the scope of the FCA, itself. Nonetheless, where the basis of the FCA lawsuit rests solely on the basis of an alleged violation of a cGMP or similar agency rule or regulation, the Rostholder decision provides persuasive precedent to prevent the FCA from being used improperly as a means of broader enforcement of FDA’s regulatory scheme under the FDCA.