In Brief

  • Case alleges that a whistleblower’s former employer processed drugs in violation of safety regulations and, therefore, caused those drugs to be ineligible for reimbursement by Medicare and Medicaid.
  • The decision closes a potentially lucrative avenue for False Claims Act cases against pharmaceutical companies and others based solely on regulatory non-compliance.

The U.S. Circuit Court of Appeals for the Fourth Circuit dealt a significant blow in February to efforts to use the False Claims Act (“FCA”) against pharmaceutical companies who sell contaminated products to the government in violation of federal safety regulations. The whistleblower, or qui tam, claim at issue alleged that the defendant, Omnicare, Inc., had violated the FCA by processing its drugs in violation of Food and Drug Administration (“FDA”) safety regulations and then placing those adulterated drugs in the stream of commerce where Medicare and Medicaid provided reimbursements for them. The Court of Appeals upheld the dismissal of the claim, holding that the whistleblower failed to allege either that his former employer had made a false statement or that it had acted with the requisite knowledge.

Omnicare ran two operations in a building in Toledo, Ohio: Heartland Repack Services, LLC, a drug repackaging operation, and a pharmacy. Barry Rostholder, a licensed pharmacist who worked for Heartland, discovered that although Heartland did not repackage penicillin, the pharmacy that shared the building with Heartland did. This violated FDA regulations requiring that penicillin repackaging operations be conducted in separate facilities from those for drugs that do not contain penicillin. Drugs that do not comply with the regulations are considered “adulterated” under the Food, Drug, and Cosmetic Act (“FDCA”).

Rostholder resigned from Heartland in 2006 and contacted the FDA concerning Omnicare’s apparent violations. An investigation by the FDA uncovered the presence of penicillin throughout the Heartland facility, leading the agency to issue a warning letter to Omnicare and threaten various other actions. Omnicare subsequently disposed of $19 million of likely contaminated inventory.

In May 2007, Rostholder filed suit under the False Claims Act against Omnicare. He argued that Omnicare had submitted false claims to Medicare and Medicaid by knowingly or recklessly repackaging drugs in violation of the FDA regulations, where the violations caused the drugs to be ineligible for coverage under those programs. The government declined to intervene. The U.S. District Court for the District of Maryland dismissed the claim. It held that Rostholder failed to allege that Omnicare, by merely selling the contaminated drugs, had made a false statement or acted with the requisite knowledge, two elements required to state a claim under the FCA.

The Fourth Circuit affirmed. It acknowledged that failure to  follow the FDA’s safety regulations classified Omnicare’s products as “adulterated” under the FDCA. To qualify as a “covered outpatient drug” under the Medicare and Medicaid statutes, however, a drug need only be approved by the FDA, not comply with its processing regulations. Because such compliance is not required for reimbursement by Medicare and Medicaid, the court said, “the submission of a reimbursement request for [an approved] drug cannot constitute a ‘false’ claim under the FCA on the sole basis that the drug has been adulterated as a result of having been processed in violation of FDA safety regulations.” Similarly, because Omnicare’s alleged conduct did not amount to submitting a false claim, the court held that Rostholder could not plausibly allege that Omnicare had done so knowingly, defeating the scienter element, or fraudulent intent, needed for an FCA claim.

The court lauded the correction of regulatory infractions as a “worthy goal” but explained that such violations are “not actionable under the FCA in the absence of actual fraudulent conduct.” Further, endorsing the whistleblower’s theory 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.” The court pointed to the broad remedial powers possessed by the FDA to enforce its own regulations – powers that the agency had used in its proceedings against Omnicare – as evidence that “Congress did not intend that the FCA be used as a regulatory-compliance mechanism in the absence of a false statement or fraudulent conduct directed at the federal government.”

Given the myriad statutes and regulations that govern the pharmaceutical industry, the court closed a potentially wide avenue for FCA claims by holding that selling drugs that violate safety regulations and for which government reimbursement will be sought does not, by itself, constitute making a false claim. The decision also warded off the broader, more dangerous proposition that any regulatory slip-up by a defendant could create grounds for an FCA suit. Without an allegation of actual fraudulent conduct related to procuring government funds, it appears that such claims will have little chance of success going forward.