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Third Circuit Provides Defense for FCA Claims Concerning Pre-2010 Conduct

Client Alert

Authors: Michael A. Schwartz, Allison DeLaurentis and Michael S. DePrince

6/24/2019
Third Circuit Provides Defense for FCA Claims Concerning Pre-2010 Conduct

On June 18, the Third Circuit affirmed a District of Delaware decision dismissing a False Claims Act (FCA) case against Medco Health Solutions, Inc. because the relator was not an original source of the information underlying his allegations under the pre-2010 FCA public disclosure bar.1 On the heels of the Supreme Court’s decision in Cochise Consultancy, Inc. v. United States ex rel. Hunt, this dismissal is a good reminder that, while qui tam relators may be able to bring claims for conduct that spans a decade, defendants can still take advantage of the more stringent public disclosure bar for conduct that occurred before 2010.

Relator’s Allegations

The relator, Paul Denis, was a former vice president of pharmaceutical contracting for Medco, where he worked for more than 15 years. Medco is a pharmacy benefit manager that negotiates with pharmaceutical manufacturers to secure discounts and rebates on behalf of its clients, including managed care organizations, health insurers, employers and unions. In his role, Denis claimed to have become familiar with all aspects of the company’s pharmaceutical contracting business, including contract administration and negotiation.

Denis alleged that Medco defrauded the government by favoring two of AstraZeneca’s prescription medications — Nexium and Toprol-XL — in exchange for kickbacks. Specifically, Denis claimed that AstraZeneca paid rebates to Medco to obtain favorable formulary placement and lock out competitors’ drugs. According to Denis, these rebates were then recharacterized as “purchase discounts” that appeared only on Medco’s product invoices and were hidden from Medco’s clients — including health care plans that receive subsidies from government payors, such as Medicare Part D.

Public Disclosure Bar and Original Source Exception

After Denis filed his third amended complaint, the district court dismissed for lack of subject matter jurisdiction under the public disclosure bar because the allegations had been disclosed in previous federal lawsuits and in the media. When the public disclosure bar applies, a relator may not continue with the action unless he or she is an “original source” of the information.

Before the 2010 amendments to the FCA, a relator qualified as an original source if he or she possessed “direct and independent knowledge of the information on which the allegations are based.” The court applied this pre-2010 version of the FCA’s public disclosure bar in this case.2

Original Source Allegations and Third Circuit Decision

In his fourth amended complaint, Denis alleged that he was an original source with knowledge that was “direct and independent of any public disclosures to the extent they may exist.” Specifically, Denis alleged:

  • he was on the Medco distribution list to which the agreements were circulated

  • he attended meetings where Medco executives discussed, learned of, and sought to maximize the financial benefits of the agreements, and

  • he was instructed not to provide the agreements to auditors.

In affirming the district court’s dismissal, the Third Circuit reasoned that Denis’s complaint “does not allege that he took part in negotiating agreements between Medco and [AstraZeneca] that produced the allegedly fraudulent discount arrangement at issue in this case.” Rather, the allegations reflect “exclusively information he learned second-hand from other Medco employees and reviewing the agreements already in place.”

Key Takeaways

This case applies only to the application of the pre-2010 public disclosure bar. As noted above, Congress’s 2010 amendments to the FCA changed the standard for the original source exception to the public disclosure bar. The pre-amendment statute required a relator to have “direct and independent knowledge,” but the post-amendment statute requires only that a relator have “knowledge that is independent of and materially adds to” already publicly disclosed information.

Had the current, amended version of the statute applied, Denis’s accounts of his extensive knowledge of the pharmaceutical contracting business, and his discussions with the perpetrators of the fraud, may have satisfied the “independent of and materially adds to” standard. The district court observed that “the direct knowledge requirement restricts the number of individuals that qualify as an original source” — and further intimated that “perhaps that is the reason why Congress removed the direct knowledge requirement from the amended statute.”

The Third Circuit decision also is important given the U.S. Supreme Court’s recent clarifications on the statute of limitations applicable to FCA suits.3 Under the Court’s Cochise decision, when the government has not intervened, a relator can file a complaint either (1) within six years after the alleged violation or (2) up to 10 years after the alleged violation, provided that the suit is filed within three years of the government knowing, or having reason to know, of the relevant facts — whichever is longer.

Given that qui tam relators can reach conduct spanning up to a decade, it is possible a relator’s allegations will be subject, in part or in full, to the pre-2010 original source standard. As such, in the event of a possible public disclosure, defendants should evaluate which original source standard applies and evaluate whether a relator can prove “direct and independent knowledge” of the alleged conduct. Defendants also should keep in mind that there is disagreement over which version of the original source doctrine applies to an alleged continuing fraud that spans the time before and after the 2010 amendment. For example, some courts appear to hold that the pre-2010 standard applies to the entire alleged fraud, while others would bifurcate the fraud at 2010 and apply both standards.4 Defendants will want to evaluate whether the full claim can be litigated under the more exacting direct and independent knowledge standard.

Endnotes

1 United States ex rel. Denis v. Medco Health Solutions, Inc., No. 17-3562 (3d Cir. June 18, 2019).

2 In 2010, Congress amended this language so that a relator with “knowledge that is independent of and materially adds to” already publicly disclosed information could constitute an original source. 31 U.S.C. § 3730(e)(4)(B).

3 Cochise Consultancy, Inc. v. United States ex rel. Hunt, 139 S. Ct. 1507 (2019).

4 Compare Cause of Action v. Chi. Transit Auth., 815 F.3d 267 (7th Cir. 2016) (rejecting to characterize portions of a continuing fraud in 2009 and 2010 as “discrete events” and applying the pre-2010 standard), with United States ex rel. Judd v. Quest Diagnostics Inc., No. 2:10-cv-04914 (D.N.J. May 30, 2014) (holding that the pre-2010 standard applies to pre-2010 conduct), aff’d, 638 F. App’x 162 (3d Cir. 2015).

The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.

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