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Decided:  February 21, 2014

The Fourth Circuit Court of Appeals affirmed the district court’s dismissal of relator’s False Claims Act (“FCA”) claim, which alleged that the defendants presented false claims to the government for reimbursement of drugs packaged in violation of Food and Drug Administration (“FDA”) regulations and, therefore, ineligible for reimbursement.

Omnicare provides certain pharmaceutical services to senior citizens through its drug repackaging and pharmacy facilities. Omnicare owned Heartland Repack Services, LLC (“Heartland”), the drug repackaging operation located in Toledo, Ohio (“the Toledo building”). Omnicare also operated the pharmacy that shared the Toledo building with Heartland. Although Heartland repackaged non-penicillin drugs for distribution, the Omnicare pharmacy that shared the Toledo building processed penicillin products. From 1997 until 2006, Relator Barry Rostholder (“relator”), a licensed pharmacist, was employed at Heartland. In 2004, when Omnicare executive Denis Holmes suggested that Heartland begin repackaging penicillin products, relator informed him that any repackaging of penicillin drugs would constitute a violation of FDA regulations requiring the separate processing of penicillin and non-penicillin products. In February 2006, relator resigned from Heartland due to his concerns about the facility’s quality control efforts. Relator then notified the FDA, which investigated Heartland and discovered that penicillin was being repackaged in the Toledo building.

The Fourth Circuit first addressed whether the district court lacked subject matter jurisdiction over the action due to the “public disclosure bar” in the FCA, which requires the person bringing the action be an original source of the information. The Fourth Circuit concluded relator had independent knowledge, apart from Securities and Exchange Commission’s filings regarding Omnicare’s revenue, that Omnicare caused claims to be submitted to the government for payment. Therefore, the public disclosure bar did not divest jurisdiction.

The Fourth Circuit then addressed whether the district court erred in dismissing relator’s complaint on the ground that he did not adequately allege a false statement or fraudulent course of conduct as required for an FCA claim. To plead an FCA claim, a relator must plausibly allege four distinct elements: (1) there was a false statement or fraudulent course of conduct; (2) made or carried out with the requisite scienter; (3) that was material; and (4) that caused the government to pay out money or to forfeit moneys due.

Relator’s assertion that Omnicare fraudulently made claims for payment for “adulterated” drugs was based on the statutes governing reimbursement under Medicare and Medicaid. Those statutes define “covered outpatient drugs” as those “approved for safety and effectiveness” under the FDCA. Therefore, to qualify as a “covered outpatient drug” as defined in the Medicare and Medicaid statutes, FDA must merely approve the drug. The relevant statues do not provide that when an already-approved drug has been produced or packaged in violation of FDA Safety regulations, that particular drug may not be the proper subject of a reimbursement request under Medicare and Medicaid. Therefore, the Fourth Circuit concluded that once a new drug has been approved by the FDA and thus qualifies for reimbursement under the Medicare and Medicaid statutes, the submission of a reimbursement request for that 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.

Although compliance with FDA regulations is material to the government’s decision to provide reimbursement for regulated drugs, a relator must allege both materiality and a “false statement or fraudulent course of conduct” as distinct elements of an FCA claim. The Fourth Circuit noted that were it to accept relator’s theory of liability based merely on a regulatory violation, it 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 Fourth Circuit further concluded that relator failed to allege Omnicare acted with the requisite scienter. The FCA requires actual knowledge, deliberate ignorance, or reckless disregard of the truth or falsity of the information. Because the Medicare and Medicaid statutes do not prohibit reimbursement for drugs packaged in violation of the FDA regulations, Omnicare could not have knowingly submitted a false claim for such drugs.

Full Opinion

– Sarah Bishop