FCA's Scope Widens as 8th Circ. Embraces Little-Used Theory
The Eighth Circuit this week endorsed a controversial fraud theory potentially allowing the federal government to recoup every payment it makes to drugmakers and other contractors if they engage in misleading conduct, strengthening an increasingly popular False Claims Act argument and putting many millions more dollars in play, experts say.
In the whistleblower suit targeting Bayer AG, former marketing staffer Laurie Simpson accuses her ex-employer of downplaying the potential for cholesterol drug Baycol to seriously damage muscle fibers. That deception led the U.S. Department of Defense to ink contracts worth about $12 million yearly for the now-discontinued product, which it never would have done had the true risks been known, Simpson alleged.
As a result, every dollar the government expended represented an ill-gotten gain for Bayer that should be returned, the suit asserted in putting forward a “fraud-in-the-inducement” premise.
“This has been a theory that [the U.S. Department of Justice] has been pushing recently, and the fact that we have an appellate decision here endorsing that theory … is significant and not good news for contractors and health care providers,” said David M. Nadler, a Dickstein Shapiro LLP partner who has closely followed the emerging trend.
Simpson, however, presented no evidence of specific claims, a standard the Eighth Circuit has long required in FCA cases to meet the “particularity” requirement of Rule 9(b) of the Federal Rules of Civil Procedure. Attorneys for Bayer said that shortcoming should be fatal to the suit, arguing that none of the nation’s circuit courts had ever allowed such a sweeping theory of liability to proceed without stronger evidence of misconduct.
“Neither this court, nor any other court of appeals, has allowed a relator simply to assert—without more—that all claims for payment submitted to the government were false or fraudulent,” Bayer’s counsel wrote.
The Eighth Circuit disagreed, although its rationale—based largely on a 1943 decision by the U.S. Supreme Court in Marcus v. Hess—appeared to recognize implicitly that the theory and its pleading requirements have not been thoroughly fleshed out.
In that case, the high court “found FCA liability for each claim submitted to the government under a contract so long as the original contract was obtained through false statements or fraudulent conduct,” the Eighth Circuit wrote in its 2-1 opinion.
While Simpson didn’t identify any individual false claims, she did describe a DOD inquiry to Bayer about whether Baycol was riskier than other statins, a concern the drugmaker allegedly called unfounded despite knowledge to the contrary. Also, Simpson offered up some details on the government's expenditures, saying it filled 400,000 Baycol prescriptions over one 10-month period and shelled out $12 million.
“We fail to see how these allegations are insufficient to state a claim for relief under a theory of fraud in the inducement,” the court wrote.
In a dissent, U.S. Circuit Judge James B. Loken accused his colleagues of deviating from the “hornbook law” principle that whistleblowers must clearly connect fraudulent conduct with an injury.
“There is no allegation that DOD paid more for Baycol than it would have paid for a different statin. There is no allegation that the government paid damages to DOD patients who were prescribed Baycol and developed [muscle damage],” Judge Loken wrote.
“For this reason, Simpson failed to state a plausible FCA claim simply by alleging fraud in the inducement,” the judge continued. “To plead this alleged fraud with the particularity Rule 9(b) requires, she needed to allege specific harm resulting from specific false claims submitted under the fraudulently induced DOD contracts.”
The majority’s conclusion could open up a whole new can of worms for companies that have been struggling as it is to convince courts that more specificity is needed when pleading traditional FCA suits involving alleged rip-offs of Medicare or Medicaid.
And the decision is all the more concerning for contractors because it isn’t an isolated embrace of the fraud-in-the-inducement angle. Last year, the Ninth Circuit said that underbidding to land a contract could also create FCA liability under the theory; that case, Hooper v. Lockheed Martin, is now back in district court.
While there are different ways to calculate damages in FCA suits, the approach often looks at the difference between what the government paid and the value of what it received. Under a fraud-in-the-inducement theory, however, the government would claw back every last dollar, even if it benefited from the purchases.
FCA suits already carry the threat of triple damages, but some say that the idea of retroactively nullifying contracts goes too far and raises serious questions of fairness.
“Ultimately, the False Claims Act is designed to address harm to the government. It’s not about a windfall for the government. It’s about making the government whole,” said David J. Leviss, a partner specializing in FCA litigation at O’Melveny & Myers LLP.
One serious concern for contractors under the Eighth Circuit’s logic is that it might extend beyond formal contractual certifications. Simpson, for example, based her complaint in large part on written correspondence in which Bayer, responding to DOD inquiries, said it didn’t view Baycol as particularly hazardous.
If that was sufficient pleading, then courts in the future might also be willing to give more weight to misstatements in presentations that bidders frequently give when vying for government contracts, according to Albert B. Krachman, a partner at Blank Rome LLP.
“Vendors making oral presentations about their products or services need to be very careful about the representations they make,” Krachman said.
At the same time, the Simpson case did contain damaging facts that made Bayer’s defense more problematic. Most notably, the drugmaker yanked Baycol from the market less than one year after DOD asked about the risks of muscle damage—effectively an acknowledgement that those concerns were justified.
Viewed in that light, the Eighth Circuit didn’t necessarily lower the bar all that much for FCA suits.
“I would expect the courts to continue to apply a high threshold for what a relator is required to allege in bringing a fraud-in-the-inducement theory,” Leviss said.
Another saving grace was that the majority found Simpson’s evidence too weak when it came to alleged overbilling of Medicare, where it continued to demand evidence of specific false claims. That question has divided federal appeals courts, and the U.S. Supreme Court this month signaled that it may clarify the particularity requirements.
On the whole, however, the Eighth Circuit's decision contain little to smile about for government contractors, who have already been wrestling with stepped-up FCA enforcement in recent years and now find themselves even more vulnerable.
“The stakes of these cases are already high,” Nadler said. “This will take it that much higher.”
"FCA's Scope Widens as 8th Circ. Embraces Little-Used Theory," by Jeff Overley was published on Law360 on October 17, 2013. To read the full article online, please click here or visit www.law360.com. Reprinted with permission from Law360.