Monthly Archives: May 2014

District of Colorado: Costs and Fees Are Different: The Standard for the Determining the “Prevailing Party” for a Voluntary Dismissal of a False Claims Act Complaint Depends on the Provision

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In United States ex rel. Todd v. Fidelity National Financial, Inc. (D. Colo. March 12, 2014), the district court noted that the standards for determining “prevailing party” when a relator voluntarily dismisses a False Claims Act complaint change depending on whether costs or attorneys’ fees are at issue.

When determining prevailing-party status for purposes of assessing costs under Rule 54(d), a defendant is a prevailing party when a “‘plaintiff dismisses its case against the defendant, whether the dismissal is with or without prejudice.’” Id. (Cantrell v. Int’l Bhd. of Elec. Workers, AFL-CIO, Local 2021, 69 F.3d 456 (10th Cir. 1995).) As the district court recognized, “Rule 54 creates a presumption that the district court will award costs to the prevailing party.” Slip Op. While the relators argued that the court should exercise its discretion to deny costs under the circumstances, the court held that it could not assess that request under the existing record. The court ordered the defendants to submit a bill of costs for evaluation under the factors outlined in Cantrell.

The district court observed, however, that “the landscape for prevailing parties shifts dramatically when the issue is an award of attorney fees under [the] federal fee shifting statute” under the False Claims Act. Slip Op. The district court noted that the Tenth Circuit has held that to be a prevailing party under the fee-shifting statute, there must be a “judicially sanctioned change” in the relationship of the parties. In Lorillard Tobacco Co. v. Engida, 611 F.3d 1209 (10th Cir. 2010), the court held that a voluntary dismissal under Rule 41(a)(1)(A)(i) requires no court order—it is “self-effectuating.” As a result, a voluntary dismissal by the plaintiff does not make the defendant a “prevailing party” for the purposes of the fee shifting provision of the False Claims Act (31 U.S.C. § 3730(d)(4)).

Tenth Circuit Upholds Dismissal upon Government’s Motion

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In United States ex rel. Wickliffe v. EMC Corporation (April 4, 2012), the Tenth Circuit upheld the dismissal of a relator’s complaint under 31 U.S.C. § 3730(c)(2)(A), which permits the government to dismiss a relators’ complaint under the False Claims Act “notwithstanding the objections of the person initiating the action if the person has been notified by the Government of the filing of the motion and the court has provided the person with an opportunity for a hearing on the motion.” The relator opposed the government’s motion to dismiss.

Avoiding the question of whether the proper standard for assessing the government’s motion turned on whether the complaint had already been served, the Tenth Circuit applied the test set forth in United States ex rel. Sequoia Orange Co. v. Baird-Neece Packing Corp., 151 F.3d 1139, 1147 (9th Cir. 1998), which examines whether “the government offers reasons for dismissal that are rationally related to a legitimate government interest.” If the government offers such reasons, the burden shifts to the relator to show that the dismissal is arbitrary and capricious, fraudulent, or illegal.

The court found that the government easily satisfied its burden of showing that dismissal was appropriate in Wickliffe, since the government was already aware of the information disclosed in the complaint through its own investigation and had already entered into a settlement agreement with the defendant. Indeed, the settlement agreement precluded the government from recovering under the qui tam action.

The relators argued that the dismissal was arbitrary and capricious because their complaint, and not the government’s independent investigation, was the impetus for the settlement. The relators therefore argued that they were entitled to a qui tam award. Regardless of the merit in the relators’ arguments, the court held that the dispute over the award was not sufficient to prevent the government from exercising its statutory authority to dismiss the complaint. As the court recognized, the government may dismiss even meritorious complaints if doing so advances a rational government interest. Wickliffe confirms again that the government’s authority to control False Claims Act suits is almost unlimited.

Supreme Court Rules that Employees of Contractors Are Protected under Sarbanes-Oxley’s Whistleblower Protections

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In Lawson v. FMR LLC, 571 U. S. ____ (2014) , the United States Supreme Court held that the Sarbanes-Oxley Act of 2002, which was enacted in the wake of the infamous Enron scandal, protects employees of contractors for public companies from retaliation for whistleblowing.

The Court was interpreting 18 U. S. C. §1514A, which prevents publicly traded companies and related entities from taking adverse action against employees for whistleblowing. At the time, the act covered public companies and “any officer, employee, contractor, subcontractor, or agent of such company.” Id. The question in Lawson was whether the statute protected employees of privately held contractors or only the employees of the public companies. Specifically, the question in Lawson was whether “employees of private companies that contract to advise or manage mutual funds,” which are public companies without any employees, were protected under the Act. Id.

The majority opinion grounded its conclusion in what it said was the ordinary meaning of the statute. Borrowing from the dissent in the court below, the majority agreed that “‘boiling [§1514A(a)] down to its relevant syntactic elements, it provides that “no . . . contractor . . . may discharge . . . an employee.”’” Id. (quoting 670 F. 3d 61, 84 (2012) (quoting §1514A(a)).) The court recognized that under this plain-language construction, the term “employee” must refer to the contractor’s own employee. 571 U. S. ____.

The Court also recognized that an interpretation that constrained the term “employee” to refer to only the public company would not effectuate the purpose of the Act—to encourage people with information about corporate fraud to report that information to others. As the Court recognized, contractors rarely have authority to take adverse action against the employees of the public companies they work for. The Court also recognized that other language in §1514A clearly connected the “employee” referenced in the statute to his or her employer. Additionally, the equitable remedy provided for in the statute—reinstatement—would make little sense if the statute was limited to the employees of the public company. A contractor cannot reinstate an employee of the company it works for, like it can for its own employee.

The dissenting opinion predicted that interpreting “employee” as broadly as the majority opinion will open the floodgates to retaliation claims by employees of private companies whose work is unrelated to the public companies covered by the Act. Unlike the majority, the three dissenting judges found the statute to be ambiguous. “Rely[ing] on other markers of intent,” id., the dissenters concluded that the statute was only intended to cover employees of public companies.

 As it stands, however, the broader interpretation has prevailed, meaning that far more employees are now covered by Sarbanes-Oxley’s whistleblower protections, and far more private companies, including law and accounting firms, are now subject to the protections afforded to those whistleblowers. Coupled with the whistleblower provisions in the Dodd-Frank Act, the broader protections available under Sarbanes-Oxley will probably encourage more employees with knowledge of possible improprieties to step forward, which was the objective.

4th Circuit: Violation of Good Manufacturing Process Rules Is Not Grounds for False Claims Act Suit

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The Fourth Circuit Court of Appeals recently ruled that a pharmaceutical company’s violation of the Food and Drug Administration’s rules regarding the manufacturing and packaging of pharmaceutical products does not necessarily establish a claim under the federal False Claims Act, even where the pharmaceutical products were destined for patients covered by Medicaid and Medicare.

In United States ex rel. Rostholder v. Omnicare, Inc., No. 12-2431 (4th Cir. 2/21/14), the relator argued that Omnicare’s violation of the FDA’s Current Good Manufacturing Practice regulations caused the drugs it delivered to be “adulterated.” In this case, those regulations required the pharmaceutical company to handle and package penicillin-based antibiotics separately from non-penicillin-based antibiotics. The relator further argued that under the laws and regulations governing Medicare and Medicaid, only drugs that complied with the FDA’s manufacturing guidelines were eligible for reimbursement.

Even though the relator’s report to the FDA forced Omnicare to destroy approximately $19 million worth of drugs manufactured in violation of the rules, the court found that those violations did not support a claim under the False Claims Act. The court disagreed that violations of the manufacturing practice rules necessarily made the drugs ineligible for reimbursement under the Medicaid and Medicare programs. Indeed, the court ruled that compliance with the manufacturing practice rules is not necessarily required for payment by the government health care programs. Because compliance with the manufacturing rules is not a “prerequisite” to government reimbursement, the court held that Omnicare’s failure to comply with those rules was not fraudulent. Simply stated, Omnicare never made a false statement to the government.

The court’s opinion is remarkable for its discussion of the interplay between regulatory compliance issues and the False Claims Act. While plenty of False Claims Act cases are based on violations of various federal regulations, the court noted that the Act was not intended to become a catchall—or “sweeping mechanism”—to “promote regulatory compliance.” The court seemed satisfied that the FDA had adequate means to address regulatory noncompliance, including several that it deployed when the relator first brought the issue to its attention. The court seemed to suggest that the broad powers conferred by Congress on the FDA over this issue signaled Congress’s intention to except the manufacturing process rules from the False Claims Act.

This decision will undoubtedly have ramifications for future False Claims Act cases based on violations of federal regulations. Defendants in those cases may now have an additional argument for dismissal—that the powers conferred on the relevant regulatory agency are adequate to address the violations at issue and that, consequently, Congress did not intend such violations to support liability under the Federal Claims Act.