On October 6, 2014, the U.S. Supreme Court denied review of a groundbreaking Fourth Circuit decision affirming the dismissal of a novel False Claims Act suit against Reed Smith client Omnicare, Inc. In its February 2014 decision, the Fourth Circuit rejected the qui tam relator’s claim that Omnicare violated the FCA when it sought reimbursement for drugs that it allegedly packaged in violation of certain federal packaging regulations. Tracking Reed Smith’s appellate briefing and oral argument, the Fourth Circuit found that under federal statutes governing drug approval and reimbursement, approval of a drug qualifies it for Medicare/Medicaid reimbursement and thus no claim for reimbursement of such an approved drug could be false for FCA purposes merely on the ground that it was “processed in violation of FDA safety regulations.” Nor, the Fourth Circuit continued, could Omnicare have acted with the requisite knowledge (scienter) by allegedly causing reimbursement claims to be submitted to the government for drugs that were in fact eligible for reimbursement under the governing regulations and statutes. And, adopting another Reed Smith argument, the Fourth Circuit reasoned further that “correction of regulatory problems” is not the role of the FCA and that accepting relator’s theory of liability in this case would improperly “sanction use of the FCA as a sweeping mechanism to promote regulatory compliance.”

The Fourth Circuit’s decision has significant repercussions both for the pharmaceutical and health care industries and False Claims Act jurisprudence more broadly. It signals that the court will carefully review statutes and regulations when relators attempt to use violations of those statutes and regulations to make out an FCA claim. It also confirms that the FCA’s scienter requirement provides an important defense, even at the pleading stage. Additionally, it conceivably bars FCA suits based on allegations that a pharmaceutical or medical device approved by the Food & Drug Administration does not meet various regulatory or statutory requirements, sparing defendants from costly discovery. The significance of these rulings is especially great as FCA suits proliferate, and settlements and judgments explode. In fiscal year 2012 alone, nearly 800 FCA lawsuits were filed, more than half of which involved the health care industry. And in that same year, according to the U.S. Department of Justice, there were settlements and judgments in FCA cases of nearly $5 billion, more than $3 billion of which involved the health care industry. It should therefore come as no surprise that the decision has already been cited dozens of times by courts, litigants, and commentators in a variety of FCA contexts, and is considered by many observers to be among the most important FCA decisions this year.

Jim Martin and Colin Wrabley teamed up with Eric Dubelier, Larry Sher, Kate Seikaly and Mel Beras to secure the victories for Omnicare in the Fourth Circuit and the Supreme Court.

Client Alert 2014-258