Fourth Circuit rejects False Claims Act liability for providing adulterated drugs

by Ben Vernia | February 25th, 2014

On February 21, the Fourth Circuit Court of Appeals affirmed the District Court’s dismissal of U.S. ex rel. Rostholder v. Omnicare, Inc., a qui tam case brought in Maryland by a former employee of the long-term care pharmacy company, Omnicare. The relator alleged that Omnicare violated Current Good Manufacturing Practices (cGMP) at a Toledo, Ohio facility that repackaged prescription drugs. Contrary to FDA regulations, the company failed to handle penicillin products in a clean environment, resulting in the contamination of other drugs with penicillin, and risking the health of those allergic to the antibiotic. When the problem was discovered, Omnicare destroyed the drugs at the facility, but made no efforts to recall pharmaceuticals it had already dispensed to long-term care residents.

The Fourth Circuit agreed with the Maryland District Court that although the relator had alleged a violation of the FDA’s rules, this did not amount to an allegation of a False Claims Act violation. Medicare and Medicaid conditioned reimbursement on a drug’s approval, the Court reasoned, and not on whether the drug’s manufacturing or packaging complied with cGMP. Moreover, the Court concluded, those programs “do not require compliance with the CGMPs or any other FDA safety regulations as a precondition for reimbursement.” To accept the whistleblower’s theory of liability, the Fourth Circuit wrote, would “sanction the use of the FCA as a sweeping mechanism to promote regulatory compliance.”

The Court rejected Omnicare’s argument, however, that the relator’s case had been barred under the FCA’s public disclosure provision. The company asserted that SEC filings it had made after the problem had been discovered and remediated constituted public disclosures. The Court noted that in the Fourth Circuit, publicly disclosed allegations must provide the basis for the relator’s case to trigger the bar; mere similarity is insufficient. Because the relator’s knowledge came from his employment at the company, it was independent of the disclosures and so the bar did not apply.

Comment: The Fourth Circuit’s decision here could significantly impact a number of cases involving drugs made in violation of FDA’s quality requirements. Last year’s $500 million Ranbaxy settlement, for example, might never have happened if the Fourth Circuit had taken this position previously. While the court’s opinion accurately describes the reimbursement requirement of Medicare and Medicaid, the Court takes a very narrow view of the FCA’s scope here. It is difficult to reconcile their opinion that the affected drugs here are reimburseable with the fact that it would be a felony to transport those same drugs in interstate commerce.

Disclosure: The Vernia Law Firm represents a relator in an entirely unrelated case against Omnicare.

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