Thursday, July 26, 2012

Are State Organized Corporations Subject to the False Claims Act?

The U.S. Court of Appeals for the Fourth Circuit recently addressed the question of what legal test should be applied to determine whether and when state organized corporations are in fact "state agencies" and thus not subject to suit under the False Claims Act. See US ex rel Oberg v. Kentucky Higher Education Student Loan Corporation et al, No. 10-2320, June 18, 2012.  In Oberg, the relator brought suit against against four state created corporations (the Kentucky Higher Education Student Loan Corp., Pennsylvania Higher Education Assistance Agency, Vermont Student Assistance Corp., and Arkansas Student Loan Authority) alleging that these entities made fraudulent claims to the U.S. Department of Education ("DOE") "by engaging in various non-economic transactions" in order "to inflate their loan portfolios" and make these entities "eligible for federal student loan interest subsidies."  The relator claimed that the DOE had overpaid "millions" to these entities.

The state created corporations moved to dismiss the FCA claims against them on the grounds that they were "state agencies" and thus not "persons" subject to FCA claims.  The FCA provides an action against "any person" who "undertakes certain fraudulent behavior, including 'knowingly present[ing], or caus[ing] to be presented, a false or fraudulent claim for payment or approval' to an officer, employee, or agent of the United States." 31 U.S.C.  sec. 3729(a)(1)(A).  In Vermont Agency of Natural Resources v. United States ex rel. Stevens, 529 U.S. 765, 780, 787-88 (2000), the Supreme Court held that the FCA "does not subject a State (or state agency) to liability" due to the "longstanding interpretive presumption that 'person' does not include the sovereign." Corporations, the Court observed, are "presumptively covered by the term 'person," id. at 782, and in Cook County v. U.S. ex rel Chandler, 538 U.S. 119, 125 (2003), the Court went further and found that municipal corporations are also persons subject to qui tam suits under the FCA.  The District Court in Oberg dismissed the case, finding that the state created corporations were state agencies. In so doing, the Fourth Circuit observed, it "did not apply any stated legal test" and instead "looked to state statutory provisions" to determine "each entity's status as a 'state agency.'"

The Fourth Circuit reversed the District Court's dismissal, and remanded the matter, saying "the critical inquiry is whether appellees are truly subject to sufficient state control to render them a part of the state, and not a "person," for FCA purposes."  To determine whether an agency is part of the state, the Court employed what it called the "arm-of-the-state-analysis used in the Eleventh Amendment context" and analyzed four "non-exclusive factors:"  (i) whether the state would pay any judgment rendered against the agency; (ii) the degree of autonomy exercised by the entity, including whether the state can veto the entity's actions; (iii) whether the entity is "involved with" state concerns as opposed to non-state or local issues; and (iv) and how the entity is treated under state law.  Applying these factors, the Court explained, should assist in determining whether the state-created entity functions independently of the state or functions as an arm or alter-ego of the state.

Overall, the decision is short and straightforward.  The Fourth Circuit does not claim to be breaking new ground in applying this test to FCA claims and state organized corporations, as it cites the 9th, 10th, and 5th Circuits for support.

A. Brian Albritton
July 26, 2012

Wednesday, July 18, 2012

Recent False Claims Act Articles That Are Worth A Read

This week I came across two articles on the web concerning the False Claims Act which I commend to readers.

First, I recommend the "2012 Mid-Year False Claims Act Update" recently published by Gibson Dunn as it provides a good, succinct summary of False Claims Act highlights thus far in 2012.  The Update addresses such topics as (i) legislative action, both federal and state, and discusses several states that recently amended their statutes as well as numerous other proposed state bills; (ii) surveys recent significant False Claims Act settlements in health care, mortgage and financial services, and procurement and defense industries; and (iii) case law developments and trends, discussing many of the cases highlighted in the blog such as Davis and Schweizer along with recent cases addressing the False Claims Ac "first to file" bar and "public disclosure" bar.

Second, I commend to you the article,"False Claims Act Investigations:  Time for a New Approach?" published in October 2011 by John Bentivoglio, Jennifer Bragg, Michael Loucks, and Gregory Luce, all partners at Skadden Arps.  The article observes that companies subject to False Claims Act investigations are hampered in their ability to defend themselves since most such investigations are conducted under seal, and the government is able to investigate and use its limited resources at a timetable that suits it.   While a qui tam is under seal, the article point out "the government and the whistle-blower have an advantage" because "a company does not know the precise nature of the allegations pending against it and does not have the power of discovery and the right to defend that it is afforded by the federal court system once the suit has been disclosed and the litigation engaged."  During this time, the article argues, government and the whistleblower can use the all-to-common extended seal period to keep the defendant in the dark as to precise nature of the allegations against it and to gather the evidence they need. 

Given the advantages to the government and whistleblower of an extended seal period, the article asserts that "companies presently faced with a pending false claims investigation might consider whether a more aggressive strategy of forcing the government’s disclosure of the litigation (the unsealing of the complaint and other documents in the file) will better inform the company’s ability to defend itself: to engage in the process of discovery permitted by the Federal Rules of Civil Procedure."  In turn, the article contends that several cases and legislative history permit defendants to challenge the government's justification for keeping  a qui tam matter sealed.

Companies faced with False Claims Act investigations have a hard choice, and most prefer, as the article acknowledges, to settle or where possible, to dispose of the matter while under seal, thereby controlling the effects of bad press as well as other collateral damage.  At the same time, I think that every False Claims Act defense counsel has experienced the frustration of trying to defend a qui tam that is under seal because they are in the dark as to the allegations against the client and the government refuses to disclose the substance of the alleged fraud it is investigating.  From the vantage of the defendant, the government appears to employ a lengthy seal period to build a case at its leisure and to avoid having to actually litigate the matter.  I would certainly be interested in hearing of any instances where defendants sought to unseal a matter on behalf of their client in order to force the matter into civil litigation as the article suggests.

A. Brian Albritton
July 18, 2012

Wednesday, July 4, 2012

Is there Hope for the IRS Whistleblower Program?

The IRS Whistleblower Program has been the subject of repeated criticism from several corners.  For example, in a Forbes article last March, "IRS Whistleblowers See Little Reward," Erika Kelton of the Phillips & Cohen firm, one of the leading relator firms, accused the IRS of "sitting on a mountain of whistleblower claims" and  asserted that the "real problem" in processing these claims is "the IRS itself and institutional resistance to whistleblowers within the IRS that is hobbling the whistelblwoer program and draining its enormous promise." In fact, Kelton quoted the former IRS Chief Counsel as saying, "The new whistleblower provisions Congress enacted a couple of years ago have the potential to be a real disaster for the tax system. I believe that it is unseemly in this country to encourage people to turn in their neighbors and employers to the IRS as contemplated by this particular program. The IRS didn’t ask for these rules; they were forced on it by the Congress."

Criticism of the IRS Whistleblower Program has not been limited to relators' counsel. As detailed in Whistleblower Protection Blog, Richard Renner discusses two recent reports prepared by the Treasury Inspector General for Tax Administration and the General Accounting Office that were critical of the IRS Whistleblower Program. See IG Report says IRS Whistleblower Office falls short and resists audit.

According to a recent article in Accounting Today, "IRS Plans to Fix Whistleblower Program," the IRS is responding to this criticism.  In a June 20th memo, the IRS Deputy Commissioner for Services and Enforcement pledged to work with "the Whistleblower Office and with internal and external stakeholders on a comprehensive review of operating guidelines and procedures . . . . . to improve the timeliness and quality of decisions as the Service evaluates and acts on whistleblower information."  Outlining proposed internal deadlines for reviewing whistleblower claims, the Commissioner stated: claims received by the Whistleblower Office "should be initially evaluated by the office within 90 days" and review by subject matter experts from the Operating divisions and Criminal Investigation "should be completed within 90 days of receipt."

The Accounting Today article, which I commend to readers, further discusses efforts by U.S. Senator Charles Grassley to pressure the IRS to improve the Whistleblower Program and highlights a recent Bloomberg article that was critical of the IRS Program as well, as it relates that "in the past five years, over 1,300 claims have been filed against nearly 10,000 companies and individuals, alleging tax underpayments of at least $2 million, but only three whistleblower awards have been paid so far under the new program." 

A. Brian Albritton
July 4, 2012

Tuesday, July 3, 2012

GlaxoSmithKline to Pay Largest Health Care Fraud Settlement in US History

In the largest health care fraud settlement in U.S. history, the U.S. Department of Justice announced today that "global health care giant" GlaxoSmithKline LLC ("GSK") agreed to plead guilty and to pay $3 billion to resolve "its criminal and civil liability arising from the company’s unlawful promotion of certain prescription drugs, its failure to report certain safety data, and its civil liability for alleged false price reporting practices."

Deputy Attorney General James Cole described the plea and settlement with GSK as follows:  "GSK will plead guilty to criminal charges and pay $1 billion in criminal fines and forfeitures for illegally marketing and promoting the drugs Paxil and Wellbutrin for uses not approved by the FDA – including the treatment of children for depression, and the treatment of other patients for ailments ranging from obesity, to anxiety, to addiction and ADHD – and for failing to report important clinical data about the drug Avandia to the Food and Drug Administration.  GSK will pay an additional $2 billion to resolve civil allegations that it caused false claims to be submitted to federal health care programs for these and other drugs as a result of the company’s illegal promotional practices and payments to physicians.  This settlement also resolves a civil investigation of the company’s alleged underpayment of rebates that were required under the Medicaid Drug Rebate Program."

As with previous criminal and False Claim Act settlements with Big Pharma discussed in the blog, GSK's conduct as detailed in the plea and the allegations of the False Claim Act complaint is disturbing and reprehensible.  For example, the factual allegations of the Information detail GSK's marketing of the prescription drug Paxil for use in treating depression in children and adolescents even though the drug had not been found to have any efficacy for such a population. 

Paxil had been approved by the FDA for the treatment of depression in adults, and it was one of the top 10 selling drugs in the U.S., with sales surpassing $1.8 billion a year in 2001-2002.  Paxil, however, was never approved by the FDA "for any purpose" in the treatment of children and adolescents.  In fact, GSK conducted three placebo-controlled studies in the safety and efficacy of using Paxil to treat depression in children and adolescents, and those studies failed to demonstrate any "efficacy" for the treatment of this population between the "patients in the study who received the drug being studied and patients in the study who received a placebo."  After these studies, a GSK contractor hired to write an article about one of the studies misrepresented the study's findings as being favorable for the treatment of children and adolescents with Paxil, going so far as to say that "the findings of this study provide evidence of the efficacy and safety of [Paxil] in the treatment of adolescent depression."

With the article in hand, GSK then forwarded it to its 1900 sales representatives who sold Paxil with a cover letter stating, "Paxil demonstrates REMARKABLE efficacy and safety in the treatment of adolescent depression." This was just the beginning of GSK's marketing of Paxil.  In addition, the Information reflects that GSK created a "150 person neuroscience specialty sales force to promote Paxil to psychiatrists."  The Company also promoted Paxil's use in adolescents at Paxil "Forum Events," dinner programs, lunch programs, and spa programs. GSK had their sales personnel target those physicians --including physicians who only treated patients under age 18-- who prescribed the most antidepressants and provide free samples of Paxil in the hope that they would shift their patients to using Paxil.

GSK, however, did not inform its sales personnel that the FDA had not approved Paxil for the treatment of children or adolescents, and it continued to conceal that its studies did not support its claims for Paxil's efficacy in this population.  In fact, the FDA later recommended that Paxil "not be used to treat depression in patients under 18" and later recognized that antidepressants, such as Paxil, "increased the risk of suicidal thinking and behavior in . . . patients under age 18." 

Paxil was not the only drug that GSK unlawfully promoted:  it unlawfully promoted Wellbutrin and Avandia as well.  As a result of the criminal plea, GSK will pay fines and forfeiture totaling $1 billion.  The "civil settlements" resolve claims relating to these three drugs and others and will require GSK to pay $2 billion. 

One of the civil settlements reported that relators had filed 4 qui tams against GSK and that the U.S. had intervened in them in 2011.  The settlements explicitly did not address the whether any relator was entitled to any share of the proceeds or whether in fact they had filed valid qui tams.

DOJ has posted the  key documents in the criminal and civil matters, and they can be found here.

A. Brian Albritton
July 2, 2012