United States ex rel. Rostholder v. Omnicare, Inc., No. 12-2431 (4th Cir. 2014)
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Relator filed a qui tam action under the False Claims Act (FCA), 31 U.S.C. 3729-3733, against Omnicare, alleging that defendants violated a series of FDA safety regulations requiring that penicillin and non-penicillin drugs be packaged in complete isolation from one another. The court concluded that the public disclosure bar did not divest the district court of jurisdiction over relator's FCA claims. The court concluded that once a new drug has been approved by the FDA and thus qualified for reimbursement under the Medicare and Medicaid statutes, the submission of a reimbursement request for that drug could not constitute a "false" claim under the FCA on the sole basis that the drug had been adulterated as a result of having been processed in violation of FDA safety regulations. The court affirmed the district court's grant of Omnicare's motion to dismiss, holding that relator's complaint failed to allege that defendants made a false statement or that they acted with the necessary scienter. The court also concluded that the district court did not abuse its discretion in denying relator's request to file a third amended complaint.
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PUBLISHED UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT No. 12-2431 UNITED STATES ex rel. BARRY ROSTHOLDER; BARRY ROSTHOLDER, individually, Plaintiffs - Appellants, and STATE OF CALIFORNIA; STATE OF DELAWARE; STATE OF FLORIDA; STATE OF HAWAII; STATE OF ILLINOIS; STATE OF INDIANA; STATE OF LOUISIANA; STATE OF MASSACHUSETTS; STATE OF MICHIGAN; STATE OF MONTANA; STATE OF NEW HAMPSHIRE; STATE OF NEW MEXICO; STATE OF NEW YORK; STATE OF NEVADA; STATE OF TENNESSEE; STATE OF TEXAS; STATE OF VIRGINIA; COOK COUNTY, ILLINOIS; DISTRICT OF COLUMBIA; CITIES OF CHICAGO AND NEW YORK; STATE OF GEORGIA; STATE OF NEW JERSEY; STATE OF OKLAHOMA; STATE OF RHODE ISLAND; STATE OF WISCONSIN, Plaintiffs, v. OMNICARE, INCORPORATED, a Delaware Corporation; OMNICARE DISTRIBUTION CENTER, LLC, f/k/a Heartland Repack Services, LLC, a Delaware Limited Liability Company, jointly and severally, Defendants Appellees. Appeal from the United States District Court for the District of Maryland, at Baltimore. Catherine C. Blake, District Judge. (1:07-cv-01283-CCB) Argued: December 10, 2013 Decided: February 21, 2014 Before NIEMEYER, SHEDD, and KEENAN, Circuit Judges. Affirmed by published opinion. Judge Keenan wrote the opinion, in which Judge Niemeyer and Judge Shedd joined. ARGUED: Gerald C. Robinson, GERALD ROBINSON LAW FIRM PLLC, Minneapolis, Minnesota, for Appellants. James Christopher Martin, REED SMITH LLP, Pittsburgh, Pennsylvania, for Appellees. ON BRIEF: Jay P. Holland, JOSEPH, GREENWALD & LAAKE, PA, Greenbelt, Maryland, for Appellants. Colin E. Wrabley, Pittsburgh, Pennsylvania, Eric A. Dubelier, Lawrence S. Sher, Katherine J. Seikaly, REED SMITH LLP, Washington, D.C., for Appellees. 2 BARBARA MILANO KEENAN, Circuit Judge: Relator action Barry under the Rostholder False (relator) Claims Act filed (FCA), 31 this qui tam U.S.C. §§ 3729 through 3733, against his former employer, Omnicare, Inc., and its affiliated companies. Relator alleged that the defendants violated a series of Food and Drug Administration (FDA) safety regulations requiring that penicillin and non-penicillin drugs be packaged in complete isolation from one another, which violations resulted in a legal presumption of penicillin crosscontamination. According to relator, these contaminated drugs were not eligible for reimbursement by Medicare and Medicaid and, therefore, any claims presented to the government for reimbursement for these drugs were false under the FCA. The district court granted Omnicare s motion to dismiss the complaint under Federal Rule of Civil Procedure 12(b)(6). Because relator already had filed two amended complaints, the court denied any further leave to amend. hold that relator s complaint failed Upon our review, we to allege that the defendants made a false statement or that they acted with the necessary scienter. We also conclude that the district court did not abuse its discretion in denying relator s request to file a third amended complaint. district court s judgment. 3 We therefore affirm the I. Omnicare provides certain pharmaceutical services to senior citizens through its drug repackaging and pharmacy facilities. As alleged in relator s second amended complaint, Omnicare owned Heartland Repack Services, LLC (Heartland), the drug repackaging operation at issue in this case located in Toledo, Ohio (the Toledo building). Heartland repackaged drugs into convenient units use. for pharmacies Toledo patient nationwide, building with Omnicare including also a Heartland. operated pharmacy Such that pharmacies hundreds of shared the primarily served nursing homes owned by Omnicare s partner, Health Care Resources. Although distribution, Heartland the repackaged Omnicare non-penicillin pharmacy that building processed penicillin products. shared drugs the for Toledo The pharmacy and the repackaging operations were located in the Toledo building, and were separated by rolling garage-type doors. Within the building, employees of both the repackaging and pharmacy units shared break areas, entrances, and exits. The Toledo building also had a single ventilation and heating/cooling system. From 1997 until 2006, relator, a licensed pharmacist, was employed at Heartland. Relator s job responsibilities included overseeing repackaging, quality assurance, regulatory affairs, and wholesale and distribution. 4 In 2004, Omnicare executive and relator s supervisor, Denis Holmes, suggested that Heartland begin repackaging penicillin products. that any repackaging of penicillin Relator informed Holmes drugs would constitute a violation of FDA regulations requiring the separate processing of penicillin and non-penicillin products. Relator conducted further research regarding the FDA s penicillin isolation requirements and stated his conclusions in a memorandum that he provided to Holmes. the pharmacy relator manager for repackaged the in first penicillin, Heartland s the time that despite non-penicillin Heartland facility). Toledo Relator also contacted building, the pharmacy sharing drug who the informed frequently building operation packaging with (the At Holmes request, relator researched and recommended ways in which Heartland could repackage penicillin in compliance with FDA regulations. In February 2006, relator resigned from Heartland due to his concerns about the facility s quality control efforts. Several months after his resignation, relator notified the FDA of Heartland s improper repackaging practices. information, and were repackaged FDA advised in investigators by the visited employees that Repackaging the no Based on this Heartland penicillin Division. Based facility was being on these representations, the investigators left the Heartland facility. 5 Relator later participated in an interview with FDA officials, during which [h]e described the specific details of the penicillin summer of Heartland exposure 2006, the facility repackaged in at FDA and the the Heartland conducted discovered Toledo another that building. facility. In of inspection penicillin Testing the the was being revealed the presence of penicillin throughout the building, including in the Heartland facility. letter to Omnicare (the As a result, the FDA issued a warning warning letter), outlining numerous violations of FDA regulations, both related and unrelated to Omnicare s practices of handling penicillin. The warning letter explained that Omnicare s failure to adhere to the FDA s Current Good Manufacturing Practice regulations (the CGMPs) caused the drugs to be adulterated. Rather products, inventory. than quarantining Omnicare disposed and of conducting nearly $19 tests million on its worth of According to the complaint, Omnicare at that time had not recalled any of its drugs due to suspected penicillin contamination, nor had Omnicare reimbursed the government for amounts already paid for the contaminated drugs. 6 In May 2007, relator filed this action under the FCA, 31 U.S.C. § 3729(a)(1), (a)(2), and (a)(7) (2006), 1 and similar state statutes, against Omnicare and its affiliated companies Omnicare). 2 (collectively, knowingly building] and/or in recklessly violation of Relator alleged repackaged that Omnicare drugs laws, applicable at [the Toledo including [the CGMPs], which rendered [the drugs] presumptively unsafe under [the CGMPs], and therefore adulterated and misbranded, and therefore not in their FDA-approved form, and thus ineligible for coverage under government programs. The government declined to intervene in the action. The district court granted Omnicare s motion to dismiss, holding that relator had failed to allege that Omnicare made a false statement conduct. to the government or engaged in fraudulent The court also held that relator had not adequately alleged the details of any false claims that had been submitted to the government for reimbursement. After the court denied relator s his motion for leave to amend complaint, relator timely appealed. 1 The 2009 amendments to the FCA resulted in a renumbering of these sections. See Fraud Enforcement and Recovery Act of 2009, Pub. L. No. 111-21, 123 Stat. 1617. We refer to the preamendment numbering system as cited in the complaint. 2 The second amended complaint was filed in October 2010. 7 II. A. Before addressing the merits of relator s arguments on appeal, we first consider Omnicare s assertion that the district court lacked subject matter jurisdiction over this action due to the public disclosure jurisdictional question bar de in novo, the FCA. and We examine review the this district court s jurisdictional findings of fact for clear error. U.S. ex rel. Vuyyuru v. Jadhav, 555 F.3d 337, 350 (4th Cir. 2009); U.S. ex rel. Grayson v. Advanced Mgmt. Tech., Inc., 221 F.3d 580, 582 (4th Cir. 2000); see also Gaines Motor Lines, Inc. v. Klaussner Furniture Indus., 734 F.3d 296, 301 (4th Cir. 2013) (noting our obligation to assure ourselves of our jurisdiction ). The version of the public disclosure bar in place at the time of the relevant events 3 provided: 3 The public disclosure bar provision was amended in 2010. See Patient Protection and Affordable Care Act, Pub. L. No. 111148, 124 Stat. 119 (2010). The disclosures at issue in this case occurred in 2006, and relator filed the original complaint in 2007. The amendments to the public disclosure bar are not retroactive, and neither party argues that the amended statute should apply. See Graham Cnty. Soil & Water Conservation Dist. v. U.S. ex rel. Wilson, 559 U.S. 280, 283 n.1 (2010). Accordingly, like the district court, we apply the pre-amendment version of the statute and our precedent interpreting that version. 8 (A) No court shall have jurisdiction over an action under this section based upon the public disclosure of allegations or transactions in a criminal, civil, or administrative hearing, in a congressional, administrative, or Government [General] Accounting Office report, hearing, audit, or investigation, or from the news media, unless the action is brought by the Attorney General or the person bringing the action is an original source of the information. (B) For purposes of this paragraph, original source means an individual who has direct and independent knowledge of the information on which the allegations are based and has voluntarily provided the information to the Government before filing an action under this section which is based on the information. 31 U.S.C. § 3730(e)(4) (2006) (emphasis added). Omnicare argues that the public disclosure bar divested the district court of jurisdiction warning because letter and relator s complaint Omnicare s Form is 10-Ks Securities and Exchange Commission (SEC). 4 based upon the filed with the Omnicare also asserts that relator is not an original source of the information in the complaint. We disagree with Omnicare s arguments. Under this Court s precedent, a qui tam action is based upon publicly disclosed allegations only if the qui tam plaintiff s allegations were actually derived from the public 4 Publicly traded companies must submit to the SEC a Form 10-K annually. The form provides a comprehensive overview of the company s business and financial condition and includes audited financial statements. U.S. Securities and Exchange Commission, Form 10-K, available at http://www.sec.gov/answers/form10k.htm (last accessed Feb. 20, 2014). 9 disclosure itself. U.S. ex rel. Wilson v. Graham Cnty. Soil & Water Conservation Dist., 528 F.3d 292, 308 (4th Cir. 2008), rev d on other original). A grounds qui by U.S. 280 action tam 559 will not (2010) be (emphasis barred if in the plaintiff s claims are similar or even identical to the publicly disclosed allegations, so long as the plaintiff had independent knowledge of the facts and did not derive his allegations from the public disclosure itself. 5 Id. We conclude that relator s FCA complaint was not based upon the objection warning to letter the or SEC filings, substantial despite similarities Omnicare s between the allegations in the complaint and the public disclosures. The complaint makes clear that relator discovered the penicillinrelated violations of the CGMPs during his employment at Heartland. Relator s knowledge was based on his conversations with employees other familiarity with the independent research. in the Toledo repackaging Relator building, operations, also alleged his and that personal his he own twice informed the FDA of the penicillin exposure issues at Heartland, 5 We note that under the amended version of the statute, the public disclosure bar applies if substantially the same allegations or transactions as alleged in the action or claim were publicly disclosed, unless the plaintiff was an original source. 31 U.S.C. § 3730(e)(4). 10 which precipitated the FDA investigations and resulted in the FDA s issuance of the warning letter. Also in his complaint, relator alleged that Omnicare supplied drugs to patients residing in nursing care facilities who primarily were insured by government health care programs. These allegations illustrate relator s independent knowledge, apart from the SEC filings regarding Omnicare s revenue, that Omnicare caused claims to be submitted to the government for payment. See Vuyyuru, 555 F.3d at 353. For the sufficiently knowledge of same reasons, alleged that the we he information conclude had on that direct which and the relator has independent allegations based, thereby entitling him to original source status. are See 31 U.S.C. § 3730(e)(4)(B) (2006). Accordingly, we hold that the public divest disclosure bar did not the district court of jurisdiction over relator s FCA claims. B. We next consider relator s primary argument on appeal, namely, that the district court erred in dismissing relator s complaint on the ground that he did not adequately allege a false statement or a fraudulent course of conduct as required for an FCA claim. We review de novo the district dismissal of relator s complaint under Rule 12(b)(6). 11 court s U.S. ex rel. Nathan v. Takeda Pharms. N. Am., Inc., 707 F.3d 451, 455 (4th Cir. 2013). The FCA is designed to prevent fraud and reflects Congress broad goal to government. protect the funds and property of the U.S. ex rel. Owens v. First Kuwaiti Gen. Trading & Contracting Co., 612 F.3d 724, 728 (4th Cir. 2010) (citation and quotation person marks is knowingly omitted). liable to presents, the or Under 31 United causes to U.S.C. States be § 3729(a)(1), government presented, fraudulent claim for payment or approval. a a if he false or To plead an FCA claim, a relator must plausibly allege four distinct elements: (1) [] there was a false statement or fraudulent course of conduct; (2) made or carried out with the requisite scienter [knowledge]; (3) that was material; and (4) that caused the government to pay out money or to forfeit moneys due (i.e., that involved a claim ). 6 Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 788 (4th Cir. 1999). Relator contends that he adequately alleged the elements of an FCA claim in this case. He asserts that by failing to comply with the CGMPs, Omnicare s repackaged drugs were adulterated 6 These elements similarly apply to FCA claims brought under § 3729(a)(2) and (a)(7). See Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 784-88 (4th Cir. 1999); U.S. ex rel. Sanders v. N. Am. Bus Indus. Inc., 546 F.3d 288, 297, 299 (4th Cir. 2008). 12 and prohibited from interstate commerce and, therefore, ineligible for reimbursement by Medicare and Medicaid. Relator thus maintains that any claim for reimbursement for these drugs under government programs was false or fraudulent within the meaning of the FCA. To determine whether relator s allegations in his second amended complaint were sufficient to withstand Omnicare s motion to dismiss under Rule 12(b)(6), we first consider the general regulations and the statutory provisions on which relator s FCA claim is based. FDA regulations set forth the Current Good Manufacturing Practices related to the handling of penicillin. The CGMPs require manufacture, that processing, [o]perations and packing relating of to penicillin the be performed in facilities separate from those used for other drug products for human use, and additionally mandate completely separate air-handling systems for such operations involving penicillin and other types of drugs. 21 C.F.R. §§ 211.42, 211.46(d). The regulations require that non-penicillin drugs be tested for the presence of penicillin [i]f a reasonable possibility exists that the non-penicillin penicillin cross-contamination. drug has been exposed 21 C.F.R. § 211.176. to The non- penicillin drug may not be marketed if detectable levels [of penicillin] are found when tested. 13 Id. Drugs that do not comply with the CGMPs are considered adulterated within the meaning of the Food, Drug, and Cosmetic Act (FDCA), and are not permitted in interstate commerce. 21 U.S.C. §§ 331, 351(a)(2)(B); see also 21 C.F.R. 210.1 (failure to comply with the CGMPs renders a drug adulterated ). Relator s assertion that Omnicare fraudulently made claims for payment for adulterated drugs is based on the statutes governing reimbursement under Medicare and Medicaid. Those statutes define covered outpatient drugs as those approved for safety and effectiveness under the FDCA, 21 U.S.C. § 355. See 42 U.S.C. § 1396r-8(k)(2)(A)(i) (Medicaid); 42 U.S.C. § 1395w-102(e) (Medicare Part D); see also 42 C.F.R. § 423.100 (defining Medicare Part D drug). The FDA s approval process for new drugs under 21 U.S.C. § 355 requires that an application for approval describe the methods used in, and the facilities and controls used for, the manufacture, processing, and packing of the drug. application or 21 U.S.C. withdraw a § 355(b). The previously FDA approved may refuse an application if these methods or facilities are inadequate to preserve [the drug s] identity, strength, quality, and purity. (e). Id. § 355(d), A new drug may not be introduced into interstate commerce unless an approved application 355(a). 14 is in effect. 21 U.S.C. § According to relator, because the Medicare and Medicaid statutes refer to the FDCA s requirements for new drug approval and marketing set forth in Section 355, Medicare and Medicaid do not authorize reimbursement for any drugs that are adulterated due to non-compliance with the CGMPs. however, expressly that prohibit adulterated. with the the Medicare and reimbursement Relator acknowledges, Medicaid for drugs statutes that do have not been Moreover, those statutes do not require compliance CGMPs or any other FDA safety regulations as a precondition to reimbursement. To qualify as a covered outpatient drug as defined in the Medicare and Medicaid statutes, a drug merely must be approved by the FDA. The relevant statutes do not provide that when an already-approved drug has been produced or packaged in violation of FDA safety regulations, that particular drug may not be the proper subject of a reimbursement request under Medicare and Medicaid. Therefore, we conclude that once a new drug has been approved by the FDA and thus qualifies for reimbursement under the Medicare and Medicaid statutes, the submission of a reimbursement request for that drug cannot constitute a false claim under the FCA on the sole basis that the drug has been adulterated as a result of having been processed in violation of FDA safety regulations. 15 Relator pleaded a maintains, false claim nevertheless, because that compliance he adequately with the has CGMPs is material to the government s decision to provide reimbursement for regulated materiality drugs. and a However, false relator statement or must allege fraudulent both course of conduct as distinct elements of an FCA claim. See Harrison, 176 Here, F.3d at compliance Medicare 788; with and Owens, the 612 F.3d at is not required CGMPs Medicaid, Omnicare has 729. not for falsely because payment stated compliance to the government, as contemplated by the FCA. 7 by such Thus, relator s allegations of regulatory violations fail to support FCA liability. See Harrison, 176 F.3d at 786-87 (discussing U.S. ex. rel. Thompson v. Columbia/HCA Healthcare Corp., 125 F.3d 899, 902 (5th Cir. 1997), and stating that FCA liability based on a false certification to the government will lie only if compliance with prerequisite to affirmatively certified the gaining such statutes a or benefit, compliance ). 7 regulations and was a the As defendant we previously Because adulterated drugs are subject to reimbursement by Medicare and Medicaid and therefore any claim for payment cannot be false, we do not separately address relator s arguments for FCA liability under implied certification or worthless services theories. See generally United States v. Sci. Applications Int'l Corp., 626 F.3d 1257, 1266-71 (D.C. Cir. 2010) (discussing various versions of the implied certification theory); U.S. ex. rel. Mikes v. Straus, 274 F.3d 687, 702-03 (2d Cir. 2001) (describing worthless services theory). 16 have explained, the correction of regulatory problems is a worthy goal, but is not actionable under the FCA in the absence of actual fraudulent conduct. Mann v. Heckler & Koch Def., Inc., 630 F.3d 338, 346 (4th Cir. 2010) (emphasis added and citation omitted). identified any In the false present statement case, or relator other has not fraudulent misrepresentation that Omnicare made to the government. Were we to accept relator s theory of liability based merely on a regulatory violation, we would sanction use of the FCA as a sweeping mechanism to promote regulatory compliance, rather than a set of statutes aimed at protecting the financial resources of the government from the consequences of fraudulent conduct. When an agency has broad powers to enforce its own regulations, liability as based the on FDA does in regulatory this case, allowing non-compliance could FCA short- circuit the very remedial process the Government has established to address non-compliance with those regulations. U.S. ex rel. Wilkins v. United Health Grp., Inc., 659 F.3d 295, 310 (3d Cir. 2011). Under the provisions of the FDCA, the Secretary of Health and Human Services may suspend or withdraw FDA approval of a drug if the packaging process is inadequate to assure and preserve [the drug s] identity, strength, quality, and purity. 21 U.S.C. § 355(e). In the present 17 case, the FDA pursued numerous regulatory actions multiple inspections conducting issuing the warning letter. Heartland products, recommending use of Omnicare, the Toledo including building and The FDA also threatened seizure of of disapproval against injunctive of any remedies, new [Heartland] as a manufacturer of drugs. and action applications listing The existence of these significant remedial powers of the FDA buttresses our conclusion that Congress did regulatory-compliance statement or not intend mechanism fraudulent that in conduct the the FCA be absence directed used of at a the as a false federal government. For the same reasons that relator has failed to plead the existence of a false statement or fraudulent conduct, he cannot plausibly allege that Omnicare acted with the requisite scienter when submitting claims to compliance with the CGMPs. that the requires defendant actual acted knowledge, the government for drugs in Liability under the FCA requires knowingly, deliberate which by ignorance, definition or disregard of the truth or falsity of the information. § 3729(a), (b)(1). not reckless 31 U.S.C. Because the Medicare and Medicaid statutes do not prohibit reimbursement for drugs packaged in violation of 18 the CGMPs, Omnicare could not have knowingly submitted a false claim for such drugs. 8 We also conclude that the district court did not abuse its discretion in denying relator s request to file a third amended complaint. In seeking leave to amend, relator did not comply with the District of Maryland s local rules, which require that a plaintiff attach to a motion to amend the proposed amended pleading. D. Md. Local Rule 103(6)(a). Relator s failure to comply with this rule justified the district court s denial of leave to amend. See Francis v. Giacomelli, 588 F.3d 186, 197 (4th Cir. 2009). Moreover, any amendment would have been futile in light of our holding that adulterated drugs are not barred from reimbursement by Medicare and Medicaid and, therefore, claims for reimbursement for these drugs cannot be false under the FCA. Finally, we emphasize that we do not condone Omnicare s disregard of FDA safety regulations that apparently occurred in this case. submission Nevertheless, of claims for we payment 8 remain for convinced drugs that packaged at the the Because we conclude that relator failed to plead the existence of a false statement and the scienter required for an FCA claim, we do not address Omnicare s alternative argument that relator did not allege the presentment of a false claim with particularity under Federal Rule of Civil Procedure 9(b) and our decision in Nathan, 707 F.3d 451. 19 Heartland facility did not constitute fraud on the government, and we are enforcement confident powers may that be the FDA s exercised use of its regulatory fully to ensure further compliance with applicable safety standards. III. In sum, we conclude that the district court properly exercised jurisdiction over this action, but that relator failed to plead the existence of a false statement and scienter as required by the FCA. Accordingly, we affirm the district court s judgment. AFFIRMED 20
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