7th Circuit
SCOTUS Denies Review of Dismissal at DOJ’s Request; Circuit Split Remains
On June 28, 2021, the United States Supreme Court denied review of a Seventh Circuit decision affirming the Department of Justice (“DOJ”)-requested dismissal of a False Claims Act (“FCA”) suit alleging a drug kickback scheme. Cimznhca LLC v. United States, No. 20-1138, 2021 U.S. LEXIS 3404 (June 28, 2021). As a result, the circuit split regarding the standard that applies to a Government’s motion to dismiss an FCA action remains unresolved. In the underlying case, relator Cimznhca, LLC filed an action against four defendants, UCB, Inc. RXC Acquisition Company, Omnicare Inc., and CVS Health Corporation, in July 2017. United States ex rel. Cimznhca, LLC v. UCB, Inc., 970 F.3d 835, 839-40 (7th Cir. 2020). Relator alleged that the defendants were engaged in a kickback scheme by providing physicians with incentives for prescribing a brand-name drug over other competitors. Id. The Government declined to intervene in December 2017, and Relator continued to prosecute the case. Id. However, the Government moved to dismiss under 31 U.S.C. § 3730(c)(2)(A) in December 2018. Id. at 840; see also Granston Memo (Jan. 10, 2018) (encouraging the DOJ to use its power to dismiss relators' claims more often). Relator objected to the dismissal. The district court held a hearing on the petition and applied the Sequoia Orange rational-basis test from the Ninth Circuit. Id. Under Sequoia Orange, when the government identifies a valid governmental purpose and a relationship between the purpose and dismissal, the court will dismiss unless the Relator can demonstrate that the dismissal is arbitrary and capricious. United States ex rel. Sequoia Orange Co. v. Baird-Neece Packing Corp., 151 F.3d 1139, 1145 (9th Cir. 1998). The district court determined the Government’s motion was arbitrary and capricious and denied it. Cimznhca, 970 F.3d at 840. The Government appealed the order. Id. The competing dismissal standard is the unfettered-right standard from Swift v. United States, 318 F.3d 250 (D.C. Cir. 2003). Under the Swift standard, the Government may dismiss an action without judicial review in virtually all cases. Id. at 253. The Tenth Circuit has followed the Ninth, adopting the Sequoia Orange standard. See, e.g., Ridenour v. Kaiser-Hill Co., Ltd. Liab. Co., 397 F.3d 925 (10th Cir. 2005). The Second and Third Circuits have noted the split but declined to adopt either standard. See, e.g., Chang v. Children’s Advocacy Ctr., 938 F.3d 384 (3d Cir. 2019); United States ex rel. Borzilleri v. Abbvie, Inc., 837 F. App’x 813, 816 (2d. Cir. 2020). In this case, the Seventh Circuit reversed and directed the district court to dismiss. 970 F.3d at 854. The Seventh Circuit declined to decide whether Sequoia Orange or Swift was the proper standard, but suggested that something closer to Swift would apply in almost all cases, excepting, for example, a fraud on the court. Id. at 851-52. Relator petitioned for a writ of certiorari, noting the circuit split on the dismissal standard. With the Supreme Court’s denial of Relator’s petition for a writ of certiorari, the circuit split remains. Defendants embroiled in FCA cases should thus remain cognizant of the opportunity, under the right circumstances, for an early exit with the support of the DOJ, but note that the applicable standard will vary depending upon the circuit in which the case is filed.
June 29, 2021
by Chris DeLong
7th Circuit
Another Qui Tam Suit Alleging a Scheme to Defraud by Reporting Inflated Drug Prices Survives Motion to Dismiss
Within the last five years, district courts in the Seventh Circuit have repeatedly denied motions to dismiss qui tam lawsuits brought under the FCA that allege a scheme to defraud government health programs by reporting inflated “usual and customary” prices for prescription drugs. By contrast, at least one district court in the Sixth Circuit recently granted such a motion under Rule 9(b). On March 7, 2019, a district court in the Tenth Circuit—considering similar prescription drug allegations for the first time—sided with the Seventh Circuit and denied defendants’ motion to dismiss plaintiffs’ FCA claims. In United States ex rel. Strauser v. Stephen L. LaFrance Holdings Inc., plaintiffs allege that between 2008 and 2012, defendants charged cash-paying customers four dollars for a thirty-day supply of any one of more than 300 commonly prescribed generic medications. Unlike cash-paying customers, plaintiffs allege that defendants charged Medicaid beneficiaries a higher price for the same drugs and reported that higher price as the “usual and customary charge to the general public” for purposes of receiving Medicaid reimbursement. Because Medicaid bases its payments on the so-called usual and customary prices reported by the pharmacies, plaintiffs allege that defendants did not extend the same four-dollar discount pricing to Medicaid in an effort to increase their reimbursement. In their complaint, Plaintiffs allege that defendants’ practices constituted fraudulent claims for payment under the FCA because it was understood throughout the pharmacy industry that “usual and customary charge” referred to the amount a pharmacy charged cash-paying customers. Plaintiffs also allege that defendants attempted to avoid detection by not advertising the four-dollar generic pricing in the media or through brochures, signs, or other promotional materials. Defendants moved to dismiss plaintiffs’ FCA claims by arguing, among other things, that plaintiffs failed to plead scienter with sufficient particularity. Defendants argued that the relevant FCA provisions—i.e., 31 U.S.C. § 3729(a)(1)(A), (B), and (G)—apply only to persons who act “knowingly.” Defendants argued that they could not have acted knowingly because excluding discount pricing of generic drugs from the usual and customary charges “was a reasonable interpretation of [an] ambiguous legal framework and not clearly proscribed by law.” The court found defendants argument unpersuasive. The court noted that defendants’ argument was “in tension with the plain meaning of the words ‘usual and customary,’” as well as plaintiffs’ allegation that the phrase is understood throughout the pharmacy industry to refer to the amount a pharmacy charges cash-paying customers. The court’s decision is notable in that expands the Seventh Circuit’s general acceptance of FCA claims regarding “usual and customary” prices for prescription drugs to a different jurisdiction. The court’s decision also serves as yet another win for whistleblowers complaining of fraudulent prescription drug practices and prices. The decision is found at: United States ex rel. Strauser v. Stephen L. LaGrance Holdings, Inc., 2019 U.S. Dist. LEXIS 36385 (N.D. Okla. Mar. 7, 2019).
March 14, 2019
by Nathan J. Ebnet
