Omnicare Decision Limits the Reach of False Claims Act

By: Ifrah Law

A recent decision by the Court of Appeals for the Fourth Circuit limiting the reach of the False Claims Act demonstrates how relators who pursue cases in which the government declines to intervene can end up making law that is unfavorable to the government’s enforcement of that statute.

United States ex rel. Rostholder v. Omnicare, Inc., et al., No. 12-2431, a qui tam case alleging violations of the False Claims Act (FCA), 31 U.S.C. §§ 3729, arose from a whistleblower’s claim that defendants violated certain Food and Drug Administration (FDA) safety regulations requiring that penicillin and non-penicillin drugs be packaged in complete isolation from one another.  The violation of these regulations resulted in a legal presumption of penicillin cross-contamination.  The relator asserted that the contaminated drugs were not eligible for reimbursement by Medicare and Medicaid and, therefore, claims presented to the government for reimbursement of these drugs were false under the FCA.

In affirming the district court’s grant of Omnicare’s motion to dismiss, the Court of Appeals focused on the specific requirement of the FCA that there be a claim that is, indeed, false.  The Court noted that the statutes providing for reimbursement require that the drug in question be approved by the FDA but these statutes do not require compliance with FDA safety regulations as a precondition for reimbursement.

The Court therefore held that, while the cross-contamination might be a violation of safety regulations, it did not transform Omnicare’s requests for reimbursement into false claims.  The Court observed statements in its own earlier cases that “the correction of regulatory problems is a worthy goal, but is ‘not actionable under the FCA in the absence of actual fraudulent conduct.’”  (citing Mann v. Heckler & Koch. Def., Inc., 630 F.3d 338, 346 (4th Cir. 2010)).  If it were “to accept relator’s theory of liability based merely on a regulatory violation,” the Court noted, “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.”  Given the FDA’s “broad powers to enforce its own regulations,” to permit the FCA to be used in this manner “could ‘short-circuit the very remedial process the Government has established to address non-compliance with those regulations.’”  (citing U.S. ex rel. Wilkins v. United Health Grp., Inc., 659 F.3d 295, 310 3d Cir. 2011)).

Based on these principles, the Court of Appeals found that the relator had failed adequately to allege the existence of a false statute or fraudulent conduct, and that he could not plausibly allege that Omnicare acted with the requisite scienter when submitting the claims in question to the government.

This Court of Appeals decision could offer support for companies in highly regulated industries that face qui tam cases under the False Claims Act that arise from violations of safety regulations.  In industries such as pharmaceutical manufacturing and packaging in which payment reimbursements are not expressly tied to compliance with safety rules, those companies may face regulatory enforcement for those violations, but will not also face assertions that they have also violated the False Claims Act.