In Novartis, the district court dismissed the relators' qui tam actions for failing to sufficiently allege their fraud claims, while rejecting the defendants' jurisdictional objections based on the first-to-file rule and the public disclosure bar. The district court opinion in Novartis thus provides valuable insights into the pleading requirements for qui tam actions, as well as other potential arguments on which to base motions to dismiss such actions
Summary of the Novartis Case
The Novartis case involved two former employees of Genentech, Inc., Frank Garcia and Stephen Fauci, and a former employee of Novartis Pharmaceuticals Corporation (Novartis), Allison Kelly. According to Garcia and Kelly (together, relators), beginning in 2003, Novartis and Genentech, Inc. began co-marketing Xolair, a medication to treat moderate to severe, persistent allergic asthma in patients over 12 years old.
The Complaints. In March 2006, Garcia and Kelly jointly filed a qui tam action (First Action) against Novartis, Novartis AG, and Genentech, Inc. (collectively, defendants), in the name of the United States pursuant to the FCA and in the names of a number of individual states under those states' qui tam statutes (the Garcia Complaint). In October 2010, Fauci filed a qui tam action against Novartis, Genentech, Inc., and Roche Holdings, Inc., (Fauci Action) in the name of the United States pursuant to the FCA and in the names of a number of individual states under those states' qui tam statutes (Fauci Complaint).
Subsequently, Kelly voluntarily moved to dismiss herself from the First Action, and the district court ordered her dismissal without prejudice in August 2011. Almost a year later, however, Kelly filed a complaint against the defendants (Second Action), as well as against Novartis Corporation, Roche Holdings, Inc., and the Roche Group (Kelly Complaint). Garcia and Fauci sought leave to amend their Complaints and consolidate them with the Kelly Complaint. All three later filed a consolidated First Amended Complaint.
The district court denied Garcia's and Fauci's individual motions to amend, struck the consolidated First Amended Complaint filed by all three, and consolidated the Garcia, Fauci, and Kelly Complaints for pre-trial and administrative purposes. In June 2014, Fauci filed a notice of voluntary dismissal of all claims raised in his complaint.
The claims at issue and motions to dismiss. The Garcia and Kelly Complaints alleged that the defendants had engaged in unlawful and fraudulent practices, such as (1) illegal off-label marketing of Xolair for unapproved indications; (2) encouraging, aiding, abetting, and causing health care providers (HCPs) to falsely represent facts on Statement of Medical Necessity (SMN) forms for Xolair; (3) offering and paying illegal kickbacks to HCPs if they promoted Xolair; (4) illegally and misleadingly instructing HCPs to use improper medical codes, or "upcoding," for the administration of Xolair; and (5) improperly targeting Disproportionate Share Hospitals (DSHs) and other hospitals receiving federal funds, all to increase reimbursement for Xolair from governmental health insurance programs. Their Complaints claimed (a) violations of 31 U.S.C. § 3729(a)(1) and (2); (b) conspiracy to defraud pursuant to 31 U.S.C. § 3729(a)(3); (c) reverse false claims violations pursuant to 31 U.S.C. § 3729(a)(7); and (d) violations of the individual states' equivalent qui tam provisions.
In June 2014, the defendants filed a motion to dismiss the First and Second Actions. Among other things, the defendants argued that (1) the district court lacked jurisdiction over the Second Action because it was barred by the first-to-file rule; (2) the district court lacked jurisdiction over the First Action and the Second Action under the public disclosure bar; and (3) the relators failed to plead fraud with particularity as required by Rule 9(b). Novartis Corporation and Roche Holdings, Inc., which were defendants only in the Second Action and the Fauci Action, also filed a motion to dismiss both of those actions.
The district court's holdings. Ruling from the bench after oral argument, the district court granted Novartis Corporation's and Roche Holdings, Inc.'s motion to dismiss and dismissed the relators' claims of conspiracy and reverse false claims violations against the defendants. The remaining issues, which it took under advisement, concerned the defendants' motion to dismiss the Second Action pursuant to the first-to-file rule, to dismiss the First and Second Actions pursuant to the public disclosure bar, and to dismiss the First and Second Actions for failure to plead fraud with particularity in accordance with Rule (9)(b).
The Jurisdictional Challenges
In their motion to dismiss, the defendants challenged the district court's jurisdiction pursuant to Rule 12(b)(1) based on the first-to-file rule and the public disclosure bar. Citing a number of federal cases, the district court explained that:
Whether a relator is qualified to bring a qui tam action under the FCA is a question of subject matter jurisdiction; and the party invoking the court's jurisdiction has the burden to prove jurisdiction exists.
Since subject matter jurisdiction was based on allegations in the Fauci Complaint and the Kelly Complaint, the district court would take as true all well-pleaded facts in the complaints, scrutinize them in the light most hospitable to the plaintiffs' theory of liability, and draw all reasonable inferences therefrom in the plaintiffs' favor.
First-to-file rule. The defendants argued that the district court lacked jurisdiction over the Second Action pursuant to the "first-to-file rule" because it was based on the same facts underlying the First Action. The district court, however, refused to dismiss the Second Action based on that rule. In so doing, the district court delineated the first-to-file rule, as follows:
The first-to-file rule under 31 U.S.C. § 3730(b)(5) creates a jurisdictional bar in qui tam actions. This rule provides that "[w]hen a person brings an [FCA qui tam action], no person other than the Government may intervene or bring a related action based on the facts underlying the pending action." The first-to-file rule "serves the dual purpose of preventing parasitic claims based on allegations already available to the government and of avoiding duplicative suits." . . . It is intended to "provide incentives to relators to 'promptly alert the government to the essential facts of a fraudulent scheme.'" The First Circuit has held that 31 U.S.C. § 3730(b)(5) "bar[s] a later allegation if it states all the essential facts of a previously-filed claim or the same elements of a fraud described in an earlier suit."
United States ex rel. Garcia v. Novartis AG, slip op. at 24–25 (citations omitted).
The district court considered the defendants' argument that the "essential facts" rule barred the exercise of jurisdiction over the Second Action, and recognized that First Action and the Second Action involved the same basic facts and issues. Nevertheless, the district court held that the "essential facts" rule did not bar the exercise of its jurisdiction over the Second Action in this particular case because "Kelly and Garcia co-filed the Garcia Complaint in 2006 and together promptly informed the government about the existence of a potential fraud. For Kelly then, the Second Action is not that of an opportunistic or parasitic plaintiff taking advantage of the facts and allegations advanced in an earlier action filed by another. . . ." Id. at 26.
The district court distinguished other district court opinions barring successive actions filed by the same relator, noting that those courts "penalized the relators who filed a second qui tam action because they did so with the intention to modify or add elements or allegations that were not claimed in the first qui tam action." Id. at 28-29. Moreover, the district court noted that its conclusion would not be undermined by the anticipated ruling of the Supreme Court in Kellogg Brown & Root Servs., Inc. v. United States ex rel. Carter, 134 S. Ct. 2899(cert. granted July 1, 2014), because that "case will resolve a different question: whether the first-to-file bar under 31 U.S.C. § 3730(b)(5) functions as a 'one-case-at-a-time' rule such that when there is no prior claim pending, a relator may file a duplicative claim. This question is not relevant to Kelly's case because the First Action was still pending when Kelly filed the Second Action." United States ex rel. Garcia v. Novartis AG, slip op. at 29 n.9. (After the Novartis opinion issued, the Supreme Court held that a qui tam suit under the FCA ceases to be "pending" once it is dismissed. Kellogg Brown & Root Servs., Inc.. v. United States ex rel. Carter, 135 S. Ct. 1970 (2015)).
Public disclosure bar. In addition, the defendants argued that the district court lacked jurisdiction under the public disclosure bar because the relators' allegations were disclosed publicly by two earlier employment lawsuits made by former employees of Genentech, Inc. Despite the similarities between the actions, however, the district court again refused to dismiss the relators' actions.
In so doing, the district court explained that 31 U.S.C. § 3730(e)(4)(A) lays out a public disclosure bar for qui tam actions, according to which no court shall have jurisdiction over an action under that section based upon the public disclosure of allegations or transactions in a civil hearing, unless the person bringing the action is an original source of the information. It further explained the three-step analysis courts follow to determine whether a lawsuit is precluded by the public disclosure bar: "(1) whether there has been a prior, public disclosure of fraud; (2) whether that prior disclosure of fraud emanated from a source specified in the statute's public disclosure provision; and (3) whether the relator's qui tam action is 'based upon' that prior disclosure of fraud. . . . If all three questions are answered in the affirmative, the public disclosure bar applies unless the relator qualifies under the 'original source' exception." United States ex rel. Garcia v. Novartis AG, slip op. at 33–34 (citations omitted).
Accordingly, the district court focused on whether the prior employment actions referenced by the defendants triggered the public disclosure bar. The district court held that the first two steps were met because: (1) the employment complaints were filed in the context of a civil hearing within the meaning of step one; and (2) the filing of those employment actions in federal court meant that they were public and pre-dated the Garcia and Kelly Complaints within the meaning of step two. Then, the district court addressed step three and explained:
"[A]s long as the relator's allegations are substantially similar to information disclosed publicly, the relator's claim is 'based upon' the public disclosure even if he actually obtained his information from a different source." Although additional details may "add some color to the allegation, [if] the allegation ultimately targets the same fraudulent scheme, [it] is enough to trigger the public disclosure bar." The identity of the defendant is a "material element of a fraud claim. . . . Only when an earlier filed suit has named a member of the same corporate family are courts inclined to find generic allegations sufficient to put the government on notice of a fraudulent scheme involving a specific defendant."
Id. at 35 (citations omitted).
The district court agreed with the defendants that the previously-filed employment complaints described to a certain extent unlawful practices that the relators later alleged in their complaints. It also observed that both employment actions were against Genentech, Inc., and not against Novartis, and that Genentech, Inc. and Novartis were not members of the same corporate family. Yet, it concluded that "the District of Massachusetts has held that 'for purposes of prior disclosure, specifying a formulaic drug as part of a kickback scheme is synonymous with naming the company that produces it." Id. at 37 (citation omitted).
Nonetheless, the district court held that the earlier employment actions did not sufficiently expose the essential elements of the alleged fraud "so as to have put the government on notice and 'enable [it] to adequately investigate the case,' especially as far as Novartis is concerned." Id. (citations omitted). Moreover, it held that the allegations contained in the Garcia and Kelly Complaints were not "substantially similar" to those earlier publicly disclosed because the relators' complaints contained allegations "that go far beyond what is alleged" in the previously-filed employment complaints. "Ultimately," the district court concluded, "the Garcia and Kelly Complaints allege a wider scheme in terms of geographic location, time period, and types of fraud." Id. at 38–39.
Adequately Pleading Fraud under Rule 9(b)
The defendants also moved to dismiss the relators' claims under 31 U.S.C. §§ 3729(a)(1) and (2) for failure to plead fraud with particularity under Rule 9(b). These sections impose liability on any person who has (1) "knowingly" presented a false or fraudulent claim for payment or approval to the government or (2) "knowingly" made a false record or statement to get a false or fraudulent claim paid by the government. The defendants argued that the Garcia and Kelly Complaints were "replete with sweeping and conclusory allegations regarding off-label, kickback, and other purported 'schemes'" but did not plead fraud with particularity either as to the scheme or as to the existence of actual false claims.
In its opinion, the district court further delineated the law regarding Rule 9(b), with the following statements:
FCA allegations under federal law and their state counterparts are subject to the heightened pleading standards of Rule 9(b). . . . Rule 9(b) requires, "at a minimum," that the complaints set forth "the who, what, where, when, and how of the alleged fraud" . . . "Conclusory accusations related to 'plans and schemes' are insufficient.'" United States ex rel. Garcia v. Novartis AG, slip op. at 22, 45–46 (citations omitted).
When claiming a § 3729(a)(1) violation, the burden a relator carries under Rule 9(b) depends in large part on whether the relator has alleged that the defendant submitted false claims directly (for example, by submitting false claims itself) or indirectly (for example, by inducing a third party to submit false claims by offering payments or kickbacks). Id. at 46.
When alleging an indirect claim, a relator must "provid[e] factual or statistical evidence to strengthen the inference of fraud beyond possibility, without necessarily providing details as to each false claim." Id. (citations omitted). "Put differently, absent evidence of each of the particular false claims for reimbursement that were submitted, a relator may satisfy Rule 9(b) by alleging particular details of a scheme to submit false claims paired with" reliable indicia "that lead to a strong inference that false claims were actually submitted." Id. at 46–47 (citations omitted).
When bringing a claim under § 3729(a)(2), "it is not enough to allege that records or statements at issue were made in violation of federal law; a relator must allege that the statements were actually false." Id. at 47 (citations omitted).
Despite having allegations sufficiently detailed to thoroughly analyze and reject the first-to-file rule and public disclosure bar, the district court found that both the Garcia Complaint and Kelly Complaint failed to plead their fraud claims with sufficient particularity. With regard to the Garcia Complaint, the court found
Garcia advances no evidence of any SMN forms that were submitted because of the Defendants. Garcia can identify no claims for reimbursement to Medicare, Medicaid, or any other federal health care program. Also, the Exhibits attached to the Garcia Complaint are the official description, indications, usage, and contradictions of Xolair, blank SMN forms, and health insurance claim forms that do not evidence the actual making of false claims. Id. at 48.
Garcia. . . fails to provide even a single example of fraudulent conduct resulting in reimbursement of Xolair by a federal health care program and does not advance information regarding the alleged nationwide fraud and the importance of the false claims. Garcia does not adduce any specific evidence of a fraudulent scheme nor any reliable indicia that the alleged fraudulent schemes resulted in the submission of false claims to the government. Id. at 49.
The information contained in the Garcia Complaint barely suggests that fraud took place, and it provides no factual or statistical evidence to strengthen the inference of fraud beyond possibility. Id.
The district court acknowledged that the over 100-page Kelly Complaint contained more detailed allegations and information about the defendants' practices. Nevertheless, it still held that the Kelly Complaint failed to plead the fraud claims with sufficient particularity, noting
Kelly's detailed information regarding the instructions she and her colleagues received to promote Xolair to HCPs, even for unapproved uses, were "nothing more than improper marketing practices and illegal kickback activities used by Novartis to increase sales." Id. at 51.
Kelly failed to provide even a single example of fraudulent conduct resulting in reimbursement of Xolair by a federal health care program and did not give sufficient information regarding the nationwide fraud and the importance of false claims she alleged. Id. at 52.
Although Kelly's allegations suggested that fraud was probable, the factual and statistical evidence resulting from the information she gave was not sufficient to strengthen the inference of fraud beyond possibility. Id. at 52–53.
The Takeaway from Novartis
The district court's Novartis opinion is a good primer on the pleading standard for qui tam actions based on fraud, as well as the first-to-file rule and public disclosure bar. It is loaded with statutes, rules, cases, and analyses fundamental to defending against (and, frankly, bringing) qui tam actions.
In that regard, it makes clear that Rule 9(b) is a powerful tool to challenge and, ultimately, perhaps have dismissed a qui tam action. Indeed, the district court relied upon the numerous allegations of the complaints at issue (including their exhibits) to analyze and reject the defendants' jurisdictional challenges. Nonetheless, the district court held that those detailed allegations and exhibits did not satisfy the Rule 9(b) standard.
In so doing, the district court implicitly made an important point: The length of the complaint does not matter as much as its allegations.
Keywords: commercial and business, litigation, qui tam, first-to-file, public disclosure bar