Federal Appeals Court Rejects False Claims Act Suit Based on Drug Packaging cGMP Violations

by Reed Smith
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Last Friday, the U.S. Court of Appeals for the Fourth Circuit affirmed the dismissal of a False Claims Act (“FCA”) case brought against Omnicare.1 United States ex rel. Rostholder v. Omnicare, Inc., No. 12-2431, 2014 WL 661351 (4th Cir. Feb. 21, 2014) (a copy of the court of appeals' opinion can be found here.) In a published decision, the Fourth Circuit rejected Relator Barry Rostholder’s claim that Omnicare violated the FCA when it sought government reimbursement for drugs that it allegedly packaged in violation of the Food and Drug Administration's (“FDA”) Current Good Manufacturing Practices regulations (“cGMP”). Concluding that government reimbursement for drugs is not tied to compliance with cGMP regulations, the court of appeals rejected Rostholder’s assertion that cGMP violations alone can give rise to FCA liability. In so holding, the Fourth Circuit’s decision is in keeping with that court’s faithful adherence to the FCA’s statutory elements, and its refusal to allow regulatory violations to be transformed into a fraud case under the FCA.

Rostholder was a former employee of Heartland Repack Services LLC (“Heartland Repack”), a facility owned and operated by Omnicare. Heartland Repack, an operation that repackaged drugs into convenient units for patient use, was housed in the same building as Heartland Healthcare Services (“Heartland Pharmacy”), a dispensing pharmacy. In his FCA suit against Omnicare, Rostholder alleged that Heartland Repack's repackaging of non-penicillin drugs violated certain packaging cGMPs because penicillin drugs were handled by Heartland Pharmacy in the same building. According to Rostholder, these regulatory violations rendered the drugs at issue presumptively adulterated, and therefore ineligible for reimbursement under government programs such as Medicare and Medicaid. Omnicare’s claims for reimbursement for those drugs, Rostholder claimed, were therefore false under the FCA.

The U.S. District Court for the District of Maryland granted Omnicare’s motion to dismiss Rostholder’s complaint, holding that Rostholder’s allegations of cGMP violations were insufficient to state an FCA claim because he had failed to allege that Omnicare made a false statement or engaged in any fraudulent conduct. See United States ex rel. Rostholder v. Omnicare, Inc., No. CCB-07-1283, 2012 WL 3399789 (D. Md. Aug. 14, 2012) (a copy of the district court's opinion can be found here).

The Fourth Circuit affirmed. Hewing to its FCA precedents, the court of appeals pointed out that the alleged cGMP violations—even if they were material to the government’s decision to pay for the drugs at issue—were not enough to make out an FCA claim because Rostholder also had to allege a false statement or course of conduct. On that score, after carefully analyzing the statutes and regulations governing cGMPs and government reimbursement for drugs, the court concluded that because compliance with the cGMPs was not required for drug reimbursement by Medicare and Medicaid, Omnicare could not be held liable under the FCA because it had not made a false claim—it had not asked for reimbursement for drugs that were ineligible for reimbursement. The court went a step further and also ruled that Omnicare lacked the required scienter to be liable under the FCA because it did knowingly seek payment for drugs that it knew or should have known were not eligible for reimbursement.

Of equal significance was the Fourth Circuit’s policy discussion of efforts such as Rostholder’s to turn regulatory violations into FCA violations. The court stressed that accepting Rostholder’s regulatory violation-based theory of FCA liability would improperly “sanction use of the FCA as a sweeping mechanism to promote regulatory compliance”—an outcome that the Fourth Circuit and its sister circuits have repeatedly rejected. It reasoned that when an agency, such as the FDA in this case, has broad powers to enforce its own regulations, allowing FCA liability based on regulatory non-compliance could “short-circuit the very remedial process the Government has established to address non-compliance with those regulations.”

The Fourth Circuit’s decision in Rostholder has important repercussions for the pharmaceutical industry and FCA jurisprudence more broadly. It signals that the court of appeals will carefully review statutes and regulations when relators attempt to use violations of those statutes and regulations to make out an FCA claim, and will rigorously enforce the FCA’s statutory requirements. Likewise, it represents yet another circuit precedent emphatically rejecting attempts to equate regulatory violations with FCA liability, and respecting the role of government agencies in ensuring regulatory compliance. More narrowly—but no less notably—the Fourth Circuit’s decision establishes that once a drug has been approved by the FDA and thus qualifies for reimbursement under the Medicare and Medicaid statutes, a reimbursement request for that drug cannot constitute a false claim under the FCA on the sole basis that the drug was processed in violation of the cGMPs.

1  Reed Smith represented Omnicare in both the lower court and appellate court proceedings.

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