The threat of federal False Claims Act (“FCA”) liability based on the failure to promptly return overpayments is a relatively new phenomenon, but it is receiving a lot of attention. In 2009, Congress enacted the Fraud Enforcement and Recovery Act of 2009, which modified the FCA to enable the federal government to pursue FCA liability against persons who knowingly retain overpayments of government funds (also known as “reverse false claims”). In 2010, Congress passed the Patient Protection and Affordable Care Act, which established that any person who receives an overpayment from the Medicare or Medicaid programs — and who does not report and return an overpayment within 60 days after "identification" — will be subject to potential FCA liability. In 2012 and 2014, the Centers for Medicare and Medicaid Services (“CMS”) issued proposed rules to describe how CMS interpreted overpayments, attempting to delineate, with needle-thin precision, the different obligations of identifying, reporting, and returning overpayments to the Medicare program in order to avoid FCA liability. Various provisions in the proposed regulations have been controversial, and CMS has not yet finalized them.

Recently, a qui tam FCA case initially filed in 2014 was unsealed, asserting that reverse payment agreements – so-called “pay-for-delay” settlements – between brand and generic pharmaceutical companies caused Medicare and Medicaid to overpay for drugs. U.S. ex rel. Radice v. Astellas Pharma, Inc., et al., 2:14-CV-05389 (C.D. Cal. 2014). The relator purports to represent a number of states and the federal government against a group of pharmaceutical companies. All of the government entities declined to intervene.

The complaint advances a novel and ambitious theory built upon complex allegations of anti-trust and conspiracy activity. The relator alleges that the defendants conspired to keep the costs of certain prescription drugs at an inflated price by conspiring to delay the entry into the market of less expensive generic versions – resulting in overcharges submitted to government payors. According to the complaint, one pharma company agreed to forgo a right to launch an authorized generic. The defendants orchestrated the elaborate plan for the secret pay-for-delay agreement through the filing and settlement of a patent infringement lawsuit between the defendants. The relator contends that the $50 million settlement payment was a disguised pay-for-delay agreement – part of the overarching scheme to keep generics out of the market. This, in turn, enabled the brand manufacturer to maintain market exclusivity and, as a result, charge higher, inflated prices ultimately charged to and reimbursed by government payors.

The complaint may be the first to suggest that a reverse payment settlement agreement results in a violation of the FCA. Missing from the complaint, however, is the critical description of who knowingly submitted a false claim and how. FCA liability is triggered when a party “knowingly makes, uses or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the Government, or knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government.” When the complaint approaches pleading these crucial elements of an FCA case, the relator noticeably switches into the passive voice, unable to provide any of the requisite specificity.