Second Circuit Accepts Appeal of False Claims Act First-To-File Issues

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The Second Circuit recently agreed to accept an interlocutory appeal to decide the question whether a violation of the False Claims Act’s “first-to-file” rule compels dismissal of the complaint or whether it can be cured by the filing of an amended pleading.

In United States ex rel. Wood v. Allergan, Inc., Relator John Wood brought FCA claims against Allergan, a pharmaceutical company that develops and manufactures eye care prescription drugs. Wood alleged that Allergan violated the FCA and the Anti-Kickback Statute by providing free drugs and other goods to physicians in exchange for them providing the company’s brand name drugs to Medicare and Medicaid patients.  SDNY District Judge Jesse Furman denied most of Allergan’s motion to dismiss in an 89-page decision, deciding several FCA first-to-file issues and certifying two for interlocutory appeal to the Second Circuit.

The Initial Qui Tam Complaint Violated the “First-to-File” Bar

The FCA’s “first-to-file” rule states that once a qui tam action has been brought, no person other than the Government may intervene or bring a related action based on the same facts. The primary purpose of the first-to-file rule is to help the Government uncover and fight fraud. The rule encourages prompt disclosure of fraud by creating a race to the courthouse among those with knowledge of the fraud.

Wood was not the first relator to bring FCA claims against Allergan for the alleged conduct. Two prior actions had been brought and were pending when the Wood qui tam complaint was filed. Therefore, at the time Wood’s qui tam complaint was filed, it ran afoul of the first-to-file bar and was subject to dismissal.

The Prior-filed Actions Were Dismissed Before Wood’s Action Was Unsealed and the Third Amended Complaint Was Filed

The Wood complaint, however, was under seal for several years, and Wood amended his complaint twice before the seal was lifted. While the Wood complaint remained under seal, the two prior actions were dismissed.  When the Government declined to intervene in the Wood action and the case was unsealed, there were no longer any prior-filed pending actions. Wood thereafter filed a third amended complaint. Allergan moved to dismiss on several grounds, including the “first-to-file” bar, arguing that when Wood’s initial qui tam complaint was filed, there were two pending actions alleging the same factual allegations.

The “First-to File” Bar Is Not Jurisdictional

Judge Furman first addressed whether the “first-to-file” bar is jurisdictional. Although the majority of circuit courts have held that it is, the district court’s holding in its March 31, 2017 decision that the bar is not jurisdictional foreshadowed the Second Circuit’s similar holding four days later, in United States ex rel. Hayes v. Allstate Insurance Co.  The Circuit in Hayes stated that the first-to-file rule provides that “no person other than the Government” may bring an FCA claim that is “related” to a claim already “pending.” The Court noted that the statutory language did not speak in jurisdictional terms or refer to the jurisdiction of the courts, in contrast to other sections of the FCA. As Congress is presumed to act intentionally when it includes jurisdictional language in one statutory section but omits it in another, the Court held the a court does not lack subject matter jurisdiction over an action barred on the merits by the non-jurisdictional first-to-file rule.

An Amendment After Dismissal of the Prior Action Can “Cure” a First-to-File Violation

The district court next addressed the question of whether the first-to-file bar required dismissal of Wood’s qui tam complaint. In Kellogg Brown & Root Services, Inc. v. United States ex rel. Carter, the Supreme Court had held that “an earlier [FCA] suit bars a later suit while the earlier suit remains undecided but ceases to bar that suit once it is dismissed.”  Wood therefore would be able to bring a new FCA claim as the two prior actions had been dismissed.

However, during the years that the case had been sealed, the statute of limitations had expired on most of Wood’s claims, so a dismissal without prejudice and a re-filing of his complaint would result in a dismissal of the claims on limitations grounds. The district court was therefore faced with a question the Supreme Court did not decide: whether a violation of the first-to-file bar can be “cured” by amending or supplementing the complaint in the later-filed action after dismissal of the earlier actions.

The district court held that first-to file violation can be cured by an amended or supplemented pleading.  The court noted that most courts answering this question in the negative had relied in large part on a conclusion that the first-to-file bar is jurisdictional. The district court in Wood, and later the Second Circuit, held that the bar is non-jurisdictional. The district court noted that courts routinely allow plaintiffs to cure violations of non-jurisdictional rules by amendment under Fed. R. Civ. P. 15. Also, allowing an amendment to cure a violation advances the primary purpose of the FCA, to permit the government to recover for fraud. The court opined that barring a relator in Wood’s position from curing his violation of the rule would undermine, rather than advance, the purposes of the FCA.

The Amendment Relates Back to the Date of the Original Complaint

The parties also disputed whether, for purposes of the statute of limitations, the relevant complaint was the initial complaint, filed when the prior actions were pending, or the third amended complaint, the first one filed after they had been dismissed. The court recognized that the “touchstone” of Rule 15 is whether the original pleading put the defendant on notice of the relevant claims, and that an FCA defendant is often not on notice of a qui tam complaint because it is under seal. Nevertheless, the court concluded that any such delay is beyond the relator’s control, and an otherwise diligent relator should not have claims stripped away when the government and not the relator is to blame for the defendant not receiving notice. The district court therefore held that the third amended complaint related back to the original complaint for limitations purposes.

The Second Circuit Will Address The First-to-File Issues

In August, the Second Circuit accepted the interlocutory appeal of two issues:

  1. Whether a violation of the FCA’s “first-to-file” rule requires dismissal or can be “cured” through the filing of a new pleading after the earlier-filed action has been dismissed; and
  2. If a violation of the first-to-file bar is curable, whether the FCA’s limitations period is measured from the date of the relator’s curative pleading or the original complaint.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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