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We’re hosting a guest post today – the long title of which is “Can a Manufacturer Be Held Liable Under the False Claims Act if It Delivers Defective Medical Devices to the Government?”  This post was contributed by Antonia Guiliana, a partner at Kelly Drye, who, from her online resume knows a lot about qui tam actions and how to defeat them.  If you’ve got complements or criticisms, please direct them to her, since what follows is 100% hers.
The False Claims Act (or the “FCA”) is being used with increasing frequency and vigor against the drug and device industry. Here are some statistics:
• In 2010 alone, the federal government has already collected $3.1 billion in FCA cases. Eighty percent (80%) of these proceeds came from health care companies, including insurers and hospitals.
• Pharmaceutical companies made up 8 of the 10 largest FCA settlements in 2010.
• Ten of the world’s top twelve pharmaceutical companies have entered into corporate integrity agreements (“CIAs”) with the federal government in connection with large scale FCA settlements.
The False Claims Act, which was enacted in 1863 during the height of the Civil War to penalize vendors who sold nonfunctional gunpowder, unhealthy mules, rancid food, and faulty guns to the Union Army, and lay relatively dormant until 1986, is now, according to the plaintiffs’ bar, “the principal weapon in the government’s arsenal to combat healthcare fraud.”  How this happened is a story for another day, but for purposes of this post, all one needs to know about the FCA is this:  The FCA, as originally enacted, and as it stands today, contains qui tam provisions which enable private citizens (known as “whistleblowers” or “relators”) to bring civil actions for violations of the Act on the government’s behalf.  The financial rewards available to whistleblowers make qui tam litigation very attractive to relators and their counsel, especially in actions against large health care institutions where a single settlement or judgment can exceed tens, if not hundreds, of millions of dollars.  The relator’s “cut” is typically between 15-30% of the proceeds recovered in the action.
Since the mid-late 1990s, plaintiffs have been testing the limits of the FCA in health care litigation and have been asserting increasingly creative and far-fetched theories of liability against drug and device companies for various types of alleged conduct, including deceptive marketing practices, off-label marketing, failure to pay the appropriate Medicaid rebate, and inflated published prices.  The recent $750 million GSK settlement indicates that a new theory of liability is in play – the violation of Good Manufacturing Practices in the production of drugs and devices.
And then this [ed. note – now “last”] week, in United States ex rel. Steury v. Cardinal Health, Inc., 2010 WL 4276073 (5th Cir. Nov. 1, 2010), the Fifth Circuit rendered a decision that brings yet another potential theory of FCA liability into play – whether the FCA is violated if a company sells the government medical equipment that the company knew was defective and unsafe.
Why would a plaintiff want to bring an FCA action when it can simply file a products liability suit to address such conduct? There are two principal reasons for this.  First, an FCA plaintiff does not need to establish that it was injured by a product defect to bring a claim.  Rather, an FCA plaintiff must simply be aware of an alleged fraud committed against the government and then establish that the allegations in the qui tam complaint were not previously publicly disclosed, or if they were, that the plaintiff is the original source of the information.  Second, the damages in an FCA case can be huge.  Once FCA liability is established, the plaintiff is entitled to treble damages and penalties which can range from $5,000 – $10,000 or more per violation.  As discussed above, the relator’s “cut” ranges between 15-30% of the recovery, which can be huge in a case against a major drug or device manufacturer.  In the recent GSK settlement, a the whistleblower received $96 million, which is reported to be the largest FCA payout to a single individual in history.
And now on to Steury’s story…
At issue in Steury was whether the knowing delivery of defective products to the government violated the FCA.  Leslie Steury, the relator in the action, worked for Alaris Medical Systems as an account consultant.  As an account consultant, Steury marketed medical devices, including Signature Edition Infusion Pumps (“infusion pumps”) to hospitals, including children’s hospitals and hospitals operated by the Veteran’s Administration, from March 1996 until her termination in late September 2001.  The infusion pumps were electrical devices designed to regulate the rate at which intravenous fluids flow into patients.  Alaris started selling the infusion pumps nationwide in 1996 but stopped doing so in August 2006 after 1,300 of the products were seized by the FDA for an unrelated problem.  In her FCA complaint, Steury alleged that the infusion pumps had a dangerous defect that could cause air bubbles to accumulate and release into a patient’s intravenous line, potentially causing serious injury or death.  She alleged that she first became aware of this defect in October 2000 when a pediatric anesthesiologist at a children’s hospital in Akron informed another Alaris employee that an infusion pump had injected air into his patient’s intravenous line and that a similar problem had been reported at a children’s hospital in Philadelphia.  Seven months later, in May 2001, Steury allegedly met with Alaris’s area manager and nurses from the Akron children’s hospital to discuss concerns about the infusion pumps.  During this meeting, Alaris’s area manager allegedly discredited a nurse’s report of an infant mortality related to an intravenous air bubble.  One month later, in June 2001, Alaris’s area manager informed Steury that Alaris had temporarily suspended shipments of the infusion pumps while it reviewed the air bubble defect, but nonetheless directed Steury to continue marketing the infusion pumps.  Steury was terminated in September 2001 before she received an answer about the company’s review of the alleged defect.
Almost six years later, in May 2007, Steury filed an qui tam complaint under seal against Cardinal Health (Alaris’s successor) alleging violations of the federal FCA and a number of state FCAs.  In January 2008, the United States filed a notice that it declined to intervene in the suit (which is typically a sign that the government believes the merits of the case are weak, the damages are small, or both).
In the Fifth Circuit, to state a claim under the FCA, a plaintiff must allege: (1) a false statement or fraudulent course of conduct; (2) made or carried out with the requisite scienter; (3) that was material; and (4) that is presented to the Government.  Two key allegations in Steury’s complaint attempt to establish FCA liability.  First, she alleged that a “claimant submits a false or fraudulent claim within the meaning of the FCA when he submits a claim for payment for the Government for products that contain defective parts.” (Am. Compl. ¶ 51).  Second, she alleged that by “accepting payment from the federal Government or one of its agencies for the SE infusion pumps, Cardinal Health knowingly misrepresented that the SE infusion pumps were safe, reliable and quality-assured.” (Am. Compl. ¶ 52).
Cardinal Health moved to dismiss the complaint pursuant to Rules 9(b) and 12(b)(6).  The district court agreed and dismissed the case, and for reasons unclear from the opinion, declined to give Steury an opportunity to amend the complaint to try to cure the pleading defects.
In an effort to “streamline” the appeal, Steury pressed only one substantive contention: that Cardinal Health made a false certification (i.e., a false statement) to the Veteran’s Administration that the infusion pumps complied with the warranty of merchantability.  Steury did not assert that Cardinal Health actually made this certification.  Rather, Steury alleged that Cardinal Health, impliedly, and falsely, certified compliance with the warranty of merchantability simply by requesting payment for the infusion pumps.
Before we go any further, we need to talk a little bit about the express and implied certification theories of liability under the FCA.  A plaintiff may establish a false statement under the FCA (element #1) by alleging that when the government expressly conditions payment of a claim upon a claimant’s certification of compliance with a statute or regulation, a claimant submits a false claim when he falsely certifies compliance with that statute or regulation.  This is known as “express certification” and is recognized in many Circuits. Fewer Circuits (specifically, the Second, Sixth, Ninth, Tenth, and Eleventh Circuits) also recognize something called “implied certification” as a basis for establishing a false statement under the FCA.  The implied certification theory of liability “is based on the notion that the act of submitting a claim for reimbursement itself implies compliance with governing federal rules that are a precondition to payment.”  Mikes v. Straus, 272 F.3d 687, 699 (2d Cir. 2001).
In Steury’s case, the Fifth Circuit observed that it had not yet recognized the implied certification theory, but did not yet have to resolve the issue because the allegations in Steury’s complaint provided no basis for implying a false certification.  The court observed that “a false certification of compliance, without more, does not give rise to a false claim for payment unless payment is conditioned on compliance.”  Applying this principle to Steury’s case, the court found “no indication that the Government conditioned payment for the Signature pumps on a certification that the Signature pumps complied with the warranty of merchantability.”
While the court closed one door on Steury, it opened another when it stated later in the opinion:

We do not suggest, however that a knowing delivery of defective goods to the Government will never implicate the FCA.  Particular government contracts may specifically condition payment on a certification of compliance with the warranty of merchantability.  Other courts have suggested that the knowing provision of ‘worthless’ goods or services to the Government may violate the FCA. (citations omitted).  Steury has not yet pursued or briefed these theories, however, so we need not address them here.  Finally, although we have held that a knowing attempt to deceive the Government about the nature of commercial items may violate the FCA, the district court was correct in concluding that Steury has so far failed to allege this type of claim with particularity.

The Fifth Circuit then remanded the case to the district court with instructions to permit Steury to amend her complaint as “we cannot say that the defects in Steury’s complaint are necessarily ‘incurable’ or that amendment would be futile.”
It will be interesting to see if Steury can follow the Fifth Circuit’s guidance and file an amended complaint that can withstand dismissal under Rules 9(b) and 12(b).