How Much Detail do You Want? First Circuit Holds that Identifying One Fraudulent Medicaid claim, with Projections, is Sufficient to Survive Motion to Dismiss in FCA Case

Developing jurisprudence on FCA qui tam (whistleblower) cases, in addition to the important False Claims Act settlement discussed in a recent FDA Law Blog post (here), the First Circuit Court of Appeals issued a decision on July 26 in a case brought against DePuy Orthopaedics, Inc., alleging false claims had been submitted to government insurance programs for hip replacement prostheses. The holdings of the decision are clear. But the rationale for some of the holdings requires more discussion.

The decision (United States ex rel. Nargol v. DePuy Orthopaedics, Inc.) upheld the district court’s dismissal of claims relating to allegations of false statements made to FDA in connection with DePuy’s seeking clearance of the devices to be distributed in the United States. The First Circuit found that, even if DePuy had made false representations, any argument that those representations were materially false must fail, because FDA didn’t retract the devices’ clearance after the Agency had been informed of problems. “[I]t is not plausible that the conduct of the manufacturer in securing FDA approval constituted a material falsehood capable of proximately causing the payment of a claim by the government” when “there is no allegation that the FDA withdrew or even suspended product approval upon learning of the alleged misrepresentations,” the Nargol court said.  The court further affirmed the district court’s dismissal of plaintiff’s allegations about false statements to doctors caused the doctors to falsely certify the devices as “reasonable and necessary” for reimbursement, holding that plaintiff failed to adequately allege that differences in the devices’ stated failure rates could be material to a doctor’s decision whether to certify an FDA-cleared hip replacement as “reasonable and necessary.”

The second holding in the decision reversed the district court’s dismissal of the plaintiff’s claims alleging that large numbers of defective devices were paid for by the federal government. Specifically, the complaint alleged that devices were sold that did not comport with the specifications set forth in the devices’ FDA clearance. The District Court dismissed these allegations pursuant to Fed. R. Civ. P. 9(b), which requires claims that sound in fraud (including FCA claims) to be pleaded with particularity. The First Circuit disagreed with the District Court that plaintiff had failed to meet the 9(b) standard, and held that the plaintiff’s allegations were sufficient to survive a Motion to Dismiss on this claim: “the plain, specific misrepresentation (assuming the allegations to be true)” resulting in payment of government claims “was that the device was . . . an FDA-approved product, rather than a defectively manufactured, nonconforming variant.” But it’s more complicated than that.

Nargol’s lawyers alleged that DePuy’s sale of the out-of-specification, and thus defective, devices violated the federal FCA, and many state analogues. The First Circuit reversed the lower court’s dismissal of those claims under federal law and the laws of the State of New York, but affirmed the lower court’s dismissal of other state FCA claims. Here’s why:

Over the years, there have been many cases discussing whether allegations in FCA qui tam cases sufficiently described claims that were filed with the federal government (for Medicare, Medicaid, Veterans Administration sales, and for claims under the TriCare system that provides health insurance to military veterans and their families) for pharmaceuticals or medical devices. In early cases, motions to dismiss brought under Fed. R. Civ. P. 9(b) often succeeded because many of the whistleblowers alleging false claims for pharmaceuticals or medical devices were company employees who did not have access to information about specific claims that were filed for the products. Most courts held that it was not enough for these whistleblowers to allege, relying on statistics rather than specifics, that false claims must have been filed. The majority ruled that an FCA complaint must allege specific false claims that were actually submitted to the government. But some courts have continued to espouse a more “flexible” approach to Fed. R. Civ. P. 9(b) in FCA cases – including the First Circuit. In DePuy, the First Circuit determined that just two allegations were sufficient to keep the case against DePuy alive:

1. A “single exemplar false claim” originating when “surgeon at Stony Brook Medical Center in New York implanted” the device in a patient, and the device “failed ‘as a result of manufacturing defects in the device,’” resulting in submittal of a Medicaid claim.
2. Between 2005 and 2010, “New York State Medicaid paid for an average of approximately 1280 claims each year for total hip replacement devices,” Medicaid paid for 50 percent of the procedures, and given both DePuy’s market share and the percentage of sales of the relevant device in DePuy’s sales, “nearly 425” of the defective devices “would have been paid for by New York State Medicaid.”

The Nargol court noted that “a consensus has yet to develop” among the federal circuit courts “on whether, when, and to what extent a relator must state the particulars of specific examples of the type of false claims alleged.” In this case, the court reasoned, there was “no reason to suspect that physicians did not seek reimbursement” for the allegedly defective product, and “it is also highly likely that the expense is not one that is primarily borne by uninsured patients.” The court concluded that it is “virtually certain that the insurance provider in many cases was Medicare, Medicaid, or another government program.” Because “it is statistically certain,” assuming the complaint’s allegations to be true, that the defendant “caused third parties to submit many false claims to the government, we see little reason . . . to require Relators to plead false claims with more particularity than they have done here.” The First Circuit said the “complaint alleges the details of a fraudulent scheme with ‘reliable indicia that lead to a strong inference that claims were actually submitted . . . from the United States and from the State of New York.’”

Yet the court refused to extend the statistical analysis to claims brought under other states’ FCAs. With regard to other state Medicaid programs, the Court found that “Relators for the most part have made conclusory allegations that state and municipal analogues to the FCA were violated,” and the “complaint does nothing to allege” that the devices were “advertised to and implanted by physicians in . . . any other state or municipality except for the state of New York.” On those grounds, counts relating to claims under other state FCA analogues were correctly dismissed.

So, how much detail is enough about claims paid by the federal government? Under Nargol, description of one specific Medicaid claim, when combined with statistical projections of market share and payer mix suggesting that “many” claims were likely filed, can be enough.