U.S. ex rel. Duxbury v. Ortho Biotech Products

• Decision Date: 12 August 2009
• Docket Number: No. 08-1409.,08-1409.
• Citation: 579 F.3d 13
• Parties: UNITED STATES, ex rel. Mark Eugene DUXBURY and Dean McClellan, Plaintiffs, Mark Eugene Duxbury; Dean McClellan, Plaintiffs, Appellants, v. ORTHO BIOTECH PRODUCTS, L.P., Defendant, Appellee.
• Court: U.S. Court of Appeals — First Circuit

579 F.3d 13

UNITED STATES, ex rel. Mark Eugene DUXBURY and Dean McClellan, Plaintiffs Mark Eugene Duxbury; Dean McClellan, Plaintiffs, Appellants, v. ORTHO BIOTECH PRODUCTS, L.P., Defendant, Appellee.

No. 08-1409.

United States Court of Appeals, First Circuit.

Heard January 9, 2009.

Decided August 12, 2009.

Jan R. Schlichtmann, Beverly, MA, with whom Paul Simmerly, Heman Recor Araki Kaufman Simmerly & Jackson, PLLC, Bellevue, WA, Robert Foote, Mark Bulgarelli, Foote Meyers Mielke & Flowers, LLC, Geneva, IL, Kathleen Chavez, and Chavez Law Firm, PC, Aurora, IL, was on brief for appellants.

Ethan M. Posner, with whom Patrick S. Davies, Jennifer L. Saulino, Washington, DC, Andrew W. Lamb, Covington & Burling LLP, Washington, DC, Susan L. Burke, and Burke O'Neil LLC, was on brief for appellee.

Jamie Ann Yavelberg, with whom Charles W. Scarborough, Douglas N. Letter, Attorneys, Appellate Staff, Civil Division, Gregory G. Katsas, Assistant Attorney General, and Michael J. Sullivan, United States Attorney, was on brief as amicus curiae for the United States.

Cleveland Lawrence III, on brief as amicus curiae of Taxpayers Against Fraud Education Fund in support of appellants.

Before TORRUELLA, Circuit Judge, SILER,^* Senior Circuit Judge, and HOWARD, Circuit Judge.

TORRUELLA, Circuit Judge.

This appeal concerns the qui tam provisions of the False Claims Act (the "FCA"), 31 U.S.C. § 3730, which allow whistleblowers (called "relators") to bring certain fraud claims on behalf of the United States.¹ The relators in this case, the plaintiffs-appellants Mark Duxbury and Dean McClellan (together, the "Relators") alleged that defendant-appellee Ortho Biotech Products, L.P. ("OBP") violated the FCA in unlawfully promoting the sale of its drug Procrit. The district court dismissed all of the Relators' claims, and this appeal followed. After careful consideration, we affirm in part and reverse in part.

I. Background

A. The FCA

To provide context, we start with the statutory scheme. The FCA contains qui tam provisions that "supplement federal law enforcement resources by encouraging private citizens to uncover fraud on the government." Rost, 507 F.3d at 727. The qui tam provisions permit whistleblowers (known as relators) to bring certain fraud claims on behalf of the United States; in return, "[a] private relator is entitled to a portion of any proceeds from the suit, whether the United States intervenes as an active participant in the action or not." Id. at 727.

"The qui tam mechanism has historically been susceptible to abuse, however, by `parasitic' relators who bring FCA damages claims based on information within the public domain or that the relator did not otherwise uncover." Id. Accordingly, Congress has amended the FCA several times "to walk a fine line between encouraging whistle-blowing and discouraging opportunistic behavior." See United States ex rel. S. Prawer v. Fleet Bank of Me., 24 F.3d 320, 324-26 (1st Cir.1994) (quoting United States ex rel. Springfield Terminal Ry. Co. v. Quinn, 14 F.3d 645, 651 (D.C.Cir.1994) (detailing the history of such amendments to the FCA's qui tam provisions)).

As a result of these amendments, the FCA includes jurisdictional bars that limit a district court's subject matter jurisdiction over qui tam actions. Two of these bars are relevant to this action. The first, known as the "public disclosure" bar, provides that a court does not have subject matter jurisdiction over any qui tam action that is "based upon the public disclosure of allegations or transactions" concerning the alleged fraud, unless, among other things, "the person bringing the action is an original source of the information." 31 U.S.C. § 3730(e)(4)(A). A relator qualifies as an "original source" if (1) she has "direct and independent knowledge" of the information supporting her claims and (2) she "provided the information to the Government before filing an action." Id. § 3730(e)(4)(B). The second, known as the "first-to-file" bar, provides that when a potential relator brings an FCA action, "no person other than the Government may intervene or bring a related action based on the facts underlying the pending action." Id. § 3730(b)(5).

B. The Complaints

OBP distributes and promotes Procrit — the brand name for epoetin alfa — a drug approved by the FDA for use to treat anemia resulting from chemotherapy, chronic kidney disease, HIV infection, and blood loss from certain types of surgery. Both Relators were sales representatives for OBP who were responsible for the promotion and sale of Procrit in the Western United States. From 1992 to 1998, OBP employed Relator Duxbury, first as a Product Specialist and later as a Regional Key Account Specialist for OBP's Western Division Oncology sales force. From 1992 to 2004, OBP employed Relator McClellan, also first as a Product Specialist but later as a Territory Manager for OBP's Western Division Oncology sales force.

This appeal turns on a number of complaints filed by the Relators and other parties, which we discuss in some detail below.

On November 6, 2003, Duxbury, but not McClellan, filed a complaint (the "Original Complaint") in the District Court for the District of Massachusetts. The Original Complaint contained allegations concerning OBP's fraudulent reporting of the Average Wholesale Price ("AWP") of Procrit, a benchmark used by the Medicare program for reimbursement purposes. It was filed hot on the heels of a master consolidated complaint (the "MCC") filed in September 2002 in a multi-district litigation concerning the fraudulent reporting of AWP. See generally In re Pharm. Indus. Average Wholesale Price Litig., MDL No. 1456, No. 01-12257-PBS (the "AWP MDL").²

The Original Complaint contained two counts, one alleging "substantive violations" of the FCA and the other a conspiracy count. (Compl. ¶¶ 47-55 (Count I); id. ¶¶ 56-60 (Count II)). In support of the counts, the Original Complaint alleged that OBP published a fraudulently inflated AWP for Procrit, which resulted in the filing of false claims for reimbursement with the Medicare program. (Id. ¶¶ 1, 29). The Original Complaint further alleged that OBP marketed the "spread" — the difference between the higher, fraudulent AWP and the lower, actual cost of Procrit — to induce medical providers to purchase Procrit. (Id. ¶¶ 23, 29). Thus, according to the Original Complaint, the "spread" not only caused the filing of false claims, but constituted an "illegal kickback" to health care providers. (Id. ¶¶ 23, 30).

The Original Complaint also alleged that OBP provided "free samples" of Procrit as well as "non-public financial inducements," such as rebates, discounts, "unrestricted education grants," and "phony drug studies." (Id. ¶¶ 31, 34, 38, 40, 43). OBP allegedly used these inducements "to lower the providers' net cost of purchasing Procrit," and further "inflate[] the AWP," as "the value of these services was kept off the book, so as not [to] be reflected in the AWP." (Id. ¶ 34; see also id. ¶¶ 32-33). The Original Complaint alleged that these inducements also constituted illegal kickbacks. (See id. ¶¶ 3, 45).

With respect to the "phony drug studies," the Original Complaint alleged at Paragraphs 40 through 42 that OBP utilized "Phase IV Marketing Trials" to, among other things, "encourage the physician, clinic, or hospital to use the drug in a way which [wa]s inconsistent with its FDA approved indications and administration methods." (Id. ¶ 40(c)). The Original Complaint referred specifically to a 1997 trial in which OBP allegedly

paid physicians to dose Procrit at 40,000iu in a once per week dose instead of the FDA approved dosage of 10,000iu three times per week dosage in cancer-chemotherapy patients. The trial was very successful and the once per week dosage is now universally accepted among oncologists. The trial's success also resulted in Medicare Part B paying for 40,000iu/week of Procrit in cancer chemotherapy patients instead of 30,000iu/week-an increase in 33% in payments for each Medicare Beneficiary receiving Procrit for treatment of their chemotherapy related anemia.

(Id.) (emphasis in original). The Original Complaint further alleged that "[t]he 40,000iu dosage scheme was successful for Ortho and doctors, but Ortho ha[d] not received FDA approval for such dosage." (Id. ¶ 41) (emphasis in original).

On December 19, 2003, about one month after the filing of the Original Complaint, Kurt Blair, also a former OBP sales representative, filed a qui tam complaint (the "Blair Complaint") against OBP in the District Court for the District of Colorado. The Blair Complaint contained two counts. Count I alleged that, beginning in 1998, OBP promoted "a dosing regimen of 40,000 units once per week" even though it had not received approval from the FDA for such a high dosage. (Blair Compl. ¶¶ 22-27). Blair claimed that OBP promoted this unapproved, "off-label" dosage through a variety of means, such as direct off-label marketing to medical professionals; influencing the results of purportedly independent clinical studies; and rebate programs offered to induce increased prescriptions of Procrit, among other things. (Id. ¶¶ 27, 28-79). Blair alleged that OBP's promotion of this off-label use caused the filing of "false" claims for reimbursement with Medicare and Medicaid, insofar as the providers sought reimbursement for "nonreimburseable" uses. (Id. ¶¶ 88-91). Count II alleged that OBP caused the submission of false claims by, among other things, "paying thousands of kickbacks to Medicaid and Medicare providers, causing the providers to write tens of thousands of prescriptions for Procrit that would otherwise not have been written." (Id. ¶ 93).

As required under the FCA, both the Original Complaint and the Blair Complaint were filed under seal to allow the United States time to review both complaints and decide whether to intervene. 31 U.S.C. § 3730(b)(2).³ On March 23, 2004, the Blair district...