U.S. ex rel. Zissler v. Regents of the U. of Minn., 3-95-168/RHK/FLN.

CourtUnited States District Courts. 8th Circuit. United States District Court of Minnesota
Citation992 F.Supp. 1097
Docket NumberNo. 3-95-168/RHK/FLN.,3-95-168/RHK/FLN.
PartiesUNITED STATES of America ex rel. James ZISSLER, Plaintiffs, v. REGENTS OF THE UNIVERSITY OF MINNESOTA, Defendant.
Decision Date08 January 1998

Page 1097

992 F.Supp. 1097
UNITED STATES of America ex rel. James ZISSLER, Plaintiffs,
No. 3-95-168/RHK/FLN.
United States District Court, D. Minnesota, Third Division.
January 8, 1998.

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Marie-Therese Connolly, Carol Bennett, Helen Gaebler, and Mina Rhee, United States Department of Justice, Washington, DC, for plaintiffs.

Janice Symchych, Perry Wilson, William Dossett, & Julie Meany, Dorsey & Whitney, Minneapolis, MN, for defendant.


KYLE, District Judge.


In February 1995, Plaintiff James Zissler ("Zissler") filed suit against the Defendant the Regents of the University of Minnesota ("the University"), on behalf of the United States as a qui tam relator under the False Claims Act ("FCA"), 31 U.S.C. § 3731. In December 1996, Plaintiff the United States of America ("the government") intervened in the action. The government then filed suit against the University, alleging claims for violation of the FCA; unjust enrichment; payment by mistake; disgorgement of profits; and breach of fiduciary duties. The government's claims were on allegations that the University fraudulently submitted grant applications to the National Institute of Health ("NIH"); improperly sold unlicenced biological drugs resulting in illegal profits to the University; made fraudulent submissions for unlicenced and unreimbursable drugs to Medicare; and received illegal kickbacks related to home infusion services. On July 23, 1997, this Court granted the University's Motion to Dismiss the claims brought against it under the False Claims Act. Currently before the Court are the University's Motion for Partial Summary Judgment, based largely upon the statute of limitations, and its Motion to Dismiss the government's equitable claims. For the reasons set forth below, the Court will grant the Motion in part and deny it in part.


A. Nature of the Government's Allegations Against the University1

1. Misuse of Federal Grant Money

Between 1969 and 1993, the University received approximately $19 million in NIH grant funds for a research project entitled "Studies of Organ Transplantation in Animals and Man" ("Transplant Grant"). (Compl. of United States ¶¶ 41-42.) A central component of the Transplant Grant was the study, development, and production of Antilymphocyte Globulin ("ALG"), a drug used to reduce organ transplant rejection reactions after surgery. (Id. ¶ 41.) The University made false statements to the NIH in connection with the Transplant Grant by representing that it earned no grant-related income, when, in fact, it earned over $80 million in program income from the sale of ALG. (Id. ¶¶ 44-45.) The University also falsely inflated salary, equipment, and other grant-related costs charged to the NIH and other federal agencies in connection with the "Program for Surgical Control of Hyperlipidemias" ("POSCH") Grant and twentyeight

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other federal grants. (See id. ¶¶ 76-85, 100-104.)

2. Illegal Profits

In January of 1971, the Food and Drug Administration ("FDA") designated ALG as an investigational new drug ("IND"). (Compl. of United States ¶ 11.) Even though it is illegal to sell investigational drugs for a profit, the University sold twenty different ALG products to approximately 280 different purchasers throughout the world and made $80 million on the sales. (Id. ¶¶ 45, 53-63.) The University concealed the illegal profits it earned from ALG sales from the federal government. (Id.)

3. Medicare Reimbursement

The University submitted false claims to the Medicare Program for payment relating to ALG, Procuren, and Perfusate. (Compl. of United States ¶ 86.) The University was not entitled to reimbursement for the expenses related to these drugs because the FDA had not approved them. (Id.) The government paid the University approximately $1.1 million for these improper Medicare claims. (Id. ¶ 87.)

B. The Government's Knowledge of the University's Misconduct

1. Knowledge of ALG Sales

a. The FDA

After a 1984 inspection, the FDA learned that the University was selling ALG, and it asked University officials at the ALG program to explain why such sales should not be considered the improper commercialization of an IND. (Wilson Aff. Ex. B (Schafer report).) In 1987, after the University repeatedly failed to respond to this demand, the FDA ordered an investigation into the University's interstate shipment and sales of ALG. (Id.) Wayne Schafer ("Schafer"), an investigator for the FDA at its Minnesota branch office, conducted this investigation.

In his October 1987 report, Schafer indicated that the University had been selling ALG and that production of ALG had increased, "as well as the charges for the product, to the point where the `program' is a large manufacturing operation with about 40 employees." (Wilson Aff. Ex. B at 1, 4-5, 7.) In 1986, the University shipped 29,001.87 grams of ALG at a cost of $215/gram, and in 1987, it shipped 23,532 grams, at a cost of $215/gram, for a combined total revenue of approximately $11,500,000. (Id. at 7; Wilson's 2nd Aff.Ex. A (Ex. C-1 to Schafer's report).) In addition, Schafer reported that the University was about to solicit bids for a new $8.5 million facility for the production of ALG. (Wilson's 2nd Aff.Ex A at 1.)

Officials at the ALG program told Schafer that "they do not make a profit on the products and at times have had considerable deficits. The products are reportedly being sold on a cost recovery basis." (Wilson Aff.Ex. B at 7.)

Schafer wrote an unusually long and detailed report so whoever reviewed it would have a good background on the ALG program and all that had transpired between it and the FDA. (Wilson Aff.Ex. at 46 (Schafer testimony).) Schafer "felt there were very serious problems [with the ALG program], and [he] wanted whoever the reviewer was to be very aware of the fact that I felt that there were problems." (Id.)

Schafer passed his report on to Michael Dubinsky ("Dubinsky"), the Director of Regulations and Bioresearch Monitoring, Office of Compliance, Center for Biologics Evaluation and Research of the FDA. (Dubinsky Aff. ¶ 1.) Dubinsky reviewed this report in late 1987 or January 1988. (Wilson Aff.Ex. C at 3 (Dubinsky test.).) After reviewing the report, Dubinsky felt that there "were some findings that were very troubling and indicated that there were some serious violations of the law that may have occurred...." (Id.)

The University repeatedly told the government that it was not earning any profits from the sale of ALG, when in fact it was earning large profits. In 1984, after receiving a report that ALG vials were leaking, Schafer met with James Coggins, Surgery Budget Office Administrator, who told Schafer that the University was shipping ALG drug products on a cost basis and that the Department of Surgery was not earning any profit on the sales. (Pl.'s Ex. 10 at 4 (1984 FDA Establishment

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Inspection Report).) In 1988, after the FDA had placed a charging hold on ALG which prohibited its sale for any amount, James Condie, ALG Program Director, falsely told the FDA that the University was not shipping ALG interstate for sale. (Id. at 21.) In 1989, FDA and University officials met to discuss the charging hold. At this meeting, Dr. John Najarian, the head of the Department of Surgery, told the FDA that all revenues that the ALG Program had collected over the years had been directed back into supporting the ALG Program and that all revenue had been spent. (Id. Ex. 17 at 12 (Dubinsky Test.) & Ex. 22 (Jan. 27, 1989 FDA meeting record from ALG Program).) At this time, the balance in the ALG Program's temporary investment pool ("TIP") was $17 million. (Id. Ex. 1 at 9 (University of Minnesota President's Public Investigative Report on MALG Program).) Finally, during a 1992 review of adverse reactions to ALG in patients, University officials told FDA inspectors that it had received no profits from the sale of ALG. (Id. at Ex. 27 at 17.)

In October and November 1992, the University disclosed documents to the FDA which showed that the University was profiting from the sale of ALG. (Holobaugh Decl. ¶¶ 4-6; Pl.'s Ex. 28 at 5-7, 14-15.) FDA inspectors had not seen these documents previously, even though many of them were dated before previous inspections had been conducted. (Holobaugh Decl. ¶¶ 5-6.)

b. The NIH

In 1977, the NIH issued a report on the ALG Transplant Grant, indicating that the University was engaged in large-scale production of ALG and that several hundred patients were involved in studies of ALG at several hospitals. (Wilson Aff.Ex. M at QTX022321-22, 26 (1977 NIH report).) The report noted that "the material will be provided free to participating centers and the University of Minnesota will attempt to work out some means of recovering costs." (Id. at QTX022327.)

The NIH was aware of the costs of producing ALG. The renewal application for the Transplant Grant, dated September 30, 1986, indicated that "the costs of OKT3 ($330/dosage) is approximately the same as MALG ($270/dosage)." (Wilson 2nd Aff.Ex. C at QTX011648.)

In its annual grant applications and renewals to the NIH, the University never reported that it had earned any money from its sales of ALG. "Between 1987 and 1992... the MALG Program received gross revenues of approximately $29 million from the sales of [ALG].... It does not appear that any of this MALG Program income was reported to the NIH." (Pl.'s Ex. 1 at 27 (Pres.' Public Investigative Report on MALG Program).) In addition, the University falsely certified that it had no program income for each year that it received the Transplant Grant.2 (Id. at 5 (Reports and Expenditures and Financial Status Reports for the Transplant Grant from 1968 through 1995).) In October 1993, the University disclosed to NIH...

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