United States ex rel. Schumann v. Astrazeneca Pharm. L.P.

• Decision Date: 20 October 2014
• Docket Number: No. 13–1489.,13–1489.
• Citation: 769 F.3d 837
• Parties: UNITED STATES of America, ex rel. Karl S. SCHUMANN, and on Behalf of the States of California, Delaware, the District of Columbia, Florida, Hawaii, Illinois, Louisiana, Massachusetts, Nevada, Tennessee, Texas and Virginia; Karl S. Schumann v. ASTRAZENECA PHARMACEUTICALS L.P.; Astrazeneca LP; Bristol–Myers Squibb Company; E.I. DuPont De Nemours & Company; DuPont Pharmaceuticals Company Karl S. Schumann, Appellant.
• Court: U.S. Court of Appeals — Third Circuit

769 F.3d 837

UNITED STATES of America, ex rel. Karl S. SCHUMANN, and on Behalf of the States of California, Delaware, the District of Columbia, Florida, Hawaii, Illinois, Louisiana, Massachusetts, Nevada, Tennessee, Texas and Virginia; Karl S. Schumann

v.ASTRAZENECA PHARMACEUTICALS L.P.; Astrazeneca LP; Bristol–Myers Squibb Company; E.I. DuPont De Nemours & Company; DuPont Pharmaceuticals Company Karl S. Schumann, Appellant.

No. 13–1489.

United States Court of Appeals, Third Circuit.

Argued Nov. 6, 2013.

Opinion filed: Oct. 20, 2014.

W. Scott Simmer, Esquire, Paul M. Honigberg, Esquire, (argued), Thomas J. Poulin, Esquire, Blank Rome LLP, Washington, D.C., Stephen M. Orlofsky, Esquire, Nicholas C. Harbist, Esquire, Blank Rome LLP, Princeton, NJ, Counsel for Appellant.

Mark E. Haddad, Esquire, (argued), Collin P. Wedel, Esquire, Sidley Austin LLP, Los Angeles, CA, Michael P. Doss, Esquire, Sidley Austin LLP, Chicago, IL, Counsel for Appellees AstraZeneca LP and AstraZeneca Pharmaceuticals L.P.

Catherine E. Stetson, Esquire, (argued), Jessica L. Ellsworth, Esquire, David M. Ginn, Esquire, Hogan Lovells U.S. LLP, Washington, D.C., Thomas M. Gallagher, Esquire, Pepper Hamilton, Philadelphia, PA, Counsel for Appellees Bristol–Myers Squibb Company, DuPont Pharmaceuticals, Company, and E.I. DuPont De Nemours & Company.

Before: GREENAWAY, JR., VANASKIE and ROTH, Circuit Judges.

OPINION

ROTH, Circuit Judge:

Plaintiff Karl S. Schumann, proceeding as a qui tam relator under the False Claims Act (FCA), 31 U.S.C. § 3729 et seq., and corresponding state laws, appeals the District Court's orders granting motions to dismiss by defendants Bristol–Meyers Squib Company, E.I. du Pont de Nemours and Company, and DuPont Pharmaceuticals Company (together, BMS), and defendants AstraZeneca Pharmaceuticals LP and AstraZeneca LP (together, AZ). Schumann alleges defendants (1) improperly induced Medco Health Solutions, Inc., his employer, to offer certain of defendants' drugs in its mail-order pharmacies and in health plans it managed; (2) did not include those inducements when calculating the best price for their drugs, and thus submitted inaccurate best price reports to the government; (3) overcharged the government based on those inaccurate best prices; and (4) underpaid rebates owed based on those inaccurate best prices.

The District Court found it lacked subject matter jurisdiction over Schumann's claims because he did not have the requisite direct and independent knowledge to satisfy the original source exception to the FCA's public disclosure bar. As a result, the court dismissed Schumann's claims with prejudice. We will affirm.

I. Background

A. FCA Statutory Framework

As we have previously explained in great detail, the FCA makes it unlawful to knowingly submit a fraudulent claim to the government. See, e.g., United States ex rel. Paranich v. Sorgnard, 396 F.3d 326, 331–32 (3d Cir.2005) ; United States ex rel. Dunleavy v. Cnty. of Del., 123 F.3d 734, 738 & n. 6 (3d Cir.1997) ; United States ex rel. Stinson, Lyons, Gerlin & Bustamante, P.A. v. Prudential Ins. Co., 944 F.2d 1149, 1153–54 (3d Cir.1991). “The qui tam provision of the [FCA], permits, in certain circumstances, suits by private parties on behalf of the United States against anyone submitting a false claim to the Government. Prior to 1986, such suits were barred if the information on which they were based was already in the Government's possession.” Hughes Aircraft Co. v. United States ex rel. Schumer, 520 U.S. 939, 941, 117 S.Ct. 1871, 138 L.Ed.2d 135 (1997).

In 1986, Congress amended the FCA to encourage private plaintiffs—relators, in FCA parlance—to bring civil cases if they had information that someone had defrauded the government. See False Claims Amendments Act (FCAA), Pub.L. No. 99–562, 100 Stat. 3153 (codified at 31 U.S.C. § 3729 –33 (1988) ); Graham Cnty. Soil & Water Conservation Dist. v. United States ex rel. Wilson, 559 U.S. 280, 293–95, 298, 130 S.Ct. 1396, 176 L.Ed.2d 225 (2010). But, “to strike a balance between encouraging private persons to root out fraud and stifling parasitic lawsuits,” Graham Cnty., 559 U.S. at 295, 130 S.Ct. 1396, Congress added the public disclosure bar to withdraw jurisdiction over, among other things, suits based on information that had been previously disclosed unless “the person bringing the action is an original source of the information.” FCAA § 3 (codified at 31 U.S.C. § 3730(e)(4)(A) );¹ see also United States ex rel. Atkinson v. PA. Shipbuilding Co., 473 F.3d 506, 518–19 & n. 20 (3d Cir.2007) (describing purpose behind FCAA and public disclosure bar). Congress defined an “original source” as “an individual who has direct and independent knowledge of the information on which the allegations are based and has voluntarily provided the information to the Government before filing an action under this section which is based on the information.” FCAA § 3 (codified at 31 U.S.C. § 3730(e)(4)(B) ).

B. Medicaid and Related Statutory Framework

Under the Medicaid Drug Rebate Program, a participating drug manufacturer agrees to pay rebates to state Medicaid programs in exchange for those programs covering the cost of a manufacturer's drugs. See Omnibus Reconciliation Act of 1990, Pub.L. No. 101–508, § 4401, 104 Stat. 1388 (1990) (codified as amended at 42 U.S.C. § 1396r–8 (2012) ); see also Astra USA, Inc. v. Santa Clara Cnty., ––– U.S. ––––, 131 S.Ct. 1342, 1345–46, 179 L.Ed.2d 457 (2011). The Department of Health and Human Services (HHS) determines the amount of the rebate using a statutory formula based on a manufacturer's average and best prices for a particular drug. See, e.g., 42 U.S.C. § 1396r–8(c). Each manufacturer calculates these prices—which is “a complex enterprise requiring recourse to detailed information about the company's sales and pricing,” Astra, 131 S.Ct. at 1346 (citing 42 U.S.C. § 1396r–8(k) ; 42 C.F.R. §§ 447.500 –520 ) (2010)² —and submits them to HHS each quarter, 42 U.S.C. § 1396r–8(b)(3). HHS may not disclose a manufacturer's reported prices except in certain circumstances. Astra, 131 S.Ct. at 1346 (citing 42 U.S.C. § 1396r–8(b)(3)(D) (2010) ).

Pertinent here, a drug maker participating in Medicaid must also comply with Section 340B of the Public Health Service Act, 42 U.S.C. § 256b(a). That section prohibits a manufacturer from charging certain state-operated programs that receive federal funds more than the average price for its drugs, as defined by the Medicaid Drug Rebate Program, less a specified rebate percentage. See Astra, 131 S.Ct. at 1346. In addition, the federal anti-kickback statute (AKS) prohibits a drug maker from knowingly offering any remuneration to induce others to cause the government to pay for its drugs. Medicare and Medicaid Patient Protection Act, Pub.L. No. 92–603, 86 Stat. 1419, 1454 (codified at 42 U.S.C. § 1320a–7b(b) ) (1972).³

At all relevant times, BMS participated in Medicaid's Drug Rebate Program with regard to its anticoagulant Coumadin, and AZ participated in the program with regard to its proton pump inhibitors (PPIs) Nexium and Prilosec. Both companies also participated in the Section 340B program with those drugs, and sold those drugs to government health care programs. Therefore, the companies were prohibited from, and subject to liability under the FCA for, misreporting their average and best prices for those drugs, over-charging or under-rebating the government based on those prices, and improperly inducing others to cause the government to pay for their drugs.See, e.g., United States ex rel. Wilkins v. United Health Grp., Inc., 659 F.3d 295, 311–13 & n. 19 (3d Cir.2011) (finding FCA claim properly pleaded where plaintiff alleged defendant's claim for payment was false due to a violation of the pre-PPACA AKS); Hutchins v. Wilentz, Goldman & Spitzer, 253 F.3d 176, 182–83 (3d Cir.2001) (noting FCA liability attaches to conduct that causes or would cause government economic loss).

C. Facts and Procedural History

From 1999 to 2003, Schumann was Vice President of Pharmaceutical Contracting for Medco, a large national pharmacy benefit manager (PBM). As a PBM, Medco manages mail-order pharmacies and pharmacy benefits for health plans, including those offered by various federal and state government entities to qualifying employees, and contracts with drug makers, including BMS and AZ, to offer their products in the health plans Medco manages. Health plans retain PBMs such as Medco “to efficiently manage their benefit plans and to achieve cost savings” by “negotiating discounts or rebates from drug manufacturers, providing mail order prescription service to plan members, contracting with retail pharmacies for reimbursement when prescriptions are filled for plan members, and electronic processing and paying of claims.” In re Pharmacy Benefit Mgrs. Antitrust Litig., 582 F.3d 432, 434 (3d Cir.2009). As a result, Medco had the power to determine whether BMS's and AZ's products would be available to patients covered by plans it managed, to negotiate the price at which such products would be available, and to influence the average and best prices for BMS and AZ products.

Schumann filed his initial Complaint under seal in the Eastern District of Pennsylvania on September 26, 2003, on behalf of the federal government, eleven states, and the District of Columbia. Schumann subsequently filed under seal a First Amended Complaint on November 9, 2005, and a Second Amended Complaint on November 22, 2006. On June 15, 2009, after the government declined to intervene, the District Court lifted the seal for all matters occurring on or after that date and accepted Schumann's Third Amended Complaint (TAC) for filing.

BMS moved to dismiss the TAC under Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6), arguing Schumann was not an original source under the FCA and had failed to state a claim upon which relief could be granted. Schumann responded by seeking leave to further amend his complaint to address the...