United States ex rel. Kelly v. Novartis Pharm. Corp.

• Decision Date: 17 June 2016
• Docket Number: No. 15–1470,15–1470
• Citation: 827 F.3d 5
• Parties: United States of America et al., ex. rel., Allison Kelly, Frank Garcia, Plaintiffs, Appellants, v. Novartis Pharmaceuticals Corporation; Novartis Corporation; Genentech, Inc.; and Roche Holdings, Inc., Defendants, Appellees.
• Court: U.S. Court of Appeals — First Circuit

827 F.3d 5

United States of America et al., ex. rel., Allison Kelly, Frank Garcia, Plaintiffs, Appellants

v.Novartis Pharmaceuticals Corporation; Novartis Corporation; Genentech, Inc.; and Roche Holdings, Inc., Defendants, Appellees.

No. 15–1470

United States Court of Appeals, First Circuit.

June 17, 2016

Timothy Cornell, with whom Cornell Dolan, P.C., was on brief, Boston, MA, for appellants.

Elliot R. Peters, with whom Steven A. Hirsch, David J. Silbert, Keker & Van Nest LLP, San Francisco, CA, Matthew J. O'Connor, Ronald G. Dove, Jr., and Covington & Burling LLP, Washington, DC, were on brief, for Genentech, Inc. and Roche Holdings, Inc., appellees.

Michael A. Rogoff, with whom Debra E. Schreck, Kaye Scholer LLP, New York, NY, Tracy A. Miner, and Demeo LLP, Boston, MA, were on brief, for Novartis Pharmaceuticals Corporation and Novartis Corporation, appellees.

Before Kayatta, Stahl, and Barron, Circuit Judges.

STAHL

, Circuit Judge.

Appellants Allison Kelly and Frank Garcia (“Relators”) brought qui tam actions against Appellees Genentech, Inc. and Roche Holdings, Inc. (“Genentech”) and Novartis Pharmaceuticals Corporation and Novartis Corporation (“Novartis”) (collectively, “Defendants”) under the False Claims Act (“FCA”), 31 U.S.C. § 3729 et seq. ,

and related state statutes. Relators allege that Defendants caused physicians and healthcare providers to submit false claims to the government for reimbursement for Xolair, an injected drug used to treat allergies.

Because Relators failed to state their complaints with sufficient particularity and the district court did not abuse its discretion in denying Relators leave to amend, we AFFIRM the district court's decision to dismiss the federal claims with prejudice. After dismissing the federal claims, however, the district court declined to exercise jurisdiction over the state-law claims and then dismissed these claims with prejudice. Because the court erred in dismissing the state-law claims with prejudice, we VACATE this portion of the district court's decision and REMAND with instructions to dismiss Relators' state-law claims without prejudice.

I. Facts & Background¹

Xolair

is a drug approved by the FDA for treating moderate-to-severe persistent allergic asthma in patients twelve and older whose symptoms are not adequately controlled with inhaled corticosteroids. The drug is co-promoted in the United States by Genentech and Novartis.

In 2006, Frank Garcia and Allison Kelly jointly filed a qui tam complaint (the “2006 Garcia Complaint” or “2006 Garcia Action”) alleging that defendants had marketed Xolair unlawfully. Garcia had been a Xolair sales representative for Genentech from 2003 to 2004, and Kelly had been a Xolair sales representative for Novartis from 2003 to 2007. The 2006 Garcia Complaint alleged that Defendants illegally promoted Xolair for off-label uses,² paid kickbacks to doctors,³ encouraged sales representatives to improperly complete and influence the completion of Statement of Medical Necessity (“SMN”) forms,⁴ and targeted Disproportionate Share Hospitals.⁵ Based on these allegations, Relators claimed that Defendants violated the FCA and analogous state statutes by causing false claims for Xolair to be presented to government healthcare programs.

In 2010, another Genentech sales representative, Stephen Fauci, filed a complaint similarly alleging that Genentech and Novartis had promoted off-label uses of Xolair (the “2010 Fauci Complaint” or “2010 Fauci Action”).

After conducting a four-year investigation, the United States, in January 2011, declined to intervene in the 2006 Garcia Action and the 2010 Fauci Action. The vast majority of the States named as plaintiffs followed the United States' lead and declined as well. So too did counsel for Kelly and Garcia, who withdrew. In light of this apparent unraveling, Kelly asked to be dismissed as a relator from the 2006 Garcia Action and asked that her name remain under seal. The court dismissed Kelly from the action and gave Garcia sixty days to file an amended complaint removing all references to Kelly. Garcia requested several extensions of time to file this complaint as he sought new counsel to carry the action forward.

Then, in June 2012, Kelly returned to the court, now represented by the new counsel for Garcia and Fauci, and filed yet another qui tam complaint under seal (the “2012 Kelly Complaint” or “2012 Kelly Action”). In her new complaint, Kelly built upon the allegations contained in the pending 2006 Garcia and 2010 Fauci Complaints, contending that Defendants illegally promoted Xolair for off-label uses; paid kickbacks to physicians; aided and encouraged doctors to falsify SMNs; targeted and marketed to Disproportionate Share Hospitals; encouraged doctors to “upcode”;⁶ and failed to provide the best price for Xolair to healthcare providers. Four months later, Garcia and Fauci moved to consolidate their actions with the new 2012 Kelly Action and moved for leave to file an amended joint complaint (“Joint Complaint” or “Joint Action”). The court did not rule on the motion to consolidate and amend, and the federal government and several States once again declined to intervene.

In 2013, the district court unsealed the 2012 Kelly Complaint, leaving the 2006 Garcia Action and the 2010 Fauci Action under seal. Finally, in January 2014, Kelly served the 2012 Kelly Complaint on Defendants. That same month, the United States filed a motion to partially lift the seal in the 2006 Garcia and 2010 Fauci Actions, pointing out that the 2012 Kelly Complaint “could be subject to dismissal under the False Claims Act's ‘first to file’ rule” because it was “based on the same facts underlying the complaints” in the those actions. The court allowed the motion and unsealed, among other documents, the 2006 Garcia Complaint and the 2010 Fauci Complaint.

Relators then attempted to re-file their pending motion to consolidate and amend. In response, the court gave Defendants two weeks to respond to the proposed Joint Complaint. Defendants opposed the Joint Complaint on grounds of futility, undue delay, and prejudice. Genentech and Novartis argued that the 2010 Fauci and 2012 Kelly Actions fell under the first-to-file bar and noted that the cases had been pending for several years before the Joint Complaint had been filed. The next day, on April 18, 2014, the court entered a short order denying Relators' motion to consolidate and amend.

A few months later, Defendants filed a motion to dismiss the 2006 Garcia Complaint and the 2012 Kelly Complaint.⁷ On March 17, 2015, the court granted Defendants' motion, dismissed the federal claims with prejudice, and issued judgment for Defendants. The court held that the 2006 Garcia and 2012 Kelly Complaints failed to plead fraud with particularity, as required by Federal Rule of Civil Procedure 9(b)

, and that amendment would be futile. The court also dismissed Relators' pendent state-law claims with prejudice. Relators now appeal.

II. Analysis

Relators raise three issues on appeal. First, they contend that the district court abused its discretion when it denied their 2014 motion to amend and consolidate by failing to declare its reasoning on the record at the time of the denial. Second, Relators argue that the district court erred in dismissing their federal claims with prejudice. Finally, Relators argue that the court erred in dismissing their state-law claims with prejudice.

A. Motion to Amend

Relators claim the district court erred in its April 18, 2014 order because it denied their first motion to amend and consolidate without explaining its reasoning on the record. We review the denial of a motion to amend for abuse of discretion. United States ex rel. Poteet v. Bahler Med., Inc. , 619 F.3d 104, 116 (1st Cir. 2010)

. Here, no such abuse can be found.

Although the court could, and perhaps should, have foreclosed this basis for appeal through a short recitation of its reasoning, this omission alone is not a basis for reversal. As the Supreme Court held in Foman v. Davis :

In the absence of any apparent or declared reason —such as undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, futility of amendment, etc.—the leave sought should, as the rules require, be ‘freely given.’ Of course, the grant or denial of an opportunity to amend is within the discretion of the District Court, but outright refusal to grant the leave without any justifying reason appearing for the denial is not an exercise of discretion; it is merely abuse of that discretion....

371 U.S. 178, 182, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962)

(emphasis added). The court's basis for decision need not be declared if its reasons are apparent from the record. United States ex rel. Wilson v. Bristol–Myers Squibb, Inc. , 750 F.3d 111, 119 (1st Cir. 2014) (“We ‘defer to the district court's hands-on judgment so long as the record evinces an adequate reason for the denial.’ ” (quoting Aponte–Torres v. Univ. of P.R. , 445 F.3d 50, 58 (1st Cir. 2006) )); ACA Fin. Guar. Corp. v. Advest, Inc. , 512 F.3d 46, 55 (1st Cir. 2008) (noting that “the district court enjoys significant latitude in deciding whether to grant leave to amend” and that we will “defer to the district court's decision ‘if any adequate reason for the denial is apparent on the record’ ” (quoting LaRocca v. Borden, Inc. , 276 F.3d 22, 32 n.9 (1st Cir. 2002) )).

Here, the court's decision immediately followed Defendants' opposition memorandum, which set out adequate bases for denial: undue delay and futility. As Defendants pointed out in that memorandum, Relators “offer[ed] no valid reason” for “withholding for at least five years the 'additional details' they s[ought] to include in their amended complaint.” See Nikitine v. Wilmington Tr. Co. , 715 F.3d 388, 390–91 (1st Cir. 2013)

(“[W]hen ‘a considerable period of time...