In the Supreme Court of the United StatesIn the Supreme Court of the United StatesIn the Supreme Court of the United StatesIn the Supreme Court of the United StatesIn the Supreme Court of the United States

UNITED STATES et al., ex rel. BARRY ROSTHOLDER,Petitioner,

v.

OMNICARE, INC. AND OMNICARE DISTRIBUTIONCENTER, LLC,

Respondents.

On Petition for Writ of Certiorari to theUnited States Court of Appeals for the Fourth Circuit

PETITION FOR WRIT OF CERTIORARI

GERALD C. ROBINSON, ESQ. Counsel of RecordGERALD ROBINSON LAW FIRM PLLC5600 W. 70th St., Suite 200Minneapolis, MN 55439(612) 803-5981gerald.robinson@gcrobinsonlaw.com

Counsel for Petitioner

Becker Gallagher · Cincinnati, OH · Washington, D.C. · 800.890.5001

NO.

i

QUESTIONS PRESENTED

This case arose from the submission of claims toMedicaid and Medicare Part D for drugs that, pursuantto the Federal Food, Drug, and Cosmetic Act(“FD&CA”) and its implementing regulations, werelegally presumed to be cross-contaminated withpenicillin and, because penicillin is deadly to apercentage of the population, were thereforeautomatically barred from interstate commerce asadulterated and misbranded drugs. Medicaid andMedicare Part D statutes limit payment for outpatientdrugs to only those which are “approved for safety andeffectiveness as a prescription drug under [21 U.S.C. §355] of the … (“FD&CA”).” Petitioner alleged that theclaims for those drugs were ineligible for paymentunder Medicaid and Medicare Part D, and thereforeconstituted “false or fraudulent” claims under the FalseClaims Act (“FCA”), 31 U.S.C. § 3729 et seq. TheFourth Circuit affirmed dismissal for failure to state aclaim under Rule 12(b)(6). Against this statutorybackdrop, this case presents the following questions:

1. Whether, as the First and D.C. circuits expresslyheld, and other circuits are in accord, FCA actions maybe predicated on statutory or regulatory violationswithout requiring an express statement by thegovernment that compliance with the statute orregulation is a condition of payment; or whether, as theFourth Circuit held here, an FCA action may bepredicated on statutory or regulatory violations only ifthe government expressly stated that payment isconditioned upon compliance with the relevant statutesor regulations.

ii

1a. Whether the term “FDA-approved,” as usedin Medicaid and Medicare Part D’s statutorydefinition of “covered outpatient drugs,”means that the drug product reaching thebeneficiary is in its FDA-approved form; orwhether, as the Fourth Circuit held, it onlymeans that the drug manufacturer hasobtained pre-market approval for the drug’sformulation.

2. Whether, as other circuit courts have held, anineligible claim is “false or fraudulent” under the FCA;or whether, as the Fourth Circuit held here (andapparently interpreting its judicially imposedmateriality element), an ineligible claim is onlyactionable under the FCA as “false or fraudulent” if itis accompanied by a false statement or fraudulentcourse of conduct directed at the federal government.

3. Whether, according to the principles espoused bythis Court and the Eighth Circuit, the FCA is not pre-empted by other legislative schemes such as theFD&CA; or whether, as the Fourth Circuit held here,an FCA action predicated on adulterated andmisbranded drugs is pre-empted by the FD&CA’sregulatory enforcement mechanisms.

iii

PARTIES TO THE PROCEEDING BELOW

Petitioner Barry Rostholder was plaintiff/relator1 inthe district court, and appellant in the court of appeals.

Respondents Omnicare, Inc. and OmnicareDistribution Center, LLC were defendants in thedistrict court, and Appellees in the court of appeals.

1 “Relator” is the term used for the plaintiff in a qui tam actionunder the FCA. “Qui tam” is short for “qui tam pro domino regequam pro se ipso in hac parte sequitur” which translates to “whopursues this action on our Lord the King’s behalf as well as hisown.” Vt. Agency of Natural Res. v. U.S. ex rel. Stevens, 529 U.S.765, 768 n.1 (2000).

iv

TABLE OF CONTENTS

QUESTIONS PRESENTED . . . . . . . . . . . . . . . . . . . i

PARTIES TO THE PROCEEDING BELOW . . . . . iii

TABLE OF AUTHORITIES . . . . . . . . . . . . . . . . . . vi

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

OPINIONS BELOW . . . . . . . . . . . . . . . . . . . . . . . . . 2

JURISDICTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

STATUTES AND REGULATIONS INVOLVED . . . 2

STATEMENT OF THE CASE . . . . . . . . . . . . . . . . . 9

I. Factual and Procedural History . . . . . . . . . . 9

Background Facts . . . . . . . . . . . . . . . . . . . . . . 9

Commencement of this FCA Action . . . . . . . 12

The District Court Opinion . . . . . . . . . . . . . 13

The Circuit Court Opinion . . . . . . . . . . . . . . 16

REASONS FOR GRANTING THE PETITION . . . 19

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

The FCA Generally . . . . . . . . . . . . . . . . . . . . 20

Question 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Background on the “Express Condition ofPayment” Construct . . . . . . . . . . . . . . . . 23

v

The D.C. and First Circuit’s Rejection ofan “Express Condition of Payment”Construct . . . . . . . . . . . . . . . . . . . . . . . . . 26

The Fourth Circuit’s Approach . . . . . . . . 28

Question 1a . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Question 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Question 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

This Case is an Appropriate Vehicle to Resolvethe Questions Presented . . . . . . . . . . . . . . . . . . 37

Suitable Companion to Case No. 13-435 . . . . . . 38

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

APPENDIX

Appendix A Opinion and Judgment in the UnitedStates Court of Appeals for the FourthCircuit(February 21, 2014) . . . . . . . . . . . App. 1

Appendix B Memorandum and Order in theUnited States District Court for theDistrict of Maryland(August 14, 2012) . . . . . . . . . . . . App. 21

Appendix C Order in the the United StatesDistrict Court for the District of Maryland(October 19, 2012) . . . . . . . . . . . App. 62

vi

TABLE OF AUTHORITIES

CASES

Ab-Tech Constr., Inc. v. U.S., 31 Fed. Cl. 429 (1994) . . . . . . . . . . . . . . . . . . . . 24

Cawley v. U.S., 272 F.2d 443 (2d Cir. 1959) . . . . . . . . . . . . . . . . 33

Connecticut Nat’l Bank v. Germain, 503 U.S. 249 (1992) . . . . . . . . . . . . . . . . . . . . . . 36

Fed. Crop Ins. Corp. v. Merrill, 332 U.S. 380 (1947) . . . . . . . . . . . . . . . . . . . . . . 35

Indiana State Dist. Council of Laborers and HODCarriers Pension and Welfare Fund v. Omnicare,Inc., 583 F.3d 935 (6th Cir. 2009) . . . . . . . . . . . . . . . 39

Indiana State Dist. Council of Laborers and HODCarriers Pension and Welfare Fund v. Omnicare,Inc., 719 F.3d 498 (6th Cir. 2013) . . . . . . . . . . . . . . . 39

In re Average Wholesale Price Litig., 478 F. Supp. 2d 164 (D. Mass. 2007) . . . . . . . . . 22

In re Univ. Med. Cntr., 973 F.2d 1065 (3d Cir. 1992) . . . . . . . . . . . . . . . 31

Kaiser Steel Corp. v. Mullins, 455 U.S. 72 (1982) . . . . . . . . . . . . . . . . . . . . . . . 30

Marcus v. Hess, 317 U.S. 537 (1943) . . . . . . . . . . . . . . . . . . . 22, 29

New York v. Amgen, Inc., 652 F.3d 103 (1st Cir. 2011) . . . . . . . . . . . . . . . 27

vii

Omnicare, Inc. v. The Laborers District CouncilConstruction Industry Pension Fund and TheCement Masons Local 526 Combined Funds, Case No. 13-435 . . . . . . . . . . . . . . . . . . . . . . . 9, 38

Radzanower v. Touche Ross Co., 426 U.S. 148 (1976) . . . . . . . . . . . . . . . . . . . . . . 37

Rock Island, Ark. & La. R.R. v. U.S., 254 U.S. 141 (1920) . . . . . . . . . . . . . . . . . . . . . . 35

Rockwell Int’l Corp. v. U.S., 549 U.S. 457 (2007) . . . . . . . . . . . . . . . . . . . . . . 29

U.S. ex rel. A+ Homecare, Inc. v. Medshares Mgmt.Grp., Inc., 400 F.3d 428 (6th Cir. 2005) . . . . . . . . . . . . . . . 35

U.S. ex rel. Berge v. Bd. Of Tr. of Univ. of Ala., 104 F.3d 1453 (4th Cir. 1997) . . . . . . . . . . . . . . 34

U.S. ex rel. Colquitt v. Abbott Labs, 864 F. Supp. 2d 499 (N.D. Tex. 2012) . . . . . . . . 22

U.S. ex rel. Connor v. Salina Reg’l Health Ctr., Inc.,453 F.3d 1211 (10th Cir. 2008) . . . . . . . . . . . . . 21

U.S. ex rel. DeCesare v. Americare In HomeNursing, 757 F. Supp. 2d 573 (E.D. Va. 2010) . . . . . . 14, 16

U.S. ex rel. Fallon v. Accudyne Corp., 880 F. Supp. 636 (W.D.Wis.1995) . . . . . . . . . . . 24

U.S. ex rel. Franklin v. Parke-Davis, 147 F. Supp. 2d 39 (D. Mass. 2001) . . . . . . . . . . 22

viii

U.S. ex rel. Harrison v. Westinghouse SavannahRiver Co., 176 F.3d 776 (4th Cir. 1999) . . . . . . 15, 24, 28, 34

U.S. ex rel. Hendow v. Univ. of Phoenix, 461 F.3d 1166 (9th Cir. 2006) . . . . . . . . . . . . . . 22

U.S. ex rel. Holder v. Special Services, Inc., 296 F. Supp. 2d 1167 (C.D. Cal. 2003) . . . . . . . 21

U.S. ex rel. Hutcheson v. Blackstone Medical Inc., 647 F.3d 377 (1st Cir), cert. denied 132 S. Ct.815 (2011) . . . . . . . . . . . . . . . . . . . . . . . . 27, 28, 35

U.S. ex rel. Lemmon v. Envirocare of Utah, Inc., 614 F.3d 1163 (10th Cir. 2010) . . . . . . . . . . . . . 26

U.S. ex rel. Mikes v. Straus, 274 F.3d 687 (2d Cir. 2001) . . . . . . . . . . 25, 26, 38

U.S. ex rel. Nathan v. Takeda PharmaceuticalsNorth America, Inc., 707 F.3d 451 (4th Cir. Jan. 11, 2013), cert.denied 134 S.Ct. 1759 (Mar. 31, 2014) . 16, 17, 38

U.S. ex rel. Newsham v. Lockheed Missiles & SpaceCo., Inc., 722 F. Supp. 607 (N.D. Cal. 1989) . . . . . . . . . . . 20

U.S. ex rel. Onnen v. Sioux Falls Indep. Sch. Dist.No. 49-5, 688 F.3d 410 (8th Cir. 2012) . . . . . . . . . . . . . . . 36

U.S. ex rel. Pogue v. American Healthcorp., Inc., 914 F. Supp. 1507 (M.D.Tenn.1996) . . . . . . . . . 25

U.S. ex rel. Thompson v. Columbia/HCAHealthcare Corp., 125 F.3d 899 (5th Cir. 1997) . . . . . . . . . . . . . . . 24

ix

U.S. Nursing Corp v. St. Joseph’s Medical Ctr., 39 F.3d 790 (7th Cir. 2004) . . . . . . . . . . . . . . . . 30

U.S. v. An Article of Drug Labeled WhiteQuadrisect, 484 F.2d 748 (7th Cir. 1973) . . . . . . . . . . . . . 6, 32

U.S. v. Article of Drug . . . Bacto-Unidisk, 394 U.S. 784 (1969) . . . . . . . . . . . . . . . . 30, 33, 34

U.S. v. Bhutani, 266 F.3d 661 (7th Cir. 2001) . . . . . . . . . . . . . . . 31

U.S. v. Bornstein, 423 U.S. 303 (1976) . . . . . . . . . . . . . . . . . . . 23, 34

U.S. v. General Dynamics Corp., 19 F.3d 770 (2d Cir. 1994) . . . . . . . . . . . . . . . . . 36

U.S. v. Incorporated Village of Island Park, 888 F. Supp. 419 (E.D.N.Y.1995) . . . . . . . . . . . 24

U.S. v. Kellogg, Brown & Root Servs. (KBR), 800 F. Supp. 2d 143 (D.D.C. 2011) . . . . . . . . . . 27

U.S. v. Marcus, 82 F.3d 606 (4th Cir. 1996) . . . . . . . . . . . . . . . . 31

U.S. v. McLeod, 721 F.2d 282 (9th Cir. 1983) . . . . . . . . . . . . . . . 23

U.S. v. Neifert-White Co., 390 U.S. 228 (1968) . . . . . . . . . . . . 22, 23, 28, 34

U.S. v. Rachel, 289 F. Supp. 2d 688 (D. Md. 2003) . . . . . . . . . . 21

U.S. v. Sci. Applications Int’l Corp. (“SAIC”), 626 F.3d 1257 (D.C. Cir. 2010) . . . . . . . . . . 26, 27

x

U.S. v. Scolnick, 331 F.2d 598 (1st Cir. 1964) . . . . . . . . . . . . . . . 23

Vermont Agency of Natural Resources v. U.S. ex rel.Stevens, 529 U.S. 765 (2000) . . . . . . . . . . . . . . . . . . . . . . 36

Vt. Agency of Natural Res. v. U.S. ex rel. Stevens, 529 U.S. 765 (2000) . . . . . . . . . . . . . . . . . . . . . . iii

Wyeth v. Levine, 555 U.S. 555 (2009) . . . . . . . . . . . . . . . . . . . . . . 36

STATUTES

21 U.S.C. § 211.176 . . . . . . . . . . . . . . . . . . . . . . . . . 12

21 U.S.C. § 331 . . . . . . . . . . . . . . . . . . . . . . . . 5, 8, 11

21 U.S.C. § 351 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

21 U.S.C. § 351(a)(2)(B) . . . . . . . . . . . . . . . . . . . . . . 8

21 U.S.C. § 352 . . . . . . . . . . . . . . . . . . . . . . . . . . 5, 10

21 U.S.C. § 352(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

21 U.S.C. § 355 . . . . . . . . . . . . . . . . . . . i, 4, 5, 10, 32

21 U.S.C. § 355(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

21 U.S.C. § 355(b) . . . . . . . . . . . . . . . . . . . . . . . . . 5, 7

21 U.S.C. § 355(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

21 U.S.C. § 355(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

28 U.S.C. § 1254(l) . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

28 U.S.C. § 1331 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

31 U.S.C. § 3729 . . . . . . . . . . . . . . . . . . . . . . . i, 2, 20

xi

31 U.S.C. § 3729(a)(1) . . . . . . . . . . . . . . . . . . . passim

31 U.S.C. § 3729(a)(2) . . . . . . . . . . . . . . . . . . . . . . . 23

31 U.S.C. § 3729(b) . . . . . . . . . . . . . . . . . . . . . . . 3, 21

31 U.S.C. § 3729(b)(2) . . . . . . . . . . . . . . . . . . . . . . . . 4

31 U.S.C. § 3729(c) . . . . . . . . . . . . . . . . . . . . . . . . . . 4

31 U.S.C. § 3730(e)(4) . . . . . . . . . . . . . . . . . . . . . . . 16

31 U.S.C. § 3732 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

42 U.S.C. § 1395w-102(e) . . . . . . . . . . . . . . . . . . . . . 5

42 U.S.C. § 1396r-8(k)(2)(A)(i) . . . . . . . . . . . . . . . . . 4

21 C.F.R. 207.3(a)(8) . . . . . . . . . . . . . . . . . . . 6, 10, 33

21 C.F.R. § 210.1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

21 C.F.R. § 211.176 . . . . . . . . . . . . . . . . . 7, 11, 12, 13

21 C.F.R. § 211.42(c) . . . . . . . . . . . . . . . . . . . . . . . . 11

21 C.F.R. § 211.42(d) . . . . . . . . . . . . . . . . . . . . . . 7, 11

21 C.F.R. §211.46(d) . . . . . . . . . . . . . . . . . . . . . . 7, 11

Fraud Enforcement and Recovery Act of 2009(FERA), Pub. L. No. 111-21, 123 Stat. 1617 (May20, 2009) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 4

Section 11 of the Securities Act of 1933, 15 U.S.C. §77k . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38, 39

RULES

Fed. R. Civ. P. 9(b) . . . . . . . . . . . . . . . . 14, 16, 17, 37

Fed. R. Civ. P. 12(b)(6) . . . . . . . . . . . . . . . . . . passim

xii

Fed. R. Civ. P. 59(e) . . . . . . . . . . . . . . . . . . . . . . . . . 16

OTHER AUTHORITIES

The Department of Health and Human Servicesand The Department of Justice Health CareFraud and Abuse Control Program AnnualReport for Fiscal Year 2013, at pp. 73-75 (Feb.2 0 1 4 ) ( a v a i l a b l e a thttp://oig.hhs.gov/publications/docs/hcfacFY2013-hcfac.pdf, last accessed May 11, 2014) . 19, 20

1 F. SHANNON, THE ORGANIZATION ANDADMINISTRATION OF THE UNION ARMY, 1861-186558 (1965) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Restatement (Second) of Contracts § 181 . . . . . . . . 29

S. REP. NO. 99-345 (1986), reprinted in 1986U.S.C.C.A.N. 5266 . . . . . . . . . . . . . . . . . . . . 20, 21

Tomes, Fortunes of War, 29 HARPER’S MONTHLYMAG. 228 (1864) . . . . . . . . . . . . . . . . . . . . . . . . . 20

1

INTRODUCTION

Petitioner seeks this Court’s resolution of a starkcircuit court split over the proper pleading standard fora False Claims Act (“FCA”) action predicated onviolation of statutory or regulatory provisions bearingon the essential element of the quality of goodsbargained and paid for by the government.

The Fourth Circuit held that claims for payment ofsuch goods are actionably false only if the governmentexpressly stated that compliance with the particularstatute or regulation is a condition of payment. Othercircuit courts have squarely rejected such an expresscondition of payment requirement as contrary to theFCA’s text and, ultimately, its purpose.

Especially when applied to statutes and regulationsthat bear directly on the traditional essential elementof quality, such an express condition of paymentapproach “creates a counter-intuitive gap” precisely asto the type of misconduct that prompted passage of theFCA 150 years ago – substandard goods. As such, it isalso contrary to this Court’s precedent admonishingthat the FCA be construed broadly and without rigidconstructs, so as to reach all types of deceit that mightaffect the federal fisc.

The Fourth Circuit’s supporting rationales areequally flawed, as they contradict this Court’sinterpretation of the FCA and other legal principles,and create additional conflicts with other circuits.

If the Fourth Circuit’s holdings are allowed tostand, drug manufacturers and repackagers couldintentionally lace drugs with rat poison and killthousands of Medicaid and Medicare Part D

2

beneficiaries, yet those programs would still have topay for the drugs. Such a holding undermines both theFD&CA and the FCA, and is contrary to the precedentsof this Court and other circuits.

OPINIONS BELOW

The opinion of the Fourth Circuit, Case No. 12-2431,affirming Respondents’ motion to dismiss, is reportedat 745 F.3d 694 (4th Cir. Feb. 21, 2014). Pet. App. 1. The opinion of the District of Maryland, Case No. 1:07-cv-01283-CCB, granting Respondents’ motion todismiss, is not reported, but is available on Westlaw as2012 WL 3399789 (D. Md. Aug. 14, 2012). Pet. App. 21.

JURISDICTION

The district court’s jurisdiction was invoked under28 U.S.C. § 1331 because the action arose under thelaws of the United States, in particular the FalseClaims Act (“FCA”), 31 U.S.C. § 3729 et seq. Moreover,the FCA itself confers jurisdiction on the district court.31 U.S.C. § 3732.

The court of appeals entered judgment on February21, 2014. This Court’s jurisdiction is invoked under 28U.S.C. § 1254(l).

STATUTES AND REGULATIONS INVOLVED

1) Relevant portions of the False Claims Act, 31 U.S.C.§ 3729 et seq., are as follows:

3

a) 31 U.S.C. § 3729(a)(1)2 which, at the time thecase was commenced, imposed liability againstanyone who:

knowingly presents, or causes to bepresented, to an officer or employee of theUnited States Government or a member ofthe Armed Forces of the United States a falseor fraudulent claim for payment or approval.

Petitioner pled primarily under this provision, onthe premise that claims presented for nonconforminggoods are “false or fraudulent.”

b) 31 U.S.C. § 3729(b)3 defined the terms “knowing”and “knowingly” to

mean that a person, with respect toinformation – 1) has actual knowledge of theinformation; 2) acts in deliberate ignorance ofthe truth or falsity of the information; or 3)acts in reckless disregard of the truth orfalsity of the information, and no proof ofspecific intent to defraud is required.

2 In 2009 this section was renumbered (a)(1)(A), and amended.Fraud Enforcement and Recovery Act of 2009 (FERA), Pub. L. No.111-21, 123 Stat. 1617 (May 20, 2009). Petitioner does not assertthat the amendments apply here.

3 In 2009 this section was amended to alter the formatting and tomake clear that the closing phrase “no proof of specific intent todefraud is required” applied to all subparts of the definition. Pub.L. No. 111-21. Otherwise, the substance of the definition was notchanged.

4

c) 31 U.S.C. § 3729(c)4 defined the term “claim” asfollows:

(c) CLAIM DEFINED. For purposes of thissection, “claim” includes – any request ordemand, whether under a contract orotherwise, for money or property which ismade to a contractor, grantee, or otherrecipient if the United States Governmentprovides any portion of the money orproperty requested or demanded, or if theGovernment will reimburse such contractor,grantee, or other recipient for any portion ofthe money or property which is requested ordemanded.

2) The Medicaid statute defining “covered outpatientdrug” states:

… a drug which may be dispensed only uponprescription …, and – (i) which is approved forsafety and effectiveness as a prescription drugunder section 505 . . . of the Federal Food, Drug,and Cosmetic Act [21 U.S.C. § 355].

42 U.S.C. § 1396r-8(k)(2)(A)(i).

3) The Medicare Part D statute adopting Medicaid’sdefinition of “covered outpatient drug” states:

… the term “covered part D drug” means – (A) adrug that may be dispensed only upon aprescription and that is described in

4 In 2009 this provision was renumbered as 3729(b)(2), andamended to add language. Pub. L. No. 111-21. Petitioner does notcontend that those amendments apply here.

5

subparagraph (A)(i), (A)(ii), or (A)(iii) of section1396r-8(k)(2) of this title.

42 U.S.C. § 1395w-102(e).

4) The FD&CA provision governing approval of drugproducts for entry into interstate commerce, 21U.S.C. § 355, and the corollary provisionsprohibiting adulterated and misbranded drugs frominterstate commerce, 21 U.S.C. §§ 331, 351 and 352,are voluminous. Pertinent here, 21 U.S.C. § 355governs not only the initial clinical trials, acceptabledosage and formulation of a drug, it also requiresthat (bold added):

the methods used in, and the facilities andcontrols used for, the manufacture, processing,and packing of such drug are [] adequate topreserve its identity, strength, quality, andpurity.

21 U.S.C. § 355(b). The methods and facilities mustalso be adequate to “preserve [the drug’s] identity,strength, quality, and purity.” 21 U.S.C. § 355(d) & (e). Drugs that do not conform to these requirements shallnot be introduced into interstate commerce. 21 U.S.C.§ 355(a).

5) The foregoing provision of 21 U.S.C. § 355(b) is thestatutory authority for the FDA’s promulgation ofthe current Good Manufacturing Practice (“cGMP")regulations, as reflected in 21 C.F.R. § 210.1 whichstates (bold added):

(a) The regulations set forth in this partand in parts 211, 225, and 226 of this chaptercontain the minimum current good

6

manufacturing practice for methods to beused in, and the facilities or controls to beused for, the manufacture, processing,packing, or holding of a drug to assurethat such drug meets the requirements ofthe act as to safety, and has the identity andstrength and meets the quality and puritycharacteristics that it purports or isrepresented to possess.

(b) The failure to comply with anyregulation set forth in this part and in parts211, 225, and 226 of this chapter in themanufacture, processing, packing, or holdingof a drug shall render such drug to beadulterated under section 501(a)(2)(B) ofthe act and such drug, as well as the personwho is responsible for the failure to comply,shall be subject to regulatory action.

See, U.S. v. An Article of Drug Labeled WhiteQuadrisect, 484 F.2d 748, 749-50 (7th Cir. 1973)(cGMPs were made part of the FDA-approval scheme“[i]n order to protect public safety”). These cGMPsapply equally to repackagers such as Respondents here,since the term “manufacturing or processing” is definedto include “repackaging.” 21 C.F.R. 207.3(a)(8).

6) The FD&CA implementing regulations known ascurrent Good Manufacturing Practice (“cGMP"), requiring the complete separation of penicillindrugs from other drugs, and imposing a legalpresumption of actual contamination automaticallybarring drugs from interstate commerce if there isa “reasonable possibility” of contamination, are asfollows:

7

a) 21 C.F.R. § 211.42(d) states:

Operations relating to the manufacture,processing, and packing of penicillin shall beperformed in facilities separate from thoseused for other drug products for human use.

b) 21 C.F.R. §211.46(d) states:

Air-handling systems for the manufacture,processing, and packing of penicillin shall becompletely separate from those for otherdrug products for human use.

c) 21 C.F.R. § 211.176 states:

If a reasonable possibility exists that a non-penicillin drug product has been exposed tocross-contamination with penicillin, the non-penicillin drug product shall be tested for thepresence of penicillin. Such drug productshall not be marketed if detectable levels arefound when tested according to proceduresspecified in ‘Procedures for Detecting andMeasuring Penicillin Contamination inDrugs,’ which is incorporated by reference.

7) The foregoing provision of 21 U.S.C. § 355(b) is alsoechoed in the FD&CA’s definition that a drug isadulterated if:

the methods used in, or the facilities andcontrols used for, the manufacture, processing,packing, or holding do not conform to or are notoperated or administered in conformity withcurrent good manufacturing practice toassure that such drug meets the requirement

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of this chapter as to safety and has the identityand strength, and meets the quality and puritycharacteristics, which it purports or isrepresented to posses.

21 U.S.C. § 351(a)(2)(B) (bold added). 8) The FD&CA also defines “misbranded” to include

any labeling (broadly defined to include packaging,inserts, literature and all other forms ofcommunication) that is “false or misleading as toany particular.” 21 U.S.C. § 352(a).

9) The FD&CA also deters any acts that cause orfurther the adulteration or misbranding of drugs, byprohibiting:

(a) The introduction or delivery forintroduction into interstate commerce of any… drug … that is adulterated or misbranded.

(b) The adulteration or misbranding ofany … drug … in interstate commerce.

(c) The receipt in interstate commerce ofany … drug … that is adulterated ormisbranded, and the delivery or proffereddelivery thereof for pay or otherwise.

***

(g) The manufacture within any Territory ofany … drug … that is adulterated ormisbranded.

21 U.S.C. § 331.

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STATEMENT OF THE CASE

I. Factual and Procedural History

Background Facts

Respondent Omnicare, Inc. is the parent companyof a vertically integrated enterprise that recentlydescribed itself to this Court as the “the nation’slargest provider of pharmaceutical care services for theelderly and other residents of long-term facilities in theUnited States and Canada.”5 Omnicare’s operationsinclude hundreds of subsidiaries operatingapproximately 300 front-line pharmacies fillingprescriptions for millions of residents in long-termfacilities each year. RSAC6 ¶ 68. Omnicare’spharmacies are supported by affiliated subsidiariesproviding large-scale wholesale purchasing,repackaging and distribution of drugs to thepharmacies. RSAC ¶¶ 64, 69.

Respondent Omnicare Distribution Center, LLC(then known as Heartland Repack Services, LLC)(hereafter “Heartland Repack”) was one of twoOmnicare facilities that repackaged drugs into blisterpacks that were shipped as part of a just-in-timeinventory system to affiliated pharmacies, where they

5 Omnicare’s Petition for Writ of Certiorari in Omnicare, Inc. v.The Laborers District Council Construction Industry Pension Fundand The Cement Masons Local 526 Combined Funds, Case No. 13-435, at p. 3. Petition granted March 3, 2014.

6 “RSAC” refers to the Redacted Second Amended Complaint,filed in the district court as Document No. 94.

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were affixed with a prescription label and dispensed tonursing home residents. RSAC ¶¶ 58-59, 68, 75-80. Amajority of nursing home residents are Medicaid and/orMedicare beneficiaries, and in 2006 Omnicaregenerated at least $3.5 billion in revenue from billingits drugs to those programs. RSAC ¶¶ 70-71.

Petitioner Rostholder was employed by RespondentHeartland Repack as Senior Director of Operations forrepackaging from 1997 until early 2006. RSAC ¶¶ 8,85. Petitioner’s responsibilities included overseeing therepackaging of up to 200 million doses per year ofdrugs destined for nursing home residents. RSAC ¶¶64, 69. Petitioner’s boss, Denis Holmes, was anemployee of Omnicare, Inc., and oversaw all operationsat the Heartland facility which, in addition towholesaling and distribution supporting therepackaging operations, included a commercialpharmacy servicing Omnicare’s local nursing homeclients in the Toledo, Ohio area. RSAC ¶¶ 54, 64, 87-94,103, 106, 109, 114-117, 119.

As a drug repackager, Heartland Repack’soperations were subject to the FDA’s current GoodManufacturing Practice (“cGMP") regulations. 21C.F.R. § 207.3(A)(8). The cGMPs were promulgated bythe FDA under authority of 21 U.S.C. § 355 [preciselythe section of the FD&CA referenced by Medicaid’s andMedicare Part D’s definition of “covered outpatientdrugs”] in order to ensure that drugs reachingconsumers conformed to the “identity, strength,quality, and purity” set forth in the pre-marketapproval obtained by the manufacturer. RSAC ¶¶ 26-28, 41-56. If not, the drug products are not in their“FDA-approved” form, and are statutorily deemed

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adulterated and/or misbranded, and prohibited frominterstate commerce. 21 U.S.C. §§ 331, 352.

At the heart of this case, the cGMPs prohibit thepackaging of penicillin in the same facility where non-penicillin drugs are packaged for human use. RSAC ¶51 (citing 21 C.F.R. § 211.42(d) and § 211.46(d)).7 Dueto the risk of life-threatening allergic reactions, the lawstrictly states that if there is a “reasonable possibility”of penicillin cross-contamination, the drugs areautomatically barred from interstate commerce unlessand until they are tested and proven safe. RSAC ¶ 53(citing 21 C.F.R. § 211.176)).

During his employment, Petitioner became awarethat Omnicare and Heartland Repack knowinglypermitted the Heartland Repack operations to beconducted in the same building as a commercialpharmacy handling penicillin drugs, without evenattempting to isolate the Heartland Repack operationsfrom the very real risk of penicillin contamination.RSAC ¶¶ 54, 64, 87-94, 103, 106, 109, 114-117, 119. That risk arose because the repack and pharmacyoperations shared the same air-handling system, therewere two large garage doors between the operationsthat were left open 25% of the time, and employees ofthe two operations shared entrances, a break room andother space in the building. RSAC ¶¶ 54, 65.

After being denied the authority to correct this andother regulatory compliance issues, Petitioner leftHeartland Repack in early 2006. RSAC ¶¶ 8, 103, 106,109. A few months later, Petitioner notified the FDA

7 Mis-cited in the RSAC as 21 C.F.R. § 211.42(c).

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of the situation, which prompted the FDA to inspectHeartland Repack in the summer of 2006. RSAC¶¶ 110-113. In August 2006, the FDA permanentlyclosed Heartland Repack due to the levels of penicillindust throughout the facility, which the FDA found metthe definition of a “reasonable risk” of penicillin cross-contamination under 21 C.F.R. § 211.176. RSAC ¶¶114-17, 119 and Ex. 1. The FDA admonishedHeartland Repack that, pursuant to 21 U.S.C. §211.176, the remaining inventory was automaticallyprohibited from interstate commerce until such time asit was tested and proven completely free ofcontamination from penicillin or other beta-lactams. Id.Instead of testing the millions of doses of inventorypurchased at a cost of $19 million, which would havecreated proof of the level of penicillin contamination onthe drugs that had already left Heartland Repack,Respondents destroyed the remaining inventory andtook a $19 million write-off. Five months later, theFDA issued a warning letter to Heartland Repack dueto its failure to complete corrective actions, wherein theFDA recapped its prior investigation, findings andactions. RSAC ¶¶ 115, 117 and Ex. 1.

Commencement of this FCA Action

On May 15, 2007, Petitioner properly filed underseal this FCA action on behalf of the United States, andon behalf of 22 States and the District of Columbiawith similar False Claims Acts, seeking recovery of thepayments made for drugs ineligible for coverage underMedicaid and Medicare Part D. In late 2010, after thegovernment plaintiffs completed their investigationsand declined intervention, the Second Amended

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Complaint (“SAC”) was unsealed and served uponRespondents.

Pursuant to Respondents’ motion, the District Courtordered [Doc. 93] the redaction of certain material inthe SAC that was facially attorney-client privileged,pending a later determination whether the privilegewas vitiated by the crime-fraud exception.

The Redacted Second Amended Complaint (“RSAC”)[Doc. 94] alleged that Defendants knowingly placedrepackaged drugs into interstate commerce that wereexpressly and automatically barred by 21 C.F.R. §211.176 because of a "reasonable possibility" ofpenicillin cross-contamination. RSAC ¶ 53. Relatorfurther alleged that, as a result, the drugs did notconform to Medicaid’s and Medicare Part D’s drugquality specifications, and were thus ineligible forpayment, thereby rendering all claims submitted forthose drugs false or fraudulent under the FCA. RSAC¶¶ 27, 30.

Respondents moved to dismiss the RSAC at thepleading stage [Doc. 84]. Respondents made a three-pronged attack, asserting that the action was: a) barredby the FCA’s public disclosure jurisdictional limitation;b) failed to state a claim under Fed. R. Civ. P. 12(b)(6);and/or c) failed to plead with sufficient particularityunder Rule 9(b).

The District Court Opinion

On August 14, 2012 the district court issued itsopinion dismissing the RSAC under Rule 12(b)(6). Pet.App. 21.

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As to the FCA’s public disclosure jurisdictionallimitations, the district court held that since thePetitioner’s tip to the FDA precipitated the disclosures,he was clearly an original source entitled to maintainthis action, even assuming certain documents cited inthe complaint triggered the FCA’s public disclosurebar. Pet. App. 38-46. This ruling was affirmed by thecircuit court. Pet App. 7-10.

The district court also held that Petitioner generallysatisfied Rule 9(b), because he was not required at thepleading stage to present details of claims actuallysubmitted to Medicaid and Medicare. Pet. App. 44-45. The district court reasoned that Petitioner had“adequately alleged the existence of a fraudulentscheme under which every claim submitted bydownstream pharmacies and long-term care facilitiesto the government for a drug product repacked atHeartland Repack was false.” [Pet. App. 45 (italics inoriginal), citing U.S. ex rel. DeCesare v. Americare InHome Nursing, 757 F. Supp. 2d 573, 583 (E.D. Va.2010)]. While the circuit court did not address thisissue, the district court’s holding is consistent withintervening Fourth Circuit precedent, discussed infraat 16.

The district court continued, however, holding thatRelator’s complaint failed to state a cause of action8

under Fed. R. Civ. P. 12(b)(6). Pet. App. 47-58. Thedistrict court applied the Fourth Circuit’s test requiringthe relator to allege:

8 Since the term “claim” under the FCA typically refers to a callupon the government fisc for payment, Relator uses the phrase“cause of action” to refer to a legal claim.

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(1) whether there was a false statement orfraudulent course of conduct; (2) made or carriedout with the requisite scienter; 3) that wasmaterial; and 4) that caused the government topay out money or to forfeit moneys due (i.e. thatinvolved a “claim”).

Pet. App. 50, citing U.S. ex rel. Harrison v.Westinghouse Savannah River Co., 176 F.3d 776 (4thCir. 1999).

Focusing on the first element of the test, the districtcourt presaged the Fourth Circuit’s later interpretationin this case that the false statement or fraudulentconduct “must be directed at the federal government.” In particular, the district court concluded that no FCAclaim was stated because Petitioner failed to allege anovertly false statement or false express certificationmade to the government, or allege that Respondentsremained silent in the face of a duty to disclose thedrugs’ adulterated and misbranded status, or engage inother overt acts designed to conceal information fromthe government. Pet. App. 52-56.

The district court opined that, without furtherguidance from the Fourth Circuit, an FCA action couldonly be framed in one of the ways already recognized bythe Fourth Circuit. Pet. App. 56. The district courtwent on to discuss such alternatives, and the additionalfacts that would be necessary under each one. Pet. App.56-58. Concluding that Petitioner did not have facts toframe the case according to any of the preconceivedideas of what satisfies the first prong of the Harrisontest, the district court dismissed the action withprejudice and without leave to amend. Id.

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The district court denied Petitioner’s Motion forReconsideration pursuant to Fed. R. Civ. P. 59(e),whereafter Relator perfected his appeal to the circuitcourt. Pet. App. 62.

The Circuit Court Opinion

The Fourth Circuit issued its opinion on February21, 2014, and ruled on two points.

The circuit court affirmed the district court’sholding that there was no jurisdictional bar since, evenif there were public disclosures, Petitioner qualified asan “original source” under 31 U.S.C. § 3730(e)(4). Pet.App. 7-10.

As to Rule 9(b), the Fourth Circuit did not render anopinion. Petitioner notes, however, that after thedistrict court issued its opinion, the Fourth Circuitissued an opinion affirming the reasoning used by thedistrict court to find that Petitioner had satisfied rule9(b). In particular, in U.S. ex rel. Nathan v. TakedaPharmaceuticals North America, Inc., 707 F.3d 451(4th Cir. Jan. 11, 2013), cert. denied 134 S.Ct. 1759(Mar. 31, 2014), the Fourth Circuit held that

when a [FCA] defendant’s actions, as allegedand as reasonably inferred from the allegations,could have led, but need not necessarily have led,to the submission of false claims, a relator mustallege with particularity that specific falseclaims actually were presented to thegovernment for payment.

Id. at 457 (italics in original). Nathan therebyvalidated the holding in DeCesare which the districtcourt here relied upon to find that Petitioner

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“adequately alleged the existence of a fraudulentscheme under which every claim submitted … wasfalse.” Pet. App. 45. Hence, the facts of this case fitneatly within the parameters of Nathan, such that onremand the Fourth Circuit will have no basis fordismissing the case under Rule 9(b).

As to Rule 12(b)(6), the circuit court made fourpoints. First, it opined that the statutory definition of“covered outpatient drugs” was insufficient to supportFCA liability. Instead, it ruled that FCA liability couldonly arise if the definition had expressly stated thatpayment was conditioned on either compliance with theFD&CA’s prohibition against adulteration (andconcomitant misbranding), or compliance with theparticular cGMPs at issue. Pet. App. 13. The FourthCircuit did not veil this absolute rule under the rubricof implied certification. Id. This holding conflicts withother circuit courts, and gives rise to QuestionPresented No. 1.

Second, having ruled that FCA liability could onlyattach if the government expressly statedstatutory/regulatory compliance was a condition ofpayment, the circuit court was then free to erroneouslyinterpret Medicaid/Medicare’s definition of “coveredoutpatient drugs.” In particular, the Fourth Circuitinterpreted it to mean simply that the drugmanufacturer had to have pre-market approval for thedrug (i.e. approval of the formulation), not that theactual drug product reaching the beneficiary had to bein its FDA-approved form. Pet. App. 13-14. The FourthCircuit then summarized:

Therefore, we conclude that once a new drug hasbeen approved by the FDA and thus qualifies for

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reimbursement under the Medicare andMedicaid statutes, the submission of areimbursement request for that drug cannotconstitute a “false” claim under the FCA on thesole basis that the drug has been adulterated asa result of having been processed in violation ofFDA safety regulations.

Pet. App. 14.9 This gives rise to Question PresentedNo. 1a.

Third, and apparently interpreting its judiciallyimposed materiality element, the Fourth Circuit opinedthat a FCA cause of action predicated on a statutory orregulatory violation would only be viable if it wasaccompanied by a “false statement or other fraudulentmisrepresentation . . . made to the government,” Pet.App. 14-15, or a “false statement or fraudulent courseof conduct directed at the federal government.” Pet.App. 16. This interpretation is contrary to the FCA’stext, purpose and history, and contrary to this Court’sprecedent, and gives rise to Question Presented No. 2.

Finally, the Fourth Circuit also purported to bolsterits conclusion by erroneously reasoning that the FDA’sprospective enforcement mechanisms (which do notallow it to recoup sums paid by other governmentagencies) pre-empted an FCA action. Pet. App. 15-16. This holding also conflicts with this Court’s precedent,and that of at least one other circuit, and thus givesrise to Question Presented No. 3.

9 As a necessary corollary to this conclusion, the Fourth Circuitgratuitously noted that scienter could not exist. Pet. App. 16.

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REASONS FOR GRANTING THE PETITION

Introduction

The federal courts of appeal are sharply divided asto the appropriate pleading standard for FCA actionsarising from violations of federal statutes orregulations. The split goes to the essence of a “claim”for payment, and what makes that claim false. TheFourth Circuit’s supporting rationales are equallyflawed, and require this Court’s intervention to resolveadditional circuit court splits and/or because they arecontrary to this Court’s precedent.

If allowed to stand, the Fourth Circuit’s decisionwill mean that once a drug manufacturer obtains pre-market approval of a drug’s formulation, anyone alongthe chain of interstate commerce is free to lace the drugwith rat poison and/or market it as a cure-all, andgovernment health care programs must pay for itbecause only the FDA’s prospective enforcementremedies apply. Given the hundreds of billions ofdollars paid for drugs each year by government healthcare programs, the Fourth Circuit’s interpretationcreates a huge financial incentive for drugmanufacturers and others to ignore the FD&CA,thereby creating a significant risk to public health.

This Court’s intervention will ensure the FCA’svigor as the government’s primary tool to combat deceit- which in 2013 drained tens of billions of dollars fromMedicaid and Medicare alone.10

10 See generally, The Department of Health and Human Servicesand The Department of Justice Health Care Fraud and AbuseControl Program Annual Report for Fiscal Year 2013, at pp. 73-75

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Analysis

The FCA Generally

The False Claims Act (“FCA”), 31 U.S.C. 3729 etseq., was passed in 1863 to combat deceit perpetratedupon the government by profiteers during the CivilWar. See S. REP. NO. 99-345, at 8 (1986), reprinted in1986 U.S.C.C.A.N. 5266, 5273. This case focuses on 31U.S.C. § 3729(a)(1), which imposes liability on anyonewho, “knowingly presents or causes to be presented …a false or fraudulent claim for payment.” Just as FCAliability attached to knowingly presenting claims for“spavined beasts and dying donkeys” 150 years ago,11

today FCA liability still attaches to knowinglypresenting claims for substandard goods. As Congressnoted:

a false claim may take many forms, the mostcommon being a claim for goods or services notprovided, or provided in violation of contractterms, specification, statute, or regulation.

(Feb. 2014) (available at http://oig.hhs.gov/publications/docs/hcfacFY2013-hcfac.pdf, last accessed May 11, 2014).

11 As colorfully explained at the time, “[f]or sugar [the government]often got sand; for coffee, rye; for leather, something no better thanbrown paper; for sound horses and mules, spavined beasts anddying donkeys; and for serviceable muskets and pistols, theexperimental failures of sanguine inventors, or the refuse of shopsand foreign armories.” U.S. ex rel. Newsham v. Lockheed Missiles& Space Co., Inc., 722 F. Supp. 607, 609 (N.D. Cal. 1989) (quoting1 F. SHANNON, THE ORGANIZATION AND ADMINISTRATION OF THEUNION ARMY, 1861-1865 58 (1965) (quoting Tomes, Fortunes ofWar, 29 HARPER’S MONTHLY MAG. 228 (1864))).

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S. Rep. No. 99-345, at 9, reprinted in 1986 U.S.C.C.A.N.5266, 5274 (italics added). Furthermore, Congresscrafted the broad definition of “knowingly,” whichreaches intentional or reckless “disregard for the truthor falsity of the information,” 31 U.S.C. § 3729(b),specifically to target the “corporate ostrich” that has“’buried his head in the sand’ and failed to make simpleinquiries which would alert him that false claims werebeing submitted.” U.S. v. Rachel, 289 F. Supp. 2d 688,695 (D. Md. 2003) (quoting S. Rep. No. 99-345, at 17, 21(1986), reprinted in 1986 U.S.C.C.A.N. 5266).

The only difference from 150 years ago is that,rather than a simple purchase order for horses, thetransaction may be in the form of a lengthy contract fora high-tech weapons system, or in the form of a benefitprogram embodied in legislation. Furthermore, thegovernment often incorporates by reference otherlegislation, either because it sets forth standardizedterms (i.e. the Federal Acquisition Regulations(“FARs”) and the Truth in Negotiation Act (“TINA”)),because it concerns the integrity of the contractor’soperations (i.e. Anti-Kickback Statute (“AKS”)), orbecause it regulates a relevant facet of interstatecommerce (i.e. the FD&CA). In such situations,“compliance with federal regulations [is] the sine quanon of payment.” U.S. ex rel. Holder v. SpecialServices, Inc., 296 F. Supp. 2d 1167, 1175 (C.D. Cal.2003) (collecting cases where withholding informationabout non-compliance with federal regulations resultedin FCA liability); U.S. ex rel. Connor v. Salina Reg’lHealth Ctr., Inc., 453 F.3d 1211, 1222 (10th Cir. 2008)(“some regulations or statutes may be so integral to thegovernment’s payment decision as to make any[artificial classifications] a ‘distinction without a

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difference’”) (quoting U.S. ex rel. Hendow v. Univ. ofPhoenix, 461 F.3d 1166, 1177 (9th Cir. 2006)); U.S. exrel. Franklin v. Parke-Davis, 147 F. Supp. 2d 39, 51 (D.Mass. 2001) (“failure to abide by a rule or regulation[concerning off-label promotion of drugs] amounts to amaterial misrepresentations [sic] made to obtain agovernment benefit”); U.S. ex rel. Colquitt v. AbbottLabs, 864 F. Supp. 2d 499, 530 (N.D. Tex. 2012)(“Medicare claims for expenses that are not coveredand are ineligible for payment are false claims”); see Inre Average Wholesale Price Litig., 478 F. Supp. 2d 164,173 (D. Mass. 2007) (“the allegation that the claim isunderpinned by fraud [in the form of inflated drugprices reported to compendia] is sufficient” to state anFCA claim).

In the present case, the terms of the transactionswere embodied in government health care benefitprograms whose legislation constitutes a unilateralcontract with any qualified provider who deliversconforming goods, and where the relevant qualitymetric incorporates by reference the government’sseparate body of law regulating the introduction ofdrugs into interstate commerce.

This Court’s precedent illustrates that, under theFCA, a claim for payment is a representation ofentitlement to payment, and that it is false if itdemands more than what the facts and circumstancesshow the claimant is entitled to receive. Marcus v.Hess, 317 U.S. 537 (1943) (bid-rigging tainted everyclaim that ensued under the contracts and caused thegovernment to pay more than it would have paid in acompetitive environment); U.S. v. Neifert-White Co.,390 U.S. 228, 229-30, 233 (1968) (loan application

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supported by inflated purchase contract is a false claimfor disbursement of more money than the applicant iseligible to receive); see U.S. v. Bornstein, 423 U.S. 303,311-13 and n.13 (1976) (“falsely branded” goods causedthe claims submitted for those goods by another to befalse); accord U.S. v. Scolnick, 331 F.2d 598, 599 (1stCir. 1964) (cashing government check known to beissued in error constituted a false claim under theFCA); U.S. v. McLeod, 721 F.2d 282, 283-84 (9th Cir.1983) (same).

Indeed, this “Court has consistently refused toaccept a rigid, restrictive reading” of the FCA, notingthat the “[d]ebates at the time [of the FCA’s 1863passage] suggest that the Act was intended to reach alltypes of fraud, without qualification, that might resultin financial loss to the Government.” Neifert-White, 390U.S. at 231. These principles remained firmly rooteduntil the late 20th century, when courts borrowed fromthe concept of “express certification” of compliance(which when false gives rise to liability under 31 U.S.C.§ 3729(a)(2) as a “false record or statement”), andbegan wrestling with the judicial construct of “impliedcertification” of compliance (which when false gives riseto liability under 31 U.S.C. § 3729(a)(1) as a “false orfraudulent claim”).

Question 1

Background on the “Express Condition of Payment”Construct

The notion that the government must expresslystate that statutory or regulatory compliance is acondition of payment is a misapplication of the expresscertification concept. By way of background, express

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certifications of compliance were sometimes requiredby the government as a condition of payment when itsought to impose conditions or limitations on the use ofits money that went beyond the essential elements ofprice, quantity and quality. See, Harrison, 176 F.3d at786-87 (discussing express certification, and citing U.S.ex rel. Fallon v. Accudyne Corp., 880 F. Supp. 636, 638(W.D.Wis.1995) (express certification of compliancewith environmental laws); U.S. v. Incorporated Villageof Island Park, 888 F. Supp. 419, 434–36, 440–41(E.D.N.Y.1995) (express certification of compliancewith Fair Housing Act’s non-discriminationrequirements, and with an affirmative action plan);U.S. ex rel. Thompson v. Columbia/HCA HealthcareCorp., 125 F.3d 899, 902 (5th Cir. 1997) (expresscertifications of compliance with Medicare anti-kickback and anti-self-referral statutes). The themesrunning through such cases are that the ancillarystatute or regulation enforces the public policy purposeof a program (i.e. minority or small businessadvancement), upholds the integrity of governmentcontracting (i.e. anti-kickback and anti-self-referralprohibitions), or enforces strings attached to funding(i.e. environmental compliance).

In contrast, implied certification was a judicialconstruct used by a few courts in the 1990’s to denotean instance where there was not an expresscertification of compliance with statutes or regulations,but where the nature of the law nonetheless supportedthe conclusion that it was an essential element of thegovernment’s bargain such that the presentment of aclaim implied compliance. E.g. Ab–Tech Constr., Inc. v.U.S., 31 Fed. Cl. 429, 433-34 (1994) (progress paymentvouchers were false claims because they impliedly

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certified compliance with Small BusinessAdministration’s minority contracting program)); U.S.ex rel. Pogue v. American Healthcorp., Inc., 914 F.Supp. 1507, 1509 & 1513 (M.D.Tenn.1996) (FCA claimstated framed as implied certifications of Medicareanti-kickback and anti-self-referral statutes).

Confusion arose, however, after the Second Circuit’sopinion in U.S. ex rel. Mikes v. Straus, 274 F.3d 687 (2dCir. 2001). Faced with a federalism issue, and desiringto avoid encroaching on state regulation of the practiceof medicine, the Second Circuit borrowed principlesfrom express certification to impose a bright-line“express condition of payment” version of impliedcertification as the requisite pleading standard for anFCA action alleging substandard medical services. TheSecond Circuit’s analysis, however, made severaldistinctions which other courts began using astalismans for measuring the sufficiency of any FCAaction predicated on violation of a statute or regulation.

In particular, the Second Circuit began bydistinguishing between “factually false” and “legallyfalse.” The latter referred to failure to comply with astatutory or regulatory requirement, and was itselfbroken down into “express certification” of complianceand “implied certification” of compliance. Addressingthe implied certification construct, the Second Circuitconcluded that, because the relevant Medicare statutesand regulations concerning the quality of medicalservices did not expressly state that compliance was acondition of payment, they must be merely “conditionsof participation” in the program. Id. at 702. TheSecond Circuit, however, emphasized that its expresscondition of payment requirement was driven by the

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federalism issue before it, and was therefore confinedto FCA cases alleging substandard medical services. Id.at 699-700. The present case, involving drugsregulated by the federal government, lacks thefederalism rationale justifying application of theSecond Circuit’s bright-line approach.

In the ensuing years, the Mikes iteration of impliedcertification, requiring the government to expresslystate that statutory/regulatory compliance is acondition of payment, was applied not just to FCAactions alleging substandard medical services, but to awide range of FCA actions alleging violation of astatute or regulation. After years of confusedinterpretations and applications of the Mikesconstructs, the circuit courts are increasinglydistancing themselves from Mikes’ “express conditionof payment” requirement for statutory/regulatoryviolations. Instead, the courts examine the nature ofthe law and its relationship to the purpose of thetransaction in order to glean the government’s intent tomake statutory/regulatory compliance an essentialelement of its bargain. E.g. U.S. ex rel. Lemmon v.Envirocare of Utah, Inc., 614 F.3d 1163, 1167-70 (10thCir. 2010). The D.C. and First circuits have made theclearest departures, thereby setting-up the sharpestconflict, and are discussed in the following paragraphs.

The D.C. and First Circuit’s Rejection of an “ExpressCondition of Payment” Construct

The D.C. Circuit, addressing an FCA action arisingfrom substandard services under a contract, squarelyrejected the idea that the government must expresslystate that compliance with a statute or regulation is acondition of payment. U.S. v. Sci. Applications Int’l

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Corp. (“SAIC”), 626 F.3d 1257, 1269 (D.C. Cir. 2010). After detailed analysis, the court reasoned thatrequiring an express statement that compliance is acondition of payment would create a “counterintuitivegap” in the FCA precisely as to the types of cases thatprompted the FCA’s passage 150 years ago. Id. at 1269(D.C. Cir. 2010) (stripping away the intricacies of therigid judicial constructs of ‘factual falsity’ and ‘legalfalsity,’ knowingly billing for nonconforming goods orservices is actionably false under the FCA). Asastutely noted later by one court, when impliedcertification is properly understood and framed, suchexpress preconditions of payment may only benecessary to state an FCA cause of action as to “anobscure statutory provision or minor contractualterms.” U.S. v. Kellogg, Brown & Root Servs. (KBR),800 F. Supp. 2d 143, 156 (D.D.C. 2011) (citing SAIC,626 F.3d at 1268-69).

In a pair of cases, the First Circuit squarely rejectedthe idea that “only express statements in statutes orregulations can establish preconditions of payment,”reasoning that “it is not set forth in the text of theFCA.” U.S. ex rel. Hutcheson v. Blackstone MedicalInc., 647 F.3d 377, 388 (1st Cir), cert. denied 132 S. Ct.815 (2011) (finding FCA cause of action properly statedby alleging that violations of Medicaid/Medicare Anti-Kickback Statute rendered Medicare claims ineligiblefor payment and thus “false or fraudulent” under 31U.S.C. § 3729(a)(1)) (citing SAIC, 626 F.3d at 1269);New York v. Amgen, Inc., 652 F.3d 103, 109-110 (1stCir. 2011) (same as to Medicaid claims). The FirstCircuit also concluded that adherence to the myriad ofrigid judicial constructs used by other courts, such as“factual falsity” versus “legal falsity,” and “express

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certification” versus “implied certification,” should beavoided because they were obscuring sound analysis.Hutcheson, 647 F.3d at 384-86.

The Fourth Circuit’s Approach

The Fourth Circuit sat on the sidelines during theimplied certification debate, having rejected it early-onas problematic. Harrison, 176 F.3d at n.8. Instead, theFourth Circuit purported to follow this Court’s decisionin Neifert-White by admonishing that the phrase “falseor fraudulent” is a “term of art” that must beinterpreted as a whole to reach all types of deceitaffecting the government fisc. Id. at 785, 788. Nonetheless, a few paragraphs later the court ignoredits own admonition and crafted a test for Rule 12(b)(6)sufficiency whose first prong split the phrase “false orfraudulent,” and seemed to more closely reflect the“false record or statement” situation before it. Id. at788 (requiring relator to plead a “false statement orfraudulent course of conduct”).

On its face, the Harrison test may seem workable,but the absence of successful cases in the FourthCircuit predicated on substandard goods suggestedshoals beneath the calm surface. The district court’sopinion in this case cryptically presaged those shoals,while the Fourth Circuit’s opinion finally laid thembare.

The Fourth Circuit’s opinion in this case began byasserting that Medicaid and Medicare’s permissivelyframed definition of “covered outpatient drugs” wasinsufficient to support FCA liability. Instead, it opinedthat FCA liability could only arise if the definition hadexpressly stated that payment was conditioned on

29

either compliance with the FD&CA’s prohibitionagainst adulteration (and concomitant misbranding), orcompliance with the particular cGMPs at issue. Pet.App. 13.

The Fourth Circuit’s ruling effectively imposes onCongress and/or government agencies the burden ofexpressly stating when compliance with a statute orregulation is an essential element of the government’sbargain, even when the statute or regulation clearlybears on the traditional essential element of quality. Imposing such strictures on how Congress must framecoverage, however, is contrary to the principles ofstatutory construction applied by this Court. See,Rockwell Int’l Corp. v. U.S., 549 U.S. 457, 470 (2007)(nothing prevents Congress from defining FCAjurisdiction any way it chooses); Marcus v. Hess, 317U.S. at 542 (“[s]ound rules of statutory interpretationexist to discover and not direct the Congressional will”). In fact, the Fourth Circuit’s approach would compelbenefit program legislation to become bloated withrepeated incantations that each particular provision isa condition of payment.

Furthermore, a fundamental principle of contractlaw brings into focus the logic and sufficiency ofCongress’ choice to permissively frame the definition of“covered outpatient drugs.” That legal principle iscaptured in the Restatement (Second) of Contracts§ 181, “Effect of Failure to Comply with Licensing orSimilar Requirement,” which states:

If a party is prohibited from doing an actbecause of his failure to comply with a licensing,registration or similar requirement, a promise inconsideration of his doing that act or of his

30

promise to do it is unenforceable on grounds ofpublic policy if

(a) the requirement has a regulatorypurpose, and

(b) the interest in the enforcement ofthe promise is clearly outweighed by thepublic policy behind the requirement.

Kaiser Steel Corp. v. Mullins, 455 U.S. 72, 77 (1982)(refusing enforcement of contract in violation of federalantitrust or labor laws, since “no court will lend itsassistance . . . [to enforce] an illegal contract,”); U.S.Nursing Corp v. St. Joseph’s Medical Ctr., 39 F.3d 790,795 (7th Cir. 2004) (nursing agency’s failure to obtainlicense rendered contract unenforceable). In thepresent case, drugs are subject to precisely such aregulatory scheme, the FD&CA, for the protection ofthe public. U.S. v. Article of Drug . . . Bacto-Unidisk,394 U.S. 784, 798 (1969) (“remedial legislation such asthe Food, Drug, and Cosmetic Act is to be given aliberal construction consistent with the Act's overridingpurpose to protect the public health, and specifically .. . to ensure that [drug] products marketed serve thepublic with ‘efficacy’ and ‘safety’”).

Congress evidently had the foregoing legal principlein mind when it drafted the definition of “coveredoutpatient drugs” for Medicaid and Medicare Part D. This conclusion is supported not only by the structureof the definition, but also by the fact those programsare in the nature of unilateral contracts where eachclaim for payment is a representation that the providermet the requirements of the government’s offer setforth in the programs’ statutes and regulations, and

31

thus each claim is an acceptance of the government’soffer, thereby forming a binding contract for payment. See In re Univ. Med. Cntr., 973 F.2d 1065 (3d Cir.1992). Given the automated nature of drug claimprocessing, however, submission of a claim is at best arebuttable representation to the Government that thehealthcare provider accepted the offer by providingservices or goods that conform to the offer, therebyforming a contract for payment.

Consistent with the foregoing principle, Petitioneralleged in the RSAC, at ¶ 46, that:

. . . even though a drug formulation may havereceived “FDA-approval,” the actual drugproduct is not in its FDA-approved form unlessit complies with cGMP and proper labelingrequirements. U.S. v. Marcus, 82 F.3d 606, 610(4th Cir. 1996) (when drug product isadulterated and/or misbranded, the government“did not receive that which they bargained for –an FDA-approved drug of known safety andefficacy,” and is entitled to recoup all sums paidfor the drug) (italic in original); U.S. v. Bhutani,266 F.3d 661, 670 (7th Cir. 2001).

In U.S. v. Marcus, the Fourth Circuit noted thatwithout additional testing there was no way todetermine whether the drugs were safe and effective,i.e. in their FDA-approved form, and that such asituation “prevents the drug from being that which itpurports to be [and] consumers would not purchase adrug of unknown safety and efficacy at any price.” 82F.3d at 610. In other words, adulterated andmisbranded drugs are worthless. The present casepresents a similar situation, this time involving a

32

cGMP regulation that automatically barred the drugsfrom interstate commerce until the requisite cross-contamination testing established that the drugs werewhat they purported to be – safe (i.e. in their FDA-approved form).

For all of the foregoing reasons, this Court’sintervention is necessary to resolve a long-simmeringpoint of confusion that has now matured into a sharpcircuit split over the appropriate standard for pleadinga FCA action predicated on violation of a statute orregulation bearing on the quality of goods.

Question 1a

Having ruled that FCA liability could only attach ifthe government expressly stated statutory/regulatorycompliance was a condition of payment, the circuitcourt was then free to erroneously interpretMedicaid/Medicare’s definition of “covered outpatientdrugs.” In particular, the Fourth Circuit interpreted itto mean simply that the drug manufacturer had tohave pre-market approval for the drug (i.e. approval ofthe formulation), not that the actual drug productreaching the beneficiary had to be in its FDA-approvedform. Pet. App. 13-14.

Such an interpretation reads 21 U.S.C. § 355 asapplying to only approval of the drug’s formulation andindications for use. Such a narrow interpretationignores that the cGMPs were made part of the FDA-approval scheme “[i]n order to protect public safety,”White Quadrisect, 484 F.2d at 749-50. It also ignoresthat the cGMPs apply equally to repackagers, such as

33

Respondents here, since the term “manufacturing orprocessing” is defined to include “repackaging.” 21C.F.R. 207.3(a)(8).

Moreover, such an interpretation ignores thecontext of the definition, which is focused on the drugproduct actually delivered to the beneficiary and forwhich payment is sought. Instead, the interpretationassumes that the term “drug” means the formulation,and would only make sense if Medicaid and Medicarewere paying the manufacturer for rights to use thatformulation.

The Fourth Circuit’s interpretation is thereforeinvalid because it is contrary to the statutory purpose.Bacto-Unidisk, 394 U.S. 784 at 799 and n.18 (“thepurpose of a statutory provision is the best test of themeaning of the words chosen,” quoting Cawley v. U.S.,272 F.2d 443, 445 (2d Cir. 1959)). In the present case,the purpose of the definition of “covered outpatientdrugs” is to ensure that, as to each claim for payment,the drug product delivered to the beneficiary was in itsFDA-approved form. Any contrary reading producesthe absurd result reached here, where the governmentwas required to pay for drugs legally presumed to becontaminated with a deadly substance and thereforeautomatically barred from interstate commerce. Takento its logical conclusion, the government would berequired to pay for drugs intentionally laced with ratpoison.12

12 It is worth noting that the FD&CA was promulgated andvariously amended in response to, and in order to prevent a repeatof, occurrences such as the “Elixir-Sulfanilamide” tragedy of 1937in which nearly 100 persons died as the result of ingesting an

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This Court’s intervention is sought to correct thisinvalid statutory interpretation which is contrary tothis Court’s precedent and undermines this Court’sinterpretation of the FCA’s broad reach.

Question 2

Apparently interpreting its judicially imposedmateriality element13, the Fourth Circuit opined thatunder the first prong of its Harrison test, a FCA causeof action predicated on a statutory or regulatoryviolation would have to be accompanied by a “falsestatement or other fraudulent misrepresentation . . .made to the government,” Pet. App. 14-15, or a “falsestatement or fraudulent course of conduct directed atthe federal government.” Pet. App. 16. In other words,the knowing presentment of a claim that is ineligiblefor payment is insufficient for FCA liability withoutanother overt statement or act designed and intendedto mislead the government. Such an interpretation iscontrary to the FCA’s text and purpose, and contrary tothis Court’s precedent. Neifert-White, 390 U.S. at 232(the FCA must be broadly construed); Bornstein, 423U.S. at 311-13 (subcontractor’s “falsely branded” tubescaused prime contractor to unwittingly submit claimsthat were false).

untested drug. Bacto-Unidisk, 394 U.S. at n.18. In the presentcase, the FDA determined that the risk of death was high enoughto warrant barring drugs from interstate commerce untilcompletion of similar testing whenever there was a “reasonablepossibility” of penicillin cross-contamination.

13 U.S. ex rel. Berge v. Bd. Of Tr. of Univ. of Ala., 104 F.3d 1453,1460 (4th Cir. 1997).

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Under the Fourth Circuit’s interpretation,defendants are free to intentionally and blatantlyviolate the FD&CA, the Anti-Kickback Statute, theFederal Acquisition Regulations, the Truth inNegotiation Act, or any number of other laws, all withFCA impunity -- so long as they keep silent about it,and so long as the government hasn’t imposed a legalduty to disclose such violations. See, Hutcheson, 647F.3d at 389 (rejecting constructs that would precludeupstream actors from FCA liability for “causing” thepresentment of false or fraudulent claims). In short,the Fourth Circuit’s position strips the phrase “causesto present” from 31 U.S.C. § 3729(a)(1).

Such an interpretation is repugnant to the purposeof the FCA, and the longstanding tradition of applyingthe “square corners” doctrine to dealings with thegovernment. As this Court stated when re-affirmingthat principle in the mid-twentieth century:

that “[a person] must turn square corners whenthey deal with the Government,” does not reflecta callous outlook. It merely expresses the dutyof all courts to observe the conditions defined byCongress for charging the public treasury.

Fed. Crop Ins. Corp. V. Merrill, 332 U.S. 380, 385(1947) (quoting Rock Island, Ark. & La. R.R. v. U.S.,254 U.S. 141, 143 (1920)).14 The Fourth Circuit failedto acknowledge, let alone distinguish, this Court’srelevant legal precedents that invalidate such a

14 The “square corners” doctrine has been routinely applied in FCAcases. E.g., U.S. ex rel. A+ Homecare, Inc. v. Medshares Mgmt.Grp., Inc., 400 F.3d 428, 446 (6th Cir. 2005).

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position. Therefore, this Court’s intervention isrequired to preserve this Court’s precedent requiringthat the FCA be broadly interpreted without rigidconstructs.

Question 3

The Fourth Circuit also purported to bolster itsconclusion by erroneously reasoning that the FDA’sprospective enforcement mechanisms, which do notallow it to recoup sums paid by other governmentagencies, precluded an FCA action. Pet. App. 15-16. This reasoning ignores the dual roles played by thegovernment as both regulator and third-party payor,and leaves the latter without a remedy. This reasoningis also contrary to the principles espoused by this Courtthat the FCA co-exists with other federal legislation.See Vermont Agency of Natural Resources v. U.S. ex rel.Stevens, 529 U.S. 765, 786 n.17 (2000) (“there is noquestion that the PFCRA [Program Fraud CivilRemedies Act] was designed to operate in tandem withthe FCA”);

The Eighth Circuit recently ruled that Title IV ofthe Higher Education Act of 1965 did not pre-empt theFCA. U.S. ex rel. Onnen v. Sioux Falls Indep. Sch. Dist.No. 49-5, 688 F.3d 410, 415 (8th Cir. 2012). Thatholding is in accord with this Court’s instructions that“so long as there is no positive repugnancy between twolaws, a court must give effect to both.” ConnecticutNat’l Bank v. Germain, 503 U.S. 249, 253 (1992); U.S.v. General Dynamics Corp., 19 F.3d 770, 774 (2d Cir.1994) (implied pre-emption is strongly disfavored,therefore the Anti-Kickback Act does not pre-empt theFCA); see also, Wyeth v. Levine, 555 U.S. 555, 568-71(2009) (the FD&CA’s regulation of drugs did not pre-

37

empt personal injury action under state law failure-to-warn theory, and the manufacturer ultimately bearsthe burden of ensuring the drug is not misbrandedbecause of false, misleading or inadequate labeling). Similarly, the Fourth Circuit’s construction would runafoul of the “cardinal principle of statutory constructionthat repeals by implication are not favored.”Radzanower v. Touche Ross Co., 426 U.S. 148, 154(1976).

Importantly, given the fact that the federalgovernment is the largest third-party payor of drugs inthe country, the Fourth Circuit’s opinion in this caseactually undermines the FD&CA by creating hugefinancial incentives to ignore it.

For all the foregoing reasons, this Court’sintervention is sought to uphold this Court’s precedentavoiding implied pre-emption of the FCA by other laws,and to resolve the circuit split on this issue.

This Case is an Appropriate Vehicle to Resolvethe Questions Presented

This case is an appropriate vehicle to resolve theQuestions Presented because they present purequestions of law, and a ruling on the QuestionsPresented will be determinative.

First, the district court and the circuit court foundthat the case was not jurisdictionally barred by theFCA’s public disclosure provision. Therefore, that issuehas been laid to rest.

Second, the district court’s ruling that Petitionersatisfied Rule 9(b) because he alleged a scheme thatnecessarily resulted in the ineligibility, and therefore

38

falsity, of all claims submitted to the government, is onall fours with the Fourth Circuit’s later decision inNathan v. Takeda. Hence, there will be no basis for thecircuit court or the district court to dismiss this actionon those grounds.

Third, this is not a situation where reasonableminds could differ on whether the statutes orregulations have a bearing on the essential element ofthe government’s bargain. Instead, the underlyingstatutes and regulations that were violated beardirectly on the quality of drugs paid for by Medicaidand Medicare Part D.

Fourth, the relevant cGMP regulations are notdiscretionary. Quite the contrary, they imposed a legalpresumption of actual penicillin cross-contaminationrendering the drugs adulterated and misbranded, andautomatically barred from interstate commerce.

Fifth, because drugs are regulated by the federalgovernment, it stands diametrically opposed from thefederalism situation faced by the Second Circuit inMikes v. Straus that spawned confusion over the“express condition of payment” pleading standard.

Suitable Companion to Case No. 13-435

This case will also make a natural companion to theCourt’s recent grant of a writ of certiorari in Omnicare,Inc. v. The Laborers District Council ConstructionIndustry Pension Fund and The Cement Masons Local526 Combined Funds, No. 13-435, petition grantedMarch 3, 2014. In that case, the question presented iswhether plaintiff shareholders bringing an actionunder Section 11 of the Securities Act of 1933, 15

39

U.S.C. § 77k, must plead objective falsity or subjectivefalsity as to Omnicare’s allegedly false and misleadingopinion that it was in material compliance withapplicable laws. As the decisions below in that casereveal, Omnicare’s opinions about legal compliance arealleged to be false because they were made at a timewhen Omnicare was the subject of two FCA actions andrelated government investigations that ultimatelyresulted in payments of over $100 million to Medicareand Medicaid. Indiana State Dist. Council of Laborersand HOD Carriers Pension and Welfare Fund v.Omnicare, Inc., 583 F.3d 935, 941 (6th Cir. 2009)(“ISDCL v. Omnicare I”) (noting Omnicare wasengaged in “improper drug recycling and improper drugsubstitution”), and 719 F.3d 498, (6th Cir. 2013)(“ISDCL v. Omnicare II”) (noting Omnicare providedimproper kickbacks to drug manufacturers). Therefore,the present case would provide a vehicle for thepetitioner in that case, Omnicare, to simultaneouslyaddress the pleading standard for the very type ofunderlying misconduct as to which it was rendering anopinion -- FCA liability arising from statutory orregulatory violations. Omnicare is well suited toaddress this issue, since it is the nation’s largestpharmacy catering to nursing homes, dispensing drugsto millions of nursing home patients across the country,and generating over $3 billion/year in revenue fromMedicare and Medicaid.

CONCLUSION

Petitioner respectfully submits that this Petitionshould be granted in its entirety.

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Respectfully submitted,

Gerald C. Robinson, Esq.Counsel of Record

Gerald Robinson Law Firm, PLLC5600 W. 70th Street, Suite 200Minneapolis, MN 55439(612) 803-5981gerald.robinson@gcrobinsonlaw.com

Attorney for Petitioner BarryRostholder

May 2014

APPENDIX

i

APPENDIX

TABLE OF CONTENTS

Appendix A Opinion and Judgment in the UnitedStates Court of Appeals for the FourthCircuit(February 21, 2014) . . . . . . . . . . . App. 1

Appendix B Memorandum and Order in theUnited States District Court for theDistrict of Maryland(August 14, 2012) . . . . . . . . . . . . App. 21

Appendix C Order in the the United StatesDistrict Court for the District of Maryland(October 19, 2012) . . . . . . . . . . . App. 62

App. 1

APPENDIX A

PUBLISHED

UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT

No. 12-2431

[Filed February 21, 2014]_______________________________________________UNITED STATES ex rel. BARRY )ROSTHOLDER; BARRY ROSTHOLDER, ) individually, )

)Plaintiffs - Appellants, )

)and )

)STATE OF CALIFORNIA; STATE OF ) DELAWARE; STATE OF FLORIDA; STATE OF ) HAWAII; STATE OF ILLINOIS; STATE OF ) INDIANA; STATE OF LOUISIANA; STATE OF )MASSACHUSETTS; STATE OF MICHIGAN; ) STATE OF MONTANA; STATE OF NEW )HAMPSHIRE; STATE OF NEW MEXICO; )STATE OF NEW YORK; STATE OF NEVADA; )STATE OF TENNESSEE; STATE OF TEXAS; )STATE OF VIRGINIA; COOK COUNTY, )ILLINOIS; DISTRICT OF COLUMBIA; CITIES )OF CHICAGO AND NEW YORK; STATE OF )GEORGIA; STATE OF NEW JERSEY; STATE OF )OKLAHOMA; STATE OF RHODE ISLAND; )

App. 2

STATE OF WISCONSIN, ))

Plaintiffs, ) )

v. ))

OMNICARE, INCORPORATED, a Delaware ) Corporation; OMNICARE DISTRIBUTION )CENTER, LLC, f/k/a Heartland Repack Services, ) LLC, a Delaware Limited Liability Company, )jointly and severally, )

)Defendants – Appellees. )

_______________________________________________ )

Appeal from the United States District Court for theDistrict of Maryland, at Baltimore. Catherine C.

Blake, District Judge. (1:07-cv-01283-CCB)

Argued: December 10, 2013Decided: February 21, 2014

Before NIEMEYER, SHEDD, and KEENAN, CircuitJudges.

Affirmed by published opinion. Judge Keenan wrotethe opinion, in which Judge Niemeyer and Judge Sheddjoined.

ARGUED: Gerald C. Robinson, GERALD ROBINSONLAW FIRM PLLC, Minneapolis, Minnesota, forAppellants. James Christopher Martin, REED SMITHLLP, Pittsburgh, Pennsylvania, for Appellees. ON BRIEF: Jay P. Holland, JOSEPH, GREENWALD& LAAKE, PA, Greenbelt, Maryland, for Appellants.Colin E. Wrabley, Pittsburgh, Pennsylvania, Eric A.

App. 3

Dubelier, Lawrence S. Sher, Katherine J. Seikaly,REED SMITH LLP, Washington, D.C., for Appellees.

BARBARA MILANO KEENAN, Circuit Judge:

Relator Barry Rostholder (relator) filed this qui tamaction under the False Claims Act (FCA), 31 U.S.C.§§ 3729 through 3733, against his former employer,Omnicare, Inc., and its affiliated companies. Relatoralleged that the defendants violated a series of Foodand Drug Administration (FDA) safety regulationsrequiring that penicillin and non-penicillin drugs bepackaged in complete isolation from one another, whichviolations resulted in a legal presumption of penicillincross-contamination. According to relator, thesecontaminated drugs were not eligible forreimbursement by Medicare and Medicaid and,therefore, any claims presented to the government forreimbursement for these drugs were false under theFCA.

The district court granted Omnicare’s motion todismiss the complaint under Federal Rule of CivilProcedure 12(b)(6). Because relator already had filedtwo amended complaints, the court denied any furtherleave to amend. Upon our review, we hold that relator’scomplaint failed to allege that the defendants made afalse statement or that they acted with the necessaryscienter. We also conclude that the district court didnot abuse its discretion in denying relator’s request tofile a third amended complaint. We therefore affirm thedistrict court’s judgment.

App. 4

I.

Omnicare provides certain pharmaceutical servicesto senior citizens through its drug repackaging andpharmacy facilities. As alleged in relator’s secondamended complaint, Omnicare owned HeartlandRepack Services, LLC (Heartland), the drugrepackaging operation at issue in this case located inToledo, Ohio (the Toledo building). Heartlandrepackaged drugs into convenient units for patient use.Omnicare also operated hundreds of pharmaciesnationwide, including a pharmacy that shared theToledo building with Heartland. Such pharmacies“primarily” served nursing homes owned by Omnicare’spartner, Health Care Resources.

Although Heartland repackaged non-penicillindrugs for distribution, the Omnicare pharmacy thatshared the Toledo building processed penicillinproducts. The pharmacy and the repackagingoperations were located in the Toledo building, andwere separated by “rolling” garage-type doors. Withinthe building, employees of both the repackaging andpharmacy units shared “break” areas, entrances, andexits. The Toledo building also had a single ventilationand heating/cooling system.

From 1997 until 2006, relator, a licensedpharmacist, was employed at Heartland. Relator’s jobresponsibilities included “overseeing repackaging,quality assurance, regulatory affairs, and wholesaleand distribution.” In 2004, Omnicare executive andrelator’s supervisor, Denis Holmes, suggested thatHeartland begin repackaging penicillin products.Relator informed Holmes that any repackaging ofpenicillin drugs would constitute a violation of FDA

App. 5

regulations requiring the separate processing ofpenicillin and non-penicillin products.

Relator conducted further research regarding theFDA’s penicillin isolation requirements and stated hisconclusions in a memorandum that he provided toHolmes. Relator also contacted the pharmacy managerin the Toledo building, who informed relator for thefirst time that the pharmacy frequently repackagedpenicillin, despite sharing the building withHeartland’s non-penicillin drug packaging operation(the Heartland facility). At Holmes’ request, relatorresearched and recommended ways in which Heartlandcould repackage penicillin in compliance with FDAregulations.

In February 2006, relator resigned from Heartlanddue to his concerns about the facility’s quality controlefforts. Several months after his resignation, relatornotified the FDA of Heartland’s “improper repackagingpractices.” Based on this information, FDAinvestigators visited the Heartland facility and wereadvised by employees that “no penicillin was beingrepackaged in the Repackaging Division.” Based onthese representations, the investigators left theHeartland facility.

Relator later participated in an interview with FDAofficials, during which “[h]e described the specificdetails of the penicillin exposure” at the Heartlandfacility. In the summer of 2006, the FDA conductedanother inspection of the Heartland facility anddiscovered that penicillin was being repackaged in theToledo building. Testing “revealed the presence ofpenicillin throughout the building,” including in theHeartland facility. As a result, the FDA issued a

App. 6

warning letter to Omnicare (the warning letter),outlining numerous violations of FDA regulations, bothrelated and unrelated to Omnicare’s practices ofhandling penicillin. The warning letter explained thatOmnicare’s failure to adhere to the FDA’s CurrentGood Manufacturing Practice regulations (the CGMPs)caused the drugs to be “adulterated.”

Rather than quarantining and conducting tests onits products, Omnicare disposed of nearly $19 millionworth of inventory. According to the complaint,Omnicare at that time had not recalled any of its drugsdue to suspected penicillin contamination, nor hadOmnicare reimbursed the government for amountsalready paid for the contaminated drugs.

In May 2007, relator filed this action under theFCA, 31 U.S.C. § 3729(a)(1), (a)(2), and (a)(7) (2006),1

and similar state statutes, against Omnicare and itsaffiliated companies (collectively, Omnicare).2 Relatoralleged that Omnicare “knowingly and/or recklesslyrepackaged drugs at [the Toledo building] in violationof applicable laws, including [the CGMPs], whichrendered [the drugs] presumptively unsafe under [theCGMPs], and therefore adulterated and misbranded,and therefore not in their FDA-approved form, andthus ineligible for coverage under government

1 The 2009 amendments to the FCA resulted in a renumbering ofthese sections. See Fraud Enforcement and Recovery Act of 2009,Pub. L. No. 111-21, 123 Stat. 1617. We refer to the pre-amendmentnumbering system as cited in the complaint.

2 The second amended complaint was filed in October 2010.

App. 7

programs.” The government declined to intervene inthe action.

The district court granted Omnicare’s motion todismiss, holding that relator had failed to allege thatOmnicare made a false statement to the government orengaged in fraudulent conduct. The court also held thatrelator had not adequately alleged the details of anyfalse claims that had been submitted to thegovernment for reimbursement. After the court deniedrelator’s motion for leave to amend his complaint,relator timely appealed.

II.

A.

Before addressing the merits of relator’s argumentson appeal, we first consider Omnicare’s assertion thatthe district court lacked subject matter jurisdictionover this action due to the “public disclosure bar” in theFCA. We review this jurisdictional question de novo,and examine the district court’s jurisdictional findingsof fact for clear error. U.S. ex rel. Vuyyuru v. Jadhav,555 F.3d 337, 350 (4th Cir. 2009); U.S. ex rel. Graysonv. Advanced Mgmt. Tech., Inc., 221 F.3d 580, 582 (4thCir. 2000); see also Gaines Motor Lines, Inc. v.Klaussner Furniture Indus., 734 F.3d 296, 301 (4th Cir.2013) (noting our “obligation to assure ourselves of ourjurisdiction”).

The version of the public disclosure bar in place atthe time of the relevant events3 provided:

3 The public disclosure bar provision was amended in 2010. SeePatient Protection and Affordable Care Act, Pub. L. No. 111-148,

App. 8

(A) No court shall have jurisdiction over anaction under this section based upon the publicdisclosure of allegations or transactions in acriminal, civil, or administrative hearing, in acongressional, administrative, or Government[General] Accounting Office report, hearing,audit, or investigation, or from the news media,unless the action is brought by the AttorneyGeneral or the person bringing the action is anoriginal source of the information.

(B) For purposes of this paragraph, ‘originalsource’ means an individual who has direct andindependent knowledge of the information onwhich the allegations are based and hasvoluntarily provided the information to theGovernment before filing an action under thissection which is based on the information.

31 U.S.C. § 3730(e)(4) (2006) (emphasis added).Omnicare argues that the public disclosure bardivested the district court of jurisdiction becauserelator’s complaint is “based upon” the warning letterand Omnicare’s “Form 10-Ks” filed with the Securities

124 Stat. 119 (2010). The disclosures at issue in this case occurredin 2006, and relator filed the original complaint in 2007. Theamendments to the public disclosure bar are not retroactive, andneither party argues that the amended statute should apply. SeeGraham Cnty. Soil & Water Conservation Dist. v. U.S. ex rel.Wilson, 559 U.S. 280, 283 n.1 (2010). Accordingly, like the districtcourt, we apply the pre-amendment version of the statute and ourprecedent interpreting that version.

App. 9

and Exchange Commission (SEC).4 Omnicare alsoasserts that relator is not an “original source” of theinformation in the complaint. We disagree withOmnicare’s arguments.

Under this Court’s precedent, “a qui tam action isbased upon publicly disclosed allegations only if the quitam plaintiff’s allegations were actually derived fromthe public disclosure itself.” U.S. ex rel. Wilson v.Graham Cnty. Soil & Water Conservation Dist., 528F.3d 292, 308 (4th Cir. 2008), rev’d on other grounds by559 U.S. 280 (2010) (emphasis in original). A qui tamaction will “not be barred if the plaintiff’s claims aresimilar or even identical to the publicly disclosedallegations, so long as the plaintiff had independentknowledge of the facts and did not derive hisallegations from the public disclosure itself.”5 Id.

We conclude that relator’s FCA complaint was not“based upon” the warning letter or SEC filings, despiteOmnicare’s objection to the “substantial similarities”between the allegations in the complaint and the publicdisclosures. The complaint makes clear that relator

4 Publicly traded companies must submit to the SEC a “Form 10-K” annually. The form “provides a comprehensive overview of thecompany’s business and financial condition and includes auditedfinancial statements.” U.S. Securities and Exchange Commission,Form 10-K, available at http://www.sec.gov/answers/form10k.htm(last accessed Feb. 20, 2014).

5 We note that under the amended version of the statute, thepublic disclosure bar applies “if substantially the same allegationsor transactions as alleged in the action or claim were publiclydisclosed,” unless the plaintiff was an original source. 31 U.S.C. §3730(e)(4).

App. 10

discovered the penicillin-related violations of theCGMPs during his employment at Heartland. Relator’sknowledge was based on his conversations with otheremployees in the Toledo building, his personalfamiliarity with the repackaging operations, and hisown independent research. Relator also alleged that hetwice informed the FDA of the penicillin exposureissues at Heartland, which precipitated the FDAinvestigations and resulted in the FDA’s issuance ofthe warning letter.

Also in his complaint, relator alleged that Omnicaresupplied drugs to patients residing in nursing carefacilities who primarily were insured by governmenthealth care programs. These allegations illustraterelator’s independent knowledge, apart from the SECfilings regarding Omnicare’s revenue, that Omnicarecaused claims to be submitted to the government forpayment. See Vuyyuru, 555 F.3d at 353.

For the same reasons, we conclude that relator hassufficiently alleged that he had “direct and independentknowledge of the information on which the allegationsare based,” thereby entitling him to original sourcestatus. See 31 U.S.C. § 3730(e)(4)(B) (2006).Accordingly, we hold that the public disclosure bar didnot divest the district court of jurisdiction over relator’sFCA claims.

B.

We next consider relator’s primary argument onappeal, namely, that the district court erred indismissing relator’s complaint on the ground that hedid not adequately allege a false statement or afraudulent course of conduct as required for an FCA

App. 11

claim. We review de novo the district court’s dismissalof relator’s complaint under Rule 12(b)(6). U.S. ex rel.Nathan v. Takeda Pharms. N. Am., Inc., 707 F.3d 451,455 (4th Cir. 2013).

The FCA is designed to prevent fraud and reflectsCongress’ broad goal “to protect the funds and propertyof the government.” U.S. ex rel. Owens v. First KuwaitiGen. Trading & Contracting Co., 612 F.3d 724, 728 (4thCir. 2010) (citation and quotation marks omitted).Under 31 U.S.C. § 3729(a)(1), a person is liable to theUnited States government if he “knowingly presents, orcauses to be presented, a false or fraudulent claim forpayment or approval.” To plead an FCA claim, a relatormust plausibly allege four distinct elements: “(1) []there was a false statement or fraudulent course ofconduct; (2) made or carried out with the requisitescienter [knowledge]; (3) that was material; and (4)that caused the government to pay out money or toforfeit moneys due (i.e., that involved a ‘claim’).”6

Harrison v. Westinghouse Savannah River Co., 176F.3d 776, 788 (4th Cir. 1999).

Relator contends that he adequately alleged theelements of an FCA claim in this case. He asserts thatby failing to comply with the CGMPs, Omnicare’srepackaged drugs were “adulterated” and prohibitedfrom interstate commerce and, therefore, ineligible forreimbursement by Medicare and Medicaid. Relator

6 These elements similarly apply to FCA claims brought under§ 3729(a)(2) and (a)(7). See Harrison v. Westinghouse SavannahRiver Co., 176 F.3d 776, 784-88 (4th Cir. 1999); U.S. ex rel.Sanders v. N. Am. Bus Indus. Inc., 546 F.3d 288, 297, 299 (4th Cir.2008).

App. 12

thus maintains that any claim for reimbursement forthese drugs under government programs was false orfraudulent within the meaning of the FCA.

To determine whether relator’s allegations in hissecond amended complaint were sufficient to withstandOmnicare’s motion to dismiss under Rule 12(b)(6), wefirst consider the general regulations and the statutoryprovisions on which relator’s FCA claim is based. FDAregulations set forth the “Current Good ManufacturingPractices” related to the handling of penicillin. TheCGMPs require that “[o]perations relating to themanufacture, processing, and packing of penicillin” be“performed in facilities separate from those used forother drug products for human use,” and additionallymandate “completely separate” “air-handling systems”for such operations involving penicillin and other typesof drugs. 21 C.F.R. §§ 211.42, 211.46(d).

The regulations require that non-penicillin drugs betested for the presence of penicillin “[i]f a reasonablepossibility exists” that the non-penicillin drug has beenexposed to penicillin cross-contamination. 21 C.F.R.§ 211.176. The non-penicillin drug may not bemarketed “if detectable levels [of penicillin] are foundwhen tested.” Id. Drugs that do not comply with theCGMPs are considered “adulterated” within themeaning of the Food, Drug, and Cosmetic Act (FDCA),and are not permitted in interstate commerce. 21U.S.C. §§ 331, 351(a)(2)(B); see also 21 C.F.R. 210.1(failure to comply with the CGMPs renders a drug“adulterated”).

Relator’s assertion that Omnicare fraudulentlymade claims for payment for “adulterated” drugs isbased on the statutes governing reimbursement under

App. 13

Medicare and Medicaid. Those statutes define “coveredoutpatient drugs” as those “approved for safety andeffectiveness” under the FDCA, 21 U.S.C. § 355. See 42U.S.C. § 1396r-8(k)(2)(A)(i) (Medicaid); 42 U.S.C.§ 1395w-102(e) (Medicare Part D); see also 42 C.F.R.§ 423.100 (defining Medicare “Part D” drug). The FDA’sapproval process for new drugs under 21 U.S.C. § 355requires that an application for approval describe “themethods used in, and the facilities and controls usedfor, the manufacture, processing, and packing” of thedrug. 21 U.S.C. § 355(b). The FDA may refuse anapplication or withdraw a previously approvedapplication if these methods or facilities “areinadequate to preserve [the drug’s] identity, strength,quality, and purity.” Id. § 355(d), (e). A new drug maynot be introduced into interstate commerce unless anapproved application is in effect. 21 U.S.C. § 355(a).

According to relator, because the Medicare andMedicaid statutes refer to the FDCA’s requirements fornew drug approval and marketing set forth in Section355, Medicare and Medicaid do not authorizereimbursement for any drugs that are “adulterated”due to non-compliance with the CGMPs. Relatoracknowledges, however, that the Medicare andMedicaid statutes do not expressly prohibitreimbursement for drugs that have been adulterated.Moreover, those statutes do not require compliancewith the CGMPs or any other FDA safety regulationsas a precondition to reimbursement.

To qualify as a “covered outpatient drug” as definedin the Medicare and Medicaid statutes, a drug merelymust be approved by the FDA. The relevant statutes donot provide that when an already-approved drug has

App. 14

been produced or packaged in violation of FDA safetyregulations, that particular drug may not be the propersubject of a reimbursement request under Medicareand Medicaid. Therefore, we conclude that once a newdrug has been approved by the FDA and thus qualifiesfor reimbursement under the Medicare and Medicaidstatutes, the submission of a reimbursement requestfor that drug cannot constitute a “false” claim underthe FCA on the sole basis that the drug has beenadulterated as a result of having been processed inviolation of FDA safety regulations.

Relator maintains, nevertheless, that he adequatelyhas pleaded a false claim because compliance with theCGMPs is material to the government’s decision toprovide reimbursement for regulated drugs. However,relator must allege both materiality and a “falsestatement or fraudulent course of conduct” as distinctelements of an FCA claim. See Harrison, 176 F.3d at788; Owens, 612 F.3d at 729. Here, because compliancewith the CGMPs is not required for payment byMedicare and Medicaid, Omnicare has not falselystated such compliance to the government, ascontemplated by the FCA.7 Thus, relator’s allegationsof regulatory violations fail to support FCA liability.See Harrison, 176 F.3d at 786-87 (discussing U.S. ex.

7 Because adulterated drugs are subject to reimbursement byMedicare and Medicaid and therefore any claim for paymentcannot be “false,” we do not separately address relator’s argumentsfor FCA liability under “implied certification” or “worthlessservices” theories. See generally United States v. Sci. ApplicationsInt’l Corp., 626 F.3d 1257, 1266-71 (D.C. Cir. 2010) (discussingvarious versions of the implied certification theory); U.S. ex. rel.Mikes v. Straus, 274 F.3d 687, 702-03 (2d Cir. 2001) (describingworthless services theory).

App. 15

rel. Thompson v. Columbia/HCA Healthcare Corp., 125F.3d 899, 902 (5th Cir. 1997), and stating that FCAliability based on a false certification to the government“will lie only if compliance with the statutes orregulations was a prerequisite to gaining a benefit, andthe defendant affirmatively certified such compliance”).As we previously have explained, the correction ofregulatory problems is a worthy goal, but is “notactionable under the FCA in the absence of actualfraudulent conduct.” Mann v. Heckler & Koch Def.,Inc., 630 F.3d 338, 346 (4th Cir. 2010) (emphasis addedand citation omitted). In the present case, relator hasnot identified any false statement or other fraudulentmisrepresentation that Omnicare made to thegovernment.

Were we to accept relator’s theory of liability basedmerely on a regulatory violation, we would sanction useof the FCA as a sweeping mechanism to promoteregulatory compliance, rather than a set of statutesaimed at protecting the financial resources of thegovernment from the consequences of fraudulentconduct. When an agency has broad powers to enforceits own regulations, as the FDA does in this case,allowing FCA liability based on regulatory non-compliance could “short-circuit the very remedialprocess the Government has established to addressnon-compliance with those regulations.” U.S. ex rel.Wilkins v. United Health Grp., Inc., 659 F.3d 295, 310(3d Cir. 2011).

Under the provisions of the FDCA, the Secretary ofHealth and Human Services may suspend or withdrawFDA approval of a drug if the packaging process is“inadequate to assure and preserve [the drug’s]

App. 16

identity, strength, quality, and purity.” 21 U.S.C.§ 355(e). In the present case, the FDA pursuednumerous regulatory actions against Omnicare,including conducting multiple inspections of the Toledobuilding and issuing the warning letter. The FDA alsothreatened seizure of Heartland products, use ofinjunctive remedies, and action recommending“disapproval of any new applications listing[Heartland] as a manufacturer of drugs.” The existenceof these significant remedial powers of the FDAbuttresses our conclusion that Congress did not intendthat the FCA be used as a regulatory-compliancemechanism in the absence of a false statement orfraudulent conduct directed at the federal government.

For the same reasons that relator has failed to pleadthe existence of a false statement or fraudulentconduct, he cannot plausibly allege that Omnicareacted with the requisite scienter when submittingclaims to the government for drugs not in compliancewith the CGMPs. Liability under the FCA requires thatthe defendant acted “knowingly,” which by definitionrequires actual knowledge, deliberate ignorance, orreckless disregard of the truth or falsity of theinformation. 31 U.S.C. § 3729(a), (b)(1). Because theMedicare and Medicaid statutes do not prohibitreimbursement for drugs packaged in violation of theCGMPs, Omnicare could not have knowingly submitteda false claim for such drugs.8

8 Because we conclude that relator failed to plead the existence ofa false statement and the scienter required for an FCA claim, wedo not address Omnicare’s alternative argument that relator didnot allege the presentment of a false claim with particularity

App. 17

We also conclude that the district court did notabuse its discretion in denying relator’s request to filea third amended complaint. In seeking leave to amend,relator did not comply with the District of Maryland’slocal rules, which require that a plaintiff attach to amotion to amend “the proposed amended pleading.” D.Md. Local Rule 103(6)(a). Relator’s failure to complywith this rule justified the district court’s denial ofleave to amend. See Francis v. Giacomelli, 588 F.3d186, 197 (4th Cir. 2009). Moreover, any amendmentwould have been futile in light of our holding thatadulterated drugs are not barred from reimbursementby Medicare and Medicaid and, therefore, claims forreimbursement for these drugs cannot be “false” underthe FCA.

Finally, we emphasize that we do not condoneOmnicare’s disregard of FDA safety regulations thatapparently occurred in this case. Nevertheless, weremain convinced that the submission of claims forpayment for drugs packaged at the Heartland facilitydid not constitute fraud on the government, and we areconfident that the FDA’s use of its regulatoryenforcement powers may be exercised fully to ensurefurther compliance with applicable safety standards.

III.

In sum, we conclude that the district court properlyexercised jurisdiction over this action, but that relatorfailed to plead the existence of a false statement and

under Federal Rule of Civil Procedure 9(b) and our decision inNathan, 707 F.3d 451.

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scienter as required by the FCA. Accordingly, we affirmthe district court’s judgment.

AFFIRMED

App. 19

UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT

No. 12-2431 (1:07-cv-01283-CCB)

[Filed February 21, 2014]_______________________________________________UNITED STATES ex rel. BARRY )ROSTHOLDER; BARRY ROSTHOLDER, ) individually, )

)Plaintiffs - Appellants, )

)and )

)STATE OF CALIFORNIA; STATE OF ) DELAWARE; STATE OF FLORIDA; STATE OF ) HAWAII; STATE OF ILLINOIS; STATE OF ) INDIANA; STATE OF LOUISIANA; STATE OF )MASSACHUSETTS; STATE OF MICHIGAN; ) STATE OF MONTANA; STATE OF NEW )HAMPSHIRE; STATE OF NEW MEXICO; )STATE OF NEW YORK; STATE OF NEVADA; )STATE OF TENNESSEE; STATE OF TEXAS; )STATE OF VIRGINIA; COOK COUNTY, )ILLINOIS; DISTRICT OF COLUMBIA; CITIES )OF CHICAGO AND NEW YORK; STATE OF )GEORGIA; STATE OF NEW JERSEY; STATE OF )OKLAHOMA; STATE OF RHODE ISLAND; )STATE OF WISCONSIN, )

)Plaintiffs )

)v. )

)

App. 20

OMNICARE, INCORPORATED, a Delaware ) Corporation; OMNICARE DISTRIBUTION )CENTER, LLC, f/k/a Heartland Repack Services, ) LLC, a Delaware Limited Liability Company, )jointly and severally, )

)Defendants – Appellees. )

_______________________________________________ )

J U D G M E N T

In accordance with the decision of this court, thejudgment of the district court is affirmed.

This judgment shall take effect upon issuance ofthis court’s mandate in accordance with Fed. R. App. P.41.

/s/ PATRICIA S. CONNOR, CLERK

App. 21

APPENDIX B

IN THE UNITED STATES DISTRICT COURTFOR THE DISTRICT OF MARYLAND

Civil No. CCB-07-1283

[Filed August 14, 2012]_________________________________________UNITED STATES OF AMERICA, ex rel. )BARRY ROSTHOLDER, ET AL. )

)v. )

)OMNICARE, INC., ET AL. )_________________________________________ )

MEMORANDUM

Barry Rostholder (“Relator”), a former employee ofHeartland Repack Services, LLC (“Heartland Repack”),brings this claim against Heartland Repack and itsparent company, Omnicare Inc. (“Omnicare”), as a quitam relator on behalf of the United States under thefederal False Claims Act, 31 U.S.C. §3730(b)(1). Relatoralso includes claims under state and local false claimslaws on behalf of 22 states; the District of Columbia;Cook County, Illinois; and the cities of Chicago andNew York. Defendants Heartland Repack andOmnicare have jointly filed a motion to dismiss for lackof subject matter jurisdiction and for failure to meetthe pleading standards of Fed. R. Civ. P. 9(b) and Fed.R. Civ. P. 12(b)(6). A hearing was held on June 28,

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2012. For the following reasons, the defendants’motions to dismiss will be granted.

I. BACKGROUND

The federal False Claims Act (“FCA” or “the Act”),31 U.S.C. §§ 3729–3733 (2006), prohibits persons andentities from knowingly presenting, or “caus[ing] to bepresented,” false or fraudulent claims to the federalgovernment for payment or approval. Id. § 3729(a)(1).The FCA may be enforced directly by the AttorneyGeneral, but it also contains an alternative privateenforcement mechanism. This “qui tam” provisionallows private individuals—often, but not always,whistleblowers with inside information about fraud—tobring suit on behalf of the United States. See id.§§ 3730(b), (e). The private individual, called a“relator,” must file suit under seal, giving the UnitedStates government time to investigate the claim andchoose to either intervene in the action or allow therelator to proceed on his own. Id. § 3730(b)(4). Theaction is then unsealed and notice provided to thedefendant. If the action is successful, the relatorreceives a percentage of any proceeds. Id. § 3730(d).

This FCA case involves Medicare and Medicaidbilling for Heartland Repack pharmaceutical productsthat may have been exposed to penicillin cross-contamination in violation of Food Drug and CosmeticsAct (FDCA) regulations. See 21 C.F.R. §§ 211.42(d),211.176. According to relator, between 2001 and 20071

1 The False Claims Act contains a six-year statute of limitations,31 U.S.C. § 3731(b)(1), which is tolled when the relator originallyfiles suit. See In re Pharm. Indus. Average Wholesale Price Litig.,498 F. Supp. 2d 389, 396 (D. Mass. 2007). Relator filed suit in 2007

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Heartland Repack sold the products to Omnicarepharmacies and other pharmacies jointly owned byOmnicare, knowing that the products were adulterated.These pharmacies then allegedly billed state Medicaidprograms for reimbursement or resold the products tounrelated long-term care facilities which either directlyor indirectly billed Medicare for the products. Relatorargues that the United States and various states andlocalities did not get the benefit of the bargain whenthey reimbursed Omnicare and its clients for theallegedly adulterated products. Thus, relator argues,Heartland Repack and Omnicare should be liableunder the federal False Claims Act and similar stateand local laws.

A. Defendants’ business model

Omnicare is a Delaware corporation with itsprincipal place of business in Covington, Kentucky. Thecorporation provides pharmacy services to patients andresidents of long-term care facilities. During the claimperiod, Omnicare operated approximately threehundred “long-term care pharmacies” that servicedskilled nursing facilities and long-term care facilities inforty-seven states. (Second Am. Compl. ¶ 67 (“SAC”).)In 2006, the last year before this suit was filed,Omnicare reported $6.5 billion in net sales revenue.(Id. at ¶ 71.)

Heartland Repack is a wholly-owned subsidiary ofOmnicare. In 1994, Omnicare entered into a 50-50partnership with a long-term care provider, Health

and therefore this suit cannot reach any of defendants’ actions thatoccurred prior to 2001.

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Care Resources, n/k/a HCR Manor Care (“HCR”), toform Heartland Healthcare Services. HeartlandHealthcare Services was located in a warehouse inToledo, Ohio, and was comprised of several units,including wholesale and distribution, repackaging, anda pharmacy. In 2001, Omnicare acquired HCR’sownership stake in the wholesale and distribution andrepackaging units of Heartland Healthcare Services.With these units, Omnicare formed Heartland Repack.2

“Repackaging” was an important part of Omnicare’svertically-integrated business model. Most patients orresidents of long-term care facilities are prescribed aregimen of various medications. Heartland Repackutilized a repackaging method through which the exactmedications a patient needed at a certain time of daywould be segregated into “sealed cells or ‘blisters.’” (Id.at ¶¶ 73–75.) Heartland Repack would purchase bulkpharmaceutical products (mainly generic drugs) andthen repackage them into “bingo cards” with plasticbubbles full of the appropriate medication or “unitdoses” that were smaller versions of bingo cards. (Id. at¶¶ 69, 76.) The repackaged drugs were sold toOmnicare’s three hundred long-term care pharmaciesas well as to the three Heartland Healthcare Servicespharmacies. (Id. at ¶ 68.)

After the formation of Heartland Repack, theHeartland Healthcare Services pharmacy unitcontinued to be owned jointly by Omnicare and HCR,and the Heartland Repack repackaging unit and theHeartland Healthcare Services pharmacy unit

2 In 2008, Heartland Repack was renamed Omnicare DistributionCenter, LLC.

App. 25

continued to jointly occupy the original warehouse. (Id.at ¶ 61.)

Heartland Repack was a large facility. The companyemployed “over 100 individuals on a regular basis,” (id.at ¶ 85), and by 2005 Heartland Repack wasrepackaging “over 200 million doses” annually. (Id. at¶ 69.) According to relator, Heartland Repack was oneof only two repackaging facilities owned by Omnicare,(id. at ¶ 72), with the other facility, Vanguard Repack,located in Glasgow, Kentucky. (Relator’s Opp. to Def.’sMot. Dismiss 25, ECF No. 87). At first, HeartlandRepack was the larger of the two facilities, though theyeventually became the same size “in later years.” (SAC¶ 72.) Heartland Repack and Vanguard Repacktogether provided a substantial percentage—or perhapsall—of the drugs for Omnicare’s three hundred long-term care pharmacies.3

Reimbursement from Medicaid and Medicare hasbeen an important source of sales revenue forOmnicare. According to Omnicare’s 10-K filings withthe SEC, as relator notes in the SAC, “historicallyapproximately one half of [Omnicare’s] revenue wasderived ‘directly from government sources, principally

3 Relator contends in his opposition memorandum that Omnicare’sthree hundred long-term care pharmacies received all of theirdrugs from either Vanguard Repack or Heartland Repack.(Relator’s Opp. to Def.’s Mot. Dismiss 25, ECF No. 87.) This fact isnot stated expressly in the complaint, but is implied by statementssuch as “[t]he repackaging operation provided repackagedpharmaceuticals to all of the Omnicare pharmacies,” (SAC ¶ 85),and “at all times Heartland Repack was the source for a majorityof the drugs that generated Omnicare’s revenue, including revenuefrom government programs and plans.” (Id. at ¶ 72.)

App. 26

state Medicaid programs and to a lesser extent thefederal Medicare program.’” (Id. at ¶ 70 (quotingOmnicare’s Mar. 16, 2006, 10-K filing).) The SACprovides specific numbers from 2005 and 2006. In 2005,46% of Omnicare’s $5.3 billion in net sales revenue was“derived from beneficiaries covered under stateMedicaid programs.” (Id.) After Medicare Part Dbecame effective on January 1, 2006, the sources ofOmnicare’s revenue shifted toward Medicare. In 2006,42% of the company’s $6.5 billion in net sales camefrom Medicare and only 12% from Medicaid. (Id. at¶ 71 (citing Omnicare’s Mar. 1, 2007 10-K filing).)

The SAC provides a description of how the productswere ordered from Heartland Repack and howgovernment program reimbursement functioned.Heartland Repack would receive “an order for bingocards or unit doses from an Omnicare [or presumablya Heartland Healthcare Services] pharmacy.” (Id. at¶ 77.) When the order was processed, HeartlandRepack would “inscribe each bingo card or unit dosewith a Lot Number, a Heartland Repack ServicesNational Drug Code (“NDC”) number, and the drugmanufacturer’s NDC number.” (Id.) NDC numbers areunique three-segment numbers required by FDCAregulations.4 The first segment of the number, the

4 FDCA regulations require establishments “that engage in themanufacture, preparation, propagation, compounding, orprocessing” of human drugs to “register and submit a list of everydrug in commercial distribution.” 21 C.F.R. § 207.20. The drug listsmust include NDC numbers for each drug. Id. § 207.25. The NDCnumber is “requested but not required to appear on all drug labelsand in all drug labeling, including the label of any prescriptiondrug container furnished to a consumer.” Id. § 201.2.

App. 27

“labeler code,” identifies the specific manufacturer ordistributor (including repackers) of the drug product.See 21 C.F.R. § 207.35(b)(2)(i).

After repackaging, drugs were sent to HeartlandRepack’s wholesale and distribution unit, which “keptrecords of the drugs and lot numbers received.” (SAC¶ 78.) The wholesale and distribution unit then soldand shipped the products to the Omnicare andHeartland Healthcare Services pharmacies. Thesepharmacies “in turn provided repackaged drugs to HCRManor Care Nursing Homes and other long-term carefacilities.” (Id. at ¶ 79.) As relator describes in the SAC:

Specifically, HCR Manor Care Nursing Homesand other SNFs/ALFs would submit patientpharmaceutical orders to their regionalHeartland Healthcare Services or Omnicarepharmacy for processing. The orders would thenbe processed by the pharmacy intakedepartment (which verifies all patient payorsources such as Medicare, Medicaid, privateinsurance, etc.), packed into a plastic “tote bag”for each patient, and shipped to the appropriatecare facility.

(Id. at ¶ 80.)

Heartland Repack thus did not itself receivepayments directly from government sources. Thecompany’s only income, as described by relator, camefrom sales of repackaged pharmaceuticals to Omnicareand Heartland Healthcare Services pharmacies.Whether and how government program reimbursementto these pharmacies took place depended on eachpatient, or the mix of patients, at a nursing home or

App. 28

SNF and their respective eligibility. Relator includesshort descriptions of the various programs under whichhe alleges that the government providedreimbursements for Heartland Repack drugs.

Under Medicare, the Centers for Medicare andMedicaid Services (“CMS”), a division of the UnitedStates Department of Health and Human Services,provides reimbursements for the use of approvedprescription drugs under the different relevant sectionsof the program. Medicare Part A uses a “ProspectivePayment System” (“PPS”) to pay for services providedto hospital inpatients, home health care patients, andpatients of Skilled Nursing Facilities (“SNFs”). (Id. at¶ 19.)5 This system means that providers do not billMedicare for specific drugs necessary for specificpatients. Rather, as described in the SAC:

[A] skilled nursing facility receives a “bundled”payment for all services and items provided toan SNF patient covered by Medicare Part A. The“bundled” payment is an estimate of the costs forall lodging, meals, skilled nursing care, physicaltherapy, medications, social services, and otherqualified treatments based, in part, on actualcost data submitted by each SNF in its annualCost Report.

(Id. at ¶ 20.) In annual Medicare Cost Reports, afacility would report the price it paid for drugspurchased from an Omnicare or Heartland Healthcare

5 Medicare will pay for care provided to SNF patients for up to 100days, after which time the patient assumes responsibility for thecosts. If the patient does not have the financial means to pay, thenthe costs are covered under Medicaid. (SAC ¶ 21.)

App. 29

Services pharmacy. (Id. at ¶ 81.) And the facility “mustproperly differentiate between ‘allowable costs’ and‘non-allowable costs’ incurred. Allowable costs includeFDA-approved drugs, but not drugs whose safety wasuncertain and therefore not in their FDA-approvedform.” (Id. at ¶ 20.)

After January 1, 2006, Medicare beneficiaries couldenroll in Medicare Part D, which provided muchbroader prescription drug coverage than previouslyavailable under Medicare Part A. Part D is mediated byprivate insurers, called Part D Providers (“PDPs”).Under Part D, long term care facilities and skillednursing facilities would order prescriptions fromOmnicare or Heartland Healthcare Servicespharmacies, and the pharmacies would bill PDPs. (Id.at ¶ 83.) PDPs receive payment from Medicare inaccordance with previously negotiated agreements. Asthe SAC describes:

[T]he government advances funds to the Part DProvider (“PDP”) on a monthly basis according tothe PDP’s accepted bid. As an express conditionof payment under Medicare Part D, for eachprescription dispensed to one of its Part Denrollees, the PDP must submit to Medicarecertain “prescription drug event data,” includingthe price paid by the PDP. The required data isused in the yearend reconciliation processdesigned to ensure that the governmentultimately only pays for the actual cost of FDA-approved drugs dispensed to enrolledbeneficiaries.

(Id. at ¶ 26.)

App. 30

Medicare Part C, also known as MedicareAdvantage (“MA”), works through a similar model. PartC allows Medicare beneficiaries to receive all Medicarebenefits (not just for prescription drugs) throughprivate insurance plans, instead of directly from CMS.Under MA, the government pays the private insurer amonthly amount per enrolled beneficiary. (Id. at ¶ 23.)MA plans cover the costs associated with Medicare PartA, and for an additional premium MA plans may alsooffer Medicare Part D outpatient drug coverage—theseare known as MA-PD plans. For drugs provided tobeneficiaries with either type of MA plan, Omnicare orHeartland Healthcare Services pharmacies would billthe private Part C providers who “in turn receivedfunds from the government,” (id. at ¶ 83), and “thegovernment imposes certain reporting requirements toensure that it is only paying for eligible drugs.” (Id. at¶ 23.)

Under Medicaid, which is a joint federal-stateprogram, the Omnicare and Heartland HealthcareServices pharmacies “submit claims directly to therelevant state Medicaid agency’s fiscal intermediary,which then pays the claims according to that state’sapproved Medicaid covered drug payment schedule.”(Id. at ¶ 29.) Federal laws and regulations limitMedicaid payments to those for “reasonable andnecessary services.” (Id. at ¶ 30.) And coverage ofoutpatient drugs is limited to “those that meet all therequirements and conditions of FDAapproval.” (Id.(citing 42 U.S.C. § 1396r-8(k)(2)(A)(i)).) The federalgovernment makes quarterly grants to each state toreimburse the state for the federal share of Medicaidexpenditures. See 42 C.F.R. § 430.30. To obtainreimbursement for the federal share of program

App. 31

expenditures, a State must submit a quarterlyexpenditure report to CMS (the “CMS–64 Report”)stating the amount the State expended on servicesduring the relevant quarter. Id.

Relator also alleges that drugs repackaged atHeartland Repack were, in some cases, eventuallyreimbursed by federal programs other than Medicareor Medicaid. The SAC briefly describes and providescitations to the laws and regulations governing theTRICARE/CHAMPVA program for active duty andretired members of the uniformed services, theVeteran’s Health Administration, and the FederalEmployee Health Benefit Program. The SAC, however,does not provide any factual allegations to support theclaim that beneficiaries of those programs were servedwith drugs repackaged at Heartland Repack. Thus, itis unnecessary here to detail the specificreimbursement policies and procedures of theseprograms.

B. Relator’s allegations of fraudulent conduct

Relator began his employment for the defendants in1997 and left in February or March of 2006. At somepoint during this time period, and presumably duringthe events described below, he was employed byHeartland Repack as “Senior Director of Operations forrepacking.” (SAC ¶ 8.) His responsibilities includedoverseeing repackaging, quality assurance, regulatoryaffairs, and wholesale and distribution—though atsome point a reorganization removed wholesale anddistribution from his supervision.

In mid-2004, Omnicare Senior Vice-President DenisHolmes suggested to relator that Heartland Repack

App. 32

consider adding amoxicillin and penicillin to the list ofdrugs repackaged at the facility. (Id. at ¶ 90.) Relatorresearched FDA guidelines and sent a memorandum toHolmes and to Omnicare’s attorney Ralph Breitfeller.(Id. at ¶ 93.) The memorandum concluded that“repackaging penicillin alongside the otherpharmaceuticals was in fact in violation of FDAregulations.” (Id.) Because penicillin drugs can causeallergic reactions in up to two percent of patients, theFDCA current Good Manufacturing Practices(“CGMP”) require that “[o]perations relating to themanufacture, processing, and packing of penicillinshall be performed in facilities separate from thoseused for other drug products for human use.” 21 C.F.R.§ 211.42(d).

During his research, relator contacted the managerfor the Heartland Healthcare Services pharmacy thatcontinued to share the warehouse building withHeartland Repack. The pharmacy manager thereadvised him that the pharmacy “repacked penicillinfrequently.” (SAC ¶ 94.) This was a problem, relatorstates, because “the pharmacy unit was separated fromthe repackaging unit only by large overhead doors(similar to garage doors) which . . . were kept openapproximately 25 percent of the time during businesshours.” (Id. at ¶ 65.) And, “the same ventilation andheating/cooling system was used throughout thebuilding.” (Id.)

Relator advised both Holmes and Breitfeller of thesituation, but according to relator, nothing was done tothe remedy the problem. As relator alleges, “Holmesdid not respond to Relator’s suggestions regarding legalmethods in which Heartland Repack could repackage

App. 33

penicillin. After relator left Holmes’ office, the issue ofrepackaging penicillin at Heartland Repack was notbrought up again.” (Id. at ¶ 108.) Relator resigned fromHeartland Repack on or about February 28, 2006,allegedly as a result of “repeated disagreements withmanagement over quality control issues,” including thecross-contamination issue. (Id. at ¶ 109.)

C. FDA Warning Letter

According to the Second Amended Complaint,relator “caused and precipitated” an FDA investigationof Heartland Repack in mid-2006. (Id. at ¶ 115.)“Approximately four or five months after resigningfrom Heartland Repack,” relator was travelling onbusiness for a new company, and he used a pay phonefrom the Cleveland Hopkins airport in Ohio “to call theFDA Unit in Cincinnati and report Heartland Repack’simproper repackaging practices.” (Id. at ¶ 110.)

The FDA sent inspectors to the Toledo facility.According to relator, Heartland Repack employees toldinspectors that “‘no penicillin was being repackaged inthe Repackaging Division’ – a statement that wasmisleading because it failed to disclose that penicillinwas being repacked in the pharmacy located in thesame building . . . .” (Id. at ¶ 111.) Relator againcontacted the FDA and was interviewed by two FDAagents to whom he “described the specific details of thepenicillin exposure at Heartland Repack’s Toledofacility.” (Id. at ¶ 113.)

When the FDA returned to the Heartland Repackbuilding, it inspected the neighboring pharmacy aswell. The result of the investigation was described in

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an FDA Warning Letter sent to Omnicare on January11, 2007. According to the letter, the

[FDA investigator] documented seriousdeviations from the Current GoodManufacturing Practice (CGMP) regulations . . .These deviations cause your drug products to beadulterated within the meaning of section501(a)(2)(B) [21 U.S.C. § 351(a)2)(B)] of theFederal Food Drug and Cosmetic Act.

(Warning Letter 1, ECF No. 94-1).

The penicillin cross-contamination issue is the firstand most prominent CGMP deviation cited in theletter. According to the letter:

Separate or defined areas or other controlsystems to prevent contamination or mixup areinadequate, and operations relating to therepacking of penicillin are not performed infacilities separate from those used for non-penicillin drug products for human use. [21 CFR§ 211.42(c) and (d)] Specifically, your firm,which repacks human drugs, shares a buildingwith a pharmacy that packs betalactamantibiotics, including penicillins andcephalosporins. Your facility shares a commondock area, common receiving area, doorways, anoverhead door near the maintenance room,cleaning equipment, and personnel with thepharmacy. The pharmacy uses the common areato receive beta-lactams. Sufficient controls havenot been established to prevent the exposure ofcephalosporin drug products and non-beta-lactam drug products to cross-contamination,

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either with penicillin drug products or with eachother.

(Id. at 2 (emphasis in original).) Citing the aboveproblems, the letter continues:

Non-penicillin drug products were not tested forthe presence of penicillin, when a reasonablepossibility existed that a non-penicillin drugproduct had been exposed to cross-contaminationwith penicillin. [21 CFR § 211.176] Specifically,your firm has not tested any of the human drugproducts that have been repacked by your firmfor the presence of penicillin. As pointed out . . .above, your firm does not have separate facilitiesnor do you have separate air handling systemsfor handling penicillin products.

(Id. at 4 (emphasis in original).)

The letter acknowledged that Omnicare hadpromised to take corrective actions, includingquarantining all products under Heartland RepackServices’ control, recalling all products still within theirexpiration date, initiating a penicillin samplingprogram, ceasing all distribution of products untiltesting was complete, and “permanently moving [the]drug repackaging operation to a new facility.” (Id. at 8.)

Information about Omnicare and HeartlandRepack’s actions subsequent to the investigation weremade available in Omnicare’s 2006 10-K filing with theSEC. There, according to relator, Omnicare “brieflymentioned its testing and the presence of beta-lactamresidue,” (SAC ¶ 119), and the companies “wrote-off theinventory at a pretax cost of $18.9 million and disposedof the drugs.” (Id. at ¶ 120.) According to information

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obtained from FDA enforcement reports, relatorfurther concluded that the defendant had not, at thetime of the second amended complaint, recalled anyproducts due to penicillin contamination. (Id. at ¶ 121.)And, based on information and belief, relator allegesthat the defendants “have not reimbursed the federalor state governments for any monies the governmentsimproperly paid to Defendants or others for theadulterated, misbranded and inel ig iblepharmaceuticals.” (Id.)

D. Procedural History

On May 15, 2007, relator filed the originalcomplaint in this action as a qui tam litigant on behalfof the United States and various states and cities. (ECFNo. 1.) Pursuant to 31 U.S.C. §3730(b)(2), the originalcomplaint was filed under seal to afford the UnitedStates time to consider whether to intervene. Afterseveral motions for extension of time filed by theUnited States on behalf of itself and the other parties,relator filed an amended complaint on February 9,2009, also under seal. (ECF No. 23.) The United Stateseventually declined to intervene, but requested that thecourt solicit written consent of the United States beforegranting any settlement or dismissal. (ECF No. 29.)Similar notices to decline intervention were filed by thestates of California, Florida, Illinois, Michigan,Nevada, New York, and Texas. On October 26, 2010,relator filed a second amended complaint, which wasunsealed on November 9, 2010, and served upondefendants on November 19, 2010.

Relator’s second amended complaint containstwenty-nine counts. The first three counts allegeviolations of the federal False Claims Act, and counts

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four through twenty-nine allege violations of parallelstate and local acts. Count I alleges a violation of§ 3729(a)(1) of the federal FCA, which provides forliability for any person who “knowingly presents, orcauses to be presented, to [the government] a false orfraudulent claim for payment or approval.” Count IIalleges a violation of § 3729(a)(2), which similarlyprovides liability for any person who “knowinglymakes, uses, or causes to be made or used, a falserecord or statement to get a false or fraudulent claimpaid or approved by the Government.” And Count IIIalleges a violation of § 3729(a)(7), which provides forliability for a person who “knowingly makes, uses, orcauses to be made or used, a false record or statementto conceal, avoid, or decrease an obligation to pay ortransmit money or property to the Government.”6

On September 30, 2011, defendants filed a motionto dismiss for lack of subject matter jurisdiction and forfailure to state a claim. Relator filed a response, andthe United States also filed a Statement of Interest.Defendants filed a reply. Subsequently, relator filed amotion for leave to file a surreply to defendants’ replyto the United States’s Statement of Interest, anddefendants filed a response to the final motion. Themotion for leave to file a surreply will be granted. SeeLocal Rule 105.2(a). Below, the court addressesdefendants’ motion to dismiss.

6 As noted below, Congress amended the language and numberingof §3729(a) in 2009. The references in the SAC are to the code priorto amendment.

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II. DISCUSSION

A. Subject Matter Jurisdiction – PublicDisclosure Bar

In a False Claims Act case, a relator bears theburden of showing that subject matter jurisdictionexists. U.S. ex rel. Vuyyuru v. Jadhav, 555 F.3d 337,347–48 (4th Cir. 2009). “Unless ‘the jurisdictional factsare intertwined with the facts central to the merits ofthe dispute,’ the district court may then go beyond theallegations of the complaint and resolve thejurisdictional facts in dispute by considering evidenceoutside the pleadings, such as affidavits.” Id. at 348(citing Adams v. Bain, 697 F.2d 1213, 1219 (4th Cir.1982)). A court should grant a motion to dismiss forlack of subject matter jurisdiction “if the materialjurisdictional facts are not in dispute and the movingparty is entitled to prevail as a matter of law.” Evansv. B.F. Perkins Co., 166 F.3d 642, 647 (4th Cir. 1999).

As an initial matter, federal district courts havesubject matter jurisdiction over all civil actions “arisingunder” the laws of the United States. 28 U.S.C. § 1331.“A suit ‘arises under’ federal law if federal law createsthe cause of action.” Provident Life & Acc. Ins. Co. v.Waller, 906 F.2d 985, 988 (4th Cir. 1990). Here relator’score claim is a violation of federal law, the federal FCA,and therefore § 1331 applies, and the court thereforealso has supplemental jurisdiction over the state law

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claims arising from the same transactions. See 28U.S.C. § 1367; 31 U.S.C. § 3732(b).7

The False Claims Act, however, contains additionaljurisdictional restrictions that “bar[] federal courtsfrom exercising subject matter jurisdiction over certainqui tam actions.” United States ex rel. Wilson v.Graham County Soil & Water Conservation Dist., 528F.3d 292, 299 (4th Cir. 2008) (citing Rockwell Int’lCorp. v. United States, 549 U.S. 457 (2007)), rev’d onother grounds by 130 S. Ct. 1396 (2010). Relevant here,language known as the “public disclosure bar” relievescourts of jurisdiction where a relator’s claims have beenpublicly disclosed prior to the filing of the suit and therelator cannot establish that he is an “original source”of the information underlying the complaint. 31 U.S.C.§ 3730(e)(4). Congress’s purpose in enacting the publicdisclosure bar was to find “the golden mean betweenadequate incentives for whistleblowing insiders withgenuinely valuable information and discouragement ofopportunistic plaintiffs who have no significantinformation to contribute of their own.” Wilson, 528F.3d at 306 (quoting United States ex rel. SpringfieldTerminal Ry. Co. v. Quinn, 14 F.3d 645, 649 (D.C. Cir.1994)).

Until the statutory language was amended in 2010,the public disclosure bar provided that:

[n]o court shall have jurisdiction over an actionunder this section based upon the public

7 Relator expressly alleges as much, (SAC ¶¶ 1–3), which makesdefendants’ objection that relator did not properly plead subjectmatter jurisdiction under § 1331 somewhat mystifying.

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disclosure of allegations or transactions in acriminal, civil, or administrative hearing, in acongressional, administrative . . . report,hearing, audit, or investigation . . . unless theaction is brought by the Attorney General or theperson bringing the action is an original sourceof the information.

31 U.S.C. 3734(e)(4)(A) (2006).8 The FCA thus requiresthe court “to answer three questions: Was there apublic disclosure? If there was a public disclosure, wasthe qui tam action based on the public disclosure? Ifthe action was based on the public disclosure, was thequi tam plaintiff an original source?” Wilson, 528 F.3dat 299. Defendants argue that this action is based on apublic disclosure—the FDA warning letter—and thatrelator cannot establish that he is an “original source.”

Relator does not contest defendants’ argument thatthe FDA warning letter sent to Omnicare constitutes apublic disclosure within the terms of the False ClaimsAct. Rather, relator argues that the complaint is not“based on” the warning letter, within the meaning ofthe term as interpreted by the Fourth Circuit, and thatin any case relator is an original source of theinformation contained in the letter. On this latter point

8 Section 10104(j)(2) of the March 23, 2010, Patient Protection andAffordable Care Act, Pub. L. 111-148, 124 Stat. 119 (“PPACA”)“replace[d] the prior version of 31 U.S.C. § 3730(e)(4) with newlanguage.” Graham County Soil and Water Conserv. Dist. v. UnitedStates ex rel. Wilson, 130 S. Ct. 1396, 1400 n.1 (2010). Thelegislation makes no reference to retroactivity, however, and thusdoes not apply to this case. See Id.

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the court agrees, making moot the question of whetherthe complaint is “based upon” the warning letter.9

Section 3734(e)(4)(B) defines the term “originalsource” as “an individual who has direct andindependent knowledge of the information on which theallegations are based and has voluntarily provided theinformation to the Government before filing an actionunder this section which is based on the information.”31 U.S.C. § 3734(e)(4)(B). Relator has provided detailedallegations sufficient to meet his burden of provingoriginal source status.

9 It is appropriate here to skip consideration of whether thecomplaint is “based upon” the public disclosure because the FourthCircuit’s minority approach to this question, in practice, mergesinto the question of whether the relator is an “original source.” TheFourth Circuit maintains the minority view that “a qui tam actionis based upon publicly disclosed allegations only if the qui tamplaintiff’s allegations were actually derived from the publicdisclosure itself.” Wilson, 528 F.3d at 308 (emphasis in original)(citing United States ex rel. Siller v. Becton Dickinson & Co., 21F.3d 1339, 1348 (4th Cir. 1994)). Under this approach, a claim isnot “derived from” the public disclosure if relator “had independentknowledge of the facts and did not derive his allegations from thepublic disclosure itself.” Id. As discussed below, “independentknowledge of the facts” is one of the statutory requirements forfinding a relator to be an original source.

Of further note, in future cases the court will not need toconsider this question, as PPACA amended § 3730(e)(4)(A) toeliminate the phrase “based upon.” The public disclosure barinstead now requires original source status “if substantially thesame allegations or transactions as alleged in the action or claimwere publicly disclosed . . . .” 31 U.S.C.A. § 3730(e)(4)(A) (West2012).

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First, relator has adequately alleged that hevoluntarily provided information about the allegedfraud to the government before the initiation of thissuit. Relator alleges that he “originally broughtHeartland Repack’s unlawful activities to the attentionof the FDA,” (SAC ¶ 116), by calling the FDA Unit inCincinnati to “report Heartland Repack’s improperrepackaging practices.” (Id. at ¶ 110.) And relator againvoluntarily initiated contact with the FDA after helearned of the first unsuccessful inspection. (Id. at¶ 112.) Thus, the inspection and audit leading to theFDA warning letter “were caused and precipitated byRelator.” (Id. at ¶ 116.)

Defendants correctly argue that a relator is notnecessarily an “original source” of a public disclosuresimply because, as here, the relator voluntarilyprovided the tip that led to the governmentinvestigation and public disclosure. In other words, arelator does not become an original source “merely bycommunicating to the government, ‘I think somethingfishy is going on in connection with GovernmentContract A and Contractor B,’ and then relying on theevidence of fraud, if any, disclosed by a subsequentgovernment investigation.” U.S. ex rel. Detrick v.Daniel F. Young, Inc., 909 F. Supp. 1010, 1022 (E.D.Va. 1995). Rather, the relator must have a “core ofknowledge about the fraud” that is direct andindependent of the subsequent governmentinvestigation. Id. at 1020; see also United States v. NewYork Med. Coll., 252 F.3d 118, 121 (2d Cir. 2001)(holding that a third party cannot be “‘the source of thecore information’ upon which the qui tam complaint isbased”); United States ex rel. Hafter v. SpectrumEmergency Care, Inc., 190 F.3d 1156, 1163 (10th Cir.

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1999) (finding no direct and independent knowledgewhere “most of the core information contained in thecomplaint came from [a third party’s] independentresearch and investigation and not from [the relator]”).

Relator has, however, sufficiently alleged andshown that he possessed and communicated the “core”information that was later included in the warningletter. Relator alleged that he undertook independentresearch into the regulations regarding penicillin cross-contamination over two years before the FDA warningletter. (SAC ¶ 93.) He alleged that he learnedindependently of the penicillin repacking in theadjacent pharmacy at about the same time. (Id. at¶ 94.) Relator alleged that, in his first call to the FDA,he reported Heartland Repack’s “improper repackagingpractices.” (Id. at ¶ 110.) And, when relator later wasinterviewed by the FDA agents, he “described thespecific details of the penicillin exposure at HeartlandRepack’s Toledo facility.” (Id. at ¶ 113.)

The FDA investigation and warning letter—at leastthe portion of it cited in relator’s complaint—does notadd any significant new knowledge. Rather, theinvestigation only “verified that penicillin was, in fact,being repackaged in the same building as HeartlandRepack” and confirmed that “[t]his was in violation ofFDA guidelines and regulations.” (Id. at ¶ 114.)10

10 The detail with which relator alleges he communicated hisconcerns about penicillin repackaging to both his supervisors andto the FDA distinguishes this case from New York Medical College,in which “Plaintiffs’ amended complaint relie[d] overwhelminglyon the ‘confirmed’ and ‘quantified’ findings of HHC’s two audits,rather than on plaintiffs’ own ‘unconfirmed’ and ‘unquantified’suspicions of fraud.” 252 F.3d at 121.

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Defendants also note that both the warning letter andrelator’s complaint cite to the same section of the FDAregulations, but this can hardly be evidence thatrelator did not have independent knowledge. Indeed,relator alleges that his 2004 memorandum to hisOmnicare supervisor “contained citations from theappropriate CGMP guidelines, as well as references tospecific cases where the FDA fined and shut downfacilities that were in violation of the regulations.” (Id.at ¶ 93.) In any case, while relator must haveindependent knowledge of the “core” informationunderlying the action, it is not necessary that a relatorhave “independent knowledge of everything in his fraudcomplaint.” Detrick, 909 F. Supp. at 1020 (emphasisadded). To be an original source, relator need only havepossessed and communicated the “‘core of knowledge’. . . not a comprehensive whole.” U.S. ex rel. Ackley v.Int’l Bus. Machs. Corp., 76 F. Supp. 2d 654, 666 (D. Md.1999) (quoting Detrick, 909 F. Supp. at 1020).

Defendant also argues that relator’s claim fails thepublic disclosure bar because he does not have directand independent knowledge of the actual, specific,claims for payment made to the government byOmnicare pharmacies and the facilities they served.This argument, however, skips an important step inthe public disclosure bar analysis. The public disclosureat issue here—the FDA investigation and warningletter—does not contain information about allegedclaims for payment. Thus, relator need not prove he isan “original source” of this missing information.

Furthermore, to survive the public disclosure bar, arelator need only demonstrate direct and independentknowledge of the facts to the extent that those facts are

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“necessary to plead a plausible fraud claim [under Rule9(b)].” U.S. ex rel. Davis v. Prince, 753 F. Supp. 2d 569,583 (E.D. Va. 2011) (citing Vuyyuru, 555 F.3d at 353).The Rule 9(b) pleading standard usually requires ashowing in the complaint of specific claims forpayment. U.S. ex rel. Clausen v. Laboratory Corp. ofAmerica, Inc., 290 F.3d 1301, 1312 (11th Cir. 2002).However, this standard may be relaxed where a relatorhas adequately alleged the existence of a fraudulentscheme. See, e.g., U.S. ex rel. DeCesare v. Americare InHome Nursing, 757 F. Supp. 2d 573, 583 (E.D. Va. 2010(finding a complaint survives Rule 9(b) where relatoralleges a fraudulent scheme that shows everycertification is false even though he “does not point toa specific moment of fraud in terms of a time anddate”). Here, as in DeCesare, relator has adequatelyalleged the existence of a fraudulent scheme underwhich every claim submitted by downstreampharmacies and long-term care facilities to thegovernment for a drug product repacked at HeartlandRepack was false.11 Rule 9(b) therefore does not requirerelator here to have alleged knowledge of specificclaims, and therefore neither does relator need to showdirect and independent knowledge of such claims tomeet the public disclosure bar.

11 This fact, that every claim generated by Heartland Repack wouldbe fraudulent under relator’s theory, distinguishes this case fromUnited States v. Kernan Hospital, --- F. Supp. 2d ----, 2012 WL3088210 (D. Md. July 30, 2012), in which another judge in thisdistrict recently dismissed a Medicare reimbursement-related FCAcomplaint for failure to adequately plead fraud under Fed. R. Civ.P. 9(b).

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In sum, assuming that the complaint is based uponpublicly-disclosed information, relator has allegedsufficient facts to show by a preponderance of theevidence that he was an original source of thisinformation. He has alleged the details of his priorknowledge with particularity, including the names ofspecific individuals who provided him with informationabout penicillin repacking and made decisions aboutwhether to act on red flags, the manner in which theinteractions between relator and the FDA wereprecipitated, and the names of the FDA agents whointerviewed relator. As a result, the public disclosurebar does not apply, and the court has subject matterjurisdiction in this case.12

12 In finding subject matter jurisdiction, the court has alsoconsidered and found unavailing defendants’ argument thatrelator’s failure to allege satisfaction of the Act’s proceduralrequirements is a jurisdictional bar. As defendant notes, the SACdoes not specifically allege that relator has provided the UnitedStates with a “copy of the complaint and written disclosure ofsubstantially all material evidence and information [the relator]possesses,” as is required by § 3730(b) of the FCA. Defendants havenot provided the court with any caselaw holding that theprocedural requirements of § 3730(b) are jurisdictional, but in anycase there is no material dispute at this stage in the litigation asto whether the relator in fact made the required disclosures. Theonly relevant evidence in the record consists of the various seal-extension motions and notices of non-intervention filed by theUnited States and the other plaintiffs. These filings indicate thatgovernmental entities had notice of the complaint, and nonemention any procedural failures. At this point, therefore, even ifthe procedural requirements of § 3730(b) are jurisdictional, they donot represent a bar to subject matter jurisdiction in this case.

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B. 12(b)(6) Failure to State a Claim

Nonetheless, having assumed jurisdiction, the courtmust dismiss relator’s suit pursuant to Fed R. Civ. P.12(b)(6). A Rule 12(b)(6) motion tests the sufficiency ofa complaint and does not “resolve contests surroundingthe facts, the merits of a claim, or the applicability ofdefenses.” Presley v. City of Charlottesville, 464 F.3d480, 483 (4th Cir. 2006) (internal quotation marks andalterations omitted) (quoting Edwards v. City ofGoldsboro, 178 F.3d 231, 243 (4th Cir. 1999)). Whenruling on such a motion, the court must “accept thewell-pled allegations of the complaint as true” and“construe the facts and reasonable inferences derivedtherefrom in the light most favorable to the plaintiff.”Ibarra v. United States, 120 F.3d 472, 474 (4th Cir.1997). However, the court “need not accept the legalconclusions drawn from the facts, and [] need notaccept as true unwarranted inferences, unreasonableconclusions or arguments.” Nemet Chevrolet, Ltd. v.Consumeraffairs.com, Inc., 591 F.3d 250, 253 (4th Cir.2009).

To survive a motion to dismiss, the factualallegations of a complaint, assumed to be true, “mustbe enough to raise a right to relief above thespeculative level.” Bell Atl. Corp. v. Twombly, 550 U.S.544, 555 (2007). The plaintiff’s obligation is to showsufficiently the “grounds of his entitlement to relief,”offering “more than labels and conclusions.” Id. It is notsufficient that the well-pleaded facts suggest “the merepossibility of misconduct.” Ashcroft v. Iqbal, --- U.S. ---,129 S. Ct. 1937, 1950 (2009). Rather, to withstand amotion to dismiss, “a complaint must contain sufficientfactual matter, accepted as true, to state a claim to

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relief that is plausible on its face,” meaning the courtcould draw “the reasonable inference that thedefendant is liable for the conduct alleged.” Id. at 1949(internal quotations and citation omitted).

The False Claims Act allows private “qui tam”litigants to bring actions on behalf of the governmentagainst anyone who, in the language of the statuteprior to its amendment in 2009,

(1) knowingly presents, or causes to bepresented, to [the government] a false or fraudulentclaim for payment or approval;

(2) knowingly makes, uses, or causes to be madeor used, a false record or statement to get a false orfraudulent claim paid or approved by theGovernment; [or]

. . .

(7) knowingly makes, uses, or causes to be madeor used, a false record or statement to conceal,avoid, or decrease an obligation to pay or transmitmoney or property to the Government, . . . .

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31 U.S.C. § 3729(a) (2006)13; see id. § 3730(b). For thepurposes of this section, “‘knowing’ and ‘knowingly’mean that a person, with respect to information-(1) has actual knowledge of the information; (2) acts indeliberate ignorance of the truth or falsity of theinformation; or (3) acts in reckless disregard of thetruth or falsity of the information, and no proof ofspecific intent to defraud is required.” Harrison v.Westinghouse Savannah River Co., 176 F.3d 776, 785(4th Cir. 1999) (citing 31 U.S.C. § 3729(b)).

“Liability under each of the provisions of the FalseClaims Act is subject to the further, judicially-imposed,requirement that the false statement or claim bematerial.” Harrison, 176 F.3d at 785. “Materialitydepends on ‘whether the false statement has a naturaltendency to influence agency action or is capable ofinfluencing agency action.’” Id. (quoting United Statesex rel. Berge v. Bd. of Trs. of Univ. of Ala., 104 F.3d

13 On May 20, 2009, Congress amended the FCA by passing theFraud Enforcement and Recovery Act of 2009 (FERA), PL 111-21,123 Stat 1617. FERA changed the numbering of 31 U.S.C.§ 3729(a) and also changed the language of the statute to includean express materiality requirement for the false record provisionsin § 3729(a)(2) and to change the definition of “obligation” in§ 3729(a)(7). The courts that have addressed the question ofretroactivity have overwhelmingly concluded that the FERAamendments are only retroactive for claims (not cases) pending onJune 7, 2008. See United States v. Kernan Hospital, --- F. Supp. 2d----, 2012 WL 3088210, at **7–8 (D. Md. July 30, 2012) (listingcases regarding § 3729(a)(2)); U.S. ex rel. Bahrani v. ConAgra, Inc.,624 F.3d 1275, 1303 n.14 (10th Cir. 2010) (holding that FERA wasnot retroactive as to § 3729(a)(7)). As a result, the court will applythe pre-FERA version of the FCA in this case, as relator hasalleged no claims pending subsequent to the date the originalcomplaint was filed in 2007.

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1453, 1459 (4th Cir. 1997)). “Materiality is a mixedquestion of law and fact.” Id.

Thus, for all three of the statutory provisions underwhich Rostholder alleges liability, the test for FalseClaims Act liability includes four prongs: “(1) whetherthere was a false statement or fraudulent course ofconduct; (2) made or carried out with the requisitescienter; (3) that was material; and (4) that caused thegovernment to pay out money or to forfeit moneys due(i.e., that involved a “claim”).” Id. at 788 (discussing§ 3729(a)(1) and § 3729(a)(2)); see U.S. ex rel. Sandersv. N. Am. Bus Indus., Inc., 546 F.3d 288, 297, 299 (4thCir. 2008) (applying the same test to a claim under 31U.S.C. § 3729(a)(7) as well).14

Rostholder has not convinced the court that thiscase meets the first prong of this test under theexisting law in the Fourth Circuit. “To satisfy this firstelement of an FCA claim, the statement or conductalleged must represent an objective falsehood.” U.S. exrel. Wilson v. Kellogg Brown & Root, Inc., 525 F.3d 370,376–377 (4th Cir. 2008) (citations omitted). “As aresult, mere ‘allegations of poor and inefficientmanagement of contractual duties’ are ‘not actionableunder the [FCA].’” Id. at 377 (citing Harrison, 176 F.3dat 789). “Likewise, ‘imprecise statements or differencesin interpretation growing out of a disputed legalquestion are similarly not false under the FCA.’” Id.(quoting U.S. ex rel. Lamers v. City of Green Bay, 168

14 “[T]here is no requirement that the government have suffereddamages as a result of the fraud.” Id. at 785 n.7 (citing U.S. ex rel.Joslin v. Cmty. Home Health of Maryland, Inc., 984 F. Supp. 374,383 (D. Md. 1997)).

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F.3d 1013, 1018 (7th Cir. 1999)). “Harrison [] makesclear that ‘fraud may only be found in expressions offact which (1) admit of being adjudged true or false ina way that (2) admit of empirical verification.’” Id. at377–78 (quoting Harrison, 176 F.3d at 792 (internalquotations omitted)).

“In the paradigmatic case, a claim is false becauseit ‘involves an incorrect description of goods or servicesprovided or a request for reimbursement for goods orservices never provided.’” United States v. Sci.Applications Int’l Corp., 626 F.3d 1257, 1266 (D.C. Cir.2010) (quoting Mikes v. Straus, 274 F.3d 687, 697 (2dCir. 2001)). A claim may also be fraudulent whereinvoices submitted to the government falsely inflate theactual cost of providing goods or services. See UnitedStates v. Rachel, 289 F. Supp. 2d 688, 697 (D. Md.2003); see also U.S. ex rel. DRC, Inc. v. Custer Battles,LLC, 562 F.3d 295, 299, 305 (4th Cir. 2009) (suggestinginvoices billing the Coalition Provisional Authority inIraq for substantially more than the actual cost ofgoods provided are actionable as fraudulent claimsunder the FCA). And, a claim may be fraudulent wherethe defendant “misrepresents the quality of a productin an effort to achieve an unwarranted payment forinferior goods.” Mann v. Heckler & Koch Def., Inc., 630F.3d 338, 346 (4th Cir. 2010).15

15 As discussed below, a variant of this paradigmatic case is the“worthless services” claim, where a product or service provided is“so deficient that for all practical purposes it is the equivalent of noperformance at all.” Chesbrough v. VPA, P.C., 655 F.3d 461, 468(6th Cir. 2011) (quoting Mikes v. Straus, 274 F.3d 687, 702–03 (2dCir. 2001)).

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Similarly, under the “false certification” doctrine,“[w]here the Government conditions payment of a claimupon certification of compliance with a statute orregulation, . . . a party violates the FCA by falselycertifying compliance with the statute or regulation.”U.S. ex rel. Joslin v. Cmty. Home Health of Maryland,Inc., 984 F. Supp. 374, 383–84 (D. Md. 1997) (citationsomitted).16 Courts have generally declined to “findliability merely for non-compliance with a statute orregulation.” Harrison, 176 F.3d at 786–87 (emphasisadded). But, a claim for payment may be false withinthe bounds of the FCA when the claim “rests on a falserepresentation of compliance with an applicable federalstatute, federal regulation, or contractual term,” Sci.Applications, 626 F.3d at 1266, and where complianceis a “prerequisite” to payment of the claim by thegovernment. Harrison, 176 F.3d at 786.17 Thus, for

16 Some courts have describes false certification claims as claimsof “legal” falsity, as opposed to the “paradigmatic” claims describesabove, which are claims of “factual” falsity. See, e.g., U.S. ex rel.Wilkins v. United Health Group, Inc., 659 F.3d 295, 305 (3d Cir.2011) (citing U.S. ex rel. Conner v. Salina Reg’l Health Ctr., Inc.,543 F.3d 1211, 1217 (10th Cir. 2008)). But see U.S. ex rel.Hutcheson v. Blackstone Medical, Inc., 647 F.3d 377, 385–86 (1stCir. 2011) (declining to employ the factual/legal distinction becauseit has no basis in the text of the FCA statute and “may do more toobscure than clarify the issues before us”).

17 As the Fourth Circuit mentioned in Harrison, the legislativehistory of the act supports the conclusion that statutory andregulatory violations may, at least in some way, produce a “falseclaim:”

[E]ach and every claim submitted under a contract, loanguarantee, or other agreement which was originallyobtained by means of false statements or other corrupt or

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example, when a Medicare or Medicaid-reimbursedprovider falsely certifies its compliance with the Anti-Kickback Statute limiting payments as inducementsfor health care referrals, claims for governmentreimbursement submitted pursuant to thatcertification may be considered false or fraudulentwithin the meaning of the FCA. DeCesare, 757 F. Supp.2d at 586–87.

A majority of the circuits have now extended thecertification doctrine to apply also to implied—as wellas express—false certifications. See Mikes, 274 F.3d at700; U.S. ex rel. Wilkins v. United Health Grp., Inc.,659 F.3d 295, 306 (3d Cir. 2011); U.S. ex rel. Augustinev. Century Health Servs., Inc., 289 F.3d 409, 415–16(6th Cir. 2002); Ebeid ex rel. U.S. v. Lungwitz, 616 F.3d993, 996–98 (9th Cir. 2010); U.S. ex rel. Conner v.Salina Reg’l Health Ctr., Inc., 543 F.3d 1211, 1217(10th Cir. 2008); Sci. Applications, 626 F.3d at 1266,1270–71; see also McNutt v. Haleyville Med. Supplies,Inc., 423 F.3d 1256, 1259–60 (11th Cir. 2005) (agreeingthat liability may attach to claims where defendantviolated the Anti-Kickback Statute, though notdiscussing the term “implied false certification”). Cf.U.S. ex rel. Hutcheson v. Blackstone Med., Inc., 647F.3d 377, 385–88 (1st Cir. 2011) (declining to adopt theterminology of “certification,” but favorably citing theD.C. Circuit’s approach in SAIC for determiningwhether a claim is false or fraudulent).

fraudulent conduct, or in violation of any statute orapplicable regulation, constitutes a false claim.

Harrison, 176 F.3d at 786 (emphasis in original) (quoting S. Rep.No. 99-345, at 9, reprinted in 1986 U.S.C.C.A.N. at 5274).

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The Fourth Circuit, however, has not yet adoptedthe implied certification doctrine, and relator clarifiedat oral argument that he does not ask the court to doso. Indeed, relator explained that this is not a falsecertification case at all, express or implied. Relatorargues instead that the court need only apply the“traditional materiality” test of the Fourth Circuit,directing the court’s attention to Harrison. Relator thusappears to argue that any claim for goods or servicesprovided in violation of a statute or regulationrepresents “fraudulent conduct” within the meaning ofHarrison—as long as the violation is material. In otherwords, the court need not analyze whether “fraudulentconduct” exists separately from the materiality prongof the test.

Harrison, however, suggests materiality andfraudulent conduct are separate prongs of the test. Thecourt held that liability under the FCA is “subject tothe further, judicially-imposed, requirement that thefalse statement or claim be material.” 176 F.3d at 785(emphasis added). Thus where a false certification ofregulatory compliance is given—satisfying the falsestatement or fraudulent conduct prong—the relatormust also prove materiality. In a case like this, whereno facially false statement is given, other circuits mightapply an implied certification doctrine to address thefirst prong of the test. Harrison suggests theappropriate alternative in the Fourth Circuit is toapply a traditional analysis of fraud by omission. Id. at787 n.8 (citing Berge, 104 F.3d at 1461).

The Berge decision cited in Harrison held that whilean omission may render an otherwise truthfulstatement or claim false or fraudulent, “”[t]here can

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only be liability under the False Claims Act where thedefendant has an obligation to disclose the omittedinformation.” Berge, 104 F.3d at 1461 (citing UnitedStates ex rel. Milam v. Regents of the Univ. of Cal., 912F. Supp. 868, 883 (D. Md. 1995)); see also U.S. ex rel.Harrison v. Westinghouse Savannah River Co., 352F.3d 908, 915–16 (4th Cir. 2003) (“Harrison II”)(distinguishing Harrison from Berge). In other words,the nondisclosure of regulatory violations alone doesnot automatically equate to “fraudulent conduct.” SeeMann, 630 F.3d at 346 (“Correcting regulatoryproblems may be a laudable goal, but one notactionable under the FCA in the absence of actualfraudulent conduct.” (emphasis added) (quoting UnitedStates ex rel. Hopper v. Anton, 91 F.3d 1261, 1269 (9thCir. 1996))). It is the omission of the fact that aregulatory violation occurred—where an obligation todisclose that fact existed—that is “fraudulent” for thepurposes of the FCA.18 Relator did not address fraud byomission or identify any obligation to disclose in hisbriefing or at oral argument.

18 In addition, “[a]t common law, fraud has not been limited tothose situations where there is an affirmative misrepresentationor the violation of some independently-prescribed legal duty,”United States v. Colton, 231 F.3d 890, 898 (4th Cir. 2000), such asthe obligation to disclose discussed in Harrison and Berge. “Rather,even in the absence of a fiduciary, statutory, or other independentlegal duty to disclose material information, common-law fraudincludes acts taken to conceal, create a false impression, mislead,or otherwise deceive in order to ‘prevent[ ] the other [party] fromacquiring material information.’” Colton, 231 F.3d at 898 (quotingRestatement (Second) of Torts § 550 (1977)). Relator does not,however, allege any active concealment or suppression on the partof Omnicare. He alleges only the failure to disclose.

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In sum, relator does not argue there was anaffirmative false statement or false certification;relator does not argue this court should adopt theimplied certification theory; and relator does not arguefor the theory of fraud by omission, which Harrisonappears to suggest may be appropriate under somecircumstances. Relator’s argument instead appears toread the first prong—false statement or fraudulentconduct—out of the Harrison test for FCA liability.Without clearer guidance from the Fourth Circuit, Icannot agree that such an approach is appropriate asto claims brought here under 31 U.S.C.A. § 3729(a)(1),§ 3729(a)(2), and § 3729(a)(7), as relator has allegedthem.

Moreover, also relevant to the 12(b)(6) analysis isrelator’s failure to provide sufficient specificity as tothe content of the claims allegedly made bydownstream actors. The False Claims Act “attachesliability, not to the underlying fraudulent activity or tothe government’s wrongful payment, but to the claimfor payment.” Harrison, 176 F.3d at 785 (quotingUnited States v. Rivera, 55 F.3d 703, 709 (1st Cir.1995)). Presumably, the actual “claims” in this case arethe reimbursement requests and reports sent byOmnicare pharmacies, SNFs and other intermediariesto CMS. Relator, however, has not sufficientlyexplained the nature of this process or directed thecourt to the specific regulations, guidance manuals, orspecific forms that are used in the paymentprocess—much less copies of the specific forms thatrequested reimbursement for the Heartland Repackdrugs at issue. Compare DeCesare, 757 F. Supp. 2d at577–78 (allowing Medicare-related FCA claims toproceed where relator provided language from and

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specific regulations requiring annual provider costreports), with United States v. Kernan Hospital, --- F.Supp. 2d ----, 2012 WL 3088210, at *10 (D. Md. July 30,2012) (dismissing healthcare reimbursement claimswhere relator did not include copies of cost reports or“even explain the circumstances under which suchreports are submitted”). Indeed, relator’s complaint isat times frustratingly unspecific. For example, in theSecond Amended Complaint, relator describedMedicare Part C in the following manner:

To the extent the law required the Part CProviders to provide the government withpricing and other data concerning theseprescriptions to ensure that Medicare ultimatelyonly paid for the actual cost of FDA approveddrugs dispensed, then Defendants’ conductrendering the drugs ineligible for paymentconcomitantly rendered the data submitted tojustify their coverage false and/or fraudulent.

(SAC ¶ 82.) Relator cites no specific regulation thatrequires the pricing data, and does not in fact appearto plead with certainty that such a requirement evenexists.

Relator asks too much of the court. Given no specificclaim pleaded, no names of specific downstream actorswho submitted the alleged claims, no specific forms orprocesses of claims adequately described, and no theoryof fraudulent conduct other than “materiality,” thecourt simply cannot determine that this FCA case hasbeen adequately alleged under Fourth Circuitprecedent. As a result, the court must grant

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defendants’ motion to dismiss under Fed. R. Civ. P.12(b)(6).19

CONCLUSION

For the above reasons, the court will grantdefendants’ motion to dismiss for failure to state aclaim. Because relator has already filed a SecondAmended Complaint, this dismissal will be withprejudice as to relator and any further leave to amendwill not be granted.

The government has requested that any dismissalof relator’s claim should be without prejudice asagainst the United States, and the court agrees. Thegovernment’s decision not to intervene in this case doesnot suggest that the government necessarily believedthat no FCA case was viable. As the Fourth Circuit hasnoted, a decision not to intervene may “not [necessarilybe] an admission by the United States that it hassuffered no injury in fact, but rather [the result of] acost-benefit analysis.” Berge, 104 F.3d at 1458; see alsoWilliams v. Bell Helicopter Textron Inc., 417 F.3d 450,

19 This opinion should not be taken to suggest that a violation ofthe CGMP may never result in FCA liability. The government, inits Statement of Interest, submits that “violations of CGMPregulations may, in certain circumstances, be material to thegovernment’s decision whether to pay for the affected products,and thus relevant in an FCA case.” (Statement of Interest 4, ECFNo. 89.) As an example, the government directs the court’sattention to the “worthless services” doctrine, under which “theperformance of the service is so deficient that for all practicalpurposes it is the equivalent of no performance at all.” Mikes, 274F.3d at 703. As with the implied certification doctrine, relator hasspecifically declined to address the worthless services doctrine inthis case and the court therefore will not consider it.

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455 (5th Cir. 2005) (holding that dismissal withprejudice as to the United States was improper wherebasis for dismissal was failure to meet heightenedpleading standard under FRCP 9(b)). Accordingly, itwould be inappropriate to dismiss with prejudice as tothe United States or as to the states or localities onwhose behalf relator brought this claim.

A separate order follows.

August 14, 2012 Date

/s/ Catherine C. Blake United States District Judge

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IN THE UNITED STATES DISTRICT COURTFOR THE DISTRICT OF MARYLAND

Civil No. CCB-07-1283

[August 14, 2012]_________________________________________UNITED STATES OF AMERICA, ex rel. )BARRY ROSTHOLDER, ET AL. )

)v. )

)OMNICARE, INC., ET AL. )_________________________________________ )

ORDER

For the reasons stated in the accompanyingMemorandum, it is hereby ORDERED that:

1. the defendants’ motion to dismiss for failure to statea claim (ECF No. 84) is GRANTED withprejudice as to relator;

2. the motion to dismiss is GRANTED withoutprejudice as to the United States and other stateand local government parties;

3. relator’s motion for leave to file a surreply (ECF No.91) is GRANTED;

4. the Clerk shall CLOSE this case; and

5. copies of this Order and the accompanyingMemorandum shall be sent to counsel of record.

August 14, 2012Date

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/s/ Catherine C. Blake United States District Judge

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APPENDIX C

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND

Civil No.: CCB-07-1283

[Filed October 19, 2012]________________________________________UNITED STATES OF AMERICA, ex rel. )BARRY ROSTHOLDER, ET AL. )

)v. )

)OMNICARE, INC., ET AL. )_________________________________________ )

ORDER

Relator’s motion and amended motion forreconsideration have been read, together with thedefendants’ opposition and the relator’s reply. While Iunderstand that relator disagrees with mymemorandum and order issued August 14, 2012, this isnot sufficient to satisfy Rule 59(e) standards.Hutchinson v. Staton, 994 F.2d 1076, 1081-82 (4th Cir.1993). Nor has relator shown grounds to file yetanother amended complaint.

Accordingly, it is hereby ORDERED that:

1. the initial motion for reconsideration (ECF No.107) is Denied as moot; and

2. the amended motion for reconsideration (ECFNo. 108) is Denied.

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Date: October 19, 2012

________/s/__________________Catherine C. Blake United States District Judge