District Court Rejects the Industry-Wide Public Disclosure Bar, Part II

By Jonathan DeSantis

In Part I of this blog series, we discussed the False Claims Act (“FCA”)’s public disclosure bar and the so called industry-wide public disclosure bar. In this blog post, we will examine a recent qui tam case that discusses and rejects the industry-wide public disclosure bar.

An industry-wide public disclosure bar is difficult to reconcile with the language of the public disclosure bar, which requires that the allegations in a relator’s complaint be “substantially similar” to the publicly disclosed materials.   It is hard to see how public disclosures that do not mention a specific company be “substantially similar” to allegations that the company committed fraud.

United States ex rel. Rahimi v. Zydus Pharm. (USA), Inc.

A recent decision in the District of New Jersey is illustrative.  In United States ex rel. Rahimi v. Zydus Pharm. (USA), Inc.,[1] a relator alleges that Zydus manufactured various generic drugs.  Zydus allegedly committed fraud by submitting inflated pricing information to third-parties that created publications providing the average wholesale prices of drugs.  Medicaid used these publications to set the rates at which it reimbursed pharmacies for dispensing drugs to Medicaid beneficiaries.  Thus, the relator alleges that Zydus provided false and inflated pricing information so that pharmacies that dispensed Zydus drugs received increased compensation.  This allegedly assisted Zydus in marketing its products to pharmacies by ensuring pharmacies that the products would generate increased revenue.  As a result of Zydus’ conduct, the Government allegedly lost money by providing more in reimbursements than it would have had Zydus reported accurate pricing information.

Zydus filed a motion to dismiss and raised various arguments, including an argument that the relator’s claims were barred by the public disclosure bar.   Zydus pointed to many publicly available materials discussing fraud in report average wholesale prices across the pharmaceutical industry.   None of these materials mentioned Zydus, but Zydus nonetheless contended that the public disclosure bar applied because it is a relatively large pharmaceutical company and thus could be readily identified from the public disclosures.

The Government filed a powerful statement of interest in which it argued that “disclosures of industry-wide fraud do not automatically constitute public disclosures as to specific industry members.”[2]  In support of that argument, the Government asserted:

Many False Claims Act cases, including qui tam cases, focus on types of fraud that are common to particular industries (for example, Medicare overbilling or underpayment of oil and gas royalties) and familiar to the government. Nonetheless, a relator who brings particular instances of such fraud to light performs a valuable service, one that the False Claims Act’s qui tam provisions were intended to encourage. The identity of the entity that perpetrated a fraud and the method by which it did so are among the most fundamental elements of an allegation or a transaction under the False Claims Act. Courts have made clear that general allegations of fraud in such a large industry will not necessarily bar subsequent, specific fraud claims against a particular defendant.[3]

Moreover, the Government asserted that the purpose of the public disclosure bar “is ill-served by a reading of the public disclosure bar that allows the existence of qui tam actions against one set of actors in a large industry to automatically foreclose future actions raising similar fraud allegations against unrelated members of that industry.”[4]

In a decision on April 26, 2017, the district court agreed with the relator’s and the Government’s position and denied the motion to dismiss.[5]   First, the court noted that none of the public disclosures mentioned Zydus.  The court suggested that it may be possible for the public disclosure to apply if Zydus was readily identifiable from the public disclosures even if it was not mentioned by name.  However, the court found that Zydus was not readily identifiable from the public disclosures for various reasons, including that the generic drug manufacturing industry is quite large and that Zydus is not one of the largest pharmaceutical companies in the country.   Accordingly, the district court concluded that the public disclosures cited by Zydus did not trigger the public disclosure bar.

Conclusion

In conclusion, there is tension between application of an industry-wide public disclosure bar with the requirement that public disclosures be substantially similar to a relator’s claims to implicate the public disclosure bar.   While not all courts addressing an industry-wide public disclosure bar argument have done so, many have applied the “readily identifiable” rule such that public disclosures that do not name the specific company at issue can only trigger the public disclosure if the company is “readily identifiable” from the public disclosures.

[1] 2017 WL 1503986 (D.N.J. Apr. 26, 2017)

[2] Statement of Interest of the United States, 2016 WL 2341694 (D.N.J. Apr. 13, 2016).

[3] Id.

[4] Id.

[5] 2017 WL 1503986 (D.N.J. Apr. 26, 2017).

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By | 2018-03-25T16:03:54+00:00 June 15th, 2017|False Claims Act Legal News|