By Karon Fowler

In Rostholder v. Omnicare, Barry Rostholder, a licensed pharmacist, filed a qui tam action under the False Claims Act (“FCA”) against his former employer, Omnicare, Inc., and its affiliated companies. Under the FCA, Rostholder is the “relator” of the claim.  This means he is a private person that has brought a lawsuit on behalf of the U.S. under the FCA based on information that the named defendant has knowingly submitted or caused the submission of false or fraudulent claims to the U.S. The qui tam cause of action provides that, if successful, Rostholder would receive a portion of the recovered damages.

Rostholder claimed that Omnicare violated several FDA safety regulations requiring that penicillin and non-penicillin drugs be packaged in complete isolation from one another. Violations of these regulations result in a legal presumption of penicillin cross-contamination. According to the complaint, these contaminated drugs were not eligible for reimbursement by Medicare and Medicaid. Therefore, any claims presented for reimbursement were “false” under the FCA. The district court granted Omnicare’s 12(b)(6) motion and denied any further leave to amend because Rostholder had already filed two amended complaints.

The Fourth Circuit first reviewed Omnicare’s assertion that the district court lacked subject matter jurisdiction under to the “public disclosure bar” in the FCA. Such review was de novo and the Court examined the lower court’s jurisdictional findings of fact for clear error. The version of the public disclosure bar in place at the time of Rostholder’s complaint states that “[n]o court shall have jurisdiction over an action under this section based upon the public disclosure of allegationsunless the action is brought by the Attorney General or the person bringing the action is an original source of the information.” 31 U.S.C. § 3730(e)(4)(2006) (emphasis provided by Court). The Court concluded that Rostholder’s complaint was not “based upon” the warning letter or SEC filings, despite Omnicare’s objection to the “substantial similarities” between the allegations in the complaint and the public disclosures. It was Rostholder’s discovery of the penicillin-related violations during his employment that provided the basis for his complaint. His allegations that Omnicare supplied drugs to patients residing in nursing care facilities who were primarily insured by government health programs illustrate his independent knowledge that Omnicare caused claims to be submitted to the government for payment. Therefore, the public disclosure bar did not divest the district court of jurisdiction over the claims.

However, the Fourth Circuit held that Rostholder’s complaint failed to allege that Omnicare made a false statement or that they acted with the necessary knowledge. Under the FCA, a person is liable to the U.S. government if he “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval.” Four elements are required for a well-plead FCA claim: “(1) [] there was a false statement or fraudulent course of conduct; (2) made or carried out with the requisite scienter [knowledge]; (3) that was material; and (4) that caused the government to pay out money or to forfeit moneys due (i.e., that involved a ‘claim’).” Although Rostholder adequately plead that compliance with the FDA’s Current Good Manufacturing Practice regulations (“CGMPs”) is material to the government’s decision to provide reimbursement for related drugs, he failed to adequately allege the existence of a “false statement or fraudulent course of conduct.” Compliance with the FDA’s CGMPs is not required for payment by Medicare and Medicaid, so Omnicare had not falsely stated such compliance with the government, as contemplated by the FCA.  The Fourth Circuit explains that the correction of regulatory problems is important, but it does not provide a basis for FCA claims in the absence of actual fraudulent conduct.

The Court further concluded that the district court did not abuse its discretion in denying Rostholder’s request to file a third amended complaint. The District of Maryland’s local rules require a plaintiff attach to a motion to amend “the proposed amended pleading.” Rostholder failed to comply with this rule, which justified the district court’s denial of leave to amend. The Court adds that any amendment would have futile because adultered drugs are not barred from reimbursement and, therefore, claims for reimbursement for these drugs cannot be “false” under the FCA.