Full 4th Circuit to tackle Medicaid fraud standard under False Claims Act

(Reuters) - The full 4th U.S. Circuit Court of Appeals will hear argument Thursday in a case alleging that a company now owned by Allergan defrauded the federal government out of $680 million by deliberately reporting inaccurate drug-pricing data to Medicaid.

The court granted en banc review after a divided panel said it didn’t matter whether Forest Laboratories actually intended to defraud the government, since the drug-pricing rules are ambiguous and Forest’s interpretation of them was objectively reasonable.

Attorneys for Deborah Sheldon, the widow of former Forest sales manager Troy Sheldon, said the panel’s 2-1 decision in January “tips the scale toward fraudsters” and would have a “far-reaching and negative impact” on whistleblowers and the government’s ability to recover under the False Claims Act.

The government agrees, warning of “enormous practical consequences” if the panel’s decision stands.

Under the majority’s standard, “a defendant can actually understand a requirement correctly, choose to violate it but avoid all liability if its attorney can conjure up a post-hoc alternative interpretation of the requirement that is at least objectively reasonable,” Justice Department lawyer Joshua Dos Santos wrote in the government’s amicus brief.

That’s “a standard ‘only the dimmest of fraudsters could fail to take advantage of’,” Dos Santos added, quoting the panel’s dissent. He will also participate in the oral arguments.

Sheldon drew additional amicus support from the nonprofit Taxpayers Against Fraud Education Fund, which has urged the U.S. Supreme Court to review a similar decision last year by the 7th Circuit.

Allergan and its attorneys did not respond to requests for comments. However, its brief opposing en banc review called the panel’s decision a straightforward application of a Supreme Court holding from 2007, known as the Safeco test.

While the high court was interpreting a different statute, the 7th, 8th and D.C. Circuits have applied the Safeco test in False Claims Act cases “for the better part of a decade” without unleashing the “abuses” Sheldon and her supporters envision, John Elwood of Arnold & Porter Kaye Scholer wrote for Allergan.

“It is not too much to ask regulators to speak clearly before recovering quasi-criminal treble damages (under the False Claims Act) for noncompliance with ambiguous provisions,” Elwood wrote.

The Pharmaceutical Research and Manufacturers of America (PhRMA), the U.S. Chamber of Commerce, and the Washington Legal Foundation filed amicus briefs supporting Allergan, saying the Safeco test serves as a bulwark against “meritless nuisance lawsuits” under the False Claims Act.

Allergan acquired Forest in 2014, the same year Troy Sheldon filed suit in federal court in Baltimore.

Sheldon alleged that Forest intentionally excluded various discounts available to customers when it reported the “best price” for its drugs to Medicaid between 2005 and 2014. The alleged omissions reduced the rebates that Forest was obliged to give Medicaid-participating states, which increased the amount the federal government had to pay.

Sheldon’s attorney, Joe Callow of Keating Muething & Klekamp, said in an email that they appreciate the amicus support and hope the 4th Circuit revives the litigation.

The case is United States ex rel Sheldon v. Allergan Sales LLC, 4th U.S. Circuit Court of Appeals, No. 20-2330.

For Sheldon: Joe Callow and Greg Utter of Keating Muething & Klekamp, and Joel Hesch

For Allergan: John Elwood, Paula Ramer and Christian Sheehan of Arnold & Porter Kaye Scholer

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