After DOJ Statement of Interest Shows Continued Interest in FCA Actions Premised on FDCA Violations, District Court Decision Rejects the Relator’s Theories Premised on Regulatory Violations

After DOJ Statement of Interest Shows Continued Interest in FCA Actions Premised on FDCA Violations, District Court Decision Rejects the Relator’s Theories Premised on Regulatory Violations

September 23, 2022, Covington Alert

On July 18, 2022, District Judge Rodolfo Ruiz of the U.S. District Court for the Southern District of Florida issued an order in U.S. ex rel. Crocano v. Trividia Health Inc., ECF No. 127, No. 22-CV-60160-RAR (the “Order”), granting the defendant’s motion to dismiss with prejudice on grounds that the Relator failed to state her claims with particularity, and denied leave to amend on grounds that the Relator’s theory premised on the defendant’s alleged violations of the Food, Drug, and Cosmetic Act (“FDCA”) and FDA regulations failed to state a claim under the False Claims Act (“FCA”).  After briefing on the motion to dismiss was complete, DOJ filed a statement of interest asking the Court not to “foreclose the possibility that, under certain circumstances, conduct giving rise to violations of the FDCA or FDA regulations could be material to the government’s payment decisions and provide a basis for FCA liability,” signaling DOJ’s continued interest in pursuing these types of FCA theories.  ECF No. 124 (the “Statement”).  While the Court acknowledged that a regulatory violation can theoretically rise to the level of creating FCA liability, in a blow to DOJ’s position, the Court rejected each of the Relator’s theories premised on violations of the FDCA and FDA regulations.

The Crocano case relates to Trividia’s manufacture and sale of diabetes test strips.  The Relator alleged that due to Trividia’s change in packaging equipment, millions of test strips were defective, and that inaccurate readings from the test strips led to injuries.  Order at 2.  The Relator’s FCA theory was premised on allegations that Trividia violated FDA good manufacturing practices and medical device reporting regulations.  And, in her opposition to Trividia’s motion to dismiss, the Relator narrowed in on an allegation that by failing to file adverse event reports for injuries caused by defects in its diabetes test strips, the defendant violated FDA regulations requiring adverse event reporting, rendering the test strips misbranded and claims for payment for the test strips false because, according to Relator, misbranded devices are ineligible for government reimbursement.  Id. at 11.

DOJ’s statement of interest argued that “[v]iolations of the FDCA may be relevant in FCA cases where the violations are significant, substantial, and give rise to actual discrepancies in the composition, functioning, safety, or efficacy of the affected product.”  Statement at 2. First, in DOJ’s view, when a manufacturer defrauds the FDA during the approval process or to avoid a recall by hiding material information concerning the safety or efficacy of a drug or device, the manufacturer’s conduct may be a sufficient cause of the claim for payment to make out a fraudulent inducement claim under the FCA.  Id. at 4-5.  Second, if the defendant’s violations of the FDCA or FDA regulations rendered its products “worthless,” the defendant could face FCA liability under the “worthless services” doctrine.  Id. at 5-6.

In its statement, DOJ did not take a position on the Relator’s theory, but pointed to adverse event reports submitted to FDA -- and cited the regulations identified by the Relator -- as an example of a circumstance in which a drug or device manufacturer’s fraudulent conduct before the FDA may ultimately cause a claim for payment.  Id. at 4.  But, even according to DOJ, this is a heavy burden, and DOJ did not take the position that a mere regulatory violation, without more, automatically renders a claim false.  For example, DOJ stated that in “circumstances in which the defendant’s false statements or material omissions masked problems that . . . would have prompted the FDA to institute or require a product recall, subsequent claims relating to the affected devices could be rendered ‘false or fraudulent’ because the government would not have paid the claims for those affected devices but for the defendant’s conduct.”  Id. at 5 (emphasis added). 

In its decision, the Court did not foreclose an FCA theory premised on violations of FDA regulations, acknowledging that a regulatory violation can give rise to liability under the FCA if the regulatory violation is material to a claim for payment.  Order at 16.  The Court found, however, that not all “weaselly behavior” or regulatory violations are FCA violations.  Id.  There must be a connection to claims for payment.  Id.  Citing the Fourth Circuit, the Court explained that to hold otherwise “would sanction use of the [False Claims Act] as a sweeping mechanism to promote regulatory compliance, rather than a set of statutes aimed at protecting the financial resources of the government from the consequences of fraudulent conduct.”  Id. (quoting United States ex rel. Rostholder v. Omnicare, Inc., 745 F.3d 694, 702 (4th Cir. 2014)).  

The Court squarely rejected the Relator’s most sweeping theory—that if a product is “misbranded,” it is ineligible for reimbursement and therefore all claims are “false.”  Id. at 18 (the Relator’s case “falls apart . . . [because] Relator cites no portion of the FDCA closing the circuit between misbranding and claims for reimbursement from the government”).  With respect to the adverse reporting regulations relied on by the Relator in her opposition to Trividia’s motion to dismiss -- and cited by DOJ -- the Court found that the regulations’ “connection to claims for payment by the government is tenuous at best.”  Id.  The Court explained, for example, that there was no “statutory condition tying adverse event reporting to eligibility for reimbursement[,]” suggesting that the materiality analysis for such a theory is a demanding one.  Id. at 19. 

The Court also rejected the other theories and arguments advanced by the Relator.  The Court held that the Relator failed to identify any false statements or fraudulent misrepresentations made to the FDA.  Id. at 20.  The District Court also rejected the Relator’s theory that Trividia falsely certified compliance with FDA regulations, reasoning that compliance with the FDA regulations are not “required for payment by Medicare and Medicaid[.]”  Id. at 19 (quoting Rostholder, 745 F.3d at 702). The Court further rejected the Relator’s contention that certain units of defective test strips were not “reasonable and necessary” and thus statutorily ineligible for payment, joining numerous other courts that have held that the statutory standard is applied at the product level rather than the unit level.  Id. at 20-21.  Finally, the Court rejected the extension of the “worthless services” doctrine to create FCA liability for “worthless products.”  Id. at 21.

DOJ’s statement of interest in this case shows that the government continues to be interested in pursuing FCA cases premised on alleged violations of the FDCA and FDA regulations.  While the Court’s opinion did not foreclose these theories altogether, it was clear that the government/relator must show a strong connection between the regulatory violations and the government’s payment of claims.

If you have any questions concerning the material discussed in this client alert, please contact the members of our False Claims Act practice.