The Third Circuit recently ruled that a qui tam relator must have “direct knowledge” of the fraud or false statements at issue in order to satisfy the False Claims Act’s (“FCA”) “original source” jurisdictional requirement.  A relator fails to satisfy the direct knowledge requirement where his or her allegations are mere inferences based on the review of agreements and documents, discussions of those documents with others, or conclusions based on industry experience.  The case is U.S. ex rel. Schumann v. Astrazeneca Pharmaceuticals L.P., No. 13-1489 (3rd Cir. Oct. 20, 2014).

The qui tam provisions of the FCA bar a private relator from bringing a claim based on information that already has been disclosed publicly unless the relator is an “original source” of the information.  The original source exception requires that the individual must have “direct and independent” knowledge of the FCA allegations.

In Schumann, the relator’s FCA claims were based on allegations that pharmaceutical companies violated best-price requirements of the Medicaid Drug Rebate Program and Section 340B of the Public Health Service Act, as well as the Medicare Anti-Kickback Act’s prohibition against offering inducements to others to cause the Government to pay for drugs.  The relator, a former vice president of national pharmacy benefit manager Medco Health Solutions, Inc. (“Medco”), brought FCA claims against several national pharmaceutical companies.  He alleged that the companies provided kickbacks to Medco to induce Medco to offer their drugs in the mail-order pharmacies and health plans Medco managed, misreported to the Government their best prices for drugs, and over-charged and under-rebated the Government for those drugs based on inaccurate best prices.

The relator’s allegations, however, were the product of a series of inferences.  According to his complaint, his allegations were based on his review of confidential data fee and rebate agreements, review of confidential documents in Medco’s negotiation files, discussions of those agreements with others at Medco and the pharmaceutical companies, negotiations for the extension of those agreements, and his experience in the industry.  From these sources he inferred that the pharmaceutical companies could not have afforded to enter into the agreements if they were complying with best-price and anti-kickback requirements.  The Third Circuit affirmed the dismissal of the complaint, concluded that “knowledge of a scheme is not direct when it is gained by reviewing files and discussing the documents therein with individuals who actually participated in the memorialized events.”  The court further concluded that the relator’s years of industry experience, including knowledge of business strategies and certain payments, did not constitute “direct” knowledge that pharmaceutical companies submitted inaccurate best-price reports to the Government, paid kickbacks, or submitted false claims to the Government.

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Photo of Heather Finstuen Heather Finstuen

Heather Finstuen represents and counsels government contractors in connection with internal investigations, national security law, mandatory disclosures, federal inquiries and investigations, and compliance policies and procedures. Ms. Finstuen’s experience includes conducting internal fraud and ethics investigations in various industries (defense, manufacturing, software, banking…

Heather Finstuen represents and counsels government contractors in connection with internal investigations, national security law, mandatory disclosures, federal inquiries and investigations, and compliance policies and procedures. Ms. Finstuen’s experience includes conducting internal fraud and ethics investigations in various industries (defense, manufacturing, software, banking and finance, healthcare, food) into a range of issues including labor charging, cyber security, billing and claims, sourcing requirements, manufacturing and quality control processes, accounting, compensation structures, and mortgage foreclosure practices. In the national security area, Ms. Finstuen frequently advises companies and individuals on national security regulations relating to security clearances, safeguarding classified information, and the determination and mitigation of foreign ownership, control, or influence (FOCI) by the Defense Security Service (DSS) of the Department of Defense. She has represented companies in connection with investigations and consent orders of the Department of Justice, the Department of Defense, the Federal Reserve Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Securities and Exchange Commission. Ms. Finstuen also has represented Fortune 500 companies in complex commercial litigation in federal and state courts.

Photo of Alan Pemberton Alan Pemberton

Alan Pemberton has practiced in the government contracts area since 1982, and chaired or co-chaired Covington’s government contracts practice from 2000 to 2016. His practice includes the full range of government contracts matters, including bid protest and other procurement litigation before GAO, agency…

Alan Pemberton has practiced in the government contracts area since 1982, and chaired or co-chaired Covington’s government contracts practice from 2000 to 2016. His practice includes the full range of government contracts matters, including bid protest and other procurement litigation before GAO, agency boards, and federal and state courts and ADR tribunals. He advises large and small contractors and grantees about the full range of government proposal, performance, compliance, regulatory, suspension and debarment, transactional and legislative issues. He also directs the firm’s pro bono program as co-chair of the Public Service Committee.