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Third Circuit Dismisses FCA Case Under Pre-ACA Version of Public Disclosure Bar

The Third Circuit Court of Appeals recently dismissed a relator’s False Claims Act (“FCA”) case under the pre-Affordable Care Act (“ACA”) version of the public disclosure bar.  The court decided in U.S. ex rel. Denis v. Medco that to escape the FCA’s public disclosure bar by qualifying as an “original source” under the pre-ACA version of the FCA, a relator must have first-hand, non-derivative knowledge of conduct giving rise to the FCA claim.

Paul Denis, a former Medco employee, alleged that Medco unlawfully accepted kickbacks disguised as discounts, which were hidden in confidential agreements with drug manufacturer AstraZeneca.  In return for these payments, Medco purportedly provided AstraZeneca with favored drug formulary placement for certain drugs.  The relator further contended that requests for reimbursement submitted to federal health care programs for these prescription drugs were tainted by the kickbacks and were thus false claims under the FCA.

The United States declined to intervene in the case.  Denis filed four complaints, but the district court dismissed the third amended complaint for lack of subject matter jurisdiction, finding that the alleged misconduct had already been disclosed publicly in previous lawsuits and in the media.  The court held that Denis was barred from proceeding against Medco because he was not an “original source.” 

Denis appealed, but the Third Circuit affirmed the district court’s decision that Denis was not an “original source, because Denis did not take part in negotiating the confidential agreements that allegedly contained the kickbacks disguised as discounts.  Rather, he learned of the alleged kickbacks second-hand from other Medco employees, and from reviewing the agreements already in place.  He therefore lacked direct and independent knowledge of the misconduct, which he must have to qualify as an ‘original source.’”

Under Denis, once the alleged wrongdoing is publicly disclosed, and thus barred by the FCA’s pre-ACA version of the public disclosure bar, a relator cannot escape this bar by qualifying as an “original source” unless the relator was involved in or had direct knowledge of the alleged misconduct. 

Denis was decided under the pre-ACA version of the FCA and highlights the broadening of the original source exception to the public disclosure bar brought about by the ACA’s revisions to the FCA.  Before the ACA amendments, the original source exception required a relator to have “direct and independent knowledge,” but the post-ACA version  uses a less stringent standard, requiring a relator to have “knowledge that is independent of and materially adds to” publicly disclosed information.

While the pre-ACA version is narrower, as evidenced by Denis, this version still comes into play in FCA litigation because of the FCA’s up-to-10-year statute of limitations for declined cases under the Supreme Court’s recent Cochise Consultancy, Inc. v. United States ex rel. Hunt decision.  Given the potential for a relator’s claims to extend back 10 years, the pre-ACA version of the public disclosure bar may apply to portions of a relator’s claims if they allege unlawful conduct before the ACA amendments in 2010.

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Jane Haviland's practice focuses primarily on health care enforcement defense. Jane defends laboratories, physicians, and other clients facing government investigations and whistleblower complaints regarding alleged violations of the federal False Claims Act, the federal anti-kickback statute, the Stark law, and similar state laws.