Health Law Advisor

Thought Leaders On Laws And Regulations Affecting Health Care And Life Sciences

FDA Announces November Public Hearing on Off-Label Communications: An Important Step Forward or a Signal that FDA is Headed Back to the Drawing Board?

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On August 31, 2016, FDA issued a notification of public hearing and request for comments on manufacturer communications regarding unapproved uses of approved or cleared medical products. The hearing will be held on November 9-10, 2016, and individuals wishing to present information at the hearing must register by October 19, 2016. The deadline for written comments is January 9, 2017.

In the notice, FDA posed a series of questions on which it is seeking input from a broad group of stakeholders, including manufacturers, health care providers, patient advocates, payors, academics and public interest groups. The topics on which FDA is seeking feedback are broad, but generally include:

  • The impact of off-label communications on public health,
  • The impact of changes in the health care system on the development of high-quality data on new uses of cleared or approved products,
  • Preserving incentives for manufacturers to seek approval for new uses, standards for truthful and non-misleading information,
  • Factors FDA should consider in monitoring and bringing enforcement actions based on off-label communications by manufacturers,
  • The extent to which data on which off-label communications are based should be publicly available, and
  • The changes FDA should consider to existing regulations governing manufacturers’ communications regarding their products.

This announcement comes in the wake of increased pressure from lawmakers, public interest groups, and regulated industry for FDA to issue guidance or propose regulatory changes to address recent litigation clarifying commercial speech protections for pharmaceutical and medical devices manufacturers under the First Amendment. On May 26, 2016, the House Committee on Energy and Commerce sent a letter to HHS Secretary Sylvia Burwell expressing concern that FDA had failed to clarify its current thinking on permissible manufacturer communications about uses of cleared and approved drugs and devices beyond the scope of their approved labeling. In the letter, the committee noted that FDA had neither issued guidance, including guidance on the permissible scope of “scientific exchange” that has been on FDA’s Guidance Agenda since 2014, nor conducted the public hearing it announced in May 2015 in connection with negotiations on the proposed 21st Century Cures bill.  The committee expressed concern that HHS was preventing FDA from issuing guidance or proposing new regulations to address a string of recent court victories for companies and individuals prosecuted for off-label communications about drug and medical devices.

In light of the current state of First Amendment commercial speech protections, which makes it clear that manufacturers’ truthful and non-misleading speech regarding their products is not unlawful even if that speech includes uses of their products that have not been approved or cleared by FDA, other stakeholders have actively encouraged FDA to issue guidance or modify its regulations to conform its regulatory oversight and enforcement activities to this reality. While stakeholder groups have been actively engaged on these issues for several years, recent examples include the February 2016 white paper issued by the Duke-Margolis Center for Health Policy outlining policy options for off-label communications, and the joint release by BIO and PhRMA of the Principles on Responsible Sharing of Truthful and Non-Misleading Information about Medicines with Health Care Professionals and Payers on July 27, 2016.

Despite pressure from interested stakeholders, FDA has yet to propose changes to its regulations or issue long-awaited guidance on a number of topics related to manufacturers’ communications regarding off-label uses of their cleared or approved products. While FDA’s 2016 Guidance Agenda, updated most recently on August 6, 2016, continues to promise guidance on manufacturer communications regarding unapproved, unlicensed, or uncleared uses of approved, licensed, or cleared human drugs, biologics, animal drugs and medical devices and the inclusion of health care economic information in promotional labeling and advertising for prescription drugs, among others, the post-election timeline for the public hearing and FDA’s ongoing collection of feedback announced in the August 31st notice may suggest that FDA is going back to the drawing board. In particular, the focus in the notice’s background discussion and in FDA’s questions on the public health impact of off-label communications may suggest that FDA is re-evaluating its position in response to the HHS concerns about broader dissemination of off-label by manufacturers that were highlighted in the Energy and Commerce committee letter.  While FDA’s notice and request for comments is a step in the right direction, it likely signals a further delay in the issuance of guidance that is needed to bring greater clarity to the currently unsettled regulatory framework for FDA’s oversight of manufacturers’ off-label communications, and a punting of these important decisions to the next administration.

New FDA Draft Guidance Shows Limited Compromise with Brand and Generic Drug Manufacturers

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The Food and Drug Administration (FDA) issued a draft guidance (Draft Guidance) on July 11, 2016 that allows some generic drug manufacturers holding an Abbreviated New Drug Application (ANDA) to update the label of the drug they manufacture with new safety information.  The Draft Guidance provides new clarifications and recommendations to generic drug manufacturers seeking to update a generic label after withdrawal by the name brand manufacturer of the reference listed drug (RLD) (a “Withdrawn RLD”).  The Draft Guidance explains how a generic manufacturer may submit an updated label of a generic drug to the FDA for approval after withdrawal of the RLD.  The FDA must approve the proposed new label before the new generic label may be issued.  The Draft Guidance also reminds applicants that the FDA continues to retain the authority to request the ANDA-holder with a Withdrawn RLD to update the label of the drug under its ANDA for safety reasons.

The issue of generic labeling was put in the spotlight in 2011 with the US Supreme Court’s decision in  PLIVA, Inc. v. Mensing, 131 S. Ct. 2567 (2011), which held that generic drug manufacturers could not be held liable for failure to warn under state tort law because such laws were preempted by FDA regulations.  The specific regulations at issue prohibit generic manufacturers from changing a drug label unless and until the label of the RLD is amended.    Per Justice Thomas:

[t]he FDA denies that [generic drug manufacturers] could have… unilaterally strengthen[ed] their warning labels. The agency interprets… [its regulations] to allow changes to generic drug labels only when a generic drug manufacturer changes its label to match an updated brand-name label or to follow the FDA’s instructions. 

In response to public outcry over the decision in PLIVA, the FDA published a proposed rule entitled, “Supplemental Applications Proposing Labeling Changes for Approved Drugs and Biological Products” (Proposed Rule). This Proposed Rule gives generic manufacturers much broader powers and responsibilities over the labels of the generic drugs they manufacture.  The Proposed Rule was issued in 2013 and has been subject to controversy within the pharmaceutical industry.  This controversy has led to multiple delays in the finalization of the Proposed Rule and the unusual step by appropriations committees in the House of Representatives and the Senate to approve budgets that prohibit spending on the Proposed Rule.  As we reported in a June blog post, publication of the Proposed Rule has now been pushed out to at least the Summer of 2017.

In the interim, FDA’s Draft Guidance focuses on changes to generic drug labeling under a much narrower set of circumstances where the New Drug Application (NDA) of the RLD has been withdrawn by the brand name manufacturer for reasons other than safety or efficacy.

Currently, holders of a NDA or ANDA are each required to collect post-marketing safety data and provide the FDA with reports and safety data they receive for a drug under an NDA or ANDA. Based upon the data and reports submitted to the FDA, the FDA may request or require a change to the label of the corresponding drug (either a NDA or an ANDA with a Withdrawn RLD) in accordance with 21 USC §355(o)(4).  Additionally, NDA holders have available a mechanism by which the NDA holder can update the label of the drug under the NDA on its own or by providing a suggested label to the FDA for review.  This mechanism has typically been unavailable to ANDA holders. (See “Guidance for Industry: Safety Labeling Changes – Implementation of Section 505(o)(4) of the FD&C Act,” footnote 10).  The Draft Guidance clarifies that this second avenue for updating a drug’s label is available for an ANDA holder with a Withdrawn RLD if changes become necessary based upon new safety information it obtains.

Additionally, the Draft Guidance describes the other sources of data available to the holder of an ANDA with a Withdrawn RLD to aid in determining whether a label should be updated. Specifically, the FDA suggests that such an ANDA holder should review the labels of other drugs, both NDAs and ANDAs, containing the same active ingredient as they may have been updated more recently than the label of the RLD at the time it was withdrawn.

The ability to update a label under these circumstances is important for an ANDA holder with a Withdrawn RLD to avoid misbranding allegations. As the Draft Guidance states:

as a Drug is used over time, the scientific community’s understanding of the drug may evolve based on data from various sources…. Therefore, the labeling of ANDAs that rely on the withdrawn RLD might eventually become inaccurate and outdated, resulting in labeling that is false and/or misleading…

While review of new data and undergoing the process of supplementing a drug’s label with new safety information may be burdensome for ANDA holders, it is likely preferable to the risk of facing misbranding allegations.

The avenue for updated labeling in the Draft Guidance also resembles the concept of Expedited Agency Review (EAR) included in the alternative to the Proposed Rule issued jointly by the Generic Pharmaceutical Association (GPhA) and the Pharmaceutical Research and Manufacturers of America (PhRMA). While the Draft Guidance only applies to a very small and specific set of generic labels, the similarities between EAR and the FDA’s process for updating the label of an ANDA with a Withdrawn RLD demonstrates cooperation between the FDA and industry to at least find common ground on the issue of generic labeling. While the recommendations set forth in the Draft Guidance may be a sign the FDA is willing to listen to industry suggestions, the Draft Guidance’s impact is too limited to predict whether the FDA will  continue to search for middle-ground with the remaining generic labeling issues raised in the Proposed Rule.

Per the listing in the Federal Register, any comment on the Draft Guidance must be submitted by September 9th, 2016 in order to be considered in rendering the final guidance.

OCR Hones in on Smaller HIPAA Breaches

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The U.S. Department of Health and Human Services, Office of Civil Rights (“OCR”), the agency tasked with enforcing the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), recently announced that it will redouble its efforts to investigate smaller breaches of Protected Health Information (“PHI”) that affect fewer than five-hundred (500) individuals.

It has been widely known that OCR opens an investigation for every breach affecting more than 500 individuals; this announcement describes OCR’s new initiative to investigate smaller breaches as well.  OCR stated that in determining when it will open an investigation, it will evaluate a number of factors, such as: (1) the size of the breach, (2) whether the PHI was stolen or improperly disposed of, (3) whether an entity reports multiple breaches, (4) whether numerous entities are reporting breaches of a particular type, and (5) whether the breach involved unauthorized access to an IT system.  The announcement also notes that OCR may consider lack of breach reports for a region, suggesting that OCR is interested in investigating the potential of under reporting.

The announcement emphasized that OCR can determine both large scale trends among HIPAA regulated entities, and entity-specific compliance issues that must be addressed by investigating breaches.  The announcement also serves as a warning to persons and/or entities subject to HIPAA to ensure that their breach reporting and other HIPAA compliance efforts are up-to-date and ready to withstand any potential scrutiny from OCR.

CMS Issues Proposed Rule Advancing Care Coordination through Three New Mandatory Episode Payment Models and Introducing a Cardiac Rehabilitation Incentive Payment Model

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If your organization has missed an opportunity to participate in the voluntary Medicare Bundled Payments for Care Initiatives and/or the mandatory CJR program, CMS’ Centers for Medicare and Medicaid Innovation has issued a proposed rule introducing three new mandatory Episode Payment Models (EPMs) and a Cardiac Rehabilitation incentive payment model intended to be tested with a broad scope of hospitals which may not have otherwise participated in innovative payment model testing.

In the proposed rule issued August 2, 2016, CMS introduced EPMs for Acute Myocardial infarction (AMI), Coronary Surgery Bypass Graft (CABG) and Surgical Hip/Femur Fracture Treatment- Excluding Lower Joint Replacement (SHFFT) and a Cardiac Rehabilitation incentive model to be tested for five performance years, beginning July 1, 2017 and continuing through December 31, 2021. CMS estimates Medicare savings of $170 million over the five-year test period.

These new EPMs were selected to compliment care episodes addressed in other voluntary BPCI models and the mandatory Comprehensive Joint Replacement program with different patient populations due to the clinical conditions and non-elective treatment nature of the episodes chosen. As the clinical characteristics of these EPMs include both planned and unplanned treatment needs and underlying chronic conditions, the EPMs will be tested over a broader and complementary array of hospitals and MSA regions, to further promote care redesign models that focus on coordination and alignment of care in a largely fragmented acute to post acute care spectrum. It is hoped that with testing these new EPMs and the Cardiac Rehabilitation incentive model with a broader scope of hospitals with aligned post-acute providers will promote the rapid development of evidence-based knowledge CMS is striving to obtain.

These AMI, CABG and SHFFT EPMs were selected due to the high volume of these procedures among beneficiaries with common chronic conditions, such as cardiovascular disease, which contribute to the episode and impact high readmission rates. With these EPMs, CMMI is furthering its goals of testing innovative payment models to reduce cost and improve care transition efficiencies and long term outcomes throughout the care continuum. The same quality measures applied to Comprehensive Joint Replacement will be applied to SHFFT. The Cardiac Rehabilitation incentive model is designed to encourage treatment, reduce barriers to high –value care and increase utilization of cardiac rehabilitation and intensive cardiac services which have been shown to improve long term outcomes, but appear to be underutilized. (For example, CMS estimates that 35% of AMI patients older than 50 receive cardiac rehabilitation services). The Cardiac Rehabilitation incentive payment will be made to the selected hospitals with AMI and CABG EPMs for cardiac rehabilitation services provided during the EPM as they are already engaging in managing such episodes.

The EPM episodes will begin with acute admission at an anchor hospital for the applicable MS-DRG for the EPM upon discharge, and continue for 90- day period post discharge. Similar to CJR , acute care hospitals bear the financial risk for AMI, CABG and SHFFT EPMS, which include the inpatient admission(s), all related Medicare Part A and B services, including hospital, post-acute and physician services within the 90-day period. Eligible beneficiaries admitted to the anchor hospital for the applicable EPM will automatically be included within the applicable EPM. Hospitals and providers will be paid under Medicare FFS and after the first performance year, calculation of the actual episode payments will be reconciled against an established historical EPM quality adjusted target. Hospitals will bear upside and downside risk for the episodes after performance year two. The Cardiac Rehabilitation incentive will be paid to AMI and CABG EPM hospitals at a per cardiac rehabilitation/ intensive cardiac rehabilitation service level based on threshold treatments provided per AMI/ CABG episode post discharge.

While complementing current BPCI and CRJ programs, CMS is addressing potential advantages and disadvantages to certain overlapping of programs, geographic regions (MSAs) and hospitals. For example, acute care hospitals participating in BPCI Models 2 and 4 for hip and femur procedures and for all three BPCI cardiac episodes (AMI, PCI and CABG) will not be included for selection for the new EPMs. SHFFT EPMs will be implemented in the same 67 geographic MSAs where the CJR model is currently implemented. AMI and CABG EPMs will be implemented together in 98 MSAs selected based on specific criteria to avoid overlap with other payment initiatives such as BPCI models and AMI/ CABG procedure volumes.

Hospitals and certain ACOs may share gains with other providers under the AMI, CABG and SHFFT models as EPM collaborators. Similar to other model programs, the adoption of certain waivers are also proposed, such as adopting waivers of the telehealth originating and geographic site requirements and allowing for in-home telehealth visits for the three EPMs; EPM-specific limits for post-discharge home nursing visits and the SNF 3-day stay waiver, and expanding the practitioners allowed to perform certain cardiac rehabilitation services. Hospitals’ aligning with post acute providers and programs to effectively manage their EPM patients’ post acute transition and treatment adherence and monitoring will be critical to the EPM program success.

The selected MSAs and hospitals will be announced with the publication of the final rule. CMS is requesting public comment on the proposed rule and on any alternatives considered, by October 3, 2016.

“Good Faith” Off-Label Promotions Saved Ex-Acclarent Execs from Felony Misbranding Indictments

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Where does the line fall between good faith and criminal intent? That was the question that a Massachusetts federal jury faced in July as it deliberated criminal charges against William Facteau and Patrick Fabian, ex-Acclarent executives, who were indicted on multiple charges of fraud and misbranding a medical device. Acclarent’s device, the Relieva Stratus Microflow Spacer (“Stratus”), was cleared by the FDA for use as a spacer to maintain an opening in the sinus. Although the FDA expressly rejected Acclarant’s request to expand the indicated use of the device to include delivery of drugs, the government alleged that Acclarent promoted Stratus as a delivery method for the steroid drug Kenalog.

The arguments at trial focused on whether, in the defense’s view, Acclarent had done no more than claim that it had a good faith belief that it could promote the proven success of Stratus for delivering Kenalog, or the government’s position that the company’s leadership deliberately evaded the FDA’s requirements in order to put a product on the market without adequate data. The defense highlighted how, after receiving clearance for Stratus as a spacer, Acclarent asked the FDA to expand the indications for use to include the delivery of Kenalog, a corticosteroid. The FDA would not approve the expanded indication without multiple clinical trial data. The government, on the other hand, emphasized that Acclarent withheld this information when promoting Stratus to Ethicon, a subsidiary of Johnson & Johnson that bought Acclarent in 2010. After the deal closed and Ethicon realized Stratus lacked FDA clearance to deliver steroids, Ethicon ordered Acclarent to stop all off-label promotions to doctors and to notify the FDA. While Acclarent did contact the FDA, evidence shows that Facteau and Fabian continued encouraging sales representatives to promote Stratus for the delivery of Kenalog. An Acclarent sales representative testified that sales training focused on how to promote the use of Stratus with Kenalog without directly promoting the off-label use, and the videos used to train physicians showed Stratus being used to deliver a white substance resembling the steroid.

Ultimately, after six weeks of trial and almost three days of deliberations, the jury decided that good faith won over the alleged criminal intent. Fabian and Facteau were acquitted of all felony charges but convicted of ten misdemeanor counts of misbranding and adulteration of Stratus. The jury concluded that while the off-label promotion rules were broken, there was not enough evidence to conclude that the defendants had the intent to mislead or defraud doctors or the FDA. The misdemeanor convictions were based on statutes that impose strict liability, for which no finding of a criminal intent is required. A misdemeanor violation of the Food, Drug and Cosmetics Act (“FDCA”) has a maximum sentence of a year in prison per count, a year of supervised release, and a fine of either $100,000 or double the gross gain or loss.

When the dust settled from the jury’s verdict, Facteau and Fabian submitted a formal request for acquittal of the misdemeanor convictions. If the federal judge denies their request for judgment, the ex-Acclarent executives will seek a new trial. The outcome of this case may affect how medical device manufacturers deal with FDA oversight, particularly where a manufacturer seeks to market a device for a specific use but only has data addressing a more basic purpose. At the same time, the outcome may serve as an indication to the FDA that bringing similar criminal charges for off-label promotion in the future may prove more difficult than anticipated.

This post was written with assistance from Megan E. Robertson, a 2016 Summer Associate at Epstein Becker Green.

8th Circuit: Assigned Non-Competes Are Enforceable — Under Certain Facts

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Our colleagues James P. Flynn, Paul A. Gomez, Purvi B. Maniar and Yael Spiewak of Epstein Becker Green have published a blog post on the Trade Secrets & Noncompete Blog that will be of interest to our readers: “Assignment Lessons: 8th Circuit Finds Assigned Non-Competes Enforceable — Under Certain Facts.”

Following is an excerpt:

The 8th Circuit’s recent decision in Symphony Diagnostic Servs. No. 1 v. Greenbaum, No. 15-2294, __ F.3d __ (8th Cir. July 6, 2016), upheld the enforceability of non-compete and confidentiality agreements assigned by Ozark Mobile Imaging to Mobilex as part of Mobilex’s purchase of Ozark’s assets.  Although the 8th Circuit is careful to ground its analysis in that case’s specific factual and legal framework, this decision is helpful in providing some guidance to those dealing with the assignability of rights under non-compete and confidentiality agreements.

The non-compete and confidentiality agreements at issue were (1) “free standing” and (2) assignment did not “materially change the obligations of the employee” nor (3) were the agreements dependent upon “qualities specific to the employer.” Symphony Diagnostic Servs. It is also notable that the agreements contained no language regarding assignability, i.e. they did not expressly restrict or permit assignment. Symphony Diagnostic Servs. No. 1 v. Greenbaum, 97 F. Supp. 3d 1126 (W.D. Mo. March 16, 2015).  Under those factual circumstances, the 8th Circuit, applying Missouri law, concluded that a Missouri court would find the agreements assignable and enforceable.

There are lessons for both those seeking to enforce or to avoid enforcement of non-compete and confidentiality agreements following the acquisition of a business via an asset purchase.

Read the full alert here.

Disruptor Meets Regulator, and Regulator Wins: Lessons Learned from Theranos

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On July 7, 2016, the Centers for Medicare and Medicaid Services (“CMS”) imposed several administrative penalties on Theranos, a clinical laboratory company that proposed to revolutionize the clinical laboratory business by performing multiple blood tests using a few drops of blood drawn from a finger rather than from a traditional blood draw that relies on needles and tubes. However, after inspecting the laboratory, CMS concluded that the company failed to comply with federal law and regulations governing clinical laboratories and it posed an immediate jeopardy to patient health and safety. CMS has revoked the CLIA certification of the company’s California lab, imposed a civil monetary penalty of $10,000 per day until all deficiencies are corrected, barred Medicare or Medicaid reimbursement for its services, and excluded its founder and CEO from owning or operating a clinical laboratory for two years.

Although Theranos’s history has received an outsize amount of media attention, its experience with regulatory agencies highlights several important issues for start-up and emerging health care entities:

What Do Regulators Want?

It is no surprise that health care is one of the most highly regulated sectors of the U.S. economy, and that noncompliance with health care laws and regulations can result in penalties that can cripple an organization or force it to shut down. As a result, even in an environment that encourages innovation, health care organizations must understand the scope of regulatory oversight at the federal and state levels, and the range of remedies available to regulators for noncompliance. Every organization should also have a protocol in place for responding to regulatory inquiries or inspections.

What Do Health Care Providers and Payors Want?

Adopting a new health care technology is an intensely data-driven process. This is especially the case with clinical laboratories, which are subject to rigorous requirements for proficiency, quality assurance, and training. This burden is greater for laboratory-developed tests, commonly known as “home brew” tests, because they are currently exempt from FDA oversight.

In most cases, the innovator sponsors clinical studies subject to peer review and publication to demonstrate the efficacy of the new technology. These trials can also generate the clinical and cost data needed to convince practitioners that the test has reliable diagnostic or clinical value, and to persuade payors that the test is medically necessary.

However, Theranos declined requests to sponsor studies or disclose data. This was a red flag for many clinicians. In the interim, a group of independent investigators published a study based on a small sample of patients and found that the Theranos’s results were more variable than the results obtained from the same blood samples sent to laboratories using standard equipment. These variations were significant enough that they had the potential to affect clinical decision-making and jeopardize patients.

Who Is Investing in the Venture?

For start-up companies, committed investors are indispensable. Although early-stage investors are accustomed to risk, they also depend on reliable data to gauge whether health care professionals will adopt a new technology, and whether health plans will cover and pay for that technology. In Theranos’s case, several investors with experience in health care start-ups did not invest in the company because it did not release data on its proprietary technology and did not conduct or sponsor well-controlled clinical trials.

Who’s on Board?

The critical role of health care regulations demands that a company’s management and board be familiar with the key challenges and potential barriers to entry under the applicable regulatory framework. Nevertheless, at the time of the CMS survey Theranos’s board reportedly lacked individuals with specific experience in health care operations or clinical laboratories; however, it included two former Secretaries of State (one of whom had also been the dean of a business school), two former U.S. senators, the CEO of a bank, and retired military officers. While it is unclear how much the board knew of potential regulatory risks, the fact that CMS determined that the company had not made a “credible allegation of compliance” in response to any of the deficiencies in the initial survey report is an indicator that CMS did not believe that the company’s management and directors may not have appreciated the regulatory requirements or how to avoid or minimize these significant risks.

FCA Penalty Spike Confirmed by DOJ

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Entities that provide goods and services to the federal government, including health care providers and life sciences companies, should take note of the new civil monetary penalty amounts applicable to False Claims Act (“FCA”) violations. After much anticipation, the U.S. Department of Justice (“DOJ”) issued an interim final rule on June 30, 2016 confirming speculation that the penalty amounts will increase twofold.

The new minimum per-claim penalty amount will increase from $5,500 to $10,781, and the maximum per-claim penalty amount will increase from $11,000 to $21,563. The DOJ penalty increase mirrors the penalty spike announced by the U.S. Railroad Retirement Board (“Railroad Board”) in May of this year and discussed in our previous blog post.

The new penalty amounts will take effect August 1, 2016 and will apply to all violations that occurred after November 2, 2015.  This November date was the date that Congress passed the Bipartisan Budget Act of 2015 (the “Act”), which is the legislation that requires federal agencies that handle FCA cases to update their penalty amounts to adjust for inflation.

After this first adjustment, the Act allows DOJ and other federal agencies to make additional annual adjustments to penalty amounts based on the Consumer Price Index for Urban Consumers (CPI-U). Guidance on these annual adjustments is slated to be issued by the Office of Management and Budget this December.

If you would like to comment on this interim final rule, you must act quickly as the deadline for comments is August 29, 2016.

This post was written with assistance from Olivia Seraphim, a 2016 Summer Associate at Epstein Becker Green.

NY High Court Rejects Expansion of Common-Interest Doctrine

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In 2008, Ambac v. Countrywide defendants Bank of America Corporation and Countrywide Financial Corporation merged into a wholly-owned subsidiary of Bank of America.  In discovery, Bank of America withheld communications between Bank of America and Countrywide that occurred before the merger, on the basis that they were privileged attorney-client communications that were protected from disclosure under the common-interest doctrine.  In 2014, the New York Appellate Division, First Department, acknowledged that “New York courts have taken a narrow view of the common-interest [doctrine], holding it applies only with respect to legal advice in pending or reasonably anticipated litigation,” but rejected the litigation requirement.   Ambac v. Countrywide, 123 A.D.3d 129 (1st Dep’t 2014).

Last week, the Court of Appeals overturned the First Department decision and restated the narrower scope of the common-interest doctrine under New York law:

“Under the common interest doctrine, an attorney-client communication that is disclosed to a third party remains privileged if the third party shares a common legal interest with the client who made the communication and the communication is made in furtherance of that common legal interest.  We hold today, as the courts in New York have held for over two decades, that any such communication must also relate to litigation, either pending or anticipated, in order for the exception to apply.”

Ambac v. Countrywide.  The Court of Appeals noted that multiple jurisdictions take a more expansive approach to the doctrine, and commented that the Second Circuit (the federal appellate court with jurisdiction over New York) “ha[s] made clear that actual or ongoing litigation is not required” to invoke the common-interest doctrine, but does “not appear to have expressly decided whether there must be a threat of litigation in order to invoke the exception.”  Ambac v. Countrywide (citing Shaeffler v. United States, 806 F.3d 34 (2d Cir. 2015)).

Takeaways:

  • The scope of protections under the common-interest doctrine varies significantly depending on jurisdiction and governing law.
  • In order to be protected under the common-interest rule under New York law, communications among merger counterparties, including health care entities,  must be made in furtherance of a common legal interest and relate to pending or anticipated litigation.

Supreme Court: False Claims Act & Materiality Requirement

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Stuart GersonThe U.S. Supreme Court has rendered a unanimous decision in the hotly-awaited False Claims Act case of Universal Health Services v. United States ex rel. Escobar.  This case squarely presented the issue of whether liability may be based on the so-called “implied false certification” theory.  Universal Health Service’s (“UHS) problem originated when it was discovered that its contractor’s employees who were providing mental health services and medication were not actually licensed to do so. The relator and government alleged that UHS had filed false claims for payment because they did not disclose this fact and thus had impliedly certified that it was in compliance with all laws, regulations, etc.  The District Court granted UHS’s motion to dismiss because no regulation that was violated was a material condition of payment. The United States Court of Appeals for the First Circuit reversed, holding that every submission of a claim implicitly represents regulatory compliance and that the regulations themselves provided conclusive evidence that compliance was a material condition of payment because the regulations expressly required facilities to adequately supervise staff as a condition of payment.

The Supreme Court vacated and remanded the matter in a manner that represents a compromise view of implied false certification.

The Court recognized the vitality of the implied false certification theory but also held that the First Circuit erred in adopting the government’s expansive view that any statutory, regulatory, or contractual violation is material so long as the defendant knows that the Government would be entitled to refuse payment were it aware of the violation.

Instead, the Court held that the claims at issue may be actionable because they do more than merely demand payment; they fall squarely within the rule that representations that state the truth only so far as it goes, while omitting critical qualifying information, can be actionable misrepresentations.   Here, UHS and its contractor, both in fact and through the billing codes it used, represented that it had provided specific types of treatment by credentialed personnel.  These were misrepresentations and liability did not turn upon whether those requirements were expressly designated as conditions of payment.

The Court next turned to the False Claims Act’s materiality requirement, and stated that statutory, regulatory, and contractual requirements are not automatically material even if they are labeled conditions of payment. Nor is the restriction supported by the Act’s scienter requirement. A defendant can have “actual knowledge” that a condition is material even if the Government does not expressly call it a condition of payment. What matters is not the label that the Government attaches to a requirement, but whether the defendant knowingly violated a requirement that the defendant knows is material to the Government’s payment decision.

The FCA’s materiality requirement is demanding. An undisclosed fact is material if, for instance, “[n]o one can say with reason that the plaintiff would have signed this contract if informed of the likelihood” of the undisclosed fact.   When evaluating the FCA’s materiality requirement, the Government’s decision to expressly identify a provision as a condition of payment is relevant, but not automatically dispositive. A misrepresentation cannot be deemed material merely because the Government designates compliance with a particular requirement as a condition of payment. Nor is the Government’s option to decline to pay if it knew of the defendant’s noncompliance sufficient for a finding of materiality. Materiality also cannot be found where noncompliance is minor or insubstantial.

Moreover, if the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material. The FCA thus does not support the Government’s and First Circuit’s expansive view that any statutory, regulatory, or contractual violation is material so long as the defendant knows that the Government would be entitled to refuse payment were it aware of the violation.

The materiality requirement, stringently interpreted, and the fact that the First Circuit’s expansive view was rejected suggest that the game is far from over and that there still are viable defenses, facts allowing, to cases premised upon the implied false certification theory.