The federal government continues to secure significant recoveries through settlements and court awards related to its enforcement of the False Claims Act (FCA), particularly resulting from actions brought by qui tam relators. In fiscal year (FY) 2016, the federal government reported that it recovered $2.5 billion from the health care industry. Of that $2.5 billion, $1.2 billion was recovered from the drug and medical device industry.  Another $360 million was recovered from hospitals and outpatient clinics.

Government Intervention Drives Recoveries

The FY 2016 FCA statistics reflect that more than 97% of the recoveries from qui tam cases resulted from matters in which the government elected to intervene and pursue directly. Government intervention remains a real danger to health care entities.

However, more than 80% of new FCA matters were filed by qui tam relators; relator share awards reached almost $520 million in FY 2016. The financial incentives to pursue these matters are significant and well recognized; last year, the number of new qui tam FCA cases was the second highest since 1987.

Enforcement Climate Became Worse for Individuals in FY 2016—and Will Likely Continue

The government’s focus on individual liability, as reflected in the “Yates Memo,” is expected to continue. This focus on individual accountability has recently resulted in substantial FCA recoveries from physicians, a former hospital CEO, a nursing home CFO, and even the Chair of a board of directors.[1]  On the administrative side, such focus has resulted in the 20-year exclusion of a physician specializing in urogynecology whom the government alleged billed for services not performed or not medically necessary. Indeed, this focus continues: just last week, the government filed a FCA complaint against a mental health and substance abuse clinic and its owner in his individual capacity.

Regulatory Changes in 2016 Created More Financial Exposure

The monetary exposure faced by health care industry participants under the FCA is increasing. In June, the Department of Justice released an interim final rule increasing the minimum per-claim penalty under Section 3729(a)(1) of the FCA from $5,500 to $10,781 and increasing the maximum per-claim penalty from $11,000 to $21,563.

The Government’s Use of Technology

The use of technology has markedly enhanced the government’s recovery efforts. Federal and state governments, along with some commercial insurers, are investing in the use of predictive analytics that can analyze large volumes of health care data to identify fraud, waste, and abuse. Notably, the government reportedly enjoyed an $11.60 return for each dollar it spent on its investment in these technologies in 2015.  The use of such technology is expected to continue under the new administration.

The Risk of Enforcement Is Real

The FY 2016 FCA statistics reflect the government’s belief that devoting time and resources to FCA cases makes “good business sense.” This realization is very unlikely to change. Health care entities—as well as individuals—must be alert to potential violations and have strong compliance functions to deal with compliance-related matters in a way that prevents claims and litigation.

Enforcement in a Trump Administration and Opportunities to Reshape the Landscape

Enthusiasm for efforts to curb fraud, waste, and abuse is bipartisan. As a result, government enforcement is likely to stay on its present course with the incoming administration, in good part due to the high return on investment in government fraud investigations and no public policy outcry to reduce such enforcement efforts.

While the growth of the federal government’s investment in enforcement efforts might slow due to both the anticipated federal worker hiring freeze and President-elect Trump’s pledge to reduce regulations, health care entities should not ignore the real risk that they face in this area.

A new administration, however, may bring opportunities to reshape part of the enforcement landscape. President-elect Trump promised to repeal and replace the Affordable Care Act (“ACA”). Included within the ACA were several provisions that made it easier for qui tam relators to bring FCA cases.[2] While it is likely that such provisions—which plainly benefit the government—would be pressed for exemption from any repeal, this does present the potential for legislative changes beneficial to potential FCA defendants. Additionally, given the real likelihood of multiple U.S. Supreme Court appointments, along with the need to fill the more than 100 current federal district court vacancies, more legal challenges to efforts to expand the reach of the FCA can be anticipated.

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[1] See Press Release, Department of Justice, North American Health Care Inc. to Pay $28.5 Million to Settle Claims for Medically Unnecessary Rehabilitation Therapy Services (Sept. 19, 2016), https://www.justice.gov/opa/pr/north-american-health-care-inc-pay-285-million-settle-claims-medically-unnecessary; Press Release, Department of Justice, Former Chief Executive of South Carolina Hospital Pays $1 Million and Agrees to Exclusion to Settle Claims Related to Illegal Payments to Referring Physicians (Sept. 27, 2016), https://www.justice.gov/opa/pr/former-chief-executive-south-carolina-hospital-pays-1-million-and-agrees-exclusion-settle.

[2] The ACA impacted the FCA by narrowing the Public Disclosure Bar (31 U.S.C. § 3730(e)(4)(A)), expanding the scope of the “original source” exception for the Public Disclosure Bar (31 U.S.C. § 3730(e)(4)(B)), relaxing intent requirement for violations of the Anti-Kickback Statute (42 U.S.C. § 1320a-7b(h)), and providing that claims resulting from Anti-Kickback Statute violations would also be considered false claims (42 U.S.C. § 1320a-7b(g)).

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.

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.

 

In its recent decision in U.S. House of Representatives v. Burwell,[1] the U.S. District Court for the District of Columbia ruled that the Obama administration’s payment of cost-sharing subsidies for enrollees in plans offered through the Affordable Care Act’s Exchanges is unauthorized for lack of Congressional appropriation. The decision would affect future cost-sharing subsidies, though the court immediately stayed the decision pending its outcome on appeal.[2]

In its decision, the court found in favor of the members of the House of Representatives, based upon its interpretation of the applicable law. Specifically, the court found that, when Congress passed the Affordable Care Act, including Sections 1401 (premium subsidies) and 1402 (cost-sharing subsidies), it permanently appropriated funds for the former but not the latter.

The court examined prior Office of Management and Budget submissions to the House Appropriations Committee, finding that the administration had explicitly acknowledged the lack of appropriated funds for the cost-sharing reduction payments. After the Republican-controlled Congress declined the administration’s appropriations requests for the cost-sharing reduction funds, President Obama signed an appropriations bill without it. Treasury subsequently paid the cost-sharing subsidies to issuers without an appropriation. As of December 2015, 56.4% of Exchange plan enrollees were receiving the subsidies.[3]

The court rejected the administration’s arguments that, under King v. Burwell, the Act must be read for its intended effect. While King identified “three key reforms”—guaranteed coverage and community rating, individual mandate and premium tax credits—the court found that King did not treat the section 1402 cost-sharing reduction provisions as integral to those reforms. Moreover, King found the Exchange statute nonfunctional due to drafting failure and thus in need of saving. By contrast, the district court found that, here, Congress’s simple failure to appropriate cannot be remedied by a court.

The case will almost certainly be appealed to the D.C. Circuit Court of Appeals.

Ultimately, if the ruling is affirmed, absent a Congressional fix, new legal problems would arise for the Affordable Care Act’s Exchanges. Regardless of an appropriation, the Act still requires issuers to reduce cost-sharing for eligible enrollees, which would likely shield consumers but leave issuers financially exposed.

Moreover, notwithstanding the apparent lack of appropriation, the Act requires the government to pay issuers for the cost-sharing subsidies. This raises questions concerning the government’s ability to recoup payments already made. Should the government elect to discontinue the payments going forward, issuers could seek legal redress.

Notably, an affirmation of the district court could impact Exchange premiums. Many issuers have already raised premium rates for 2017, citing a high proportion of costlier, sicker enrollees. Should the courts ultimately place the burden on issuers to subsidize cost sharing, these costs are also likely to be shifted to premiums.

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[1] House of Representatives v. Burwell, No. 14-1967 (D.D.C. May 12, 2016), available at https://ecf.dcd.uscourts.gov/cgi-bin/show_public_doc?2014cv1967-73.

[2] In an earlier, controversial ruling in this proceeding, the same court allowed members of the Republican majority of the U.S. House of Representatives to proceed with the suit against the Secretaries of Treasury and Health and Human Services. The administration had argued that the House members did not standing to sue, but the court disagreed and declined to dismiss the suit.

[3] According to CMS, as of December 31, 2015, the ten highest states by percentage of Exchange plan enrollees receiving cost sharing subsidies were Mississippi (76.7%), Alabama (72.2%), Florida (70.1%), Georgia (68.1%), Hawaii (67.90%), North Carolina (63.9%), South Dakota (63.3%), Idaho (62.9%), Tennessee (62.7%) and Utah (62.6%). See CMS, Effectuated Enrollment Snapshot (Mar. 11, 2016), https://www.cms.gov/Newsroom/MediaReleaseDatabase/Fact-sheets/2016-Fact-sheets-items/2016-03-11.html.

On December 14, 2015, the U.S. District Court for the Western District of Texas denied the Texas Medical Board’s (“TMB”) motion to dismiss an antitrust lawsuit brought by Teladoc, one of the nation’s largest providers of telehealth services.[1]  Teladoc sued the TMB in April 2015, challenging a rule requiring a face-to-face visit before a physician can issue a prescription to a patient.  Following two recent Supreme Court cases stringently applying the state action doctrine, this case demonstrates the latest of the continued trend where state-sanctioned boards of market participants face increased judicial scrutiny with respect to the state action doctrine.

The Board Rule at Issue – “New Rule 190.8”

In April 2015 the TMB adopted revisions to various chapters of the Texas Administrative Code governing the practice of medicine.  Specifically, Section 190.8(1)(L) (“New Rule 190.8”) sets forth practices the TMB deems to be violations of the Texas Medical Practices Act and prohibits prescription of any “dangerous drug or controlled substance” without first establishing a “proper professional relationship.”  A “physician-patient relationship” is defined to require, among other things, a physical examination that must be performed by “either a face-to-face visit or in-person evaluation” (defined elsewhere to require that the patient and physician be in the same physical location).

Teladoc filed a lawsuit, alleging that New Rule 190.8 violated Section 1 of the Sherman Act, prohibiting anticompetitive agreements among competitors to restrain trade (the TMB is a group comprised of competing physicians).  Teladoc then obtained a preliminary injunction in May 2015, preventing the TMB from “taking any action to implement, enact and enforce” New Rule 190.8 until Teladoc’s claims are resolved.  In issuing the injunction, the court found that Teladoc demonstrated a substantial likelihood of success on the merits of its antitrust claims, a substantial threat of irreparable injury, that the threatened injury outweighed any damage that the injunction might cause the TMB, and that the injunction would not disserve the public interest.  The TMB then moved to dismiss, claiming, among other things, entitlement to state action antitrust immunity.

State Action Antitrust Immunity

State action antitrust immunity for professional board regulatory actions has two requirements: the actions must be conducted under “active state supervision,” and they must follow a “clearly articulated state policy” to displace competition.  The court held that the TMB could not claim state action immunity because the state did not exercise sufficient control over it.  The court did not address the second requirement.

The court’s order devotes significant attention to rejecting the TMB’s state action defense.  In North Carolina State Board of Dental Examiners v. FTC, which we previously covered, the Supreme Court reaffirmed that the state action exemption would not insulate the activities of state boards or regulatory agencies comprised of market participants absent active state supervision of the entity’s challenged conduct.

Both Teladoc and the TMB agreed that active state supervision is a state action requirement, but disagreed as to whether it existed.  The district court followed North Carolina State Board of Dental Examiners, noting that in order to constitute active supervision, “the supervisor must have the power to veto or modify particular decisions to ensure they accord with state policy.”

The TMB argued that it is indeed subject to active state supervision since its decisions are subject to judicial review by the courts of Texas, the Texas legislature, and the State Office of Administrative Hearings. The court found these purported review mechanisms to be focused on the mere validity/invalidity of rules—not allowing for an evaluation of the policies underlying the rules or bestowing the state with power to modify particular Texas Medical Board decisions to accord with state policy.  The court also rejected the TMB’s argument that state supervision exists by way of the Texas legislature’s “sunset review” process (where the legislature votes on whether there is a public need for continuation of a state agency) because the legislature has no authority to veto or modify any TMB rules.

Implications

Rules promulgated by state-sanctioned boards comprised of market participants are going to continue facing increased antitrust scrutiny when challenged in court.  These rulings continue to show that significant and meaningful state oversight mechanisms are a vital and scrutinized element for agencies seeking state action antitrust immunity. However, this case is far from over, and the TMB thus remains enjoined from implementing, enacting, or enforcing New Rule 190.8 until Teladoc’s claims are resolved.  While the Texas Medical Board has announced plans for appeal to the U.S. Court of Appeals for the Fifth Circuit, such a reversal would be highly unlikely at this point—meaning that the case can be expected to proceed into discovery and perhaps trial.

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[1] Teladoc, Inc. v. Texas Medical Board, 1-15-CV-343 RP (W.D. Tex. Dec. 14, 2015) (order denying motion to dismiss).

On November 24, 2015, in United States ex rel. Purcell v. MWI Corp., No. 14-5210, slip op. (D.C. Cir. Nov. 24, 2015), the District of Columbia Circuit Court of Appeals ruled that federal False Claims Act (“FCA”) liability cannot attach to a defendant’s objectively reasonable interpretation of an ambiguous regulatory provision. While outside of the health care arena, this decision has implications for all industries exposed to liability under the FCA.

In Purcell, the government alleged that false claims had been submitted as a result of certifications made by defendant MWI Corporation to the Export-Import Bank in order to secure loan financing connected with MWI’s sale of water pumps to the government of Nigeria.

As part of the loan process, the Export-Import Bank required MWI to certify that it had paid only “regular commissions” to the sales agent in connection with the transactions. Purcell alleged that non-regular commissions had been paid and that the commissions were, in fact, so great that MWI should have disclosed them as payments other than “regular commissions.”

MWI defended that the commissions it paid were at the same level it had previously paid to the agent—hence they were “regular”—and that the term was not otherwise elsewhere defined. The case was brought alleging the knowing submission of false claims for payment and the making of false statements to obtain payment of false or fraudulent claims in violation of 31 U.S.C. § 3729(a)(1) and (a)(2).

Ultimately, a jury awarded damages after finding that MWI’s certifications that it had paid only “regular commissions” were fraudulent. However, because the damages had been offset by other payments that had been made by MWI to the government, the District Court determined that there were no actual damages to be awarded. Nevertheless, because the jury found that false claims had been submitted, the Court imposed civil penalties at the then maximum amount ($10,000 per claim) for each of the alleged 58 false claims.

On appeal, MWI contended that it could not have been found liable under the FCA. It asserted that the term “regular commissions” was ambiguous and that it was entitled to its own reasonable interpretation of that term, absent notice of another meaning from the government or a court.

Holding that this presented questions of law, the Court focused on the fact that in order to be liable under the False Claims Act, a defendant must have made the false claims “knowingly”— specifically, “(1) [with] actual knowledge; (2) acting in deliberate ignorance; or (3) acting in reckless disregard.” The court held that the FCA did not reach an innocent, good faith mistake about the meaning of an applicable rule or regulation. Nor, the Court ruled, did it reach those claims made based on reasonable but erroneous interpretations of a defendant’s legal obligations. Holding that  the term “regular commissions” was ambiguous (note: no party contested that the term was ambiguous) and that there was no record evidence of any guidance from any court or relevant agency that would have suggested that the interpretation MWI made was inaccurate, the Court ruled that there was no showing of a knowing submission of a false or fraudulent claim or the making of a false or fraudulent statement in support of a false or fraudulent claim and reversed the judgment of the District Court.

Key Takeaways

MWI prevailed because its conduct was objectively reasonable given the undisputed ambiguity of the regulation and the fact that MWI acted in a customary fashion under both meanings of the word “customary.” It is significant that the Court held that these were questions of law that a judge could decide.[1]

This is of great importance to defendants, especially in the health care space where CMS and FDA regulations often are ambiguous or created ex post facto to conduct that the government decides should be considered fraudulent.  While it is generally the case that to be liable under the FCA, a defendant must have made a false claim knowingly —and the Court here is essentially reaffirming what it correctly held last year in United States ex rel. Folliard v. Gov’t Acquisitions, Inc., 764 F.3d 19, 29 (D.C. Cir. 2014) —not all circuits have issued identical holdings. Thus, if one is not concerned about extra-regulatory acquired knowledge—the thing that could potentially send what otherwise would be a case decided on motions to the jury—this is a useful and, one hopes, transferable precedent.

As significant—in light of the Department of Justice’s recently published “Memorandum Re Individual Accountability for Corporate Wrongdoing” authored by Deputy Attorney General Sally Quillian Yates,  where the focus is on the culpability of individual executives—the Purcell decision could have even broader influence.

In the civil arena, especially with regard to health care FCA cases against executives, the government is likely to advance derivative negligence theories of intent where, as usually is the case in larger companies, there is no direct participation by the individual in the alleged fraud.  Here, the strong reiteration of the three-part standard enunciated in Folliard and reiterated in Purcell ought to have a lot of value. This is especially so, since recent amendments to the FCA, including under the Affordable Care Act, have made it more difficult for defendants to get summary relief in FCA cases. That is a particular problem in cases where the government has declined intervention but relators can now more easily perpetuate litigation and pursue settlements.

Focusing on the absence of a specifically pleaded theory of culpable knowledge may prove more fruitful than trying to take advantage of jurisdictional bars that have been grossly lowered.  Doing so also helpfully implicates the Supreme Court’s teachings in Iqbal and Twombley.

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[1] While the questions of law were dispositive here, there is a major caveat: The case was held properly to have gone to the jury on the question of fact as to whether MWI otherwise had been aware of what the government contended had become its new regulatory definition. While the DC Circuit ultimately held that the evidence was legally insufficient to demonstrate such tipping, the fact remains that the Court potentially left open the door  – depending on the particulars of a given case – for the government to seek to recover even where a defendant has made an “objectively reasonable interpretation of an ambiguous regulatory provision.”

On Wednesday, October 14, 2015, the U.S. District Court for the District of Columbia (the “Court”), Judge Rudolph Contreras, vacated the Health Resources and Services Administration’s (“HRSA”) interpretive rule on Orphan Drugs (“the Interpretative Rule”) as “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.”[1]  As a result of the ruling, pharmaceutical manufacturers are not required to provide 340B discounts to certain types of covered entities for Orphan Drugs, even when the drugs are prescribed for uses other than to treat the rare conditions for which the Orphan Drug designation was given.[2]  This issue has been the subject of long and protracted litigation including a previous court ruling that invalidated HRSA’s Final Rule on Orphan Drugs because HRSA lacked the authority to promulgate the rule.[3] [HRSA Issues Interpretive Rule on 340b Orphan Drug in Response to Court Vacating Final Rule]

By way of background, the Affordable Care Act (“ACA”) amended the Public Health Service Act (“PHSA” or “the statute”) and expanded access to 340B discounts by creating new categories of eligible covered entities including freestanding cancer hospitals, children’s hospitals, critical access hospitals, rural referral centers and sole community hospitals.[4]  For these categories of covered entities only, the amendment also excluded drugs  “designated by the Secretary under section 360bb of Title 21 for a rare disease or condition” (“Orphan Drugs”) from the definition of covered outpatient drugs subject to mandatory 340B pricing requirements (“the orphan drug exclusion”).[5]

In the Interpretive Rule issued on July 24, 2014, HRSA narrowly interpreted the exclusion and required pharmaceutical manufacturers to provide 340B discounts to the new types of covered entities for Orphan Drugs when they are used to treat something other than the rare diseases and conditions they were developed to target.[6] In addition, HRSA sent letters to pharmaceutical manufacturers stating that failure to provide 340B discounts to eligible 340B covered entities for non-orphan uses would be deemed a violation of the statute.[7]  The lawsuit challenged HRSA’s interpretation, arguing that the orphan drug exclusion must apply to Orphan Drugs regardless of their particular use.[8]  The Court denied HRSA’s motion for summary judgment and granted PhRMA’s motion for summary judgment because it determined HRSA’s Interpretive Rule was contrary to the plain language of the statute.[9]

Analysis in the Court’s Opinion

Initially, the Court recognized HRSA’s authority to offer its interpretation of the statute and noted that PhRMA was not challenging HRSA’s authority to issue the Interpretive Rule.  Although the Court determined in the previous litigation that HRSA did not have authority under the statute to promulgate its Final Rule, the Court recognized that HRSA would need to provide interpretation of a pharmaceutical manufacturer’s obligations under the 340B Program.[10]

The Court determined that the Interpretive Rule constituted “final agency action” under the Administrative Procedure Act (“APA”).[11]  The Court focused the majority of its analysis on whether HRSA’s Interpretive Rule was “final.”[12]  Based on the two-part test set forth in Bennett v. Spear, the Court analyzed whether the action was the “consummation of the agency’s decision-making process” and whether “the action must be one by which rights or obligations have been determined or from which legal consequences will flow.”[13]  Since HHS conceded that the Interpretive Rule met the first element, the Court focused on the second element and determined that even prior to enforcement action, there were significant practical and legal burdens for covered entities and pharmaceutical manufacturers in the Interpretive Rule that impacted their business practices.  Additionally, since HRSA sent the manufacturers letters informing them that they were non-compliant with the statute unless the requirements in the Interpretive Rule were followed, potential penalties would accrue until HRSA pursued an enforcement action.[14]  The Court stated that “[h]aving thus flexed its regulatory muscle, [HHS] cannot now evade judicial review.”[15]  The Court concluded that the Interpretive Rule met the second element of the Bennett test.[16]

When analyzing the merits, the Court held that the Interpretive Rule “conflicts with the statute’s plain language.”[17]  Because of the conflict, the Court afforded the Interpretive Rule no deference.[18]   The Court relied on how Congress used the Orphan Drug terminology in other parts of the U.S. Code.[19]  Previously, in other contexts Congress included additional language to specify that the applicability was limited to occasions when the designated drug was used to treat the rare disease or condition, rather than the use of the Orphan Drug in general.  The Court noted that if it adopted the narrow meaning HRSA intended under the Interpretive Rule, the identified phrases elsewhere in the Code would be rendered superfluous based on the principle of statutory construction to give effect to every word in the statute.  Because of its conflict with the plain language of the statute, the Court held that the Interpretative Rule was “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.”[20]

Implications from the Decision

This decision means that pharmaceutical manufacturers are not required to provide 340B discounts on Orphan Drugs, whatever their use, to the types of covered entities added by the ACA. The Court acknowledged concerns that the amount of lost savings for these drugs could impact a covered entity’s decision to participate in the 340B Program.[21]

Additionally, this decision has implications for HRSA’s proposed Omnibus Guidance published on August 28, 2015, the comment period for which is open until October 27, 2015.  The Omnibus Guidance provides comprehensive guidance for the 340B Program. [HRSA Issues Proposed “Omnibus Guidance”].  While the Court recognized HRSA’s ability to issue interpretive guidance,[22] such guidance could be vulnerable to challenge if HRSA, after consideration of the comments submitted, finalized an Omnibus Guidance that is not consistent with the 340B statute.  Industry stakeholders should consider highlighting these types of inconsistences in the proposed Omnibus Guidance as they formulate comments for submission next week.

Finally, the recent decision might provide impetus for Congress to take legislative action.  The Court noted that it “would not rewrite the statute,” suggesting that Congress needs to take action if its intent was to limit the orphan drug exclusion.[23]  Given Congress’ recent focus on the 340B Program, it is possible that Congress could either amend the statute to clarify the orphan drug exclusion or to provide HRSA with additional rulemaking authority to allow it to address this issue and other oversight issues.


[1] 5 U.S.C. § 706(2)(A).  Pharm. Research & Mfrs. of Am. v. U.S. Dep’t of Health & Human Servs, No. 1:14-cv-01685-RC at 38 (D.D.C October 14, 2015) (hereinafter “PhRMA“).

[2] PhRMA at 36-8. HRSA may appeal the District Court’s decision within 60 days of the decision date.

[3] Pharm. Research & Mfrs. of Am. v. U.S. Dep’t of Health & Human Servs., 43 F. Supp. 3d 28 (D.D.C. 2014).

[4] Patient Protection and Affordable Care Act, Pub. L. No. 111-148, § 7101(a), 124 Stat. 119, 821–22 (codified as amended at 42 U.S.C. § 256b(a)(4)(M)–(O)).

[5] 42 U.S.C. § 256b(e).  The orphan drug exclusion does not apply to disproportionate share hospitals.

[6] HHS HRSA, Interpretive Rule: Implementation of the Exclusion of Orphan Drugs for Certain Covered Entities Under the 340B Program, (July 21, 2014), http://www.hrsa.gov/opa/programrequirements/interpretiverule/

[7] PhRMA at 10.  Additionally, the HRSA website explained that manufacturers could be subject to statutory penalties, refunds of overcharges, or termination of their Pharmaceutical Pricing Agreements. Id.

[8] Id.  at 1-2.

[9] Id. at 1-2.

[10] Id. at 12-13.

[11] The APA mandates that judicial review is permitted only when there is “final agency action.”

[12] Id. at 14, 15-27.

[13] Id. at 14.

[14] Id. at 22-26.

[15] Id. at 27.

[16] Id. at 23-27. 

[17] Id. at 2.

[18] Id. at 29.  The Court explained that if the statute were ambiguous, the Interpretive Rule was entitled to Skidmore deference, which means the Court would only follow the Interpretive Rule to the extent it is persuasive. HRSA’s Interpretive Rule would not receive Chevron deference because HRSA lacked the authority to promulgate regulations related to the orphan drug exclusion (as decided in the prior litigation).  Id.

[19] Id. at 30.

[20] Id. at 38.

[21] Id. at 36-37.

[22] Id. at 12-13.

[23] Id. at 37.

Stuart M. GersonOn December 15, 2014, the Supreme Court of the United States decided Dart Cherokee Basin Operating Co. v. Owens, a class action removal case.

In short, the Dart case is welcome news to employers. Standards for removing a case from state to federal court have been an abiding point of concern for employers faced with “home town” class actions. In more recent times, this problem has become a point of interest to employers in health care and other industries that are beset by cybersecurity and data breach cases originating in state courts but calling for the application of federal privacy standards. Dart should help them substantially.

In the Dart decision, the Supreme Court held that a defendant seeking to remove a case from state to federal court – who must file in the federal forum a notice of removal “containing a short and plain statement of the grounds for removal”  pursuant to 28 U. S. C. §1446(a) – need include only a plausible allegation that the amount in controversy exceeds the jurisdictional threshold. The notice need not contain evidentiary submissions. Section 1446(a) thus tracks the general pleading requirement traditionally required by the Federal Rules of Civil Procedure.

The Dart decision also resolves a longstanding split among the Circuit Courts of Appeals, adopting the view of a majority of the lower courts while categorically rejecting the Tenth Circuit’s requirement that an evidentiary submission had to accompany the notice of removal under the Class Action Fairness Act.

Perhaps even more noteworthy than its rejection of any requirement to submit evidence in support of removal is the Supreme Court’s categorical refusal to imply any presumption against removal to federal court. Parties have been attempting to rely upon such a presumption, often with success, for years. The Supreme Court, however, has now made it clear that there is no basis in law for it and for that reason, coupled with the requirement that a party do no more than plausibly allege the jurisdictional amount in controversy, has substantially eased the burden on a defendant’s removal of a state court action to federal court.

For those who think that the judicial conservatives and liberals always vote in a bloc and that the conservatives are always pro-business, one notes that this arguably pro-business decision was authored by Justice Ginsburg, who was joined by the Chief Justice and by Justices Breyer, Alito, and Sotomayor.  Justices Scalia, Kennedy, Thomas, and Kagan were all in dissent. One also notes that the 5-4 split should not be taken as a sign of potential weakness in the majority opinion.  The four dissenters did not dwell on the merits; they simply believed that, for jurisdictional reasons, the issue decided was not properly before the Court.