United States v. Medco Health Solutions Inc ( 2019 )

NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
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No. 17-3562
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UNITED STATES OF AMERICA; STATE OF CALIFORNIA; STATE OF FLORIDA;
STATE OF NEW JERSEY, EX REL., PAUL DENIS
v.
MEDCO HEALTH SOLUTIONS INC; EXPRESS SCRIPTS HOLDING COMPANY
Paul Denis,
Appellant
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Appeal from the United States District Court
for the District of Delaware
(D.C. No. 1-11-cv-0684)
District Judge: Honorable Richard G. Andrews
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Argued on September 26, 2018
Before: SMITH, Chief Judge, McKEE and RESTREPO, Circuit Judges
(Filed: June 18, 2019)
David S. Stone [ARGUED]
Robert A. Magnanini
Jason S. Kanterman
Stone & Magnanini
100 Connell Drive, Suite 2200
Berkeley Heights, NJ 07922
Counsel for Appellant
Craig D. Singer [ARGUED]
Enu Mainigi
Williams & Connolly
725 12th Street, N.W.
Washington, DC 20005
Counsel for Appellees
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OPINION *
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RESTREPO, Circuit Judge
Paul Denis, proceeding as a qui tam relator under the False Claims Act (FCA), 31
U.S.C. § 3729 et seq., appeals the District Court’s Order granting the motion to dismiss
of appellants Medco Health Solutions, Inc. and its parent, Express Scripts Holding
Company (collectively “Medco”). For the reasons explained below, we affirm.
I.
Medco is a pharmacy benefit manager (“PBM”) which manages prescription drug
benefits pursuant to contracts with its clients, including managed care organizations,
health insurers, employers, and unions. Medco negotiates with pharmaceutical
manufacturers to secure discounts and rebates. Denis was hired by Medco in 1992 and
served as one of its Vice Presidents from 1995 to 2008, when he left the company.
*
This disposition is not an Opinion of the full Court and, pursuant to I.O.P. 5.7, does not
constitute binding precedent.
2
Multiple previous lawsuits have involved allegations that Medco and other PBMs
received from pharmaceutical manufacturers improper rebates, discounts, or other
benefits that should have been passed on to the client healthcare plans. Here, Denis
makes such claims concerning Medco’s relationship with the manufacturer AstraZeneca
(“AZ”). He alleges that Medco accepted kickbacks from AZ in the form of hidden
discounts in confidential agreements in exchange for favoring certain drugs from AZ on
Medco’s formularies.
Denis contends these payments violated the federal Anti-Kickback Statute, see 42
U.S.C. § 1320a-7b(b), and were disguised as purchase discounts to avoid detection. He
alleges the prescriptions for these drugs were tainted by the alleged kickback violations,
and that resulting requests for payments submitted to government healthcare plans were
therefore false claims under the FCA.
Following the filing of Denis’ original Complaint and an amended Complaint, the
United States declined to intervene. After Denis filed his Third Amended Complaint
(“TAC”), Medco moved to dismiss, and the District Court granted that motion and
dismissed the TAC for lack of subject matter jurisdiction under the public disclosure bar
and under a separate jurisdictional barrier known as the first-to-file rule. In particular, the
Court dismissed the TAC with leave to amend, concluding that the allegations in the
TAC had been disclosed in previous federal lawsuits and in the media, triggering the
public disclosure bar.
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After the filing of Denis’ Fourth Amended Complaint (hereinafter “Complaint”),
Medco filed another motion to dismiss, and the District Court granted the motion, this
time with prejudice, based on the public disclosure bar. The Court determined that it
lacked subject matter jurisdiction over Denis’ claims involving his pre-2010 allegations
because he did not have the requisite direct and independent knowledge to satisfy the
original source exception to the FCA’s public disclosure bar. 1 This appeal followed.
II. 2
“The qui tam provision of the [FCA] permits, in certain circumstances, suits by
private parties on behalf of the United States against anyone submitting a false claim to
1
In the District Court, Denis alleged that Medco engaged in the same fraudulent scheme
starting in 2005. Congress amended the public disclosure bar in 2010, and those changes
do not apply retroactively. Graham County Soil & Water Conservation Dist. v. U.S. ex
rel. Wilson, 559 U.S. 280, 283 n.1 (2010); U.S. ex rel. Zizic v. Q2Administrators, LLC,
728 F.3d 228, 232 n.3 (3d Cir. 2013). Therefore, the District Court grappled with the
issue of whether the pre-2010 version of the public disclosure bar should be applied to
the entire continuing fraud claim, because that was the statute in effect at the time the
claim accrued, or whether the pre-2010 version of the statute should be applied to the
alleged pre-2010 conduct (“pre-2010 claim”), and the post-2010 statute should be applied
to the alleged post-2010 conduct (“post-2010 claim”). Although the District Court
believed the former would be the “better approach,” the Court pointed to non-
precedential caselaw in this Circuit, and followed the latter approach. In any event, since
we find that Denis waived his post-2010 claim on appeal, we need not address that issue
here, since the parties do not dispute that the pre-2010 version of the FCA’s public
disclosure bar applies to the pre-2010 claim. Accordingly, unless otherwise noted, any
discussion herein regarding the public disclosure bar refers to the pre-2010 version. See,
e.g., Wilson, 559 U.S. at 283 n.1; U.S. ex rel. Schumann v. AstraZeneca Pharms. L.P.,
769 F.3d 837, 840 n.1 (3d Cir. 2014); Zizic, 728 F.3d at 232 n.3.
2
Denis brought his FCA claims in the District Court pursuant to 31 U.S.C. § 3732,
and we have appellate jurisdiction under 28 U.S.C § 1291. This Court exercises plenary
review over a district court’s dismissal for lack of subject matter jurisdiction. Schumann,
769 F.3d at 845.
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the Government.” Schumann, 769 F.3d at 840 (quoting Hughes Aircraft Co. v. U.S. ex
rel. Schumer, 520 U.S. 939, 941 (1997)). However, “to strike a balance between
encouraging private persons to root out fraud and stifling parasitic lawsuits,” see Wilson,
559 U.S. at 294-95, the FCA’s public disclosure bar withdraws jurisdiction over, among
other things, suits based on information that had been previously disclosed unless “the
person bringing the action is an original source of the information,” see Schumann, 769
F.3d at 840 (quoting 31 U.S.C. § 3730(e)(4)(A)).
Here, Denis does not appeal the District Court’s conclusion that his claims are
based on publicly disclosed information, and that his claims are thus barred unless he is
an original source under the FCA. See Appellant Br. 32 n.9. Rather, Denis’ appeal
challenges the conclusion that he was not an “original source of the information” for
purposes of the FCA. Id.
“Original source” is defined as “an individual who has direct and independent
knowledge of the information on which the allegations are based and has voluntarily
provided the information to the Government before filing an action . . . which is based on
the information.” Schumann, 769 F.3d at 841 (quoting § 3730(e)(4)(B)) (emph. added);
see U.S. ex rel. Stinson, Lyons, Gerlin & Bustamante, P.A. v. Prudential Ins. Co., 944
F.2d 1149, 1160 (3d Cir. 1991) (noting the conjunctive “and” indicates “direct” and
“independent” each impose distinct requirements). “Direct knowledge is knowledge
obtained without any intervening agency, instrumentality, or influence: immediate.”
Schumann, 769 F.3d at 845 (quoting U.S. ex rel. Atkinson v. P.A. Shipbuilding Co., 473
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F.3d 506, 520 (3d Cir. 2007)) (internal quotation marks omitted). We have also
described direct knowledge as “first-hand [knowledge], seen with the relator’s own eyes,
unmediated by anything but [the relator’s] own labor, and by the relator’s own efforts,
and not by the labors of others, and . . . not derivative of the information of others.” Id.
(quoting U.S. ex rel. Paranich v. Sorgnard, 396 F.3d 326, 336 (3d Cir. 2005)).
“Independent knowledge” means “knowledge of the fraud cannot be merely
dependent on a public disclosure.” Id. (quoting Paranich, 396 F.3d at 336). “[A] relator
who would not have learned of the information absent public disclosure [does] not have
‘independent’ information” under the pre-2010 FCA. Id. (quoting Stinson, 944 F.2d at
1160). Further, “a relator cannot be said to have ‘direct and independent knowledge of
the information on which [its fraud] allegations are based,’ if the relator has no direct and
independent knowledge of the allegedly fraudulent statements.” Id. at 846 (quoting U.S.
ex rel. Mistick PBT v. Housing Auth. of Pittsburgh, 186 F.3d 376, 389 (3d Cir. 1999))
(internal quotation marks omitted).
In Schumann v. AstraZeneca Pharmaceuticals, a former Medco employee alleged
a substantially similar fraud between Medco and AZ as Denis does. See, e.g., Schumann,
769 F.3d at 843 (Schumann alleged, among other things, improper rebates and payments
from AZ in exchange for Medco favoring certain drugs on its formularies for health plans
managed by Medco). As in this case, Schumann’s claims were substantially similar to
other prior public disclosures. See id. at 844.
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Schumann was a Vice President in Medco’s Pharmaceutical Contracting group,
who alleged that his “direct and independent” knowledge was derived from “reviewing
confidential agreements and internal documents” and from “discussing formularies,
rebates, various fee arrangements, and best-price implications with Medco colleagues and
AZ officials.” Id. at 842, 848. Schumann also alleged he “negotiate[ed] extensions of
those agreements and arrangements; and encourage[ed] health plans managed by Medco
to favor AZ [products].” Id. at 848.
Our Court determined that Schumann was not an “original source” for purposes of
the pre-2010 public disclosure bar because his knowledge was not “direct” and “came
from reviewing documents and discussing them with colleagues who participated in the
underlying events.” Id. “Shumann substitute[d] experience-based belief that misconduct
was occurring for the requisite direct and independent knowledge. This is plainly
insufficient to qualify as an original source under the FCA.” Id.
Here, the District Court correctly concluded that Denis was not an original source
under the pre-2010 statute. Denis’ Complaint does not allege that he took part in
negotiating agreements between Medco and AZ that produced the allegedly fraudulent
discount arrangement at issue in this case. His allegations involving those dealings
reflect exclusively information he learned second-hand from other Medco employees and
reviewing the agreements already in place.
For the foregoing reasons, we affirm.
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