United States Ex Rel. Fowler v. Caremark RX, L.L.C.

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 06-4419
UNITED STATES ex rel. MICHAEL FOWLER,
PEPPI FOWLER, VICTOR CORTES,
and DANNY NEVAREZ,
Plaintiffs-Appellants,
v.
CAREMARK RX, L.L.C., and CAREMARK INC.,
Defendants-Appellees.
____________
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 03 C 8714—Suzanne B. Conlon, Judge.
____________
ARGUED JUNE 6, 2007—DECIDED JULY 27, 2007
____________
Before RIPPLE, KANNE, and EVANS, Circuit Judges.
KANNE, Circuit Judge. The plaintiff—Relators are
employees of Caremark. They filed a qui tam action under
the False Claims Act. 31 U.S.C. § 3729 et seq. The district
court held that subject matter jurisdiction existed but
dismissed the complaint on the merits. On appeal, the
Relators argue that the district court erred in dismissing
the case while Caremark argues that the case should have
been dismissed for want of subject matter jurisdiction. We
conclude that subject matter jurisdiction exists and we
affirm the judgment of the district court on the merits.
2 No. 06-4419
I. HISTORY
The United States government, like many employers,
provides health insurance benefits to its employees. The
government contracts with various private health insur-
ance plans. Federal employees are able to choose among
these private health insurance plans. Both the United
States and individual federal employees make premium
payments to the plans for the health coverage.
Many health plans provide prescription drug coverage
as part of their benefit package for the participating
federal employees. In turn, a number of these plans
contract with Caremark to provide the prescription drug
benefits provided under their respective plans. Caremark
ultimately receives payment from the federal government
and its employees for the prescription drugs and related
services provided under the plans.
The Relators, (we call them Relators, they call them-
selves Whistleblowers), were employed by Caremark at
two of its prescription drug processing facilities. The
Relators brought a False Claims Act suit on behalf of
the United States alleging that Caremark engaged in six
fraudulent schemes: (1) failing to provide a credit for
returned prescription drugs; (2) changing prescriptions
without proper approval; (3) misrepresenting the savings
obtained from its recommendations; (4) failing to substi-
tute a generic version of “Prilosec;” (5) failing to credit
for prescriptions lost in the mail; and (6) manipulating
the mandatory times for filing prescriptions.
The Relators filed their original complaint under seal in
December 2003. An amended complaint was also filed
under seal in March 2004. In July 2004, the United States
Attorney’s Office for the Northern District of Illinois
contacted Caremark and asked it to cooperate in an
investigation of Caremark’s business practices. From
October 2004 through January 2006, Caremark disclosed
No. 06-4419 3
in excess of 113,000 pages of documents to the U.S. Attor-
ney’s Office. These documents included Caremark’s
contracts with the health insurance plans serving federal
employees, invoices, quarterly reports, Caremark’s inter-
nal reports, memoranda and training procedures. In
January 2006, the government declined to intervene in
this case and the case was unsealed by the district court
in February 2006. In April and May 2006, the Relators
obtained discovery materials from both Caremark and the
U.S. Attorney’s Office.
In May 2006, the district court granted Caremark’s
motion to dismiss the first amended complaint holding
that the complaint failed to meet the heightened pleading
requirements of Rule 9(b). United States ex rel. Fowler v.
Caremark RX, Inc., 03 C 8714, 2006 WL 1519567 (N.D. Ill.
May 30, 2006). The Relators were granted leave to file
a second amended complaint which they did in June 2006.
Caremark then argued that case should be dismissed
pursuant to the jurisdictional bar contained in 31 U.S.C.
§ 3730(e)(4). Caremark’s position was that the Relators’
second amended complaint was based on publicly disclosed
information and the Relators were not the original source
of this information. The district court rejected Caremark’s
jurisdictional argument and held that the Relators met
the requirements of § 3730(e)(4). United States ex rel.
Fowler v. Caremark RX, Inc., No. 03 C 8714, 2006 WL
2425331, at *4-6 (N.D. Ill. Aug. 21, 2006).
However on the merits, the district court held that
despite increasing in size, the second amended complaint
failed to meet the heightened pleading requirements of
Rule 9. The second amended complaint consisted of 514
paragraphs spanning over 178 pages and also had over
1000 pages of attached exhibits. Id. at *3. The district
court explained that despite its length, the second
amended complaint failed to “identify a single prescription
4 No. 06-4419
through which Caremark perpetrated the alleged fraud.
Nor do they tie a specific fraudulent transaction to an
invoice submitted to the government. . . . [N]otice [suffi-
cient to satisfy Rule 9(b)] is woefully inadequate where, as
here, plaintiffs allege only generalized schemes and fail to
specify a single false claim.” Id. at *6-7.
The Relators were then given an opportunity to seek
leave to file a third amended complaint. However, the
district court warned the Relators that the case could be
dismissed in its entirety if they failed to provide a pro-
posed third amended complaint that complied with the
federal rules. The Relators then tendered their proposed
third amended complaint and sought leave to file the
complaint. The district court rejected the proposed third
amended complaint holding that it failed to meet the
requirements of Rule 9(b). United States ex rel. Fowler v.
Caremark RX, Inc., 03 C 8714, 2006 WL 3469537 (N.D. Ill.
Nov. 30, 2006). The district court, pursuant to Rule 15(a),
denied the Relators’ request to file the new amended
complaint and entered a judgment dismissing the case
in its entirety.
II. ANALYSIS
A. The Jurisdictional Bar of 31 U.S.C. § 3730(e)(4)
Caremark argues that the district court lacked subject
matter jurisdiction, pursuant to the jurisdictional bar set
forth in § 3730(e)(4), because the Relators’ claims are
based on publicly disclosed information and the Relators
are not the original source of this information. The Su-
preme Court has recently determined that § 3730(e)(4) is
a jurisdictional requirement implicating subject matter
jurisdiction and therefore no cross-appeal from Caremark
is required. Rockwell Int’l Corp. v. United States, ___
U.S. ___, 127 S. Ct. 1397, 1405-07 (2007); see generally
No. 06-4419 5
Luna v. United States, 454 F.3d 631, 635 (7th Cir. 2006)
(citing Arbaugh v. Y & H Corp., 546 U.S. 500, ___, 126 S.
Ct. 1235, 1244 (2006) (noting that a cross-appeal is not
required when a party is contesting subject matter juris-
diction)); McCready v. White, 417 F.3d 700, 702 (7th Cir.
2005) (“Ensuring the existence of subject matter juris-
diction is the court’s first duty in every lawsuit.”) (citing
Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83 (1998)).
We note that the Relators’ proposed third amended
complaint is the controlling document to be considered
by this court. “[W]hen a plaintiff files a complaint in
federal court and then voluntarily amends the complaint,
courts look to the amended complaint to determine juris-
diction.” Rockwell, 127 S. Ct. at 1409 (citing Wellness
Cmty.-Nat’l v. Wellness House, 70 F.3d 46, 49 (7th Cir.
1995); Boelens v. Redman Homes, Inc., 759 F.2d 504, 508
(5th Cir. 1985)).
Title 31, United States Code, Section 3730(e)(4) states:
(A) No court shall have jurisdiction over an action
under this section based upon the public disclosure
of allegations or transactions in a criminal, civil, or
administrative hearing, in a congressional, administra-
tive, or Government Accounting Office report, hearing,
audit, or investigation, or from the news media, unless
the action is brought by the Attorney General or the
person bringing the action is an original source of the
information.
(B) For purposes of this paragraph, “original source”
means an individual who has direct and independent
knowledge of the information on which the allega-
tions are based and has voluntarily provided the
information to the Government before filing an action
under this section which is based on the information.
31 U.S.C. § 3730(e)(4). “The bar is designed to deter
parasitic qui tam actions. . . . [O]nce information becomes
6 No. 06-4419
public, only the Attorney General and a relator who is
an ‘original source’ of the information may represent the
United States.” United States ex rel. Gear v. Emergency
Med. Assoc. of Illinois, Inc., 436 F.3d 726, 728 (7th Cir.
2006).
“The inquiry into whether a court may hear a qui tam
relator’s claim has three parts: (1) Have the allegations
made by the plaintiff been ‘publicly disclosed’? (2) If so, is
the lawsuit ‘based upon’ that publicly disclosed informa-
tion? (3) If so, is the plaintiff an ‘original source’ of the
information?” United States ex rel. Mathews v. Bank of
Farmington, 166 F.3d 853, 859 (7th Cir. 1999) (citing
United States ex rel. Cooper v. Blue Cross and Blue Shield
of Florida, Inc., 19 F.3d 562, 564 n.4 (11th Cir. 1994)); see
also Gear, 436 F.3d at 728; United States ex rel. Feingold
v. AdminaStar Fed., Inc., 324 F.3d 492, 495 (7th Cir.
2003).
Before we begin the analysis, it should be noted that
there are three types of information in the Relators’
possession in this case. First is the Relators’ “inside”
information that they obtained during their work at
Caremark. Second is the information disclosed by
Caremark directly to the Relators. Third is the information
disclosed by Caremark to the U.S. Attorney’s Office and
then passed from the U.S. Attorney’s Office to the
Relators.1
1
The record is somewhat limited as to the scope of the U.S.
Attorney’s Office’s investigation. It is clear that U.S. Attorney’s
Office contacted Caremark to investigate Caremark’s business
practices and Caremark provided information in return. This
information was then disclosed by the U.S. Attorney’s Office to
the Relators. The record does not reflect, however, whether the
U.S. Attorney’s Office was engaged in a civil or criminal investi-
(continued...)
No. 06-4419 7
Issue 1: Have the Allegations made by the Plaintiff been
“Publicly Disclosed”?
“A ‘public disclosure’ exists under § 3730(e)(4)(A) when
the critical elements exposing the transaction as fraudu-
lent are placed in the public domain.” Feingold, 324 F.3d
at 495 (citing United States ex rel. Rabushka v. Crane Co.,
40 F.3d 1509, 1512 (8th Cir. 1994); United States ex rel.
Springfield Terminal Ry. Co. v. Quinn, 14 F.3d 645, 654
(D.C. Cir. 1994)). “The point of public disclosure of a
false claim against the government is to bring it to the
attention of the authorities, not merely to educate and
enlighten the public about the dangers of misappropria-
tion of their tax money.” Mathews, 166 F.3d at 861.
“Disclosure of information to a competent public official
about an alleged false claim against the government [is a]
public disclosure within the meaning of § 3730(e)(4)(A)
when the disclosure is made to one who has managerial
responsibility for the very claims being made.” Id. The
more open a public disclosure, the less any specific public
official needs to be informed. Id. Conversely, “[i]f the
disclosure is made . . . to precisely the public official
responsible for the claim, it need not be disclosed to
anyone else to be [a] public disclosure within the meaning
of the Act.” Id. And, of course, “disclosure to the govern-
ment by a qui tam plaintiff of the information on which the
complaint is based, as mandated in § 3730(a)(2), is not
‘public disclosure’ under § 3730(e)(4)(A).” Id. at 862.
Caremark’s disclosure of information to the U.S. Attor-
ney’s Office during the government’s investigation of
1
(...continued)
gation. Specifically, the record does not tell us whether a grand
jury was involved in the investigation. Grand juries, of course,
are governed by Rule 6 of the Federal Rules of Criminal Pro-
cedure including the secrecy requirements of Rule 6(e)(2).
8 No. 06-4419
Caremark’s business practices qualifies as a public
disclosure of the Relators’ allegations. The scope of the
investigation involved whether Caremark defrauded the
federal government through its participation in the federal
employee health insurance programs. The U.S. Attorney
is the primary legal representative of the United States
within his or her respective district, 28 U.S.C. § 547, and
would be the public official responsible for bringing
criminal or civil claims against Caremark on this issue.
Thus, the Relators’ allegations have been publicly dis-
closed.
Issue 2: Is the Lawsuit “Based Upon” that Publicly
Disclosed Information?
“[A] lawsuit is based upon public[ly] disclose[d informa-
tion] when it ‘both depends essentially upon publicly
disclosed information and is actually derived from such
information.’ ” Feingold, 324 F.3d at 497 (quoting Mathews,
166 F.3d at 864). Caremark notes that our standard
conflicts with the standard adopted by the majority of
circuits and argues that we should reconsider our posi-
tion in light of this conflict.
The majority of circuits apply the standard “that a qui
tam action is ‘based upon’ a public disclosure when the
supporting allegations are ‘the same as those that have
been publicly disclosed . . . regardless of where the relator
obtained his information.’ ” Mathews, 166 F.3d at 863(quoting United States ex rel. Doe v. John Doe Corp., 960
F.2d 318, 324 (2d Cir. 1992)) (citing United States ex rel.
Kreindler & Kreindler v. United Tech. Corp., 985 F.2d
1148, 1158 (2d Cir. 1993); United States ex rel. Springfield
Terminal Ry. Co. v. Quinn, 14 F.3d 645, 652-55 (D.C. Cir.
1994); United States ex rel. McKenzie v. BellSouth
Telecomm., Inc., 123 F.3d 935, 940 (6th Cir. 1997); United
States ex rel. Wang v. FMC Corp., 975 F.2d 1412, 1417 (9th
No. 06-4419 9
Cir. 1992); United States ex rel. Precision Co. v. Koch
Indus., Inc., 971 F.2d 548, 552 (10th Cir. 1992); United
States ex rel. Cooper v. Blue Cross and Blue Shield of
Florida, Inc., 19 F.3d 562, 566-67 (11th Cir. 1994)); see
also United States ex rel. Paranich v. Sorgnard, 396 F.3d
326, 334-35 (3d Cir. 2005); Federal Recovery Servs. v.
United States, 72 F.3d 447, 451 (5th Cir. 1995); United
States ex rel. Minnesota Assoc. of Nurse Anesthetists v.
Allina Health Sys. Corp., 276 F.3d 1032, 1044-47 (8th Cir.
2002). In Mathews, we declined to adopt the majority
standard and instead adopted our current standard from
the Fourth Circuit’s decision United States ex rel. Siller v.
Becton Dickinson & Co. Mathews, 166 F.3d at 863 (citing
21 F.3d 1339, 1347-48 (4th Cir. 1994)).
In Mathews, we explained that the Fourth Circuit’s
standard of “ ‘based upon’ is . . . better on the grounds both
of plain meaning and public policy.” Id. The plain language
argument is that “ ‘based upon’ does not mean ‘similar
(even identical) to’ but ‘derived from.’ ” Id. (quoting Siller,
21 F.3d at 1347-48). The public policy justification is
that “information which happens to be similar or identical
to publicly disclosed allegations or transactions, but which
derives from some other source than the public disclosure,
is not parasitic, and should not be barred by a provision
meant to bar parasitic lawsuits.” Id. (quoting Siller, 21
F.3d at 1348).
In United States ex rel. Mistick PBT v. Housing Auth. of
the City of Pittsburgh, the Third Circuit analyzed the
circuit split and concluded that there was “merit” on both
sides of the split. 186 F.3d 376, 386 (3d Cir. 1999) (Alito,
J.). According to the Mistick court, although the minority
standard was a more faithful plain language interpreta-
tion, the interpretation would render the “original source”
exception largely superfluous. Id. Thus, the circuit split
was framed as “a clash between two textual arguments
10 No. 06-4419
concerning the meaning of 31 U.S.C. § 3730(e)(4)(A): one
based on the ordinary meaning of the phrase ‘based upon’
and one based on the precept that a statute should be
construed if possible so as not to render any of its terms
superfluous.” Id. at 387 (citations omitted). Citing various
drafting errors in the statute, the Third Circuit deter-
mined that “[t]he inescapable conclusion is that the qui
tam provision does not reflect careful drafting [and
therefore] we are hesitant to attach too much significance
to a fine parsing of the syntax.” Id. at 388. Consequently,
it rejected the plain language interpretation of the minor-
ity standard and determined the majority standard to
be superior.
Then-Chief Judge Becker dissented from the Mistick
decision. He noting that (1) traditionally courts defer to
the plain language interpretation of statutes, (2) there
were several plausible situations in which the plain
meaning interpretation would not make the “original
source” clause superfluous, (3) the plain meaning interpre-
tation was consistent with how Congress had used “based
upon” in another statute, and (4) the plain language
interpretation was consistent with both the False Claims
Act’s underlying policy and legislative history. Id. at 395-
403 (Becker, C.J., dissenting).
We reject Caremark’s invitation to alter our position
and reaffirm our adherence to the standard that “[a]
lawsuit is based upon public[ly] disclose[d information]
when it both depends essentially upon publicly disclosed
information and is actually derived from such informa-
tion.” Feingold, 324 F.3d at 497. “In a statutory construc-
tion case, the beginning point must be the language of the
statute, and when a statute speaks with clarity to an
issue judicial inquiry into the statute’s meaning, in all
but the most extraordinary circumstances, is finished.”
Estate of Cowart v. Nicklos Drilling Co., 505 U.S. 469, 475
(1992) (citing Demarest v. Manspeaker, 498 U.S. 184, 190
No. 06-4419 11
(1991)). Both the majority and minority standard have
rallied powerful arguments to their respective sides, but
the minority standard holds the trump card, the plain
language interpretation. We may be in the minority, but
we will not jettison a standard when that standard
includes an appropriate plain language interpretation of
the statute.
Returning to the jurisdictional analysis, we must
determine whether the Relators’ proposed third amended
complaint (1) depends essentially upon publicly disclosed
information and (2) is actually derived from such informa-
tion. Feingold, 324 F.3d at 497. The Relators’ proposed
third amended complaint will not meet the jurisdictional
bar of § 3730(e)(4) if the Relators used materials that they
received from the U.S. Attorney’s Office. However, the
complaint will meet the jurisdictional requirement if it
is only based on other materials such as the Relators’
“inside” knowledge that they obtained while working at
Caremark and Caremark’s disclosures made directly from
Caremark to the Relators.
In its review of the second amended complaint, the
district court determined that the Relators based their
complaint on their “inside” information and information
obtained directly from Caremark’s direct disclosure to the
Relators. Thus, jurisdiction was present, according to
the district court because there was no evidence of infor-
mation being used from the U.S. Attorney’s Office’s
disclosure. Of course, the proposed third amended com-
plaint is the controlling document to be considered because
the district court has dismissed the second amended
complaint on Rule 9 grounds, and now the Relators seek
leave to file their proposed third amended complaint.
However, based on the fact that the Relators’ practice has
been to build current complaints off of prior complaints,
and Caremark has not pointed to any indication in the
proposed third complaint that the U.S. Attorney’s Office
12 No. 06-4419
material was used in any way to construct the proposed
complaint, we conclude that the proposed third amended
complaint is not actually derived from any publicly
disclosed information provided by Caremark to the U.S.
Attorney’s Office and then passed onto the Relators.
Caremark has not pointed to specific items in the
complaint that it says comes from the U.S. Attorney’s
Office’s disclosure. Instead, Caremark’s position is that
the U.S. Attorney’s Office disclosure, and the discovery
disclosure it made directly to the Relators, consist essen-
tially of identical information. Thus, Caremark argues
that it is irrelevant whether the Relators faithfully
limited themselves to the discovery disclosures that they
received directly from Caremark and abstained from
including the U.S. Attorney’s Office material in the
complaint. Ultimately, according to Caremark, it is all the
same material, regardless of which copy was used by the
Relators in preparing their proposed third amended
complaint.
At first glance, there is logic to Caremark’s position. The
argument raises the question of what is the legal impor-
tance of whether the Relators took their information for
the complaint from Caremark’s disclosure or the U.S.
Attorney’s Office’s disclosure? It is the same material after
all. However, what this argument really does is return us
to Caremark’s prior argument that we should abandon
our current standard and instead adopt the standard
from the majority of other circuits. And as we discussed
above, we are unwilling to do this.
Congress said that, “No court shall have jurisdiction over
an action under this section based upon the public dis-
closure of allegations or transactions . . .” 31 U.S.C.
§ 3730(e)(4)(A) (emphasis added). Congress did not say,
“No court shall have jurisdiction under this section based
upon the public disclosure of allegations or transactions
No. 06-4419 13
or material that is the same or substantially the same as
the public disclosure . . . .”
This is more than a mere blind adherence to the plain
language of the statute. Congress is trying to balance two
policies in this statute. On one side, Congress wants
insiders to come forth with information about fraudulent
claims when this information is not otherwise publicly
available. On the other hand, Congress does not want self-
serving opportunists, who do not possess their own
insider information, to get in on the action and try to
collect on parasitic claims when the allegations have
already been publicly disclosed and the opportunists have
nothing new to add. The “based upon” language in
§ 3730(e)(4)(A) is the means through which Congress
strikes the balance between these two competing policies.
If we rewrite the statute to effectively include the “same
or substantially the same” language, we are eliminating
otherwise valid insider claims that Congress currently
allows to go forth. Perhaps, this class of claims should be
eliminated, but that is a policy choice reserved for the
Congress and we must respect its current decision. As the
Relators’ proposed third amended complaint does not
appear to be based upon publicly disclosed information,
the jurisdictional bar of § 3730(e)(4) does not apply
and therefore we shall turn to the merits.
B. The Merits
The district court determined that the Relators’ proposed
third amended complaint did not meet the heightened
pleading requirements of Rule 9(b), refused the Relators
leave to file the amended complaint under Rule 15(a), and
dismissed the case. “We review a denial of a motion for
leave to amend a pleading under an abuse of discretion
standard.” Gagan v. Am. Cablevision, Inc., 77 F.3d 951,
968 (7th Cir. 1996) (citing Moore v. Indiana, 999 F.2d
14 No. 06-4419
1125, 1128 (7th Cir. 1993)). Rule 15(a) states that “leave
[to amend] shall be freely given when justice so requires.”
FED. R. CIV. P. 15(a). “Although the rule reflects a liberal
attitude towards the amendment of pleadings, courts
in their sound discretion may deny a proposed amend-
ment if the moving party has unduly delayed in filing
the motion, if the opposing party would suffer undue
prejudice or if the pleading is futile.” Campania Mgmt.
Co., Inc. v. Rooks, Pitts & Poust, 290 F.3d 843, 848-49 (7th
Cir. 2002) (citing Foman v. Davis, 371 U.S. 178, 181-82
(1962); Bethany Pharm. Co. v. QVC, Inc., 241 F.3d 854, 861
(7th Cir. 2001)). Amending a complaint would be futile if
the proposed amended complaint fails to satisfy the
requirements of the federal rules. General Elec. Capital
Corp. v. Lease Resolution Corp., 128 F.3d 1074, 1085 (7th
Cir. 1997). Despite the fact that the deficiencies could be
cured through an appropriate pleading, a district court
properly exercises its discretion in dismissing the case
when the plaintiff continually fails to provide a valid
pleading in compliance with the federal rules. See Emery
v. Am. Gen. Fin., Inc., 134 F.3d 1321, 1322-23 (7th Cir.
1998) (“[T]he plaintiff has had three chances over the
course of three years to state a claim and the district
judge was not required to give her another chance.”).
We review a dismissal for failure to comply with Rule
9(b) de novo and take all factual allegations in the com-
plaint as true and make all reasonable inferences in the
plaintiffs’ favor. Borsellino v. Goldman Sachs Group, Inc.,
477 F.3d 502, 507 (7th Cir. 2007) (citing General Elec.
Capital Corp., 128 F.3d at 1078; Goren v. New Vision Int’l,
Inc., 156 F.3d 721, 725-26 (7th Cir. 1998)). “The [False
Claims Act] is an anti-fraud statute and claims under it
are subject to the heightened pleading requirements of
Rule 9(b).” United States ex rel. Gross v. AIDS Research
Alliance-Chicago, 415 F.3d 601, 604 (7th Cir. 2005) (citing
No. 06-4419 15
United States ex rel. Garst v. Lockhead-Martin Corp., 328
F.3d 374, 376 (7th Cir. 2003)).
Rule 9(b) requires that “[i]n all averments of fraud . . .,
the circumstances constituting fraud . . . shall be stated
with particularity.” FED R. CIV. P. 9(b). “A principal
purpose for requiring that fraud be pleaded with particu-
larity is, by establishing this rather slight obstacle to loose
charges of fraud, to protect individuals and businesses
from privileged libel (privileged because it is contained
in a pleading).” Kennedy v. Venrock Assoc., 348 F.3d 584,
594 (7th Cir. 2003) (citations omitted). The heightened
pleading standard requires “the plaintiff to do more than
the usual investigation before filing his complaint. Greater
precomplaint investigation is warranted in fraud cases
because public charges of fraud can do great harm to the
reputation of a business firm or other enterprise (or
individual).” Ackerman v. Nw. Mut. Life Ins. Co., 172 F.3d
467, 469 (7th Cir. 1999) (citations omitted). “A complaint
alleging fraud must provide ‘the who, what, when, where
and how.’ ” Borsellino, 477 F.3d at 507 (quoting Gross, 415
F.3d at 605; Dileo v. Ernst & Young, 901 F.2d 624, 627
(7th Cir. 1990)).
The False Claims Act imposes civil liability for a series
of actions under § 3729(a). The two applicable sections for
this case are §§ 3729(a)(1) and (a)(2). Under § 3729(a)(1),
civil liability is imposed on any person who knowingly
presents a false claim to the government for payment or
approval. 31 U.S.C. § 3729(a)(1). To establish a claim
under this section, “a relator must prove three elements:
(1) a false or fraudulent claim; (2) which was presented, or
caused to be presented, by the defendant to the United
States for payment or approval; (3) with the knowledge
that the claim was false.” United States ex rel. Walker v.
R&F Prop. of Lake County, Inc., 433 F.3d 1349, 1355 (11th
Cir. 2005). Section 3729(a)(2) prohibits a person from
knowingly making a false record or statement to get a
16 No. 06-4419
false or fraudulent claim paid or approved by the govern-
ment. 31 U.S.C. § 3729(a)(2). The three elements of a
§ 3729(a)(2) claim are: “(1) the defendant made a state-
ment in order to receive money from the government, (2)
the statement was false, and (3) the defendant knew it
was false.” United States ex rel. Crews v. NCS Healthcare
of Illinois, Inc., 460 F.3d 853, 856 (7th Cir. 2006) (quoting
Gross, 415 F.3d at 604).
The first alleged fraud involves billing for returned
prescriptions. The Relators allege that a percentage of
federal employees who received prescription drugs under
their respective health plans returned the drugs unused to
Caremark. Despite receiving the returned merchandise,
the Relators allege that Caremark continued to bill the
government for the cost of these medications or failed to
provide a refund if the government had already paid
before the return was made by the federal employee. The
Relators also argue they have identified specific transac-
tions with particularity as they identified individual
prescriptions that were returned to Caremark and corre-
sponding invoices in which Caremark continued to bill
for this returned merchandise.
We recently addressed a similar type of alleged scheme
in Crews. Crews involved a false claims suit brought by
a pharmacist who worked at a pharmacy providing phar-
maceutical services to nursing homes in the local area. 460
F.3d at 854. Approximately 60% of the nursing home
patients served by the pharmacy were on Illinois
Medicaid—which is jointly funded by the State of Illinois
and the Social Security Administration—thus implicating
the False Claims Act. Id. Prescriptions would often be
returneded unused to the pharmacy, for example when a
nursing home patient died. Id. at 855. The returned
medicine would then be recycled and reused by the phar-
macy. Id. However, the pharmacy, which we characterized
No. 06-4419 17
as “shoddy,” id. at 854, did not properly restock the
returned medicine but instead commingled the returned
drugs in garbage cans. Id. at 855. In turn, the labels for
the reissued medicine did not properly reflect the lot
number or expiration date. Id. This type of mislabeling
is a violation of federal law and the pharmacy was eventu-
ally shut down by the government. Id.After the pharmacy was shut down, Crews decided to do
a little math. She saw that 60% of the pharmacy’s patients
were on Medicaid and that 10 to 20% of the dispensed
medications were returned, recycled and reissued by the
pharmacy. Id. at 856. Consequently, Crews concluded that
6% to 12% of the recycled medications would have been
redistributed to Medicaid patients, resulting in double
billing and therefore false claims. Id. However, we rejected
this argument because Crews had failed to provide two
vouchers representing two separate charges for the
same pill. Id. at 857.
The Relators present arguments as to Caremark’s billing
for returned prescriptions fail for the same reason. The
Relators allege that they have particularized evidence
demonstrating that Caremark billed for prescriptions
despite the fact that they were returned. However, like the
situation in Crews, the Relators only have one-half of the
evidence they need to survive under Rule 9(b). The
Relators do not present any evidence at an individualized
transaction level to demonstrate that Caremark failed to
provide an appropriate refund or replacement product
for a returned prescription. The Relators see the returned
prescription but they do not know whether Caremark
replaced the returned prescription with another prescrip-
tion without charge. The Relators also see an invoice
seeking payment for a prescription they allege has been
returned and should not be paid, but they do not have
any evidence to demonstrate that Caremark failed to
18 No. 06-4419
reconcile this excess payment on a future invoice or
through an otherwise proper accounting technique.
The core of the Relators’ failure in this case is caused by
their misunderstanding of what is required to bring a
cause of action under §§ 3729(a)(1) and (a)(2). Both
sections require a false claim or statement and knowledge
that the claim or statement is false. Crews, 460 F.3d at
856; Walker, 433 F.3d at 1355. Remember what the
Relators’ employment positions were at Caremark, they
worked at two of Caremark’s distribution facilities. Thus,
it makes sense that they would see drugs being returned
and this could raise their suspicions. But what they lack
is knowledge of Caremark’s financial activities and in
particular how Caremark addressed these returns. The
Relators err by assuming, without any support, that once
a prescription was returned, Caremark automatically
either kept the money or continued to bill without pro-
viding an appropriate credit to the government or re-
placement prescription to federal employees.
Furthermore, a person must knowingly present a false
claim to the government for payment or knowingly make
a statement in order to receive payment from the govern-
ment. 31 U.S.C. §§ 3729(a)(1), (a)(2) (emphasis added).
“The mens rea element, ‘knowingly,’ requires that the
defendant have actual knowledge of (or deliberately ignore
or act in reckless disregard of) the truth or falsity of the
information. . . . Thus, ‘innocent mistakes or negligence
are not actionable.” United States ex rel. Durcholz v. FKW
Inc., 189 F.3d 542, 544 (7th Cir. 1999) (citing 31 U.S.C.
§ 3729(b); Hindo v. Univ. of Health Sci. / The Chicago
Med. Sch., 65 F.3d 608, 613 (7th Cir. 1995)). Although the
proposed third amended complaint and its accompany-
ing exhibits span several hundred pages, the Relators
fail to provide any information addressing whether
Caremark knowingly took any improper actions suf-
ficient to implicate the False Claims Act.
No. 06-4419 19
It is also important to stop at this point of the discussion
and note the scope of our review. We are reviewing the
Relators’ proposed third amended complaint to determine
whether the Relators have met the requirements of the
federal rules. As to this alleged scheme, and as we shall
see with all the alleged schemes, the Relators have failed
to meet the Rule 9(b) pleading requirements. That is our
only purpose here and we leave it to others, whether other
relators, the government, consumers, the press, or
Caremark itself, if any group so chooses, to determine
whether there are problems with Caremark’s business
practices. We are simply holding today that the district
court properly dismissed the case because the Relators,
after being given several chances, could not fashion a
complaint in compliance with the federal rules.
The Relators next argue that their proposed third
amended complaint satisfies Rule 9(b) as to the allega-
tions made about the “CCM Program.” The CCM Program
involved a cost saving procedure. Caremark and the
participating private health plans reached an agreement
under which Caremark would review submitted prescrip-
tions and determine whether the prescribed drug could
be appropriately replaced by a less expensive alternative.
Caremark, however, could not unilaterally change the
prescription but instead had to contact the prescribing
doctor who had issued the original prescription. If the
doctor agreed to take Caremark’s cost saving suggestion,
Caremark was allowed under the agreement to bill the
health plans for a percentage of the savings. The Relators
allege that Caremark did not properly contact the prescrib-
ing doctor before making the cost saving substitution.
Thus, the Relators allege that Caremark submitted false
claims when it submitted invoices for the cost savings on
prescriptions that were altered despite not being previ-
ously approved by the prescribing physician.
20 No. 06-4419
This allegation also fails because the Relators do not
provide any information to satisfy the knowledge require-
ment of the False Claims Act. There is no evidence in the
proposed third amended complaint that Caremark had
actual knowledge of this issue or otherwise ignored or
disregarded this situation. At best, the “scheme” as
currently alleged by the Relators merely rises to a breach
of contract dispute between the health plans, the govern-
ment and Caremark. The Relators’ position taken in
relation to this scheme, and permeating throughout this
entire case, is effectively that any allegedly inaccurate
claim is by definition a false claim. This standard would
transform every inaccurate claim into a false claim and
consequently replace the Act’s knowledge requirement
with a strict liability standard.
Finally, the Relators alleged three other schemes. They
argue that Caremark committed fraud when it refused to
substitute a generic for the name brand drug “Prilosec.”
The Relators also allege a “Lost in Transit” scheme and a
“Turnaround” scheme. The Relators take issue with the
district court, arguing that the district court dismissed
these claims with a minimal amount of explanation. Yet,
the Relators’ brief before this court discusses each scheme
over one page each for a total of three pages for all three
schemes. The total citation to authority in the three pages
of briefing consists of one case from the Eastern District of
Pennsylvania. “We repeatedly have made clear that
perfunctory and undeveloped argument, and arguments
that are not supported by pertinent authority, are waived.”
United States v. Hook, 471 F.3d 766, 775 (7th Cir. 2006)
(citations omitted). As such the Relators’ arguments on
these three schemes are waived. Additionally, should we
reach the merits, consistent with our previous discussion,
the Relators have failed to provide any indication that
Caremark knowingly engaging in a fraud.
No. 06-4419 21
In conclusion, the Relators’ proposed third amended
complaint does not meet the requirements of the federal
rules. Therefore, the district court properly exercised
its discretion in denying the Relators’ motion to amend
their pleading and in dismissing the case.
III. CONCLUSION
The judgment of the district court is AFFIRMED.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—7-27-07