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United States v. Omnicare, Inc.

United States Court of Appeals, Third Circuit

September 4, 2018

UNITED STATES OF AMERICA, THE STATE OF CALIFORNIA, THE STATE OF COLORADO, THE STATE OF CONNECTICUT, THE STATE OF DELAWARE, THE STATE OF FLORIDA, THE STATE OF GEORGIA, THE STATE OF HAWAII, THE STATE OF ILLINOIS, THE STATE OF INDIANA, THE STATE OF LOUISIANA, THE STATE OF MARYLAND, THE COMMONWEALTH OF MASSACHUSETTS, THE STATE OF MICHIGAN, THE STATE OF MINNESOTA, THE STATE OF MONTANA, THE STATE OF NEVADA, THE STATE OF NEW HAMPSHIRE, THE STATE OF NEW JERSEY, THE STATE OF NEW MEXICO, THE STATE OF NEW YORK, THE STATE OF NORTH CAROLINA, THE STATE OF OKLAHOMA, THE STATE OF RHODE ISLAND, THE STATE OF TENNESSEE, THE STATE OF TEXAS, THE COMMONWEALTH OF VIRGINIA, THE STATE OF WISCONSIN, AND THE DISTRICT OF COLUMBIA, ex rel. MARC SILVER, Appellant
v.
OMNICARE, INC.; PHARMERICA CORPORATION; CHEM RX CORPORATION; NCS HEALTHCARE, INC.; NEIGHBORCARE, INC.

          Argued November 15, 2017

          Appeal from the United States District Court for the District of New Jersey (D.N.J. No. 1-11-cv-01326) District Judge: Hon. Noel L. Hillman

          Shauna B. Itri [ARGUED] Daniel R. Miller Sherrie R. Savett Berger & Montague, Lisa J. Rodriguez Schnader Harrison Segal & Lewis Counsel for Appellant

          Michael R. Manthei [ARGUED] David M. Glynn Jeremy M. Sternberg Robert M. Shaw Holland & Knight, Peter J. Kocoras Thompson Hine, Judith Germano Germano Law LLC Counsel for Appellee

          Before: CHAGARES, VANASKIE, and FUENTES, Circuit Judges.

          OPINION

          CHAGARES, CIRCUIT JUDGE.

         Plaintiff-relator Marc Silver appeals the District Court's grant of PharMerica Corporation's[1] motion for summary judgment and motion to dismiss his qui tam action filed under the False Claims Act ("FCA"), 31 U.S.C. §§ 3729-33, based on the FCA's public disclosure bar. That bar generally disallows qui tam actions that rely on allegations that are, at least in substantial form, already known to the public. Silver alleges that PharMerica - which owns and operates institutional pharmacies serving nursing homes - unlawfully discounted prices for nursing homes' Medicare Part A patients (reimbursed by the United States (hereinafter, "the Government") to the nursing home on a flat per-diem basis) in order to secure contracts to supply services to patients covered by Medicare Part D and Medicaid (reimbursed directly to the pharmacy by the Government on a cost basis) in the same nursing homes. This practice is known as swapping. Silver challenges the District Court's conclusion that the alleged fraud had already been publicly disclosed. Specifically, Silver asserts that the District Court erred by (1) treating public disclosures concerning the general risk of swapping in the nursing home industry as a bar to his specific allegations, supported by non-public information, that PharMerica was actually engaging in swapping, and (2) concluding that the fraud was publicly disclosed based upon Silver's deposition testimony that he depended upon publicly available documents, without undertaking an independent review to determine whether those documents sufficiently disclosed the fraud. As explained below, we agree with Silver and conclude that his allegations of fraud were not publicly disclosed. We therefore will reverse and remand.

         I.

         The incentive for a nursing home to swap arises because of the different payment structures noted above.[2] The Government pays the nursing home a fixed per-diem rate for each Part A patient, and from this fixed amount, the nursing home must pay for all of the patient's care, including prescription drugs. Because the nursing home bears the financial risk for the amount of drugs dispensed to their Part A patients (who tend to be the sickest and so consume the most medication), nursing homes are motivated to negotiate with pharmacies for the lowest possible drug prices for those patients. In contrast, nursing homes are less concerned about the cost of drugs dispensed to Medicaid and Part D patients, because the pharmacies collect those payments directly from state Medicaid programs or from Part D prescription drug plan sponsors; the nursing homes bear no financial risk. This reimbursement structure may be viewed as incentivizing the nursing homes to "swap" with the pharmacies for lower drug prices for Part A patients in return for allowing the pharmacy to serve the more lucrative Part D patients. From the perspective of the pharmacies, it could be in their interest to provide drugs to Part A patients at even below-cost prices, because there are many fewer Part A patients than Part D patients, and the profit margins on the services provided to the Part D patients that the pharmacies would win the right to serve could compensate for the losses incurred serving the Part A patients.

         Silver alleges that PharMerica did just that: agreed with various nursing homes to provide drugs to Part A patients at per-diem rates that were so low (as little as $8 per day) that they must have been below cost, in exchange for the right to service the nursing home's other residents at the market rate. Because these alleged below-cost payments would thereby serve as "remuneration . . . to induce" the nursing homes "to refer an individual" - namely, Part D patients - "for the furnishing of any item or service for which payment may be made in whole or in part under a Federal health care program," 42 U.S.C. § 1320a-7b(b)(2)(A), Silver alleges that the swapping violated the Anti-Kickback statute. Silver accordingly brought these claims under the FCA[3] and its various state-law analogs, alleging that PharMerica fraudulently billed the federal government for services that it obtained through these alleged kickbacks by, among other things, falsely certifying in its reimbursement claims that it was complying with the Anti-Kickback rules.

         After the District Court denied PharMerica's Federal Rule of Civil Procedure 12(b)(6) motion to dismiss - a ruling that is not before this Court on appeal - PharMerica filed dispositive motions relying upon the public disclosure bar in the FCA. Because the public disclosure bar was jurisdictional before it was amended on March 23, 2010, PharMerica moved to dismiss Silver's pre-March 23, 2010 claims for lack of jurisdiction and moved for summary judgment on his later claims. The District Court granted both motions, determining - based on a number of publicly available documents that Silver admits he relied upon to deduce his allegation of fraud -that the transactions of fraud were publicly disclosed. Silver timely appealed.

         II.[4]

         The public disclosure bar to the FCA, prior to March 23, 2010, provided that "[n]o court shall have jurisdiction over an action under this section based upon the public disclosure of allegations or transactions . . . unless . . . the person bringing the action is an original source of the information." 31 U.S.C. § 3730(e)(4)(A) (2006). As amended effective March 23, 2010, [5] the disclosure bar is no longer jurisdictional and instead provides that a "court shall dismiss an action or claim under this section . . . if substantially the same allegations or transactions as alleged in the action or claim were publicly disclosed . . . unless . . . the person bringing the action is an original source of the information." 31 U.S.C. § 3730(e)(4)(A) (2010); see also United States ex rel. Moore & Co. v. Majestic Blue Fisheries, LLC, 812 F.3d 294, 300 (3d Cir. 2016). Whereas an "allegation" of fraud is a specific allegation of wrongdoing, a "transaction" that raises an inference of fraud consists of both the allegedly misrepresented facts and the allegedly true state of affairs. See United States ex rel. Dunleavy v. Cty. of Del., 123 F.3d 734, 741 (3d Cir. 1997), abrogated on other grounds by Graham Cty. Soil & Water Conservation Dist. v. United States ex rel. Wilson, 559 U.S. 280 (2010); Moore & Co., 812 F.3d at 303. As no one contends that, prior to Silver's suit, PharMerica had been publicly and explicitly accused of engaging in swapping, our task in this case is to ascertain whether the transactions raising an inference of that allegation of fraud were already publicly disclosed.

         To determine whether a fraudulent transaction has been publicly disclosed by information contained in one of the enumerated public sources, [6] this Court employs a formula of sorts, where:

"If X Y = Z, Z represents the allegation of fraud and X and Y represent its essential elements. In order to disclose the fraudulent transaction publicly, the combination of X and Y must be revealed, from which readers or listeners may infer Z, i.e., the conclusion that fraud has been committed."

United States ex rel. Zizic v. Q2Administrators, LLC, 728 F.3d 228, 236 (3d Cir. 2013) (quoting Dunleavy, 123 F.3d at 741). For a court to conclude that an inference of fraud [Z] has been publicly disclosed such that the public disclosure bar is triggered, then, "both a misrepresented [X] and a true [Y] state of facts must be publicly disclosed." United States ex rel. Atkinson v. PA. Shipbuilding Co., 473 F.3d 506, 519 (3d Cir. 2007). Where the fraud has been publicly disclosed - either because the public documents set out the allegation of fraud itself [Z] or its essential elements [X] - a relator's claim will be barred so long as it is "'supported by' or 'substantially similar to' [the] public disclosures." Zizic, 728 F.3d at 237 (quoting United States ex rel. Mistick PBT v. Hous. Auth. of City of Pittsburgh, 186 F.3d 376, 385-88 (3d Cir. 1999)); 31 U.S.C. § 3730(e)(4)(A) (2010).

         In this case, the parties agree that the allegedly "misrepresented" set of facts [X] is that PharMerica was complying with the Anti-Kickback statute, [7] and that the allegedly "true" state of facts [Y] is that PharMerica was in fact engaging in the fraudulent practice of swapping, which violates the statute. PharMerica argued - and the District Court found - that a number of publicly available reports and documents, upon which Silver testified that he relied to deduce the fraud, discussed swapping in the nursing home industry and accordingly that "the information cumulatively disclosed in the publicly available documents was sufficient to support an inference that PharMerica allegedly engaged in swapping transactions with nursing homes, and therefore the true state of facts (Y) was publicly disclosed." Appendix ("App.") 16. Finding that both X and Y were publicly disclosed, the District Court concluded that Silver's claim was barred. In reaching this conclusion, the District Court rejected Silver's argument that the public documents could not, on their own, disclose the fraud, and that to arrive at his allegations, Silver had relied on non-public contracts he had seen that indicated that PharMerica was offering below-price per-diem rates for Part A patients. Silver contends that the District Court erred in doing so for two reasons. First, Silver argues that the District Court improperly determined that documents publicly describing the generalized risk of swapping in the nursing home industry served to bar his specific claim, which depended on non-public information that PharMerica was actually engaging in swapping in specific contracts. Second, Silver contends that the District Court ignored this Court's guidance when it concluded, on the basis of Silver's testimony, that he relied upon certain publicly available information to reach his conclusion and that the information itself disclosed the fraud, without independently determining that the relevant public document did, in fact, effectuate such a disclosure. We agree.

         A.

         As noted above, the District Court determined that various reports cumulatively disclosed the alleged fraudulent ...


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