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Date: 11-23-2021
Case Style:
United States of America, e4x rel Banigan & Templin v. PHARMERICA, INC.
Case Number: 18-1487
Judge: Kermit Lipez
Court: United States Court of Appeals
For the First Circuit
On appeal from The UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
Plaintiff's Attorney: Zenobia Harris Bivens and Michael Hurta, with whom Joel M.
Androphy, Berg & Androphy, Michael E. Mone, Jr., Patricia L. Kelly,
and Esdaile, Barrett, Jacobs & Mone were on brief
Defendant's Attorney:
Description:
Boston, MA - False Claims Act lawyer represented defendant charged with defending PharMerica, Inc of defrauded the government claim.
"The FCA prohibits the knowing submission of false or
fraudulent claims to the United States." United States ex rel.
Poteet v. Bahler Med., Inc., 619 F.3d 104, 107 (1st Cir. 2010)
(citing 31 U.S.C. § 3729(a)). The relators' FCA claims are based
on PharMerica's alleged violations of the Anti-Kickback Statute
("AKS"), which prohibits the solicitation or receipt of "any
remuneration (including any kickback, bribe, or rebate)" in
exchange for purchasing or ordering any good or item "for which
payment may be made in whole or in part under a Federal health
care program." 42 U.S.C. § 1320a-7b(b)(1)(B). The AKS was
designed to prevent medical providers from making decisions based
on improper financial incentives rather than medical necessity and
to ensure that federal health care programs do not bear the costs
of such decisions. See United States v. Patel, 778 F.3d 607, 612
(7th Cir. 2015). The AKS was amended in 2010 "to create an express
link to the FCA," Guilfoile v. Shields, 913 F.3d 178, 189 (1st
Cir. 2019), but the courts had already recognized that "liability
under the False Claims Act can be predicated on a violation of the
Anti-Kickback Statute." United States ex rel. Westmoreland v.
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Amgen, Inc., 812 F. Supp. 2d 39, 54 (D. Mass. 2011) (collecting
cases).
When a relator brings a qui tam action on behalf of the
government, the United States is entitled, but not required, to
intervene and take over the prosecution of the case. 31 U.S.C.
§ 3730(b)(2). If the government declines to intervene, the relator
has the right to proceed with the suit on the government's behalf.
Id. § 3730(c)(3). Whether the government intervenes or not, the
relator is usually entitled to receive a percentage of any
settlement or any damages that are awarded. Id. § 3730(d)(1)-(2).
The public disclosure bar is designed to prevent
opportunistic relators enticed by the financial incentives that
the FCA provides "from bringing parasitic qui tam actions," see
Poteet, 619 F.3d at 107, that is, suits that are "based upon the
public disclosure of allegations or transactions in," as relevant
here, a civil "hearing."2 31 U.S.C. § 3730(e)(4)(A). A lawsuit
is "based upon" a prior public disclosure if the relator's
allegations are "substantially similar to" the information already
in the public domain. United States ex rel. Ondis v. City of
Woonsocket, 587 F.3d 49, 58 (1st Cir. 2009). The statute includes
2 "[A]s used in the statute, 'hearing' is synonymous with
'proceeding.'" Poteet, 619 F.3d at 113. "[A] disclosure in a
civil complaint is a disclosure in a civil proceeding" and thus
constitutes a public disclosure from a statutorily enumerated
source. Id.
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an exception to the jurisdictional bar, however, when "the person
bringing the action is an original source" who has "direct and
independent knowledge of the information on which the allegations
are based." Id. § 3730(e)(4)(A)-(B). Thus, the court retains
jurisdiction over the qui tam action if the relator is an original
source, even though the allegations are substantially similar to
the information revealed in the prior public disclosure.
B. Factual Background
1. Facts Alleged by Relators3
PharMerica is one of the largest long-term care pharmacy
companies in the United States, providing pharmacy supplies and
services to nursing homes and other facilities. Most nursing homes
contract with long-term care pharmacy companies like PharMerica
which, in turn, contract with pharmaceutical companies4 to purchase
the medications that will be dispensed to nursing home residents.
3 We draw these facts from the relators' third amended
complaint and the exhibits that accompany it. See Rockwell Int'l
Corp. v. United States, 549 U.S. 457, 473 (2007) (holding that the
term "allegations" as used in § 3730(e)(4) "is not limited to the
allegations in the original complaint" and "includes (at a minimum)
the allegations in the original complaint as amended" (emphasis in
original)); see also United States ex rel. Cunningham v. Millennium
Labs. of Cal., Inc., 713 F.3d 662, 670-71 (1st Cir. 2013)
(comparing allegations "in the original complaint and retained in
the amended complaint" to prior public disclosure).
4 The long-term care pharmacy companies also contract with
larger long-term care buying groups or group purchasing
organizations, which negotiate contracts on behalf of
pharmaceutical companies.
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Nursing homes also often have a dedicated physician who works
closely with the in-house nurses and pharmacy staff to provide
medical care to residents. This structure means that long-term
care pharmacy companies and their pharmacists exert considerable
influence over the choice of medications used in nursing homes.
The relators are both former employees of the
pharmaceutical company Organon, which manufactures antidepressants
called Remeron Tablet and Remeron SolTab. Remeron Tablet was
patented, developed, and put on the market first. The patent for
Remeron Tablet expired in 1998, and generic manufacturers were
expected to enter the market in 2001. To stymie generic
competition, Organon developed Remeron SolTab -- a disintegrating
tablet that is a "variant" form of Remeron Tablet -- and launched
it in 2001. Because Remeron SolTab was not considered "equivalent"
to Remeron Tablet, generic competitors were unable to manufacture
and market a similar product to Remeron SolTab.
For years, Organon offered only modest discounts of
about 2% on its medications as incentives when contracting with
long-term care pharmacy companies. The relators acknowledge that
those incentives arguably fall within a limited exception to the
AKS for fixed discounts given to group purchasing organizations.
See 42 U.S.C. § 1320a-7b(b)(3)(C). Between 1999 and 2000, however,
Organon began offering contract terms that included greater, nonexempt discounts on Remeron Tablet in an effort to increase its
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market share. Those contracts included an 8% to 14.8% "ramp-up"
discount for the first five months of the contract term, followed
by a discount of anywhere between 8% and 15% that depended upon
the market share held by Remeron Tablet (referred to as a marketshare discount). Those deals incentivized long-term care pharmacy
companies to switch prescriptions from other drugs to Remeron
Tablet, thereby boosting its market share and the discount awarded
by Organon to the companies. Making that switch on the basis of
profit potential rather than the "medical propriety" of a given
drug, the relators allege, violates the AKS.
The switch from a medication prescribed by the patient's
doctor to a medication preferred by the pharmacy is referred to as
"therapeutic interchange," and it can be accomplished in several
ways. The pharmacy can try to persuade physicians to write new
prescriptions to move a patient to the preferred drug by touting
its supposed advantages. Or the pharmacy can use a device called
an "NDC lock," which sets up the pharmacy's computer system so
that only the preferred drug may be dispensed by the pharmacist.
When an NDC lock blocks a drug from being dispensed, the pharmacist
must quickly obtain from the physician a new prescription for that
patient for a preferred drug that is not blocked. Or the pharmacy
can ask physicians to sign broader agreements that cede to the
pharmacist "their authority to choose what drug will be prescribed
within a particular class."
- 9 -
PharMerica entered into a series of contracts with
Organon, beginning in 1999 and lasting until 2005, that included
incentives for PharMerica to purchase Remeron Tablet and Remeron
SolTab and to engage in therapeutic interchange. The first
iteration of the contract included only a "ramp-up" discount
followed by a market-share discount. Then, in 2000, PharMerica
agreed to implement a therapeutic interchange program. Its
contract with Organon provided for a "ramp-up" discount, a market
share discount, a "therapeutic interchange bonus" for switching
prescriptions for other companies' antidepressants to Remeron
Tablet or Remeron SolTab, and a "conversion rebate" for changing
Remeron Tablet prescriptions to Remeron SolTab. Eventually, all
of the discounts were changed to rebates.5 Through several
5 In 1999, many states determined the Medicaid reimbursement
rate for medications based on the drug's "Average Wholesale Price"
("AWP"). See Grant Bagley et al., Accurate Drug Price Reporting:
A Modest Proposal, 19 No. 11 Andrews Pharmaceutical Litig. Rep. 13
(Jan. 2004). "AWPs are published by private reporting services"
and are "commonly understood as a 'sticker price' with little
connection to market prices." Id. Thus, the AWP did not match
the "actual acquisition cost," i.e., the amount a company actually
paid, to purchase a medication from a drug manufacturer. Around
2001, states began changing their Medicaid reimbursement systems
to calculate reimbursement based upon the actual acquisition cost
rather than AWP. Under that system, companies must often submit
their purchase invoices to receive reimbursement. Because
discounts are reflected in purchase invoices, long-term care
pharmacy companies could not hide those financial incentives when
seeking Medicaid reimbursement. The change, therefore, prompted
Organon to start offering rebates -- which are not reflected in
purchase invoices because they are "calculated only after the fact"
-- instead of discounts.
- 10 -
contract amendments, Organon continued to provide ramp-up rebates,
market-share rebates, conversion rebates, and therapeutic
interchange bonuses to PharMerica in various forms until the end
of 2005.
Two executives at Organon, Carroll McKenna and John
Maddox, were primarily responsible for coordinating Organon's
contracts with long-term care pharmacy companies. Together they
devised the business plan that included the discounts and rebates
described above. The relators' complaint refers to McKenna and
Maddox's plan to influence long-term care pharmacy companies to
obtain prescriptions for Remeron Tablet and Remeron SolTab based
on those financial incentives, rather than medical necessity, as
the "Medicaid scheme." Between 1999 and 2005, Banigan was a member
of the leadership team within the same department as McKenna and
Maddox, but he was not involved with sales or contract negotiations
with long-term care pharmacy companies.
Nevertheless, word of the Medicaid scheme made its way
to Banigan. In the middle of 2000, Banigan was among the
recipients of an email from Maddox with the subject line "Cost of
Antidepressants in Nursing Homes," in which Maddox first proposed
marketing Organon's antidepressants to long-term care pharmacy
companies by highlighting the potential for those companies to
profit if they switched patients to Organon's medications. At
that time, Medicaid reimbursement was based on AWP, which could be
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higher than the amount the company actually paid. The discounted
prices that Organon offered to long-term care pharmacies lowered
their acquisition cost. If the AWP was higher than that
acquisition cost, the companies would profit from the Medicaid
reimbursement.
In his email, Maddox explained that this "spread"
between the AWP and the discounted price long-term care pharmacy
companies paid for Organon's antidepressants was "an advantage"
for Organon "that many pharmacists are not looking at." A year
and a half later, in late 2001, Maddox emailed Banigan and another
Organon employee asking for their input about a proposal to develop
two contracts -- one version that provided only an "upfront
discount" and the other a "minimal" upfront discount followed by
rebates -- to use in different states depending upon how they
calculated Medicaid reimbursement. This proposal appears to mark
the beginning of the transition from discounts to rebates in
Organon's contracts, as described above. See supra note 5.
Organon underwent some changes in management in 2003,
and concern about job stability percolated through the leadership
ranks. Against that backdrop, both McKenna and Maddox approached
Banigan in late 2003 and talked with him about the Medicaid scheme.
Banigan first spoke with McKenna, who told him about "marketing
materials and other communications" that were used to inform
"customers how to maximize their profits by influencing providers
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to prescribe Remeron." McKenna also "explained that the Marketing
Department conspired with [the] sales team to market Remeron almost
purely based on profit potential." He told Banigan that he
considered this information to be his "insurance policy" that he
could use against Organon if the company tried to force him out.
The following day, Banigan had a similar conversation with Maddox,
who also told Banigan about the marketing materials.
Several years went by before Banigan heard anything else
about the Medicaid scheme. In 2006, Banigan transferred to a
different position in a different department within Organon, and
Templin was hired for a job in Banigan's former department. Like
Banigan, Templin soon heard about the existence of the scheme from
one of its creators. Maddox "divulged" to Templin "the existence
of a 'non-compliant' program that provided him with a 'get-outof-jail-free card with Organon.'" After his conversation with
Maddox, Templin decided to investigate on his own what Maddox told
him. Over the next few months, Templin "learned that the program
[developed by Maddox and McKenna] centered on marketing the
'opportunity to profit' in the long-term care market," a fact which
McKenna later confirmed in a conversation with Templin.
With this information in hand, Templin sought Banigan
out in April 2007 to see if he knew about the scheme. Banigan
confirmed that he did and, after speaking with Templin, decided to
conduct his own investigation to see if he could turn up copies of
- 13 -
the marketing materials that McKenna and Maddox had described to
him. Banigan eventually obtained original copies of the marketing
materials from a former Remeron brand director who had kept the
materials at his home. The materials confirmed "how blatantly
Organon had promoted the 'opportunity to profit'" with incentives
and kickbacks. Seeking further confirmation, Templin and Banigan
then located the contracts between Organon and its largest longterm care pharmacy customers, "and found that the contracts' terms
evidenced the same types of incentives reflected in the promotional
materials."
The relators' complaint alleges that, despite this
pervasive Medicaid scheme, PharMerica falsely certified its
compliance with state and federal laws applicable to the Medicaid
program, including the AKS, each time it submitted a claim for
reimbursement for Remeron Tablet and Remeron SolTab.
2. Earlier Qui Tam Action Against PharMerica
In late 2002, William St. John LaCorte, M.D., filed a
qui tam action under the FCA against PharMerica and its parent
company in federal district court in Louisiana. Compl. at 1,
United States ex rel. LaCorte v. AmerisourceBergen Corp., No. 02-
3168 (E.D. La. Oct. 18, 2002), 2002 WL 32943919 (hereinafter
"Amerisource"). A doctor who treated patients in hospitals and
nursing homes in and around New Orleans, LaCorte alleged that
PharMerica entered into contracts with pharmaceutical
- 14 -
manufacturers under which PharMerica received "financial
inducements in the form of discounts, remuneration, rebates, or
kickbacks" in exchange for using its "Select Formulary"6 to boost
the market share of the manufacturers' drugs by substituting them
for the drugs prescribed by patients' physicians.
LaCorte's FCA claims were premised on violations of
multiple state and federal statutes, including the AKS. Like
Banigan and Templin, LaCorte alleged that participants in Medicaid
programs must certify compliance with the requirements of state
and federal law for the services they provide when they seek
reimbursement for those services. LaCorte alleged that PharMerica
violated the AKS by accepting "illegal remuneration and kickbacks"
and then caused hospitals and nursing homes where it operated to
submit false claims for reimbursement by concealing its noncompliance with the AKS and other state and federal laws.
The Amerisource complaint provides a non-exhaustive list
of PharMerica's preferred drugs, including "Remeron."7 Remeron
SolTab is identified as a preferred drug in a copy of PharMerica's
Select Formulary from 2003, which is attached as an exhibit to
both the first and second amended complaints. LaCorte alleged
6 The Select Formulary is PharMerica's list of preferred
drugs.
7 The parties to this appeal use "Remeron" and "Remeron
Tablet" interchangeably.
- 15 -
that PharMerica caused physicians' prescriptions to be changed to
Select Formulary drugs by either making the change without a
physician's knowledge or consent or by obtaining the physician's
consent by providing the physician with information that
misrepresented the "preferred" drug's safety, effectiveness, and
cost savings. The case ultimately settled and was dismissed by
stipulation of the parties in 2008.
C. Procedural Background
On September 13, 2007, Banigan and Templin filed their
qui tam action under seal against Organon, PharMerica, and other
companies involved in the fraudulent scheme that they had
discovered. After the submission of two amended complaints, the
United States notified the court that it declined to intervene and
the case was unsealed shortly thereafter. The relators then filed
a third amended complaint. In 2011, PharMerica and the other
defendants each sought dismissal of the claims against them. The
district court resolved PharMerica's motion to dismiss in two
separate orders, the first in June 2012 ("2012 Order") and the
second in April 2018 ("2018 Order").
In the 2012 Order, the district court dismissed the
relators' federal FCA claims against PharMerica under the public
disclosure bar based on the Amerisource lawsuit.8 The district
8 In addition to the public disclosure bar, the district
court's 2012 Order relied on the first-to-file bar, which precludes
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court also dismissed the relators' state FCA claims that were
brought under statutes that mirror the FCA but declined to dismiss
the other state FCA claims pending further briefing from the
parties.
After the relators filed a motion to reconsider, the
district court deferred decision on that motion, and on
PharMerica's motion to dismiss the remaining state law claims,
until the relators' remaining federal FCA claims against other
defendants were resolved. Between 2014 and 2017, the relators
reached settlements with the other defendants.9 In 2017, after
those defendants had been dismissed, the district court permitted
supplemental briefing on the relators' motion for reconsideration.
a relator's suit if there is already a separate, pending lawsuit
that involves related claims. See 31 U.S.C. § 3730(b)(5). In
2015, however, the Supreme Court clarified that "an earlier suit
bars a later suit while the earlier suit remains undecided but
ceases to bar the suit once it is dismissed." Kellogg Brown &
Root Servs., Inc. v. United States ex rel. Carter, 575 U.S. 650,
135 S. Ct. 1970, 1978 (2015). Therefore, as the district court
later noted in its 2018 Order, Amerisource ceased to bar the
relators' qui tam action under the first-to-file bar after the
case was dismissed in 2008.
9 The relators first entered into a settlement agreement with
Azko Nobel and the "Organon Defendants" -- Organon USA Inc., Merck
& Co., Inc., Schering Plough Corp., Organon Pharmaceuticals USA,
Inc., Organon Biosciences N.V., and Organon International, Inc.
-- and the district court dismissed those defendants on October
27, 2014. Almost three years later, the relators settled with
Omnicare, Inc., and the district court dismissed it as a defendant
on May 26, 2017.
- 17 -
The relators sought reconsideration on multiple grounds, including
the original source exception.
In its 2018 Order, the district court denied the
relators' motion for reconsideration of the 2012 Order and granted
PharMerica's motion to dismiss the remaining state law claims.
The district court concluded that neither Banigan nor Templin
qualified as an "original source" because neither had direct
knowledge of the information underlying their allegations. This
timely appeal followed.
II.
The relators argue that the public disclosure bar does
not apply to their claims and, alternatively, that they fall within
the original source exception. We review a district court's
dismissal for lack of subject matter jurisdiction de novo. United
States ex rel. Cunningham v. Millennium Labs. of Cal., Inc., 713
F.3d 662, 669 (1st Cir. 2013).
A. Public Disclosure Bar
The public disclosure bar applies when (1) "there has
been a prior, public disclosure of fraud," (2) "that prior
disclosure of fraud emanated from a source specified in the
statute's public disclosure provision," and (3) "the relator's qui
tam action is 'based upon' that prior disclosure of fraud."
Poteet, 619 F.3d at 109. The relators focus on the third
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requirement, arguing that their qui tam action is not "based upon"
the Amerisource litigation.10
"[T]he 'based upon' requirement is satisfied when the
relator's allegations are substantially similar to allegations or
transactions already in the public domain at the time he brings
his qui tam action."11 Ondis, 587 F.3d at 58. Thus, if the
relators' allegations "ultimately target[] the same fraudulent
scheme" that was previously disclosed, "[t]hat is enough to trigger
the public disclosure bar." Poteet, 619 F.3d at 115.
Consequently, "a complaint that targets a scheme previously
10 The relators assert in passing that they dispute the
district court's finding that there was a prior, public disclosure
of fraud sufficient to satisfy the first requirement, but they do
not develop that argument further or otherwise support it. The
argument is therefore waived. See United States v. Zannino, 895
F.2d 1, 17 (1st Cir. 1990)("[I]ssues adverted to in a perfunctory
manner, unaccompanied by some effort at developed argumentation,
are deemed waived."). In any event, the argument has no merit --
the prior disclosures at issue were made in "a civil complaint
filed in court," which "qualifies as a public disclosure." Poteet,
619 F.3d at 111.
11 Although our definition of "based upon" as "substantially
similar to" is not readily reconcilable with the statutory language
of the public disclosure bar, it best "comports with the overall
structure and purpose of the FCA." Ondis, 587 F.3d at 58. As we
explained in Ondis, if we interpreted the public disclosure bar to
require that a relator's allegations actually be derived from a
public disclosure, "the relator's knowledge never could be
independent of that disclosure" and he could never be an original
source. Id. (emphasis in original). Such an interpretation would
"read the 'original source' exception out of the statute,"
contravening the "canon of statutory construction that requires
courts, whenever possible, to give meaning to every word and phrase
contained in the text of a statute." Id.
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revealed through public disclosures is barred even if it offers
greater detail about the underlying conduct." United States ex
rel. Winkelman v. CVS Caremark Corp., 827 F.3d 201, 210 (1st Cir.
2016).
To distance the allegations raised in their complaint
from the allegations disclosed in Amerisource, the relators argue
that they describe "two distinct schemes" -- the "switching scheme"
and the "conversion scheme" -- while the Amerisource relator, "at
best," alleged facts related only to the switching scheme.12
Under the relators' framework, the switching scheme includes
PharMerica's acceptance of discounts, rebates, and other financial
inducements specifically for switching patients' prescriptions
from competitor manufacturers' drugs to Remeron Tablet. The
conversion scheme, they assert, encompasses PharMerica's
acceptance of those same financial inducements to "convert"
prescriptions for one Organon drug, Remeron Tablet, to another,
Remeron SolTab.
We are not persuaded that the relators' complaint
describes two schemes. Indeed, the complaint itself refers to the
fraudulent conduct as a single "Medicaid scheme." Though
PharMerica's contracts with Organon applied different labels to
12 At oral argument, counsel for the relators referred to a
single scheme with two components rather than two separate schemes.
Discerning no meaningful difference between the two formulations,
we adopt the nomenclature set forth in the relators' brief.
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different financial incentives -- for example, a "therapeutic
interchange bonus" for switching prescriptions for competitor
antidepressants to Remeron Tablet or Remeron SolTab and a
"conversion rebate" for changing Remeron Tablet prescriptions to
Remeron SolTab -- those labels are of no legal import. The AKS
broadly prohibits the acceptance of "any remuneration (including
any kickback, bribe, or rebate)" in return for purchasing
medications that will be paid for under Medicaid. See 42 U.S.C.
§ 1320a-7b(b)(1) (emphasis added). Thus, the fraudulent conduct
at the heart of the Medicaid scheme -- the use of financial
incentives to induce PharMerica to persuade or mislead doctors to
prescribe preferred antidepressants -- was the same despite
variations in the kind of remuneration PharMerica received or the
specific drug it substituted.13
Hence, the Medicaid scheme described in the relators'
complaint is indistinguishable in all material respects from the
fraudulent scheme disclosed in Amerisource. Both suits revealed
that PharMerica violated the AKS by accepting kickbacks in exchange
13 The two-scheme formulation and the relators' effort to
distinguish their action from Amerisource on that basis reflects
our decision in Cunningham, which identified three distinct
"aspects" of a fraudulent scheme and found that only two of those
aspects had been previously disclosed. 713 F.3d at 665-66, 675-
76. But as we have said before, "Cunningham turned on the entirely
unremarkable proposition that allegations of fraud distinct from
previous disclosures are not blocked by the public disclosure bar."
Winkelman, 827 F.3d at 210. We do not have that situation here.
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for causing prescriptions to be switched to Remeron Tablet and
Remeron SolTab, regardless of the medical propriety of the change,
and then lied to the government about its compliance with the law
to improperly obtain Medicaid reimbursement for the kickbacktainted medications.
Persisting in their effort to distinguish their claims
from those in Amerisource, the relators argue that their
allegations encompass a longer period of time and describe
different and "more aggressive" methods that PharMerica used to
change patients' prescriptions from Remeron Tablet to Remeron
SolTab. But providing "greater detail about the underlying
conduct" is not enough to avoid the public disclosure bar when the
complaint "targets" the same fraudulent scheme that was revealed
in a prior public disclosure. See Winkelman, 827 F.3d at 210.
That is precisely the situation that we have here. We therefore
conclude that the public disclosure bar applies.
B. Original Source Exception
Under the FCA, a court retains jurisdiction over an
action that is based on a prior public disclosure if "the person
bringing the action is an original source of the information." 31
U.S.C. § 3730(e)(4)(A). To qualify as an original source, a
relator must have "direct and independent knowledge of the
information upon which his own allegations were based." Ondis,
587 F.3d at 58-59; see also Rockwell, 549 U.S. at 470-71. On
- 22 -
appeal, the parties focus on the "direct" knowledge requirement of
the statute. PharMerica does not dispute the "independent"
requirement.14
The FCA provides definitions for only a handful of terms
that appear in the statute, and "direct" is not one of them. In
a prior FCA case, we resorted to the dictionary and adopted its
definition of "direct" as being "marked by absence of an
intervening agency, instrumentality, or influence: immediate."
Ondis, 587 F.3d at 59 (quoting Webster's Third New International
Dictionary 640 (2002)). Employing that definition, we agree that
knowledge based entirely on "research into public records, review
of publicly disclosed materials, or some combination of these
techniques is not direct." Id. On the other end of the spectrum,
knowledge obtained from personal observation of a fraudulent act
or participation in it would clearly meet the directness
requirement. Banigan's knowledge falls between those parameters.
Banigan received two emails from Maddox, one of the two
architects of the fraudulent scheme, in 2000 and 2001, both of
which were suggestive of the scheme but did not include much
14 The relators rely solely on Banigan's original source
status to meet the jurisdictional requirement in § 3730(e)(4) and
do not argue that Templin is an original source. PharMerica,
therefore, argues that "Templin cannot ride Banigan's
jurisdictional coat-tails" and that we must dismiss all claims
asserted by Templin. Because Templin does not respond to
PharMerica's position that he cannot continue as a relator, he has
waived any argument to the contrary. See Zannino, 895 F.2d at 17.
- 23 -
detail. In the first email, Maddox informed his colleagues that
he had hatched a plan to market Remeron Tablet to long-term care
pharmacies by focusing on profit. In the second, he sought input
about different versions of the contract that Organon was offering
to those companies. Although the 2000 and 2001 emails lacked
specifics, additional information came in 2003 when Maddox and
McKenna told Banigan about materials that had been developed "to
market Remeron almost purely based upon profit potential." Banigan
obtained the remaining information underlying the relators' claims
through his own investigation, which led him to uncover original
copies of marketing materials as well as the contracts that
reflected the discounts and rebates at the heart of the Medicaid
scheme.
PharMerica argues that Banigan's knowledge is not direct
because he learned of the Medicaid scheme from McKenna and Maddox.
It emphasizes that Bangian was not involved directly in creating
the scheme, nor did he observe the scheme in operation. Also, he
did not know about it until it was "winding down" and he did not
conduct his independent investigation until after the scheme had
ended. In short, PharMerica would require a relator to have either
participated in the fraud or observed it in operation to qualify
as an original source and would exclude a relator who discovered
- 24 -
the fraud after the fact and brought it to the government's
attention.15
We disagree with that reading of the statute. Indeed,
Pharmerica's reading would exclude a relator who is told by
managers at his company that a department he does not work for is
engaging in fraud. See United States ex rel. Saldivar v. Fresenius
Med. Care Holdings, Inc., 841 F.3d 927, 936 (11th Cir. 2016). In
Saldivar, the relator brought a qui tam action alleging that his
company violated the FCA by billing the government for excess
medication that it had received at no cost after company managers
told him what the billing department was doing. Id. at 930-31.
The Eleventh Circuit held that he did not qualify as an original
15 The limitations that PharMerica urges us to adopt track
those employed by the district court, which concluded that Banigan
did not have "direct" knowledge because he did not have
contemporaneous knowledge of the fraud, he did not see any
corroborating documents until more than a year after the scheme
had concluded, and he did not discover those documents in the
regular course of his job duties. A number of circuits disqualify
relators who did not participate in or witness the ongoing fraud.
See, e.g., United States ex rel. Schumann v. Astrazeneca Pharm.
L.P., 769 F.3d 837, 847 (3d Cir. 2014) ("[K]nowledge of a scheme
is not direct when it is gained by reviewing files and discussing
the documents therein with individuals who actually participated
in the memorialized events."); United States ex rel. Newell v.
City of St. Paul, Minn., 728 F.3d 791, 797 (8th Cir. 2013) ("[A]
person who obtains secondhand information from an individual who
has direct knowledge of the alleged fraud does not himself possess
direct knowledge and therefore is not an original source under the
[FCA]." (second alteration in original) (quoting United States ex
rel. Barth v. Ridgedale Elec., Inc., 44 F.3d 699, 703 (8th Cir.
1995)).
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source because "[b]eing told what another department is doing is
almost necessarily not direct knowledge of that department's
behavior." Id. at 936. We find that result incompatible with a
core purpose of the FCA -- to incentivize disclosures of fraudulent
activity underlying claims for reimbursement from the government.
See S. Rep. No. 99-345, at 23-24 (1986), as reprinted in 1986
U.S.C.C.A.N. 5266, 5288-89.
Moreover, nothing in the statutory text limits "direct
knowledge" to knowledge gained from participation in or
observation of the fraud. The statute requires only that the
person have "direct and independent knowledge of the information
on which the allegations are based," not direct and independent
knowledge of the fraudulent acts themselves. 31 U.S.C.
§ 3730(e)(4)(B) (emphasis added); see also Kennard v. Comstock
Res., Inc., 363 F.3d 1039, 1044 (10th Cir. 2004) ("A relator need
not . . . have in his possession knowledge of the actual fraudulent
conduct itself; knowledge underlying or supporting the fraud
allegation is sufficient." (alteration in original) (quotation
marks omitted)).16
16 We note that the 2010 amendments to the FCA removed the
word "direct" from the original source exception. See Patient
Protection and Affordable Care Act, Pub. L. No. 111-148, 124 Stat.
119, at 901-02 (2010). The Judiciary Committee's report on the
amendments to the FCA reflects a frustration that court decisions
interpreting the public disclosure bar and original source
provision had created "ambiguities" and "created a chilling effect
on relators coming forward with claims because certain types of
- 26 -
We also decline to impose the contemporaneousness
requirement that PharMerica urges us to adopt because it likewise
finds no support in the text of the FCA and would only discourage
reports of fraud. See United States ex rel. Duxbury v. Ortho
Biotech Prods., L.P., 579 F.3d 13, 27 (1st Cir. 2009) (rejecting
a restrictive interpretation of the original source exception that
"did not have textual support" and would have discouraged
"productive private enforcement suits").
Accordingly, we readily conclude that Banigan's
knowledge satisfies our definition of "direct" as "immediate."
See Ondis, 587 F.3d at 59 (quoting Webster's Third New
International Dictionary 640 (2002)). As we explained in Ondis,
"immediate" is shorthand for being "marked by absence of an
intervening agency, instrumentality, or influence." Id. Banigan
was a corporate insider at Organon who learned of the fraudulent
scheme in which his own company and department participated while
he was employed there.17 He gained knowledge of the fraud from
emails and conversations with Maddox and McKenna, the architects
cases cannot survive dismissal." S. Rep. No. 110-507, at 22
(2008), 2008 WL 4415147. The report explains that "erroneous court
interpretations of the public disclosure bar" and narrow
constructions of "the terms 'direct' and 'independent' under the
original source exception" had led to the dismissal of "real
meritorious cases." Id. at 24.
17 We are not suggesting that one must be a corporate insider
to meet the "direct" knowledge requirement.
- 27 -
and primary perpetrators of the fraudulent scheme, and from
documents generated as part of the fraudulent scheme that he
obtained through his own investigative efforts. There is no
"intervening agency, instrumentality, or influence" between these
sources and Banigan's knowledge of the Medicaid scheme. We do not
think that Congress intended to reward as original sources only
those who participated in the fraud. Indeed, Banigan would seem
to be the most likely type of person to function as an original
source. Congress's attempt to preclude parasitic claims need not
preclude claims by whistleblowers.
As required by the statute, the allegations of fraud in
the complaint are based upon Banigan's direct knowledge. The
complaint uses the first Maddox email, sent in 2000, to mark the
moment when the idea to market Remeron Tablet based on profit
potential was born. It reveals that Banigan's conversations with
Maddox and McKenna, and later with Templin, prompted him to search
for the marketing materials they described to him. And much of
the detail in the complaint is, in turn, drawn from the internal
Organon documents that Banigan located as the result of that search
-- for example, it lists in detail the various financial incentives
that PharMerica received from Organon over a six-year time span
based on multiple iterations of their purchase agreement. These
sources easily meet the statutory requirement -- "direct and
- 28 -
independent knowledge of the information on which the allegations
are based." 31 U.S.C. § 3730(e)(4)(B).18
Outcome: We therefore reverse the dismissal of the FCA action,
direct the district court to dismiss Templin as a relator, and
remand for further proceedings.
Plaintiff's Experts:
Defendant's Experts:
Comments: