December 11, 2014

First Circuit Weighs In On Scope Of False Claims Act “First-To-File” Bar

whistleblower_successesBy Gordon Schnell

Under the so-called “first-to-file” rule, a whistleblower is precluded from bringing a False Claims Act case if one based on the same underlying facts is already pending. This pressure to be first to the courthouse forces whistleblowers to make a tradeoff between the speed and quality of their False Claims Act filing. In United States ex rel. Sun v. Baxter Healthcare Corp., the First Circuit recently gave its view on just how much of a tradeoff whistleblowers should be required to make.

The case involved two whistleblowers — one a former employee of Baxter; the other a former employee of one of Baxter’s longtime pharmacy customers — who sued the pharmaceutical giant for allegedly inflating the price of its drugs to secure higher than deserved Medicare and Medicaid reimbursements. Unbeknownst to the whistleblowers, another whistleblower action was pending against Baxter at the time they filed their lawsuit. The earlier case ultimately settled and Baxter moved to dismiss the latter filed action based on the first-to-file bar, among other arguments. In essence, Baxter argued the earlier suit (filed by Ven-A-Care pharmacy) “stated all the essential facts of the fraud alleged” in the Sun action. The district court agreed and dismissed the case.

On appeal, the Sun whistleblowers challenged the lower court’s ruling. Their principal contention was the first-to-file bar should not apply because their False Claims Act suit provided the government with significantly more information on Baxter’s alleged fraud. They argued “the Ven-A-Care complaint was so vague and conclusory when it came to Baxter’s conduct that it was as if the complaint alleged no fraud at all.” While the appeals court found this characterization unfair and overstated, it did acknowledge the Sun complaint “showed greater familiarity with how Baxter pulled off the supposed fraud,” and provided “far more detail” on the particulars involved.

Nevertheless, despite these substantial qualitative differences in the complaints, the Court affirmed the district court’s dismissal. It did so based on its plain and simple view of how the first-to-file bar is supposed to operate. According to the Court, “so long as the first complaint sets forth the ‘essential facts’ of the fraud alleged in the second complaint,” the first-to-file bar applies. That the later-filed complaint is substantially more detailed and of higher quality does not weigh into the equation. What matters is only that the original complaint gives “the government sufficient notice to initiate an investigation into the allegedly fraudulent practices.” This, the Court found, the Ven-A-Care complaint readily accomplished.

The Court concluded its decision with a grapple of the policy implications of applying the first-to-file bar in this type of case. The Sun whistleblowers warned “insiders like them will be discouraged from coming forward with valuable information about potential fraud for fear a less knowledgeable relator already beat them to the door.” The Court dismissed this concern as “not so powerful” because it ignores a primary purpose of the bar; namely, to encourage whistleblowers “to promptly alert the government to the essential facts of a fraudulent scheme.” The Court refused to read the bar in a way that would frustrate this underlying goal.

It is all about a “tradeoff between speed and quality,” the Court conceded. But once the “essential facts” of a fraudulent scheme are revealed, as the First Circuit sees it, the court has no further say in how this tradeoff should be made.

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