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First Circuit Revives Whistleblower Suit Against PharMerica, Rejecting Public Disclosure Challenge

Posted  February 28, 2020

Rejecting an argument that only a fraudster could love, the First Circuit Court of Appeals revived a whistleblower’s lawsuit and rightly recognized that whistleblowers can have “direct” knowledge of fraud even if they did not themselves participate in the fraud. In United States ex rel. Banigan & Templin, et al. v. PharMerica, Inc., the First Circuit interpreted the so-called “original source” provision of the False Claims Act in a manner that furthers its purpose of encouraging whistleblowers to report corporate fraud and file private enforcement lawsuits.

The facts at issue in Banigan may remind some of recent public debates about whistleblowers making reports based on information that was not “first-hand.”  As we have previously written, a whistleblower can often provide a roadmap that directs investigators to fraud and corruption, even if the government’s case ultimately hinges on witnesses other than the whistleblower. The Banigan decision recognizes this, and emphasizes the importance of whistleblowers. Still, the decision leaves many questions unanswered and amendments to the False Claims Act will likely limit Banigan’s impact on would-be whistleblowers.

Banigan’s Whistleblower Lawsuit Alleging Unlawful Kickbacks Between PharMerica and Organon

The whistleblower in the case, James Banigan, worked for Organon, a drug manufacturer that made an antidepressant drug called Remeron. Banigan was a team leader in an Organon department that coordinated contracts with pharmacy providers, including PharMerica, one of the largest companies in the United States that provided drugs to nursing homes and other facilities. In the course of his employment, Banigan learned that Organon deeply discounted the cost of Remeron for PharMerica, in exchange for PharMerica giving Remeron “preferred status” over other competitor drugs.

Banigan himself did not devise this alleged scheme. But he worked alongside two Organon executives who did, Carroll McKenna and John Maddox. Banigan received several emails from Maddox describing the program, and later heard from McKenna and Maddox that Organon’s marketing department conspired with the sales department to market Remeron “almost purely based on profit potential”; Banigan also learned of materials the marketing department developed to push the alleged scheme with Organon customers.

Banigan eventually obtained the marketing materials McKenna and Maddox described to him. He also got Organon’s contracts with its pharmacy customers, which laid out in detail the financial incentives Organon offered PharMerica and others. Banigan realized these financial incentives were likely kickbacks that were unlawful to both offer and accept. So he brought a qui tam case against PharMerica (and Organon) under the FCA, arguing that PharMerica’s billings for Remeron were false claims because the pervasive kickback scheme involving Organon tainted each claim.

District Court Holds Banigan Was Not An “Original Source,” Dismisses His Lawsuit

The district court dismissed Banigan’s lawsuit in April 2018, concluding that the FCA’s “public disclosure” bar blocked Banigan’s lawsuit because PharMerica had already faced similar claims in a whistleblower lawsuit filed in 2002.

The public disclosure bar applies when fraudulent activity that is substantially similar to the fraud the whistleblower alleges has been previously disclosedin a specified source. The rule is designed to discourage parasitic lawsuits, where the whistleblower is merely repeating public information.  However, even if there has been a prior public disclosure, the public disclosure bar will not stand in the way of the whistleblower’s lawsuit if the whistleblower is the “original source,” of the allegations. Under the version of the law that applied to Banigan’s FCA claims, to be an original source, Banigan had to show he had “direct and independent knowledge” of the information on which he based his allegations.

The district court held that Banigan was not an original source because his knowledge was not “direct,” relying on three facts:

    1. Banigan did not have contemporaneous knowledge of the alleged fraud and only saw the marketing materials after Organon wrapped up the scheme.
    2. Banigan did not see the documents in the regular course of his job duties, but rather as part of his own investigation.
    3. Banigan learned what he did from McKenna and Maddox in the context of broader concerns about management turmoil and issues at Organon, and not because he was a critical player in or close observer of the fraud.

The Appellate Reversal

Luckily for Banigan, the appellate court refused to adopt such a restrictive definition of the term “direct.”  By the appellate court’s lights, the district court’s cramped reading “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 the fraud after the fact and brought it to the government’s attention.”

Looking to the dictionary to help define “direct,” the court noted it meant “marked by absence of an intervening agency, instrumentality, or influence” or “immediate.”  There was no intervening agency, instrumentality, or influence related to Banigan’s knowledge because he was a corporate insider who learned of the fraudulent scheme in which his own department participated, while he was employed at Organon. Beyond that, Banigan’s knowledge came from emails and conversations with the architects of the scheme, as well as documents memorializing it that Banigan obtained through his own efforts.

The appellate court also went back to Congress’s purposes in enacting the FCA in the first place. Congress didn’t intend to reward as original sources only those who participated in the fraud, the court noted. As Judge Lipez, the author of the unanimous opinion, said during oral argument: “It seems to me that Mr. Banigan did exactly what Congress would want someone to do in his position. He heard about a scheme that was troubling to him. He got some confirmation, and that encourages him to do some investigation where he uncovers documents that confirm what he’s been told . . . . It seems to me he’s an individual within a company doing exactly what Congress had in mind.”

Little Clarity on What “Direct” Means In Other Contexts

The Banigan decision brings a dose of common sense to what “direct” in the original-source context does not mean, roundly rejecting the crabbed view that only whistleblowers who either participated in or personally observed a fraud can be “original sources.”

That said, Banigan  is far less clear on what will be considered “direct” in other cases, in which the character of the whistleblower’s discovery and investigation of the fraud is different. While many cases hold that a whistleblower does not have to be a corporate insider, other cases have grappled with whether whistleblowers can be original sources where they have acquired information from investigations they personally undertook.  The First Circuit’s opinion offers little guidance in these cases.

Statutory Changes Limit Impact

In addition, Banigan decided a question that is becoming less relevant each day: Congress amended the FCA in 2010 to remove the word “direct” from the original-source exception, precisely because court decisions interpreting it had created ambiguities that could deter whistleblowers. As the First Circuit wrote, “‘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.’”

It’s true that the law is different now, and that the issue in Banigan may come up less often as a result. But for whistleblowers like Banigan, and others whose claims stretch back before the 2010 amendments to the FCA, the First Circuit’s opinon may make all the difference.

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Tagged in: Anti-Kickback and Stark, Court Decision, FCA Federal, Original Source, Pharma Fraud, Public Disclosure and Public Information, Whistleblower Case,