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October 10, 2018 |
Artificial Intelligence and Autonomous Systems Legal Update (3Q18)

Click for PDF We are pleased to provide the following update on recent legal developments in the areas of artificial intelligence, machine learning, and autonomous systems (or “AI” for short), and their implications for companies developing or using products based on these technologies.  As the spread of AI rapidly increases, legal scrutiny in the U.S. of the potential uses and effects of these technologies (both beneficial and harmful) has also been increasing.  While we have chosen to highlight below several governmental and legislative actions from the past quarter, the area is rapidly evolving and we will continue to monitor further actions in these and related areas to provide future updates of potential interest on a regular basis. I.       Increasing Federal Government Interest in AI Technologies The Trump Administration and Congress have recently taken a number of steps aimed at pushing AI forward on the U.S. agenda, while also treating with caution foreign involvement in U.S.-based AI technologies.  Some of these actions may mean additional hurdles for cross-border transactions involving AI technology.  On the other hand, there may also be opportunities for companies engaged in the pursuit of AI technologies to influence the direction of future legislation at an early stage. A.       White House Studies AI In May, the Trump Administration kicked off what is becoming an active year in AI for the federal government by hosting an “Artificial Intelligence for American Industry” summit as part of its designation of AI as an “Administration R&D priority.”[1] During the summit, the White House also announced the establishment of a “Select Committee on Artificial Intelligence” to advise the President on research and development priorities and explore partnerships within the government and with industry.[2]  This Select Committee is housed within the National Science and Technology Council, and is chaired by Office of Science and Technology Policy leadership. Administration officials have said that a focus of the Select Committee will be to look at opportunities for increasing federal funds into AI research in the private sector, to ensure that the U.S. has (or maintains) a technological advantage in AI over other countries.  In addition, the Committee is to look at possible uses of the government’s vast store of taxpayer-funded data to promote the development of advanced AI technologies, without compromising security or individual privacy.  While it is believed that there will be opportunities for private stakeholders to have input into the Select Committee’s deliberations, the inaugural meeting of the Committee, which occurred in late June, was not open to the public for input. B.       AI in the NDAA for 2019 More recently, on August 13th, President Trump signed into law the John S. McCain National Defense Authorization Act (NDAA) for 2019,[3] which specifically authorizes the Department of Defense to appoint a senior official to coordinate activities relating to the development of AI technologies for the military, as well as to create a strategic plan for incorporating a number of AI technologies into its defense arsenal.  In addition, the NDAA includes the Foreign Investment Risk Review Modernization Act (FIRRMA)[4] and the Export Control Reform Act (ECRA),[5] both of which require the government to scrutinize cross-border transactions involving certain new technologies, likely including AI-related technologies. FIRRMA modifies the review process currently used by the Committee on Foreign Investment in the United States (CFIUS), an interagency committee that reviews the national security implications of investments by foreign entities in the United States.  With FIRRMA’s enactment, the scope of the transactions that CFIUS can review is expanded to include those involving “emerging and foundational technologies,” defined as those that are critical for maintaining the national security technological advantage of the United States.  While the changes to the CFIUS process are still fresh and untested, increased scrutiny under FIRRMA will likely have an impact on available foreign investment in the development and use of AI, at least where the AI technology involved is deemed such a critical technology and is sought to be purchased or licensed by foreign investors. Similarly, ECRA requires the President to establish an interagency review process with various agencies including the Departments of Defense, Energy, State and the head of other agencies “as appropriate,” to identify emerging and foundational technologies essential to national security in order to impose appropriate export controls.  Export licenses are to be denied if the proposed export would have a “significant negative impact” on the U.S. defense industrial base.  The terms “emerging and foundational technologies” are not expressly defined, but it is likely that AI technologies, which are of course “emerging,” would receive a close look under ECRA and that ECRA might also curtail whether certain AI technologies can be sold or licensed to foreign entities. The NDAA also established a National Security Commission on Artificial Intelligence “to review advances in artificial intelligence, related machine learning developments, and associated technologies.”  The Commission, made up of certain senior members of Congress as well as the Secretaries of Defense and Commerce, will function independently from other such panels established by the Trump Administration and will review developments in AI along with assessing risks related to AI and related technologies to consider how those methods relate to the national security and defense needs of the United States.  The Commission will focus on technologies that provide the U.S. with a competitive AI advantage, and will look at the need for AI research and investment as well as consider the legal and ethical risks associated with the use of AI.  Members are to be appointed within 90 days of the Commission being established and an initial report to the President and Congress is to be submitted by early February 2019. C.       Additional Congressional Interest in AI/Automation While a number of existing bills with potential impacts on the development of AI technologies remain stalled in Congress,[6] two more recently-introduced pieces of legislation are also worth monitoring as they progress through the legislative process. In late June, Senator Feinstein (D-CA) sponsored the “Bot Disclosure and Accountability Act of 2018,” which is intended to address  some of the concerns over the use of automated systems for distributing content through social media.[7] As introduced, the bill seeks to prohibit certain types of bot or other automated activity directed to political advertising, at least where such automated activity appears to impersonate human activity.  The bill would also require the Federal Trade Commission to establish and enforce regulations to require public disclosure of the use of bots, defined as any “automated software program or process intended to impersonate or replicate human activity online.”  The bill provides that any such regulations are to be aimed at the “social media provider,” and would place the burden of compliance on such providers of social media websites and other outlets.  Specifically, the FTC is to promulgate regulations requiring the provider to take steps to ensure that any users of a social media website owned or operated by the provider would receive “clear and conspicuous notice” of the use of bots and similar automated systems.  FTC regulations would also require social media providers to police their systems, removing non-compliant postings and/or taking other actions (including suspension or removal) against users that violate such regulations.  While there are significant differences, the Feinstein bill is nevertheless similar in many ways to California’s recently-enacted Bot disclosure law (S.B. 1001), discussed more fully in our previous client alert located here.[8] Also of note, on September 26th, a bipartisan group of Senators introduced the “Artificial Intelligence in Government Act,” which seeks to provide the federal government with additional resources to incorporate AI technologies in the government’s operations.[9] As written, this new bill would require the General Services Administration to bring on technical experts to advise other government agencies, conduct research into future federal AI policy, and promote inter-agency cooperation with regard to AI technologies.  The bill would also create yet another federal advisory board to advise government agencies on AI policy opportunities and concerns.  In addition, the newly-introduced legislation seeks to require the Office of Management and Budget to identify ways for the federal government to invest in and utilize AI technologies and tasks the Office of Personal Management with anticipating and providing training for the skills and competencies the government requires going-forward for incorporating AI into its overall data strategy. II.       Potential Impact on AI Technology of Recent California Privacy Legislation Interestingly, in the related area of data privacy regulation, the federal government has been slower to respond, and it is the state legislatures that are leading the charge.[10] Most machine learning algorithms depend on the availability of large data sets for purpose of training, testing, and refinement.  Typically, the larger and more complete the datasets available, the better.  However, these datasets often include highly personal information about consumers, patients, or others of interest—data that can sometimes be used to predict information specific to a particular person even if attempts are made to keep the source of such data anonymous. The European Union’s General Data Protection Regulation, or GDPR, which went into force on May 25, 2018, has deservedly garnered a great deal of press as one of the first, most comprehensive collections of data privacy protections. While we’re only months into its effective period, the full impact and enforcement of the GDPR’s provisions have yet to be felt.  Still, many U.S. companies, forced to take steps to comply with the provisions of GDPR at least with regard to EU citizens, have opted to take many of those same steps here in the U.S., despite the fact that no direct U.S. federal analogue to the GDPR yet exists.[11] Rather than wait for the federal government to act, several states have opted to follow the lead of the GDPR and enact their own versions of comprehensive data privacy laws.  Perhaps the most significant of these state-legislated omnibus privacy laws is the California Consumer Privacy Act (“CCPA”), signed into law on June 28, 2108, and slated to take effect on January 1, 2020.[12]  The CCPA is not identical to the GDPR, differing in a number of key respects.  However there are many similarities, in that the CCPA also has broadly defined definitions of personal information/data, and seeks to provide a right to notice of data collection, a right of access to and correction of collected data, a right to be forgotten, and a right to data portability.  But how do the CCPA’s requirements differ from the GDPR for companies engaged in the development and use of AI technologies?  While there are many issues to consider, below we examine several of the key differences of the CCPA and their impact on machine learning and other AI-based processing of collected data. A.       Inferences Drawn from Personal Information The GDPR defines personal data as “any information relating to an identified or identifiable natural person,” such as “a name, an identification number, location data, an online identifier or to one or more factors specific to the physical, physiological, genetic, mental, economic, cultural or social identify of that nature person.”[13]  Under the GDPR, personal data has implications in the AI space beyond just the data that is actually collected from an individual.  AI technology can be and often is used to generate additional information about a person from collected data, e.g., spending habits, facial features, risk of disease, or other inferences that can be made from the collected data.  Such inferences, or derivative data, may well constitute “personal data” under a broad view of the GDPR, although there is no specific mention of derivative data in the definition. By contrast, the CCPA goes farther and specifically includes “inferences drawn from any of the information identified in this subdivision to create a profile about a consumer reflecting the consumer’s preferences, characteristics, psychological trends, preferences, predispositions, behavior, attitudes, intelligence, abilities and aptitudes.”[14]  An “inference” is defined as “the derivation of information, data, assumptions, or conclusions from evidence, or another source of information or data.”[15] Arguably the primary purpose of many AI systems is to draw inferences from a user’s information, by mining data, looking for patterns, and generating analysis.  Although the CCPA does limit inferences to those drawn “to create a profile about a consumer,” the term “profile” is not defined in the CCPA.  However, the use of consumer information that is “deidentified” or “aggregated” is permitted by the CCPA.  Thus, one possible solution may be to take steps to “anonymize” any personal data used to derive any inferences.  As a result, when looking to CCPA compliance, companies may want to carefully consider the derivative/processed data that they are storing about a user, and consider additional steps that may be required for CCPA compliance. B.       Identifying Categories of Personal Information The CCPA also requires disclosures of the categories of personal information being collected, the categories of sources from which personal information is collected, the purpose for collecting and selling personal information, and the categories of third parties with whom the business shares personal information. [16]  Although these categories are likely known and definable for static data collection, it may be more difficult to specifically disclose the purpose and categories for certain information when dynamic machine learning algorithms are used.  This is particularly true when, as discussed above, inferences about a user are included as personal information.  In order to meet these disclosure requirements, companies may need to carefully consider how they will define all of the categories of personal information collected or the purposes of use of that information, particularly when machine learning algorithms are used to generate additional inferences from, or derivatives of, personal data. C.       Personal Data Includes Households The CCPA’s definition of “personal data” also includes information pertaining to non-individuals, such as “households” – a term that the CCPA does not further define.[17]  In the absence of an explicit definition, the term “household” would seem to target information collected about a home and its inhabits through smart home devices, such as thermostats, cameras, lights, TVs, and so on.  When looking to the types of personal data being collected, the CCPA may also encompass information about each of these smart home devices, such as name, location, usage, and special instructions (e.g., temperature controls, light timers, and motion sensing).  Furthermore, any inferences or derivative information generated by AI algorithms from the information collected from these smart home devices may also be covered as personal information.  Arguably, this could include information such as conversations with voice assistants or even information about when people are likely to be home determined via cameras or motion sensors.  Companies developing smart home, or other Internet of Things, devices thus should carefully consider whether the scope and use they make of any information collected from “households” falls under the CCPA requirements for disclosure or other restrictions. III.       Continuing Efforts to Regulate Autonomous Vehicles Much like the potential for a comprehensive U.S. data privacy law, and despite a flurry of legislative activity in Congress in 2017 and early 2018 towards such a national regulatory framework, autonomous vehicles continue to operate under a complex patchwork of state and local rules with limited federal oversight.  We previously provided an update (located here)[18] discussing the Safely Ensuring Lives Future Deployment and Research In Vehicle Evolution (SELF DRIVE) Act[19], which passed the U.S. House of Representatives by voice vote in September 2017 and its companion bill (the American Vision for Safer Transportation through Advancement of Revolutionary Technologies (AV START) Act).[20]  Both bills have since stalled in the Senate, and with them the anticipated implementation of a uniform regulatory framework for the development, testing and deployment of autonomous vehicles. As the two bills languish in Congress, ‘chaperoned’ autonomous vehicles have already begun coexisting on roads alongside human drivers.  The accelerating pace of policy proposals—and debate surrounding them—looks set to continue in late 2018 as virtually every major automaker is placing more autonomous vehicles on the road for testing and some manufacturers prepare to launch commercial services such as self-driving taxi ride-shares[21] into a national regulatory vacuum. A.       “Light-touch” Regulation The delineation of federal and state regulatory authority has emerged as a key issue because autonomous vehicles do not fit neatly into the existing regulatory structure.  One of the key aspects of the proposed federal legislation is that it empowers the National Highway Traffic Safety Administration (NHTSA) with the oversight of manufacturers of self-driving cars through enactment of future rules and regulations that will set the standards for safety and govern areas of privacy and cybersecurity relating to such vehicles.  The intention is to have a single body (the NHTSA) develop a consistent set of rules and regulations for manufacturers, rather than continuing to allow the states to adopt a web of potentially widely differing rules and regulations that may ultimately inhibit development and deployment of autonomous vehicles.  This approach was echoed by safety guidelines released by the Department of Transportation (DoT) for autonomous vehicles.  Through the guidelines (“a nonregulatory approach to automated vehicle technology safety”),[22] the DoT avoids any compliance requirement or enforcement mechanism, at least for the time being, as the scope of the guidance is expressly to support the industry as it develops best practices in the design, development, testing, and deployment of automated vehicle technologies. Under the proposed federal legislation, the states can still regulate autonomous vehicles, but the guidance encourages states not to pass laws that would “place unnecessary burdens on competition and innovation by limiting [autonomous vehicle] testing or deployment to motor vehicle manufacturers only.”[23]  The third iteration of the DoT’s federal guidance, published on October 4, 2018, builds upon—but does not replace—the existing guidance, and reiterates that the federal government is placing the onus for safety on companies developing the technologies rather than on government regulation. [24]  The guidelines, which now include buses, transit and trucks in addition to cars, remain voluntary. B.       Safety Much of the delay in enacting a regulatory framework is a result of policymakers’ struggle to balance the industry’s desire to speed both the development and deployment of autonomous vehicle technologies with the safety and security concerns of consumer advocates. The AV START bill requires that NHTSA must construct comprehensive safety regulations for AVs with a mandated, accelerated timeline for rulemaking, and the bill puts in place an interim regulatory framework that requires manufacturers to submit a Safety Evaluation Report addressing a range of key areas at least 90 days before testing, selling, or commercialization of an driverless cars.  But some lawmakers and consumer advocates remain skeptical in the wake of highly publicized setbacks in autonomous vehicle testing.[25]  Although the National Safety Transportation Board (NSTB) has authority to investigate auto accidents, there is still no federal regulatory framework governing liability for individuals and states.[26]  There are also ongoing concerns over cybersecurity risks[27], the use of forced arbitration clauses by autonomous vehicle manufacturers,[28] and miscellaneous engineering problems that revolve around the way in which autonomous vehicles interact with obstacles commonly faced by human drivers, such as emergency vehicles,[29] graffiti on road signs or even raindrops and tree shadows.[30] In August 2018, the Governors Highway Safety Association (GHSA) published a report outlining the key questions that manufacturers should urgently address.[31]  The report suggested that states seek to encourage “responsible” autonomous car testing and deployment while protecting public safety and that lawmakers “review all traffic laws.”  The report also notes that public debate often blurs the boundaries between the different levels of automation the NHTSA has defined (ranging from level 0 (no automation) to level 5 (fully self-driving without the need for human occupants)), remarking that “most AVs for the foreseeable future will be Levels 2 through 4.  Perhaps they should be called ‘occasionally self-driving.'”[32] C.       State Laws Currently, 21 states and the District of Columbia have passed laws regulating the deployment and testing of self-driving cars, and governors in 10 states have issued executive orders related to them.[33]  For example, California expanded its testing rules in April 2018 to allow for remote monitoring instead of a safety driver inside the vehicle.[34]  However, state laws differ on basic terminology, such as the definition of “vehicle operator.” Tennessee SB 151[35] points to the autonomous driving system (ADS) while Texas SB 2205[36] designates a “natural person” riding in the vehicle.  Meanwhile, Georgia SB 219[37] identifies the operator as the person who causes the ADS to engage, which might happen remotely in a vehicle fleet. These distinctions will affect how states license both human drivers and autonomous vehicles going forward.  Companies operating in this space accordingly need to stay abreast of legal developments in states in which they are developing or testing autonomous vehicles, while understanding that any new federal regulations may ultimately preempt those states’ authorities to determine, for example, crash protocols or how they handle their passengers’ data. D.       ‘Rest of the World’ While the U.S. was the first country to legislate for the testing of automated vehicles on public roads, the absence of a national regulatory framework risks impeding innovation and development.  In the meantime, other countries are vying for pole position among manufacturers looking to test vehicles on roads.[38]  KPMG’s 2018 Autonomous Vehicles Readiness Index ranks 20 countries’ preparedness for an autonomous vehicle future. The Netherlands took the top spot, outperforming the U.S. (3rd) and China (16th).[39]  Japan and Australia plan to have self-driving cars on public roads by 2020.[40]  The U.K. government has announced that it expects to see fully autonomous vehicles on U.K. roads by 2021, and is introducing legislation—the Automated and Electric Vehicles Act 2018—which installs an insurance framework addressing product liability issues arising out of accidents involving autonomous cars, including those wholly caused by an autonomous vehicle “when driving itself.”[41] E.       Looking Ahead While autonomous vehicles operating on public roads are likely to remain subject to both federal and state regulation, the federal government is facing increasing pressure to adopt a federal regulatory scheme for autonomous vehicles in 2018.[42]  Almost exactly one year after the House passed the SELF DRIVE Act, House Energy and Commerce Committee leaders called on the Senate to advance automated vehicle legislation, stating that “[a]fter a year of delays, forcing automakers and innovators to develop in a state-by-state patchwork of rules, the Senate must act to support this critical safety innovation and secure America’s place as a global leader in technology.”[43]  The continued absence of federal regulation renders the DoT’s informal guidance increasingly important.  The DoT has indicated that it will enact “flexible and technology-neutral” policies—rather than prescriptive performance-based standards—to encourage regulatory harmony and consistency as well as competition and innovation.[44]  Companies searching for more tangible guidance on safety standards at federal level may find it useful to review the recent guidance issued alongside the DoT’s announcement that it is developing (and seeking public input into) a pilot program for ‘highly or fully’ autonomous vehicles on U.S. roads.[45]  The safety standards being considered include technology disabling the vehicle if a sensor fails or barring vehicles from traveling above safe speeds, as well as a requirement that NHTSA be notified of any accident within 24 hours. [1] See https://www.whitehouse.gov/wp-content/uploads/2018/05/Summary-Report-of-White-House-AI-Summit.pdf; note also that the Trump Administration’s efforts in studying AI technologies follow, but appear largely separate from, several workshops on AI held by the Obama Administration in 2016, which resulted in two reports issued in late 2016 (see Preparing for the Future of Artificial Intelligence, and Artificial Intelligence, Automation, and the Economy). [2] Id. at Appendix A. [3] See https://www.mccain.senate.gov/public/index.cfm/2018/8/senate-passes-the-john-s-mccain-national-defense-authorization-act-for-fiscal-year-2019.  The full text of the NDAA is available at https://www.congress.gov/bill/115th-congress/house-bill/5515/text.  For additional information on CFIUS reform implemented by the NDAA, please see Gibson Dunn’s previous client update at https://www.gibsondunn.com/cfius-reform-our-analysis/. [4] See id.; see also https://www.treasury.gov/resource-center/international/Documents/FIRRMA-FAQs.pdf. [5] See https://foreignaffairs.house.gov/wp-content/uploads/2018/02/HR-5040-Section-by-Section.pdf.   [6] See, e.g. infra., Section III discussion of SELF DRIVE and AV START Acts, among others. [7] S.3127, 115th Congress (2018). [8] https://www.gibsondunn.com/new-california-security-of-connected-devices-law-and-ccpa-amendments/. [9] S.3502, 115th Congress (2018). [10] See also, infra., Section III for more discussion of specific regulatory efforts for autonomous vehicles. [11] However, as 2018 has already seen a fair number of hearings before Congress relating to digital data privacy issues, including appearances by key executives from many major tech companies, it seems likely that it may not be long before we see the introduction of a “GDPR-like” comprehensive data privacy bill.  Whether any resulting federal legislation would actually pre-empt state-enacted privacy laws to establish a unified federal framework is itself a hotly-contested issue, and remains to be seen. [12] AB 375 (2018); Cal. Civ. Code §1798.100, et seq. [13] Regulation (EU) 2016/679 (General Data Protection Regulation), Article 4 (1). [14] Cal. Civ. Code §1798.140(o)(1)(K). [15] Id.. at §1798.140(m). [16] Id. at §1798.110(c). [17] Id. at §1798.140(o)(1). [18] https://www.gibsondunn.com/accelerating-progress-toward-a-long-awaited-federal-regulatory-framework-for-autonomous-vehicles-in-the-united-states/. [19]   H.R. 3388, 115th Cong. (2017). [20]   U.S. Senate Committee on Commerce, Science and Transportation, Press Release, Oct. 24, 2017, available at https://www.commerce.senate.gov/public/index.cfm/pressreleases?ID=BA5E2D29-2BF3-4FC7-A79D-58B9E186412C. [21]   Sean O’Kane, Mercedes-Benz Self-Driving Taxi Pilot Coming to Silicon Valley in 2019, The Verge, Jul. 11, 2018, available at https://www.theverge.com/2018/7/11/17555274/mercedes-benz-self-driving-taxi-pilot-silicon-valley-2019. [22]   U.S. Dept. of Transp., Automated Driving Systems 2.0: A Vision for Safety 2.0, Sept. 2017, https://www.nhtsa.gov/sites/nhtsa.dot.gov/files/documents/13069a-ads2.0_090617_v9a_tag.pdf. [23]   Id., at para 2. [24]   U.S. DEPT. OF TRANSP., Preparing for the Future of Transportation: Automated Vehicles 3.0, Oct. 4, 2018, https://www.transportation.gov/sites/dot.gov/files/docs/policy-initiatives/automated-vehicles/320711/preparing-future-transportation-automated-vehicle-30.pdf. [25]   Sasha Lekach, Waymo’s Self-Driving Taxi Service Could Have Some Major Issues, Mashable, Aug. 28, 2018, available at https://mashable.com/2018/08/28/waymo-self-driving-taxi-problems/#dWzwp.UAEsqM. [26]   Robert L. Rabin, Uber Self-Driving Cars, Liability, and Regulation, Stanford Law School Blog, Mar. 20, 2018, available at https://law.stanford.edu/2018/03/20/uber-self-driving-cars-liability-regulation/. [27]   David Shephardson, U.S. Regulators Grappling with Self-Driving Vehicle Security, Reuters. Jul. 10, 2018, available at https://www.reuters.com/article/us-autos-selfdriving/us-regulators-grappling-with-self-driving-vehicle-security-idUSKBN1K02OD. [28]   Richard Blumenthal, Press Release, Ten Senators Seek Information from Autonomous Vehicle Manufacturers on Their Use of Forced Arbitration Clauses, Mar. 23, 2018, available at https://www.blumenthal.senate.gov/newsroom/press/release/ten-senators-seek-information-from-autonomous-vehicle-manufacturers-on-their-use-of-forced-arbitration-clauses. [29]   Kevin Krewell, How Will Autonomous Cars Respond to Emergency Vehicles, Forbes, Jul. 31, 2018, available at https://www.forbes.com/sites/tiriasresearch/2018/07/31/how-will-autonomous-cars-respond-to-emergency-vehicles/#3eed571627ef. [30]   Michael J. Coren, All The Things That Still Baffle Self-Driving Cars, Starting With Seagulls, Quartz, Sept. 23, 2018, available at https://qz.com/1397504/all-the-things-that-still-baffle-self-driving-cars-starting-with-seagulls/. [31]   ghsa, Preparing For Automated Vehicles: Traffic Safety Issues For States, Aug. 2018, available at https://www.ghsa.org/sites/default/files/2018-08/Final_AVs2018.pdf. [32]   Id., at 7. [33]   Brookings, The State of Self-Driving Car Laws Across the U.S., May 1, 2018, available at https://www.brookings.edu/blog/techtank/2018/05/01/the-state-of-self-driving-car-laws-across-the-u-s/. [34]   Aarian Marshall, Fully Self-Driving Cars Are Really Truly Coming to California, Wired, Feb. 26, 2018, available at, https://www.wired.com/story/california-self-driving-car-laws/; State of California, Department of Motor Vehicles, Autonomous Vehicles in California, available at https://www.dmv.ca.gov/portal/dmv/detail/vr/autonomous/bkgd. [35]   SB 151, available at http://www.capitol.tn.gov/Bills/110/Bill/SB0151.pdf. [36]   SB 2205, available at https://legiscan.com/TX/text/SB2205/2017. [37]   SB 219, available at http://www.legis.ga.gov/Legislation/en-US/display/20172018/SB/219. [38]   Tony Peng & Michael Sarazen, Global Survey of Autonomous Vehicle Regulations, Medium, Mar. 15, 2018, available at https://medium.com/syncedreview/global-survey-of-autonomous-vehicle-regulations-6b8608f205f9. [39]   KPMG, Autonomous Vehicles Readiness Index: Assessing Countries’ Openness and Preparedness for Autonomous Vehicles, 2018, (“The US has a highly innovative but largely disparate environment with little predictability regarding the uniform adoption of national standards for AVs. Therefore the prospect of  widespread driverless vehicles is unlikely in the near future. However, federal policy and regulatory guidance could certainly accelerate early adoption . . .”), p. 17, available at https://assets.kpmg.com/content/dam/kpmg/nl/pdf/2018/sector/automotive/autonomous-vehicles-readiness-index.pdf. [40]   Stanley White, Japan Looks to Launch Autonomous Car System in Tokyo by 2020, Automotive News, Jun. 4, 2018, available at http://www.autonews.com/article/20180604/MOBILITY/180609906/japan-self-driving-car; National Transport Commission Australia, Automated vehicles in Australia, available at https://www.ntc.gov.au/roads/technology/automated-vehicles-in-australia/. [41]   The Automated and Electric Vehicles Act 2018, available at http://www.legislation.gov.uk/ukpga/2018/18/contents/enacted; Lexology, Muddy Road Ahead Part II: Liability Legislation for Autonomous Vehicles in the United Kingdom, Sept. 21, 2018,  https://www.lexology.com/library/detail.aspx?g=89029292-ad7b-4c89-8ac9-eedec3d9113a; see further Anne Perkins, Government to Review Law Before Self-Driving Cars Arrive on UK Roads, The Guardian, Mar. 6, 2018, available at https://www.theguardian.com/technology/2018/mar/06/self-driving-cars-in-uk-riding-on-legal-review. [42]   Michaela Ross, Code & Conduit Podcast: Rep. Bob Latta Eyes Self-Driving Car Compromise This Year, Bloomberg Law, Jul. 26, 2018, available at https://www.bna.com/code-conduit-podcast-b73014481132/. [43]   Freight Waves, House Committee Urges Senate to Advance Self-Driving Vehicle Legislation, Sept. 10, 2018, available at https://www.freightwaves.com/news/house-committee-urges-senate-to-advance-self-driving-vehicle-legislation; House Energy and Commerce Committee, Press Release, Sept. 5, 2018, available at https://energycommerce.house.gov/news/press-release/media-advisory-walden-ec-leaders-to-call-on-senate-to-pass-self-driving-car-legislation/. [44]   See supra n. 24, U.S. DEPT. OF TRANSP., Preparing for the Future of Transportation: Automated Vehicles 3.0, Oct. 4, 2018, iv. [45]   David Shephardson, Self-driving cars may hit U.S. roads in pilot program, NHTSA says, Automotive News, Oct. 9, 2018, available at http://www.autonews.com/article/20181009/MOBILITY/181009630/self-driving-cars-may-hit-u.s.-roads-in-pilot-program-nhtsa-says. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work, or the authors: H. Mark Lyon – Palo Alto (+1 650-849-5307, mlyon@gibsondunn.com) Claudia M. Barrett – Washington, D.C. (+1 202-887-3642, cbarrett@gibsondunn.com) Frances Annika Smithson – Los Angeles (+1 213-229-7914, fsmithson@gibsondunn.com) Ryan K. Iwahashi – Palo Alto (+1 650-849-5367, riwahashi@gibsondunn.com) Please also feel free to contact any of the following: Automotive/Transportation: Theodore J. Boutrous, Jr. – Los Angeles (+1 213-229-7000, tboutrous@gibsondunn.com) Christopher Chorba – Los Angeles (+1 213-229-7396, cchorba@gibsondunn.com) Theane Evangelis – Los Angeles (+1 213-229-7726, tevangelis@gibsondunn.com) Privacy, Cybersecurity and Consumer Protection: Alexander H. Southwell – New York (+1 212-351-3981, asouthwell@gibsondunn.com) Public Policy: Michael D. Bopp – Washington, D.C. (+1 202-955-8256, mbopp@gibsondunn.com) Mylan L. Denerstein – New York (+1 212-351-3850, mdenerstein@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

August 29, 2018 |
Webcast: The False Claims Act – 2018 Mid-Year Update: Three Industry-Specific Programs

The False Claims Act (FCA) is well-known as one of the most powerful tools in the government’s arsenal to combat fraud, waste and abuse anywhere government funds are implicated. While the U.S. Department of Justice has recently issued statements indicating some new thinking about FCA enforcement, newly filed cases remain at historical peak levels and the DOJ has enjoyed seven straight years of more than $3 billion in annual FCA recoveries. As much as ever, any company that deals in government funds—especially in the health care and life sciences, government contracting and financial services sectors—needs to stay abreast of how the government and private whistleblowers alike are wielding this tool, and how they can prepare and defend themselves. Please join Gibson Dunn for a 90-minute discussion of the latest developments in FCA, including: The latest trends in FCA enforcement actions and associated litigation involving your industry sector; Updates on the Trump Administration’s approach to FCA enforcement; Notable legislative and administrative developments affecting the FCA’s statutory framework and application; and The latest developments in FCA case law, including the continued evolution of how lower courts are interpreting the Supreme Court’s Escobar decision. View Slides [PDF] PANELISTS: Joseph Warin is a partner in the Washington, D.C. office, chair of the office’s Litigation Department, and co-chair of the firm’s White Collar Defense and Investigations practice group. His practice focuses on complex civil litigation, white collar crime, and regulatory and securities enforcement – including Foreign Corrupt Practices Act investigations, False Claims Act cases, special committee representations, compliance counseling and class action civil litigation. Stuart Delery is a partner in the Washington, D.C. office. He represents corporations and individuals in high-stakes litigation and investigations that involve the federal government across the spectrum of regulatory litigation and enforcement. Previously, as the Acting Associate Attorney General of the United States (the third-ranking position at the Department of Justice) and as Assistant Attorney General for the Civil Division, he supervised the DOJ’s enforcement efforts under the FCA, FIRREA and the Food, Drug and Cosmetic Act. Jim Zelenay is a partner in the Los Angeles office where he practices in the firm’s Litigation Department. He is experienced in defending clients involved in white collar investigations, assisting clients in responding to government subpoenas, and in government civil fraud litigation. He also has substantial experience with the federal and state False Claims Acts and whistleblower litigation, in which he has represented a breadth of industries and clients, and has written extensively on the False Claims Act. MCLE CREDIT INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.50 credit hours, of which 1.50 credit hours may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. This program has been approved for credit in accordance with the requirements of the Texas State Bar for a maximum of 1.50 credit hours, of which 1.50 credit hour may be applied toward the area of accredited general requirement. Attorneys seeking Texas credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.50 hours. California attorneys may claim “self-study” credit for viewing the archived version of this webcast. No certificate of attendance is required for California “self-study” credit.

August 22, 2018 |
Webcast: The False Claims Act – 2018 Mid-Year Update: Drug and Device Industries

The False Claims Act (FCA) is well-known as one of the most powerful tools in the government’s arsenal to combat fraud, waste and abuse anywhere government funds are implicated. While the U.S. Department of Justice has recently issued statements indicating some new thinking about FCA enforcement, newly filed cases remain at historical peak levels and the DOJ has enjoyed seven straight years of more than $3 billion in annual FCA recoveries. As much as ever, any company that deals in government funds—especially in the health care and life sciences, government contracting and financial services sectors—needs to stay abreast of how the government and private whistleblowers alike are wielding this tool, and how they can prepare and defend themselves. Please join us for a 90-minute discussion of the latest developments in FCA, including: The latest trends in FCA enforcement actions and associated litigation involving your industry sector; Updates on the Trump Administration’s approach to FCA enforcement; Notable legislative and administrative developments affecting the FCA’s statutory framework and application; and The latest developments in FCA case law, including the continued evolution of how lower courts are interpreting the Supreme Court’s Escobar decision. View Slides [PDF] PANELISTS: Stuart Delery is a partner in the Washington, D.C. office. He represents corporations and individuals in high-stakes litigation and investigations that involve the federal government across the spectrum of regulatory litigation and enforcement. Previously, as the Acting Associate Attorney General of the United States (the third-ranking position at the Department of Justice) and as Assistant Attorney General for the Civil Division, he supervised the DOJ’s enforcement efforts under the FCA, FIRREA and the Food, Drug and Cosmetic Act. Marian J. Lee is a partner in the Washington, D.C. office where she provides FDA regulatory and compliance counseling to life science and health care companies. Ms. Lee has significant experience advising clients on FDA regulatory strategy, risk management, and enforcement actions. John Partridge is a partner in the Denver office where he focuses on white collar defense, internal investigations, regulatory inquiries, corporate compliance programs, and complex commercial litigation. He has particular experience with the False Claims Act and the Foreign Corrupt Practices Act (“FCPA”), including advising major corporations regarding their compliance programs. Jonathan Phillips is a partner in the Washington, D.C. office where he focuses on compliance, enforcement, and litigation in the health care and government contracting fields, as well as other white collar enforcement matters and related litigation. A former Trial Attorney in DOJ’s Civil Fraud section, he has particular experience representing clients in enforcement actions by the DOJ, Department of Health and Human Services, and Department of Defense brought under the False Claims Act and related statutes.   MCLE CREDIT INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.50 credit hours, of which 1.50 credit hours may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. This program has been approved for credit in accordance with the requirements of the Texas State Bar for a maximum of 1.50 credit hours, of which 1.50 credit hour may be applied toward the area of accredited general requirement. Attorneys seeking Texas credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.50 hours. California attorneys may claim “self-study” credit for viewing the archived version of this webcast. No certificate of attendance is required for California “self-study” credit.

July 31, 2018 |
Federal Circuit Update – Intellectual Property and Appellate Practice Groups

Click for PDF This July 2018 edition of Gibson Dunn’s Federal Circuit Update discusses the recent Federal Circuit Bar Association Bench and Bar Conference, provides a summary of the pending Helsinn Healthcare case before the Supreme Court regarding the on-sale bar, and briefly summarizes the joint appendix procedure at the Federal Circuit.  This Update also provides a summary of the recent en banc case involving attorneys’ fees for litigation involving the PTO.  Also included are summaries of recent decisions regarding means-plus-function terms, the entire market value rule, the interplay between software patents and section 101, and tribal sovereign immunity before the Patent Trial & Appeal Board. Federal Circuit News The annual Federal Circuit Bench and Bar Conference was held this year in Coronado, CA, from June 20 to June 23, 2018.  Nicole Saharsky, co-chair of Gibson Dunn’s Appellate and Constitutional Law practice, presented on the Supreme Court Term in Review panel, and Kate Dominguez, a partner in the firm’s New York office, participated in the conference’s first-ever moot oral argument. Supreme Court.  The Supreme Court decided three cases from the Federal Circuit in the recently concluded OT2017 Term (Oil States v. Greene’s Energy; SAS v. Iancu; WesternGeco v. ION Geophysical).  The Court also granted certiorari recently in a new case to be heard next Term: Case Status Issue Helsinn Healthcare S.A. v. Teva Pharm. USA Inc., No. 17-1229 Petition granted on June 25, 2018 Whether the sale of a patented invention by the inventor to a third party that is obligated to keep the invention confidential constitutes prior art for determining patentability Recent En Banc Federal Circuit Cases NantKwest, Inc. v. Matal, No. 16-1794 (Fed. Cir.) (July 27, 2018) (en banc):  The PTO cannot recover attorneys’ fees in litigation pursuant to 35 U.S.C. § 145. After the PTAB affirmed the rejection of NantKwest’s patent application, NantKwest appealed to the district court under Section 145.  The PTO prevailed and moved to recover both its attorneys’ fees and expert fees pursuant to section 145, which states that “[a]ll the expenses of the proceedings shall be paid by the applicant.”  Applying this statutory provision, the district court granted the expert fees, but rejected the request for attorneys’ fees.  On appeal, a Federal Circuit panel (Prost, CJ) reversed the award of attorneys’ fees, holding that the “[a]ll expenses” provision of section 145 authorizes attorneys’ fees.  Judge Stoll dissented.  The Federal Circuit sua sponte ordered that the panel decision be vacated and that the case be reheard en banc. The en banc majority (Stoll, J.) noted that the American Rule—where each litigant pays its own attorneys’ fees—is a “bedrock principle” of U.S. jurisprudence and prohibits courts from shifting attorneys’ fees from one party to the other absent a “specific and explicit directive from Congress.”  The en banc majority held that the phrase “all the expenses of the proceedings” falls short of this “stringent standard,” and thus affirmed the district court’s denial of the request for attorneys’ fees.  Chief Judge Prost dissented, joined by Judges Dyk, Reyna, and Hughes. Federal Circuit Practice Update This month, we are highlighting the difference between the Federal Rules of Appellate Procedure and the Federal Circuit Rules of Practice as relating to the content of the appendix to the briefs.  As the Federal Circuit explains in its practice notes, an appendix prepared without careful attention to Federal Circuit Rule 30 may be rejected and could result in dismissal. Contents:  In addition to the documents required by FRAP 30(a)(1)(A)-(C), Federal Circuit Rule 30(a)(2) requires that each appendix include: (1) the entire docket sheet from the proceedings below; (2) the judge’s charge to the jury, the jury’s verdict, and the jury’s responses to questions; (3) the patent-in-suit in its entirety; and (4) any nonprecedential opinion or order cited in the briefs.  Rule 30(a)(2) further explains that parties should not include other parts of the record unless they are “actually referenced in the briefs,” and the briefs should not contain “indiscriminate referencing” to blocks of pages.  To the extent the parties wish to include briefs and memoranda from the trial court in the appendix, the parties must obtain leave of the court to file the briefs or memoranda in their entirety; otherwise, the parties should include only excerpts of the documents cited in the briefs. Determination of Contents:  The Federal Circuit Rules do not follow FRAP 30(b)’s instructions for determining the contents of the appendix, but the Rules lay out a similar process.  In the absence of an agreement on the contents of the appendix, the appellant must serve on the appellee a designation of materials for the appendix within 14 days after docketing of the appeal from a court or the service of the certified list or index in an appeal from an agency.  The appellee then has 14 days to provide the appellant with a counter-designation that identifies additional parts to include.  The appellant then has 14 days to serve on all parties a table that designates the page numbers for the appendix.  The parties can agree to an extension of these time limits without leave of the court as long as it does not require an extension of the time required for filing the appellant’s brief. Format of the Appendix:  FRAP 30(d) governs the arrangement of the appendix except that the appellant must place the judgment or order from which it appeals, plus any opinion, memorandum, or findings and conclusions supporting it, as the first documents. Timing:  The Federal Circuit Rules disregard many of the FRAP 30(c) provisions relating to deferred appendices.  The Rules explain that the appellant must serve and file an appendix within seven days of the filing of the last reply brief.  If the appellant does not file a reply brief, the appellant must file the appendix within the time period for filing the reply brief. Key Case Summaries (June – July 2018) ZeroClick, LLC v. Apple Inc., No. 17-1267 (Fed. Cir. June 1, 2018):  Claim limitations without the word “means” require intrinsic or extrinsic evidence to support a finding that they are governed by § 112, ¶ 6. ZeroClick asserted patent infringement claims for patents related to modifications to a graphical user interface that allow the interface to be controlled using a pre-defined pointer or touch movements instead of a mouse.  The district court found that two claim limitations recite means-plus-function limitations:  (1) “program that can operate the movement of the pointer” and (2) “user interface code being configured to detect one or more locations touched by a movement of the user’s finger on the screen without requiring the exertion of pressure and determine therefrom a selected operation.”  After determining that these limitations were subject to § 112, ¶ 6, the district court found that the claims were invalid because the specifications do not disclose sufficient structure. The Federal Circuit (Hughes, J.) vacated the district court’s findings, explaining that, because the two limitations did not include the word “means,” the presumption is that § 112, ¶ 6 does not apply and the presumption had not been rebutted.  The court explained that the determination as to whether § 112, ¶ 6 applies must be made under the traditional claim construction principles, on an element-by-element basis, and in light of the intrinsic and extrinsic evidence.  The Federal Circuit reasoned that the district court improperly treated “program” and “user interface code” as nonce words that could substitute for “means” and presumptively bring the limitations within the ambit of § 112, ¶ 6.  The court therefore vacated the court’s invalidity finding and remanded for further proceedings. Power Integrations, Inc. v. Fairchild Semiconductor Int’l, Inc., Nos. 2016-2691, -1875 (Fed. Cir. July 3, 2018):  The entire market value rule for damages calculations is a narrow exception that a patentee can invoke only if it shows that the patented feature alone motivated consumers to buy the accused products. Power Integrations sued Fairchild for infringement of two patents.  In two separate trials, the first jury found that Fairchild infringed various claims of the asserted patents, and a second jury awarded damages of $140 million based on expert testimony from Power Integrations that relied solely on applying the entire market value rule.  The district court denied Fairchild’s post-trial motions, and Fairchild appealed. The Federal Circuit (Dyk, J.) affirmed the jury’s infringement finding but vacated and remanded the damages award.  The court reiterated that a patentee damages calculations must include apportionment so that royalties cover only the value that the infringing features contribute to the value of the accused product.  The court explained that the entire market value rule is “a demanding alternative to our general rule of apportionment,” and that it is appropriate “only when the patented feature is the sole driver of customer demand or substantially creates the value of the component parts.”  When the accused product “contains multiple valuable features, it is not enough to merely show that the patented feature is viewed as essential, that a product would not be commercially viable without the patented feature, or that consumers would not purchase the product without the patented feature.”  Instead, “the patentee must prove that those other features did not influence purchasing decisions.”  Because the patentee had failed to meet its burden showing that the patented feature “alone motivated consumers to buy the accused products,” the patentee could not invoke the entire market value rule.  The court accordingly vacated the damages award and remanded for a new damages trial. Interval Licensing LLC v. AOL, Inc., Nos. 2016-2502, -2505, -2506, -2507 (Fed. Cir. July 20, 2018):  Application of section 101 to software patents. After remand from an initial appeal to the Federal Circuit addressing claim construction issues, defendants moved for judgment on the pleadings, arguing that the claims were ineligible under 35 U.S.C. § 101.  The district court concluded that the claims were directed to the abstract idea and contained no inventive concept because the elements of the claims were “purely conventional” and did nothing more than apply the abstract idea in the environment of networked computers without any explanation as to how the claim elements solved technical issues. The Federal Circuit (Chen, J.) affirmed.  The majority explained that computer software inventions, due to their “intangible nature,” “can be particularly difficult to assess under the abstract idea exception.”  Although the court has found some software-based claims eligible for patentability, other claims “failed to pass section 101 muster” because they did not recite any “inventive technology for improving computers as tools” or “because the elements of the asserted invention were so result-based that they amounted to patenting the patent-ineligible concept itself.”  The majority concluded that the claims in this case were abstract because they were directed to “broad, result-oriented” terms that simply demanded “the production of a desired result” without “a solution for producing that result”; i.e., the claims never addressed how to reach the claimed result. Judge Plager concurred with the court’s opinion based on the “current state of the law” but wrote separately to “highlight the number of unsettled matters as well as the fundamental problems that inhere in this formulation of ‘abstract ideas.'”  In addressing the “almost universal criticism” of the application of “abstract idea” jurisprudence, he joined with Judge Lourie’s concurrence from Berkheimer v. HP Inc. in encouraging Congress to clarify § 101 law, and he also encouraged district courts to consider withholding judgment on § 101 motions until after addressing §§ 102, 103, and 112 defenses. Saint Regis Mohawk Tribe v. Mylan Pharm. Inc., Nos. 2018-1638, -1639, -1640, -1641, -1642, -1643 (Fed. Cir. July 20, 2018):  Tribal immunity does not apply in IPR proceedings. Mylan petitioned the Board to institute IPR proceedings on various patents owned by Allergan, Inc.  While the IPR was pending, Allergan transferred title of the patents to Saint Regis Mohawk Tribe, which in turn asserted sovereign immunity.  The Board denied the Tribe’s motion to terminate on the basis of sovereign immunity and Allergan’s related motion to withdraw from the proceedings.  The Tribe and Allergan appealed. The Federal Circuit (Moore, J.) held that tribal immunity does not apply in IPR proceedings.  The court explained that Indian tribes possess “inherent sovereign immunity” but that this immunity does not extend to actions brought by the federal government, including where the federal government, acting through an agency, engaged in an investigative action or pursued adjudicatory agency action.  The court concluded that IPR proceedings are hybrid proceedings, with elements of both judicial proceedings and specialized agency proceedings, but that they are more akin to specialized agency proceedings because the Director has full discretion whether to institute review of a petition, the Board can choose to continue review even if the petitioner chooses not to participate, and PTO procedures do not mirror the Federal Rules of Civil Procedure.  Because the court concluded that IPR proceedings are more akin to specialized agency proceedings, tribal sovereign immunity does not apply. Upcoming Oral Argument Calendar For a list of upcoming arguments at the Federal Circuit, please click here. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Federal Circuit.  Please contact the Gibson Dunn lawyer with whom you usually work or the authors of this alert: Blaine H. Evanson – Orange County (+1 949-451-3805, bevanson@gibsondunn.com) Blair A. Silver – Washington, D.C. (+1 202-955-8690, bsilver@gibsondunn.com) Please also feel free to contact any of the following practice group co-chairs or any member of the firm’s Appellate and Constitutional Law or Intellectual Property practice groups: Appellate and Constitutional Law Group: Mark A. Perry – Washington, D.C. (+1 202-887-3667, mperry@gibsondunn.com) Caitlin J. Halligan – New York (+1 212-351-4000, challigan@gibsondunn.com) Nicole A. Saharsky – Washington, D.C. (+1 202-887-3669, nsaharsky@gibsondunn.com) Intellectual Property Group: Josh Krevitt – New York (+1 212-351-4000, jkrevitt@gibsondunn.com) Wayne Barsky – Los Angeles (+1 310-552-8500, wbarsky@gibsondunn.com)Mark Reiter – Dallas (+1 214-698-3100, mreiter@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

July 30, 2018 |
2018 Mid-Year Government Contracts Litigation Update

Click for PDF In this mid-year analysis of government contracts litigation, Gibson Dunn examines trends and summarizes key decisions of interest to government contractors from the first half of 2018.  This publication covers the waterfront of the opinions most important to this audience issued by the U.S. Court of Appeals for the Federal Circuit, U.S. Court of Federal Claims, Armed Services Board of Contract Appeals (“ASBCA”), and Civilian Board of Contract Appeals (“CBCA”). The first six months of 2018 yielded 4 government contracts-related opinions of note from the Federal Circuit, excluding decisions related to bid protests.  From January 1 through July 30, 2018, the U.S. Court of Federal Claims issued 7 notable non-bid protest government contracts-related decisions (and one bid-protest decision with wider-reaching implications we address here), and the ASBCA and CBCA published 54 and 64 substantive government contracts decisions, respectively.  As discussed herein, these cases address a wide range of issues with which government contractors should be familiar, including matters of cost allowability, jurisdictional requirements, terminations, contract interpretation, remedies, and the various topics of federal common law that have developed in the government contracts arena.  For background on the tribunals that adjudicate government contracts disputes, please see our 2017 Year-End Update. Of 1,502 cases pending before the Federal Circuit as of June 30, 2018, 12 were appeals from the boards of contract appeals and 132 were appeals from the Court of Federal Claims (“COFC”)—cumulatively comprising just under 10% of the appellate court’s docket. Only 4% of the appeals filed at the Federal Circuit in FY 2017 were governments contracts cases, which is consistent with previous years. On May 13, 2018, Judge Lis B. Young was appointed to the ASBCA after over 25 years of public service with the Federal Government, holding various positions with the former General Services Board of Contract Appeals and  the Department of the Navy, including most recently as Associate Counsel, Navy Acquisition Integrity Office, where she worked on suspension and debarment actions. On March 28, 2018, the CBCA proposed to amend its rules of procedure for cases arising under the CDA. The Board’s current rules were issued in 2008, and were last amended in 2011. The proposed revisions establish a preference for electronic filing, are designed to “increase[e] conformity” between the Board’s rules and the Federal Rules of Civil Procedure by cross-referencing and incorporating the FRCP standards, and streamlines and clarifies the Board’s current rules and practices. Notably, a proposed change to CBCA Rule 6, which governs pleadings, would require the opposing party’s consent to amend a pleading once without permission of the Board. Comments on the Proposed Rule were due on May 29, 2018. I.    COST ALLOWABILITY & COST ACCOUNTING STANDARDS The Court of Federal Claims issued one decision during the first half of 2018 addressing the merits of cost allowability issues under the Federal Acquisition Regulation (“FAR”).  Pursuant to FAR 31.201-2, a cost is allowable only if it (1) is reasonable; (2) is allocable; (3) complies with any applicable Cost Accounting Standards, or otherwise with generally accepted accounting principles appropriate in the circumstances; (4) complies with the terms of the contract; and (5) complies with any limitations in FAR subpart 31.2. Bechtel Nat’l, Inc. v. United States, No. 17-757C (Fed. Cl. Apr. 3, 2018) In Bechtel, the Court of Federal Claims considered whether the Department of Energy’s disallowance of litigation costs breached Bechtel’s contract. Two former employees of Bechtel sued Bechtel for sexual and racial harassment and discrimination. Bechtel ultimately settled both suits and sought reimbursement of litigation costs from the government for each suit, which the contracting officer denied in a final decision. In disallowing the costs, the contracting officer relied in part on the Federal Circuit’s decision in Geren v. Tecom, Inc., 566 F.3d 1037 (Fed. Cir. 2009), which held that costs incurred in the defense of an employment discrimination suit settled before trial are unallowable unless the contracting officer determines that the plaintiff had “very little likelihood of success on the merits.” Bechtel argued that Tecom had no bearing on the allowability of its litigation costs because, unlike in Tecom, the contract here included a Department of Energy Acquisition Regulation (“DEAR”) clause that “explicitly allocat[ed] the risk of third party claims to the Government.” The Court (Kaplan, J.) rejected this argument, finding that an exception in the DEAR clause prohibiting reimbursement of liabilities “otherwise unallowable by law or the visions of this contract” applied. Employing the principles in Tecom, the COFC found the “provisions of the contract,” including the contract’s anti-discrimination provision, rendered Bechtel’s costs of defending against and settling the discrimination complaints unallowable. However, the COFC stated that the holding in Tecom “was a limited one” that did not necessarily extend to breaches of contractual obligations other than anti-discrimination provisions. Bechtel’s appeal to the Federal Circuit is pending. ___________________ The COFC also considered two questions relating to the allocation of pension assets and liabilities for the purpose of a segment closing under Cost Accounting Standard (“CAS”) 413. United States Enrichment Corp. v. United States, No. 15-68C (Fed. Cl. Jan. 16, 2018) United States Enrichment Corporation (“USEC”) became a private entity in 1998 pursuant to the 1996 USEC Privatization Act.  Post-privatization, USEC continued to operate uranium enrichment facilities for the government at Portsmouth, Ohio and Paducah, Kentucky.  In 2010, DOE wound down all enrichment work at USEC’s Portsmouth facility, and on January 1, 2011, USEC divided what had been a single cost accounting segment for Paducah and Portsmouth into two separate segments. USEC announced it would close the Portsmouth segment on September 30, 2011, which triggered its obligation to perform a segment closing adjustment under CAS 413-50(c)(12). First, rejecting USEC’s argument that CAS 413-50(c)(5) requires the use of historical “data of the segment,” the COFC (Firestone, J.) determined that USEC had applied CAS 413 incorrectly when it failed to use data from the earliest date that USEC had data for employees associated with Portsmouth to allocate pension assets and liabilities to the new segment.   Instead, the Court agreed with the Government’s argument that the allocation must be based on historic data for the workers employed at the closed segment from the earliest period when that data is available and readily determinable – including the period before USEC became a private enterprise. Second, the COFC considered whether USEC could recover any deficit for under-funded post-retirement benefit obligations (“PRB”) from the Government in the CAS 413 segment closing adjustment, or whether the PRB obligations at issue should be excluded from the closing adjustment. Applying the holding from Raytheon Co. v. United States, 92 Fed. Cl. 549 (2012), the COFC found that while some of the PRBs at issue were not vested or integral because USEC’s Plan provided that USEC could terminate or modify its obligation to pay PRBs, others were protected by the Privatization Act such that they should be factored into the segment closing adjustment, and granted-in-part and denied-in-part both parties’ cross motions for summary judgment on the issue. II.  JURISDICTIONAL ISSUES As is frequently the case, jurisdictional issues dominated the landscape of key government contracts decisions during the first half of 2018. A.  Requirement for a Valid Contract In order for there to be Contract Disputes Act jurisdiction over a claim, there must be a contract from which that claim arises.  See FAR 33.201 (defining a “claim” as “a written demand or written assertion by one of the contracting parties seeking . . . relief arising under or relating to this contract“).  The CDA applies to contracts made by an executive agency for: (1) the procurement of property, other than real property in being; (2) the procurement of services; (3) the procurement of construction, alteration, repair, or maintenance of real property; and (4) the disposal of personal property.  41 U.S.C. § 7102(a)(1)-(4). Additionally, claims under the Contract Disputes Act must be brought by a contractor in privity of contract with the government. The Federal Circuit and the ASBCA addressed these issues in the first half of 2018. Agility Logistics Servs. Co. KSC v. Mattis, No. 2015-1555 (Fed. Cir. Apr. 16, 2018) In Agility, the Federal Circuit affirmed the Armed Services Board of Contract Appeals’ dismissal for lack of jurisdiction of Agility’s claim arising from a contract originally awarded by the Coalition Provisional Authority (“CPA”) in Iraq. The COFC (Prost, C.J.) found that the CPA did not constitute an “executive agency” so as to invoke jurisdiction under the Contracts Disputes Act. The court relied primarily on the plain language of the agreement, which made clear that the CPA, which was not an executive agency, awarded the contract.  The COFC also rejected Agility’s argument that the government became the contracting party after the CPA dissolved because the Iraqi Interim Government’s Minister of Finance had properly taken responsibility for the contract after the dissolution of the CPA.  The COFC also rejected Agility’s argument that each individual task order issued was a discrete contract, finding that “even if an executive agency issued the Task Orders, it did so as a contract administrator and not as a contracting party.”  The COFC additionally found that it had no jurisdiction to review the Board’s decision regarding jurisdiction under the Board’s charter. Cooper/Ports America, LLC, ASBCA No. 61461 (May 2, 2018) After Cooper/Ports America LLC (“CPA”) entered into a novation agreement with the government and the original contractor, Shippers, CPA filed a claim for unilateral mistake based, in part, on the fact that Shippers’ bid was 63% below that of the next lowest bidder and contained mistakes that should have been apparent to the government. The government moved to dismiss, claiming that CPA lacked the required privity of contract to qualify as a “contractor” with standing to pursue a claim that accrued when it was not a party to the contract (i.e., pre-novation). More specifically, the government asserted that there must have been an express assignment of that claim to which the government consented in order for the Board to find a valid government waiver of the statutory prohibition against assignment of claims. The ASBCA (O’Sullivan, A.J.) denied the government’s motion to dismiss because the government expressly recognized CPA as the “contractor” in the novation agreement. Moreover, the novation agreement recognized CPA as “entitled to all rights, titles and interests of the Transferor in and to the contracts as if the Transferee were the original party to the contracts,” and the Board found that a narrow interpretation of the novation would fly in the face of the plain language of the agreement. B.  Adequacy of the Claim Another common issue arising before the tribunals that hear government contracts disputes is whether the contractor appealed a valid CDA claim.  FAR 33.201 defines a “claim” as “a written demand or written assertion by one of the contracting parties seeking, as a matter of right, the payment of money in a sum certain, the adjustment or interpretation of contract terms, or other relief arising under or relating to this contract.”  Under the CDA, a claim for more than $100,000 must be certified.  In the first half of 2018, the boards considered the elements of an adequate claim under the CDA. Meridian Eng’g Co. v. United States, 2017-1584 (Fed. Cir. Mar. 20, 2018) Meridian Engineering Company appealed the Court of Federal Claims’ dismissal of its claims arising from its 2007 contract to build flood control structures.  Meridian’s initial suit in the COFC alleged breach of contract, breach of the duty of good faith and fair dealing, and violation of the CDA as an independent claim. Meridian argued that the COFC erred when it “reasoned that only Meridian’s breach of contract and breach of good faith and fair dealing claims presented a viable cause of action” because its claims should have been “analyzed under the framework contemplated by the CDA, and not under the rubric of a ‘breach’ claim.” The Federal Circuit (Wallach, J.) affirmed the dismissal, finding that Meridian had not submitted a valid claim because the CDA did not itself provide a cause of action. Rather, “it is the claim asserted pursuant to the CDA that is the source of potential damages and review by the trier of fact.”  The court concluded that the COFC had not erred in finding jurisdiction under the CDA to evaluate the breach of contract claims, but found that the COFC had erred with respect to the substantive merits of certain claims. 1.  Claim Accrual Under the CDA, a claim must be submitted within six years after the claim accrues. FAR 33.201 defines accrual of a claim as the date when all events that fix alleged liability and permit assertion of the claim are known or should be known. Green Valley Co., ASBCA No. 61275 (Feb. 13, 2018) Green Valley held a blanket purchase agreement to supply life support services to the Army.  In 2006, Green Valley began invoicing the government for services it performed under the BPA, but it did not submit a certified claim for those unpaid invoices until 2017.  The contracting officer denied the claim, and Green Valley appealed.  The government sought to dismiss the claim because it had not been submitted within six years of accrual of the claim, as required by the CDA’s statute of limitations. The ASBCA (Melnick, A.J.) found that Green Valley’s claim accrued in 2006 after it submitted its invoices for payment, and that the ten-year delay in submitting the claim rendered it time-barred.  The Board explained that while an invoice is not necessarily a claim, it can be converted into one within a reasonable time if it is not acted upon or paid.  The Board considered Green Valley’s argument that the statute of limitations should be equitably tolled, noting that tolling might be appropriate if a litigant has been pursuing its rights diligently, and some extraordinary circumstance stood in its way and prevented the timely filing of the claim.  However, the Board found that Green Valley had not proven such circumstances, and dismissed the appeal as untimely. 2.  Sum Certain Fluor Fed. Sols., LLC, ASBCA No. 61353 (May 30, 2018) Fluor submitted a certified claim to the Navy for the estimated additional cost of performing work  under a unilateral modification to the contract.  The Navy argued that the claim was complex and, thus, refused to issue a final decision until it received an audit report from the Defense Contract Audit Agency (“DCAA”).  Fluor notified the Navy that it would treat the claim as a deemed denial and subsequently appealed to the ASBCA on this basis.  The Board asked the parties to respond whether the claimed amount qualified as a sum certain since it was based on estimated costs. Both parties agreed that Fluor’s claim satisfied the sum certain requirement.  The Navy argued, however, that the claim was complex and required a DCAA audit before the CO could issue a final decision. Without a final decision, the Navy argued, the claim was premature and the Board lacked jurisdiction. The Board (Clarke, A.J.) denied the Navy’s motion to dismiss for lack of jurisdiction, holding that the desired DCAA audit does not change the status of a contractor’s claim because it is not needed to assess entitlement, only quantum. The Board affirmed previous decisions that the use of estimated or approximate costs in determining the value of a claim is permissible so long as the total overall demand is for a sum certain. 3.  Claim Certification Horton Constr. Co., Inc., ASBCA No. 61085 (Feb. 14, 2018) Horton requested an equitable adjustment to its contract for the crushing of a concrete stockpile because the amount of concrete stockpile was smaller than originally anticipated. When Horton appealed from the contracting officer’s denial of its equitable adjustment claim, the government moved to dismiss for lack of jurisdiction, claiming Horton had not shown that it possessed the legal capacity to initiate or continue the appeal because the company’s status had been administratively terminated by the state of Louisiana, and that any attempt to ratify the appeal was too late. The ASBCA (Osterhout, A.J.) rejected the government’s first argument that Horton did not have the capacity to continue the appeal because Louisiana had subsequently reinstated the company.  The Board also rejected the government’s argument that the signatory to the claim was not authorized to certify the claim.  The CDA requires that a certified claim be executed by an individual authorized to bind the contractor with respect to the claim.  The test is one of authorization, and the signatory here was appointed as executrix to the estate of Mr. Horton Sr., who owned the company, and thus had power to bind the company. Moreover, the Board held, even if the executrix had not been authorized to bind the company, a defective certification under the CDA may be corrected prior to the entry of final judgment by the Board.  Accordingly, because the appeal was timely filed and the claim was properly certified and prosecuted, the Board denied the government’s motion to dismiss. Mayberry Enters., LLC v. Department of Energy, CBCA No. 5961 (Mar. 13, 2018) The Western Area Power Administration (“WAPA”), acting through the Department of Energy, filed a motion to dismiss Mayberry’s appeal from a contracting officer’s decision denying its monetary claims because Mayberry’s claim letter was uncertified. Under the CDA, while a defective certification can be corrected, a complete failure to certify may not and the Board must dismiss for lack of jurisdiction. In light of the Federal Circuit’s caution that tribunals should be wary of automatically applying claim certification to a single claim letter containing multiple claims that do not arise out of the same operative facts, Placeway Construction v. United States, 920 F.2d 903 (Fed. Cir. 1990), the CBCA reviewed the letter to determine whether the “claims” should be interpreted as a single claim or multiple claims. Because the Board (Lester, A.J.)found that each claim arose from different and unrelated problems during contract performance, each claim was analyzed for certification independently. The Board dismissed one of the three claims for lack of jurisdiction because it was in excess of $100,000 and had not been certified. Areyana Grp. of Constr. Co., ASBCA No. 60648 (May 11, 2018) Areyana Group of Construction Co. (“AGCC”) timely appealed a CO’s final decision denying a request for a time extension and the return of liquidated damages withheld by the government. The government filed a motion to dismiss, contending that AGCC failed to certify its request and that, accordingly, the ASBCA lacked jurisdiction to review its allegations. The Board (Paul, A.J.) agreed with the government and dismissed the AGCC’s claim, affirming prior holdings that absence of a certification bars the Board’s exercise of jurisdiction and is not considered a “defect.” Additionally, the Board noted that the CO’s purported issuance of a final decision does not remedy this problem. C.  Requirement for a Contracting Officer’s Final Decision A number of decisions from the tribunals that hear government contracts disputes dealt with the CDA’s requirement that a claim have been “the subject of a contracting officer’s final decision.” Hejran Hejrat Co., ASBCA No. 61234 (Apr. 23, 2018) After HHL’s contract was suspended pending a bid protest, HHL informed the contracting officer that it incurred additional costs due to the time necessary for the government’s corrective action and delay in the issuance of the notice to proceed. There was no evidence that the government considered HHL’s concerns regarding additional costs. Instead, the government issued a unilateral modification that lifted the prior award suspension; decreased the contract price; revised the performance work statement to reflect delays in government furnished equipment; and declared that an equitable adjustment due to the suspension was not required and the government was absolved of any claims due to that suspension. The ASBCA (Kinner, A.J.) dismissed HHL’s appeal for lack of jurisdiction because HHL’s purported claim was not certified and failed to request a final decision from the contracting officer.  The Board noted that the CO’s statements promising to send a final decision and, in fact, sending a document labeled final decision did not cure HHL’s failure to request a final decision.  The Board stated: “There can be no contracting officer’s final decision on a claim if the contractor has not requested that decision from the contracting officer.” H2Ll-CSC, JV, ASBCA No. 61404 (June 14, 2018) H2Ll-CSC, JV (“HCJ”) appealed a CO’s decision denying HCJ’s claim arising from an indefinite-delivery, indefinite-quantity type contract with firm-fixed-price task orders for design/build construction, and incidental service projects. The ASBCA sua sponte directed the parties to brief the issue of the Board’s jurisdiction. Specifically, the Board noted that HCJ had requested telephonically, but not in writing, that its request for an equitable adjustment be treated as a claim under the CDA. The Board (Paul, A.J.) dismissed the appeal for lack of jurisdiction, holding that a request for a final decision, like the totality of a claim submission, must be in writing and the CO cannot waive this requirement by issuing a final decision. OCCI, Inc., ASBCA No. 61279 (May 29, 2018) OCCI sought remission of liquidated damages that the government claimed for late completion of contract work, arguing that it was entitled to time extensions for government-caused and/or concurrent delay and that its failure to timely complete work under the contract was excusable. The ASBCA (Shackleford, A.J.) dismissed the appeal, holding that OCCI was precluded from raising the issue that its delay was excusable and that it was entitled to time extensions because OCCI never filed a proper CDA claim asserting entitlement to the time extensions as required by M. Maropakis Carpentry, Inc. v. United States, 609 F.3d 1323 (Fed. Cir. 2010), which held that “a contractor seeking an adjustment of contract terms [such as an extension of time] must meet the jurisdictional requirements and procedural prerequisites of the CDA, whether asserting the claim against the government as an affirmative claim or as a defense to a government action” (emphasis added). Walker Dev. & Trading Grp., Inc., CBCA No. 5907 (June 6, 2018) The Department of Veterans Affairs (“VA”) moved to strike certain counts of Walker Development & Trading Group Inc.’s complaint, asserting that the CBCA lacks jurisdiction to decide those portions of the complaint because they were not included in its claims submitted to the contracting officer. The Board (Beardsley, A.J.) observed that, while it may not consider new claims that a contractor failed to present to the contracting officer, a claim before the Board is not required to rigidly adhere to the exact language or structure of the original administrative CDA claim presented to the contracting officer.  The Board denied the motion to dismiss, finding that “the allegations in the complaint arise from the same operative facts and are not materially different.” D.  Filing Deadlines The boards of contract appeals heard cases concerning two different types of timing deadlines – the CDA’s six-year statute of limitations, and the requirement that a claim for equitable adjustment be filed before final payment is made on the contract. Khenj Logistics Grp., ASBCA No. 61178 (Feb. 15, 2018) In 2009, the government awarded KLG a contract to construct a facility in Afghanistan.  After commencing work on the contract, the government issued a stop-work order.  Shortly thereafter, the parties executed a bilateral contract modification which terminated the contract for convenience, and the government agreed to reimburse KLG for the cost of maintaining insurance, while KLG in turn released further claims against the government.  KLG finally submitted a termination claim in 2017. After KLG appealed, the government filed a motion for summary judgment based on KLG’s release and on the basis that KLG’s claim was untimely.  The ASBCA (Kinner, A.J.) held that KLG’s claim was time-barred due to the six-year CDA statute of limitations, concluding that KLG should have known that the government’s payment would not be forthcoming when the government failed to make a last payment in accordance with promises made by the contracting officer.  The Board also found there was no basis for equitable tolling because KLG had not diligently pursued its rights and there were no extraordinary circumstances that would have prevented the timely filing of the claim. Merrick Constr., LLC, ASBCA No. 60906 (Mar. 22, 2018) Merrick appealed a contracting officer’s decision denying its claim for rental costs on a bypass pumping system installed pursuant to a government change order.  The government moved for summary judgment, arguing that Merrick’s claim was precluded by the general release, and that there was an accord and satisfaction based upon a modification to the contract. The ASBCA (D’Alessandris, A.J.) explained that a release is a type of contract that grants the release of any claim or right that could be asserted against the other.  After interpreting the plain language of the release, the Board found that as a rule, a general release which is not qualified on its face bars any claims based upon events occurring before the execution of the release, and thus the government had met its burden of establishing that the general release applied.  The Board went on to note that there can be exceptions to a release, such as fraud, mutual mistake, economic duress, or consideration of a claim after release.  In this instance, the Board found that there was no mistake because Merrick’s argument was entirely speculative and no evidence was presented that would have shown that there was mistake.  The Board also held that Merrick’s claim was barred because it was submitted after final payment.  Pursuant to the Changes clause, FAR 52.243-4(f), no proposal by a contractor for an equitable adjustment can be allowed if asserted after final payment under the contract.  Because Merrick could not establish that the contracting officer knew or should have known of Merrick’s claim prior to the final payment, the Board held that Merrick’s claim was barred by final payment.  Accordingly, the Board granted the government summary judgment. Michaelson, Connor & Boul, CBCA 6021 (May 29, 2018) In February 2010, HUD awarded MCB a contract to serve as HUD’s mortgagee compliance manager to ensure lender compliance with the property conveyance requirements of HUD’s real-estate portfolio.  After the contract ended, MCB submitted a claim to the contracting officer requesting payment in the amount of $661,312.81, which MCB stated was incurred “in connection to” “extra-contractual work” allegedly requested by HUD.  The contracting officer denied MCB’s claim and MCB timely appealed to the CBCA.  HUD challenged the Board’s jurisdiction over the claim, alleging that because MCB’s claim arose after the contract ended, it did not arise out of the same operating facts as the contract and thus precluded the Board’s jurisdiction over the matter. The Board (Russell, A.J.) raised concerns about whether the claim presented to the contracting officer is the same claim that MCB presented on appeal, and ordered MCB to clarify whether it was seeking relief (1) under the contract identified in the notice of appeal, (2) under no contract, or (3) under a different contract. The Board held that it did have jurisdiction to hear MCB’s appeal because MCB’s appeal filings were “fundamentally the same” as those asserted in its claim to the contracting officer. Judge Chadwick dissented, noting that while the case presented the “closest ‘same claim/new claim’ issue” he had come across, the controlling question is whether MCB intends to litigate the operative facts of its certified claim, which according to Judge Chadwick MCB had abandoned because while the appeal sounded in contract, the certified claim was not based on any “provision, clause, or even a single word of the written contract.” E.  Amending the Complaint John C. Grimberg Co., Inc., ASBCA No. 60371 (Feb. 15, 2018) Grimberg held a contract to construct an advanced analytical chemistry wing for work with toxic agents.  After a dispute arose regarding contract terms, Grimberg filed a claim and an appeal of the contracting officer’s deemed denial when a year passed without a final decision on the claim.  Three weeks prior to the scheduled hearing date, Grimberg filed an amended complaint adding a new count based on the government’s failure to disclose superior knowledge of contract requirements.  The hearing was subsequently rescheduled by the Board to a date several months after the original hearing date.  Grimberg filed a motion for reconsideration after the Board rejected the amended complaint due to the absence of a motion for leave to amend. The ASBCA (Woodrow, A.J.) held that it had jurisdiction to hear the new count in the amended complaint because a new legal theory of recovery asserted in an amended complaint does not constitute a new claim if based upon the same operative facts as the original claim, and the new count would require review of the same evidence as the original counts.  Therefore, the Board concluded that it possessed jurisdiction to hear the new count.  The Board then determined that the proposed amendment to the complaint would be fair to both parties, as required by Board Rule 6, because the rescheduling of the hearing allowed the government additional time to address concerns raised by the new count.  Thus, the Board granted Grimberg leave to file its amended complaint. F.  Availability of Declaratory Relief The Federal Circuit and boards of contract appeals considered the availability of declaratory relief in an action brought pursuit to the CDA. Securiforce Int’l Am., LLC v. United States, Nos. 2016-2589, 2016-2633 (Fed. Cir. Jan. 17, 2018) Securiforce International America, LLC (“Securiforce”) supplied fuel to eight locations in Iraq under a contract with the Defense Logistics Agency (“DLA”). DLA partially terminated the contract for convenience with respect to two of the sites, but subsequently placed oral orders for small deliveries to those sites.  When Securiforce’s deliveries to the remaining sites were late, the government sent a show cause notice, in response to which Securiforce claimed the delays were due in part to the allegedly improper termination for convenience. The government terminated the remainder of the contract for default.  In 2012, Securiforce filed a complaint in the COFC claiming that the termination for default was improper, and then requested a final decision from the contracting officer (“CO”) that the termination for convenience had been improper. After the CO denied the request for final decision, Securiforce amended its COFC complaint to include a request for declaratory judgment that the government’s termination for convenience had been improper.  The COFC found jurisdiction over both claims and held that the partial termination for convenience of the contract had been an abuse of discretion and thus a breach of the contract, but found the termination for default proper and rejected Securiforce’s claim that its nonperformance was excused by the improper termination for convenience. On appeal, the Federal Circuit (Dyk, J.) found that the COFC lacked jurisdiction to adjudicate the declaratory relief claim regarding the validity of the government’s termination for convenience.  While contractors may seek declaratory relief in some cases, the Federal Circuit stated they may not “circumvent the general rule requiring a sum certain by reframing monetary claims as nonmonetary.”  The Federal Circuit characterized Securiforce’s declaratory relief claim as a claim for monetary relief because the default remedy for a breach of contract would be damages, and that Securiforce had failed to state a sum certain as required by the CDA.  The court further held that there would have been no jurisdictional impediment to Securiforce invoking the improper termination for convenience as an affirmative defense for its default without presenting the defense to the CO because Securiforce was neither seeking the payment of money nor attempting to change the terms of the contract.  However, under the facts at hand, the Federal Circuit concluded that the termination for convenience did not, in fact, amount to an abuse of discretion or breach of the contract.  Duke University, CBCA No. 5992 (Apr. 6, 2018) Duke University appealed a contracting officer’s final decision on what Duke referred to as a “non-monetary claim” that it had submitted to the National Institute of Allergy and Infectious Diseases (“NIAID”).  Duke did not specify a sum of monetary payment in its claim, instead seeking a declaratory judgment regarding the parties’ rights and obligations under the contract.  Applying the Federal Circuit’s recent decision in Securiforce, and upon a joint motion by the parties to dismiss the appeal without prejudice, the CBCA (Lester, A.J.) dismissed the appeal for lack of jurisdiction on the ground that Duke’s claim was one contemplated by Securiforce, requiring Duke to state a sum certain. Mare Solutions, Inc., CBCA Nos. 5540, 5541, 6037 (May 16, 2018) Mare Solutions, Inc. (“Mare”) was awarded a contract from the Department of Veterans Affairs (“VA”) for the construction of a two-story parking garage at the VA Medical Center in Erie, Pennsylvania.  When the project was nearly complete, two disputes arose – one involving bucked metal conduit on the first floor ceiling of the garage and the other regarding which party was responsible for purchasing “head-end” equipment for the video surveillance system.  Mare appealed the contracting officer’s final decisions and sought declaratory relief absolving it of liability for the buckled conduit and for the purchase of head-end equipment. At the time the appeals were filed, the ASBCA found its jurisdiction was proper because both appeals involved live performance disputes that could be resolved by declaration of the Board. At the hearing, however, the Board learned that, in addition to seeking declaratory relief, Mare had procured and installed the head-end equipment and was seeking reimbursement for those costs. Accordingly, Mare submitted a related monetary claim to the CO, which was also denied and which Mare appealed.  While there were no jurisdictional issues with the first appeal for declaratory relief relating to the metal conduit, the ASBCA (O’Rourke, A.J.) found that it no longer had jurisdiction over the head-end equipment claim for declaratory relief because the issues had been subsumed within the monetary claim.  Thus, the Board’s jurisdiction to issue declaratory relief can be obviated by the filing of a related monetary claim. Based on its interpretation of the contract, the Board ruled that Mare was not liable for the buckled conduit, but denied Mare’s monetary claim. G.  Election Doctrine A decision from the COFC highlights the issues that can arise from bringing proceedings before more than one tribunal that hear government contracts disputes. ACI-SCC JV et al v. United States, No. 17-1749C (Fed. Cl. Mar. 12, 2018) In what it described as a “conundrum of a case,” the COFC dismissed a suit against the Army Corps of Engineers brought by Plaintiff Arwand Road and Construction Company (“Arwand”), acting as Trustee for Plaintiff-Intervenors ACI-SCC JV, ACI-SCC JV LLC (together, “the JV”), and Plaintiff Advance Constructors International LLC (“ACI”). Arwand was a subcontractor to the JV, which held a number of construction contracts in Afghanistan. However, the JV did not pay Arwand on time for its work, claiming it had not yet been paid by the government. The contracting officer terminated the government’s contracts with the JV, and the JV and ACI appealed the terminations separately to the ASBCA. Both parties settled their claims and the ASBCA dismissed their appeals with prejudice. Arwand sued both the JV and ACI in the United States District Court for the District of Delaware for damages due under its subcontract with the JV, and the court awarded judgment in Arwand’s favor later that year. Arwand then filed a “petition” before the ASBCA asserting breach of contract claims against the government, which Arwand later voluntarily dismissed without prejudice. After the Delaware Court of Chancery appointed Arwand as trustee for the JV and ACI, Arwand filed suit against the Corps before the COFC in its capacity as trustee to recover unpaid fees on the JV’s contracts. The JV intervened and filed a motion to dismiss. The COFC (Wheeler, J.) dismissed the case as moot as a result of the settled ASBCA cases that had been dismissed with prejudice, at which time Arwand was merely a subcontractor with no rights, privity, or standing to sue the Government over the prime contract. Second, the COFC also held that by first filing suit at the ASBCA, Arwand lost its right to file in the COFC because courts have interpreted the CDA to impose an “either-or choice” of forum, meaning that a contractor is barred from filing in one forum if it chooses to file in the other forum first. Even though Arwand may not have had standing to file a “petition” before the ASBCA and  voluntarily dismissed the suit, he was precluded from litigating the same claim in the COFC under the CDA. III.  TERMINATIONS In two noteworthy decisions during the first half of 2018 arising from contract terminations, the ASBCA strictly construed the one-year time limit to submit a termination settlement proposal in accordance with the FAR’s termination for convenience clause. Am. Boys Constr. Co., ASBCA No. 61163 (Jan. 9, 2018) In 2013, the government awarded a contract for the construction of a prime power overhead cover to American Boys Construction Company (“American Boys”).  More than three and a half years after receiving notice of the government’s termination of the contract for convenience, American Boys submitted a termination settlement agreement proposal as a certified claim to the contracting officer.  The contracting officer denied the claim because American Boys did not file a settlement proposal within one year of the termination.  American Boys timely appealed the CO’s final decision and the government filed a motion for summary judgment requesting that the Board deny the appeal. The Board (Osterhout, A.J.) granted the government’s motion and denied the appeal because American Boys did not file its termination settlement claim until 2017 – nearly four years after the contract termination – in violation of FAR 52.249-2. Abdul Khabir Constr. Co., ASBCA No. 61155 (Apr. 6, 2018) Abdul Khabir Construction Co. appealed a contracting officer’s denial of a claim seeking settlement costs resulting from the government’s termination for convenience of its construction contract.  The government filed a motion for summary judgment, arguing that Abdul failed to submit its termination settlement proposal within a year of the effective date of termination, and did not submit its certified claim until more than seven years after termination. Abdul countered that the government never asked for a settlement proposal, and never told it where to file a claim. The Board (Osterhout, A.J.) found no evidence that the contracting officer extended the FAR’s one-year time period to file a termination claim.  Because no extension was granted and the parties did not dispute that Abdul Khabir did not submit a proposal or contact the government until over 18 months after the due date, the Board found the claim untimely and denied the appeal. IV.  CONTRACT INTERPRETATION A number of noteworthy decisions from the first half of 2018 articulate broadly applicable contract interpretation principles that should be considered by government contractors. CB&I AREVA MOX Servs., LLC v. United States, No. 16-950C, 17-2017C, 18-80C, 18-522C, 18-677C, 18-691C, 18-701C (Fed. Cl. June 11, 2018) In 1999, the Department of Energy awarded a cost reimbursement contract to the predecessor in interest of CB&I AREVA MOX Services, LLC (“MOX Services”) to construct a Mixed Oxide Fuel Fabrication Facility (“MFFF”) at a site in South Carolina. The original target completion date was in 2016, but was extended until 2029 and the estimated cost more than doubled. Under the contract, MOX Services was eligible to receive quarterly incentive fees pursuant to a vesting schedule for making progress towards completion of the construction of the MFFF beginning in 2008. Although the entire fee was provisional for at least the first year after it was invoiced, the incentive fee became 50% vested if MOX Services’ performance remained within the schedule and cost parameters for the subsequent four quarters. The government paid MOX incentive fees, of which a portion was provisional. The government suspended further incentive fee payments in 2011 when it determined that MOX Services was no longer performing within the applicable cost and schedule parameters. In 2016, MOX Services submitted a certified claim to the government for the suspended incentive fees that the company did not receive from 2011 through 2015. In response, the contracting officer not only denied the certified claim suspended payments, but also demanded that MOX Services refund the provisional incentive fee payments already made. The government argued that MOX Services has no hope of meeting the project’s parameters on cost and schedule and thus will not be entitled to retain any incentive fees at project completion. The Court of Federal Claims (Wheeler, J.) rejected this position, noting that “the contract provisions taken together unambiguously provide that the incentive fee [paid] to MOX Services is to remain in the custody of MOX Services until the MFFF construction is completed.” The court also criticized the CO’s demand for a refund of $21.6 million “as a way to gain leverage over MOX Services through baseless retaliation.” The court granted plaintiff’s partial motion for summary judgment, effectively requiring the government to return the provisional incentive fees to MOX Services until the project is completed. ABB Enter. Software, Inc., f/k/a/ Ventyx, ASBCA No. 60314 (Jan. 9, 2018) Tech-Assist, the corporate predecessor to ABB Enterprise Software, Inc., provided software and licenses to support naval maintenance requirements.  Pursuant to a master license agreement, the Navy was only allowed to install one copy of ABB’s software on ships and Navy bases, but ABB alleged that the Navy breached its licensing agreement by allowing two copies of the software to be installed on certain aircraft carriers.  After the Board granted the Navy’s motion to amend its answer to include an affirmative defense for equitable estoppel, ABB moved for summary judgment on its claim for entitlement based on its contention that the licensing agreement’s plain language only allowed for one copy of the software to be installed. The ASBCA (Kinner, A.J.) determined that the plain language of the licensing agreement controlled, and was explicitly clear that only one installation of software for each location would be allowed.  The Board also found that the Navy had not shouldered its burden to establish equitable estoppel by demonstrating that (1) the party to be stopped knew the facts; (2) the government intended that the conduct alleged to have induced continued performance will be acted on, or the contract must have a right to believe the conduct in question was intended to induce continued performance; (3) the contract must not be aware of the true facts; and (4) the contractor must rely on the government’s conduct to its detriment.  Thus, the Board granted ABB’s motion for summary judgment. Name Redacted, ASBCA No. 60783 (Feb. 8, 2018) In 2016, the government awarded a firm-fixed-price contract to Appellant for enhanced force protection and facility upgrades in Afghanistan.  The contract provided for a certain exchange rate between Afghani currency and U.S. dollars.  Following the contract’s termination for default, the contractor submitted a certified claim for additional costs, which the CO denied and the contractor appealed. In a subsequent modification converting the termination to one for convenience, the government agreed to pay over $93,000 to settle the pending appeal at the agreed upon exchange rate.  After some delay, the government paid Appellant, but Appellant countered that due to the delay there had been a change in the exchange rate, and that it was entitled to an additional $4,300.  The government moved to dismiss on the ground that the claim had been settled and Appellant had agreed to its dismissal. The Board (Melnick, A.J.) found that Appellant was not entitled to any additional costs because nothing in the modification allowed for additional compensation if the exchange rate fluctuated, and Appellant had released its claim when it agreed to the modification. Accordingly, the Board dismissed the appeal. UNIT Co., ASBCA No. 60581 (Feb. 12, 2018) The government awarded a contract for the construction of a battle command training center to UNIT.  During the course of the contract, UNIT subcontracted with other companies to perform certain mechanical work.  Due to various interpretations of design requirements, one of the subcontractors, Klebs Mechanical (“Klebs”) submitted “request for information” (“RFI”) forms to UNIT to pose questions to the government.  After some disagreement, UNIT submitted a claim for damages and costs for defective specifications, which the contracting officer denied.  The CO found that UNIT did not provide contractually required notice of the defective specifications and that its recovery was therefore barred. UNIT appealed the CO’s final decision and the government moved for summary judgment. The ASBCA (Newsom, A.J.) relied on FAR 52.236-21(a), Specifications and Drawings for Construction (Feb 1997) to find that UNIT had provided sufficient notice to the government in its RFI forms, or at the very least, that UNIT had created a disputed issue of material fact on whether or not sufficient notice was provided, and the Board accordingly denied summary judgment. MW Builders, Inc. v. United States, No. 13-1023C (Fed. Cl. Mar. 5, 2018) In our 2017 Year-End Update, we covered the Court of Federal Claims’ grant of partial judgment in favor of MW Builders, Inc. (“MW Builders”) on its claims that the Army Corps of Engineers breached its contract for electrical utility services and violated the duty of good faith and fair dealing. In a portion of the decision not covered in our Year-End Update, the COFC (Braden, C.J.) also determined that the claims of MW Builders’ subcontractor, Bergelectric, were waived as the result of a lien waiver in its subcontract providing that Bergelectric waived “any other claim whatsoever in connection with this Contract…” MW Builders moved for reconsideration of Bergelectric’s pass-through claims, arguing  that the precedent relied upon in the initial decision was inapplicable because that case was about a settlement dispute, whereas Bergelectric and MW agree that the contract does not evidence their intent. In the alternative, MW Builders claimed that the court should reform the release language. The court rejected both arguments. First, it held that the terms of the contractual release were unambiguous and that the court was therefore precluded from considering the extrinsic evidence regarding the parties’ intent even though the scope of the release included in the contract was unintentionally broad. Second, the COFC held that it does not have jurisdiction to reform an agreement between a contractor and its subcontractor, citing the Severin doctrine. Accordingly, the court denied the motion for reconsideration. V.  DAMAGES John Shaw LLC d/b/a/ Shaw Bldg. Maint., ASBCA No. 61379 (Mar. 8, 2018) In 2010, John Shaw LLC was awarded a contract to provide janitorial services at an Air Force base.  After the contract expired, Shaw presented a claim for “punitive damages” to the contracting officer, which was denied. Shaw appealed, and requested punitive damages and “missed opportunities” damages stemming from contracts allegedly not obtained due to the government’s handling of its contract.  The government moved to dismiss the claims for punitive and “missed opportunities” damages. The ASBCA (McIlmail, A.J.) dismissed Shaw’s damages claims, finding the connection between the government’s administration of the contract and the allegedly lost contracts with third parties was a claim for consequential damages, which were too remote and speculative to be recovered.  The Board further noted that it has no authority to award punitive damages, and dismissed both claims. Green Bay Logistic Servs. Co.,  ASBCA No. 61063 (Apr. 12, 2018) Green Bay appealed the Defense Contract Management Agency (“DCMA”)’s termination for convenience of its lease of two stakebed or flatbed trucks. Green Bay argued that it was owed twice the value of the contract because it attempted to deliver the vehicles twice. The ASBCA (Osterhout, A.J.) denied Green Bay’s appeal, finding that Green Bay failed to prove that it was entitled to any amount it presented to the government in its termination settlement proposal. Upon a termination for convenience of a commercial item contract, FAR 52.212-4(1) directs the government to pay the contractor: (1) a percentage of the contract price reflecting the percentage of the work performed prior to the notice of termination; and (2) reasonable charges the contractor can demonstrate to the satisfaction of the government using its standard record keeping system, have resulted from the termination. The Board concluded that because Green Bay delivered non-compliant vehicles, it did not complete any percentage of the contract, and that Green Bay did not present any reasonable charges that imposed upon the government a requirement to pay. Entergy Nuclear Generation Co. v. United States, No. 14-1248C (Fed. Cl. June 19, 2018) Entergy Nuclear Generation Company (“Entergy”) operates a nuclear power station. In 1983, Entergy’s predecessor, Boston Edison Company entered into a contract authorized by the Nuclear Waste Policy Act of 1982 for the disposal of spent nuclear fuel generated at the station to begin by January 31, 1998, but the Department of Energy (“DOE”) breached the contract and did not dispose of the spent fuel. In 2012, Entergy was awarded damages for the additional costs incurred in operating the plant due to the breach through December 31, 2008. In this second lawsuit, Entergy sought to recover damages allegedly incurred between December 31, 2008 and June 30, 2015 because Entergy could not recover future damages in the first suit. Because the government did not contest two-thirds of the damages sought by Entergy, Entergy sought partial summary judgment on liability and entry of partial final judgment on the uncontested amount. The court granted Entergy’s motion for partial summary judgment on liability for the uncontested amount, but found that the entry of partial final judgment as to the uncontested amount was improper under COFC Rule 54(b), which allows the court to direct final judgment “as to one or more, but fewer than all, claims” in an action. Here, where the COFC determined that Entergy is only alleging one “claim”—partial breach of contract—granting partial final judgment on some but not all of the harms arising out of a single claim “would be to enter judgment on less than one claim, violating Rule 54(b).” The government cross-moved for summary judgment as to Entergy’s claim for storage fees paid to the Nuclear Regulatory Commission (“NRC”). The court rejected the government’s argument that Entergy was foreclosed from proving causation between the breach and the increased fees because it had already presented such evidence, and the government’s argument had been rejected in a prior Federal Circuit case. The COFC denied the Government’s motion, finding that Entergy’s intent to present substantially different evidence from that considered in the prior Federal Circuit case created genuine dispute as to causation. Although not briefed by the parties, the court also found that because the COFC determined in a prior suit for damages brought by the Boston Edison Company that DOE’s breach was a but-for cause of the NRC fee change at the Pilgrim Nuclear Power Station, and the causation issue was not raised on appeal, issue preclusion may have provided an alternate basis to deny the Government’s motion. But the COFC had an opportunity to prohibit re-litigation of this same issue based on collateral estoppel in another case, discussed infra in Section VI(C). VI.  COMMON LAW PRINCIPLES The boards of contract appeals and COFC addressed a number of issues during the first half of 2018 arising out of the body of federal common law that has developed in the context of government contracts. A.  Application of Common Law in Government Contracts Cases Assessment and Training Solutions Consulting Corp., ASBCA No. 61047 (Mar. 6, 2018) ATSCC sought reconsideration of the ASBCA’s earlier decision sustaining ATSCC’s appeal, arguing that the Board erroneously applied a common law of bailment presumption of negligence and that the written contract should be enforced over the common law.  The Board (Clarke, A.J.) explained that the common law of bailment imposes upon the bailee the duty to protect property by exercising ordinary care and to return said property in substantially the same condition.  Thus, when the government receives property in good condition and returns it in damaged condition, there is a presumption that the cause of the damage was due to the government’s failure to exercise ordinary care.  The government argued that the presumption did not apply, and that where there was a written bailment contract, the contract should apply, not common law.  However, the Board noted that this was only true if the written contract and the common law differed.  Because the written contract and common law were the same in this instance, the Board concluded that the common law bailment presumption would apply.  Accordingly, the Board held, the prior decision’s reliance on the common law presumption was not legal error. B.  Fraud We have been following in our recent publications developments in the law of whether and to what extent the boards of contract appeals may exercise jurisdiction over claims and defenses sounding in fraud when the alleged fraud affects the administration of government contracts.  For example, in our 2016 Year-End Government Contracts Litigation Update, we covered the Federal Circuit’s decision in Laguna Construction Company, Inc. v. Carter, 828 F.3d 1364 (Fed. Cir. 2016), which held that as long as the ASBCA can rely upon prior factual determinations from other tribunals (such as through a guilty plea), the Board has jurisdiction to adjudicate legal defenses based upon those prior determinations of fraud.  In the first half of 2018, the ASBCA considered one case addressing the impact of Laguna on its jurisdiction, and another that evaluated the validity of a contracting officer’s final decision based partially on a decision of fraud. Int’l Oil Trading Co., ASBCA Nos. 57491, 57492, 57493 (Jan. 12, 2018) IOTC sought partial judgment on the pleadings or, alternatively, renewed its motion to strike the Government’s affirmative defense that IOTC obtained its contracts for fuel delivery to the government in Iraq through fraud or bribery, claiming that the Federal Circuit’s decision in Laguna abrogated the Board’s previous ruling denying IOTC’s initial motion to strike by preventing the Board from hearing the fraud-based affirmative defense. Citing ABS Development Corp., which we discussed in our 2017 Year-End Government Contracts Litigation Update, the ASBCA (Melnick, A.J.) held that Laguna did not impact its prior ruling that it was not precluded from considering fraud related claims based because the CDA’s statutory bar did not apply to an affirmative defense that a contract is void under the common law for fraud or bribery in its formation. The Board noted that the Federal Circuit’s decision did not restrict the Board’s power to determine the validity of a contract when the government has lodged an affirmative defense that the contract is void  ab initio due to fraud or bribery, as opposed to when the government is asserting a fraud claim (such as a claim under the False Claims Act) that the Board does not have jurisdiction to entertain. Accordingly, the Board denied IOTC’s motion. PROTEC GmbH, ASBCA Nos. 61161, 61162, 61185 (Mar. 20, 2018) The government moved to dismiss for lack of jurisdiction PROTEC’s appeals from the Army’s denials of its claims for unpaid invoices, arguing that the contracting officers’ final decisions were invalid because denials were based on  suspicion of fraud. None of the final decisions mentioned any suspicion of fraud; however, the U.S. Army Criminal Investigation Command was conducting an investigation into allegations of fraud at the time the final decisions were issued and at the time of the appeal. Under the FAR, a contracting officer’s authority to decide or resolve claims does not extend to settlement, compromise, payment, or adjustment of any claim involving fraud.  The COFC and CBCA have held that a final decision is therefore invalid if it is based upon a suspicion of fraud.  However, the Federal Circuit has clarified that a final decision is invalid only if the decision rests solely upon a suspicion of fraud.  Because the decisions issued to PROTEC were not based upon a suspicion of fraud and the decisions also relied upon other rationales,  it did not matter for jurisdictional purposes  that there was an ongoing criminal investigation into fraud allegations.  The Board (Sweet, A.J.) therefore denied the motion to dismiss. C.  Good Faith & Fair Dealing Ala. Power Co. v. United States, No. 17-1480, Ga. Power Co. v. United States, Nos.  17-1492C, 17-1481C (Fed. Cl. Mar. 26, 2018) In a pair of cases arising from ongoing litigation regarding the government’s failure to collect spent nuclear fuel (“SNF”) from the plaintiffs’ facilities pursuant to its contracts, the Government  sought to dismiss two claims—the first relating to the recovery of certain fees levied by the Nuclear Regulatory Commission (“NRC”), and the second to plaintiffs’ claim for breach of the covenant of good faith and fair dealing. In 2004, the COFC granted summary judgment in plaintiffs’ favor on their initial breach of contract suit. The plaintiffs sued again in 2010 to recover the damages accrued from the government’s continued breach by failing to remove the material between 2005 and 2010, including fees collected by the NRC. During that second phase of litigation, the COFC held that although the plaintiffs were entitled to recovery, they could not recover the additional NRC fees because they did not sufficiently prove the breach of contract caused the increase in the fees. The plaintiffs sued a third time to recover all costs incurred after 2011, at which point the COFC granted partial summary judgment for the government on the issue of the NRC fees as barred by the doctrine of collateral estoppel. This fourth case, based upon nearly identical facts, is framed as both a breach of contract claim and a breach of the implied covenant of good faith and fair dealing. The Government moved dismiss the breach claims related to the recovery of the NRC fees based on collateral estoppel and to dismiss the good faith and fair dealing claim as duplicative of the breach of contract claim for which liability had been established in the 1998 case. The COFC (Campbell-Smith, J.) granted the motion to dismiss the NRC fees because the allegations in the complaint were virtually identical to those in the previous complaint and there had been no change in the law between the two suits. The COFC also found that the good faith and fair dealing claim was duplicative of the breach of contract claim. To state a separate claim for breach of the implied covenant of good faith and fair dealing,  a plaintiff must allege some kind of subterfuge—evasion that goes against the spirit of the bargain, lack of diligence, willful rendering of imperfect performance, abuse of power, or interference with performance—founded upon different allegations than the breach of contract claim. The COFC found no alleged facts that even arguably support plaintiff’s conclusion that defendant was attempting to avoid its obligations, and therefore granted the motion to dismiss. Raytheon Co., ASBCA Nos. 60448, 60785 (Apr. 9, 2018) Raytheon appealed from the CO’s denial of two claims relating to additional services rendered under its “Lot 27” contract with the Air Force. About two months before the hearing, the government moved to amend its answer to add an additional “unclean hands” affirmative defense based on the latest round of government depositions of Raytheon personnel, which the government claimed revealed that Raytheon had an undisclosed pre-award plan to complete the Lot 27 contract work with future appropriated funds siphoned away from future missile production contracts that Raytheon hoped to obtain on an annual basis. Raytheon moved to dismiss the additional defense, arguing the ASBCA did not have jurisdiction to entertain the defense because it had not been submitted as  claim to the CO, and that the government did not justify the defense or the delay in raising it. The ASBCA (Scott, A.J.) granted the government’s motion to amend its answer. Although the Board recognized that the government’s amendment was filed only shortly before the hearing, there was insufficient information for the Board to conclude that the government delayed unduly in raising the defense. The Board also concluded that there was insufficient evidence to establish bad faith on the part of the government or for the Board to decide the futility of the amendment. The ASBCA did, however, allow Raytheon additional discovery and/or submissions both before and after the scheduled hearing. VII.  CASES TO WATCH While the Government Contracts Litigation Update does not typically analyze bid protest cases from the GAO or the Court of Federal Claims, two recent cases—a decision from the Court of Federal Claims, and a case still pending before the Federal Circuit— have wide-reaching implications of which government contractors should be aware. A.  Trade Agreements Act Acetris Health, LLC v. United States, No. 18-433C (Fed. Cl. May 8, 2018) The Court of Federal Claims considered Acetris Health, LLC’s challenge to the Department of Veterans Affairs’ reliance on a determination by Customs and Border Patrol that the pharmaceuticals Acetris provided under contract to the VA and the Department of Defense were considered a product of India because the active ingredient in the drug was not “substantially transformed” in the United States. The VA determined that Acetris was required to supply “only U.S.-made or designated country end products” under the contract because it was subject to the Trade Agreements Act of 1979 (“TAA”). Acetris claimed that the pharmaceuticals it provide were TAA compliant because the foreign ingredients were processed into the final product in the U.S. Acetris challenged CBP’s country of origin determination at the Court of International Trade (“CIT”) in March 2018. Before the COFC, Acetris lodged a pre-award bid protest challenge to the VA’s reliance on CBP’s determination in interpreting its solicitation. After receiving the CBP determination, the VA notified Acetris that it could no longer fulfill the relevant contract using the existing pharmaceutical supply, and solicited new proposals to supply a TAA-compliant version of the product. Acetris submitted a proposal that was rejected by the VA. The VA expressed its intention to “rely entirely” on the findings of CBP for the purpose of country of origin determinations for TAA compliance. Acetris challenged both the VA’s substantive interpretation of the TAA and its reliance on CBP to make the country of origin determination. The COFC (Sweeney, J.) denied the government’s motion to dismiss, finding that  “all of plaintiff’s claims are aimed at the actions (or inaction) of the VA” and thus are “properly the subject of a preaward bid protest.” The COFC also determined that 28 U.S.C. §1500 does not divest the COFC of jurisdiction because the court determined that the challenge to CBP’s country-of-origin determination pending before the CIT was not based on substantially the same operative facts, and that Acetris’ claims were ripe for review and stated claims upon which relief could be granted. After oral argument earlier this month, the COFC granted declaratory judgment in favor of Acetris. The COFC found that the VA misconstrued the Trade Agreements clause included in the solicitation as preventing the purchase of products that qualify as domestic end products under relevant FAR provisions. The COFC also held that the VA’s reliance on CBP’s country of origin determination, rather than independently assessing TAA compliance, was arbitrary and capricious. B.  Commercial Item Contracting Palantir USG Inc. v. United States, No. 17-1465 (Fed. Cir. Feb. 8, 2018) In February, Gibson Dunn argued before the Federal Circuit on behalf of its client Palantir Technologies to uphold a 2016 Court of Federal Claims ruling (Horn, J.) that the Army violated the Federal Acquisition Streamlining Act (“FASA”) when it decided to develop a new data-management platform from scratch without undertaking market research to determine whether its needs could be met by a commercially available product. The COFC found that Palantir was wrongly excluded from a $206 million intelligence software procurement when the Army refused to consider procuring its platform on a firm fixed price, commercial item basis, and instead issued a solicitation calling for developmental solutions on a cost-plus basis. On appeal, the Government argued that the COFC erroneously added a requirement to FASA that government market research must “fully investigate” whether commercial items could meet all or part of the agency’s requirements, and that the COFC wrongly substituted its judgment in determining that the Army’s market research was inadequate. Palantir argued that reversal of the COFC decision would “flout” the FASA procedures requiring that agencies acquire commercial items “to the maximum extent possible,” which were designed to prevent federal agencies from “wasting taxpayer funds by developing products that are already available in the commercial marketplace.” The Federal Circuit’s impending decision in this case will have wide reaching impacts on the procurement community and the deference afforded the Government’s market research in developing its solicitation requirements. VIII.  CONCLUSION We will continue to keep you informed on these and other related issues as they develop. The following Gibson Dunn lawyers assisted in preparing this client update: Karen L. Manos, Lindsay M. Paulin, Melinda Biancuzzo, Jessica Altman, Sydney Sherman, and Casper J. Yen. Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding the issues discussed above.  Please contact the Gibson Dunn lawyer with whom you usually work, or any of the following: Washington, D.C. Karen L. Manos (+1 202-955-8536, kmanos@gibsondunn.com) Joseph D. West (+1 202-955-8658, jwest@gibsondunn.com) John W.F. Chesley (+1 202-887-3788, jchesley@gibsondunn.com) David P. Burns (+1 202-887-3786, dburns@gibsondunn.com) Michael Diamant (+1 202-887-3604, mdiamant@gibsondunn.com) Michael K. Murphy(+1 202-995-8238, mmurphy@gibsondunn.com) Jonathan M. Phillips (+1 202-887-3546, jphillips@gibsondunn.com) Melinda R. Biancuzzo (+1 202-887-3724, mbiancuzzo@gibsondunn.com) Ella Alves Capone (+1 202-887-3511, ecapone@gibsondunn.com) Michael R. Dziuban (+1 202-887-8252, mdziuban@gibsondunn.com) Melissa L. Farrar (+1 202-887-3579, mfarrar@gibsondunn.com) Lindsay M. Paulin (+1 202-887-3701, lpaulin@gibsondunn.com) Laura J. Plack (+1 202-887-3678, lplack@gibsondunn.com) Erin N. Rankin (+1 202-955-8246, erankin@gibsondunn.com) Jeffrey S. Rosenberg (+1 202-955-8297, jrosenberg@gibsondunn.com) Denver Robert C. Blume (+1 303-298-5758, rblume@gibsondunn.com) Jeremy S. Ochsenbein (+1 303-298-5773, jochsenbein@gibsondunn.com) Los Angeles Marcellus McRae (+1 213-229-7675, mmcrae@gibsondunn.com) Maurice M. Suh (+1 213-229-7260, msuh@gibsondunn.com) James L. Zelenay, Jr. (+1 213-229-7449, jzelenay@gibsondunn.com) Dhananjay S. Manthripragada (+1 213-229-7366, dmanthripragada@gibsondunn.com) Sean S. Twomey (+1 213-229-7284, stwomey@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

July 26, 2018 |
2018 Mid-Year FDA and Health Care Compliance and Enforcement Update – Providers

Click for PDF A year and a half into the new Administration, we are seeing new and shifting enforcement and regulatory trends in the health care provider space. While the staying power of these trends remains uncertain, it is increasingly clear that the Administration is implementing changes—including potentially significant ones—at each of the principal health care enforcement agencies. The first half of 2018 also saw notable case law developments on some of the most hot-button issues facing health care providers, helping to round out an eventful six months across the health care compliance and enforcement landscape. We cover all of these trends and developments in greater depth below. First, while the U.S. Department of Justice (“DOJ”) and U.S. Department of Health and Human Services (“HHS”) stepped up their opioid-related enforcement efforts, other areas of enforcement saw less aggressive pursuit over the past six months compared to the first half of 2017. Notably, DOJ gave several indications of letting up on affirmative enforcement actions, including with the release of then-Associate Attorney General Rachel Brand’s memorandum (the “Brand Memo”), which prohibits DOJ from using guidance documents and sub-regulatory actions to “create binding requirements that do not already exist by statute or regulation.” The Brand Memo and other recent DOJ pronouncements are particularly salient for health care providers, for whom enforcement actions can often be grounded in agency and contractor guidance. That said, if the degree of ongoing criminal and civil enforcement efforts related to opioids is any indication, we anticipate a very busy second half of 2018 for both DOJ and the HHS Office of Inspector General (“HHS OIG”), and the Administration may be poised for a net increase in resolution numbers in the second half of the year and into 2019, notwithstanding the let-up in other areas. Second, the first six months of 2018 also saw several notable case law developments that could have a lasting impact on health care providers. We report below on courts’ ongoing efforts to make sense of the implied certification basis for False Claims Act (“FCA”) liability recognized by the Supreme Court in Universal Health Services, Inc. v. United States ex rel. Escobar. We also survey key developments regarding FCA liability in cases where a difference of medical opinion underlies providers’ alleged liability, as well as courts’ recent approaches toward statistical sampling to prove liability and damages in FCA cases. Finally, we discuss recent regulatory and case law developments salient to two of the most important and prevalent issues for health care providers—the Anti-Kickback Statute (“AKS”) and the Stark Law. As always, a collection of Gibson Dunn’s recent publications and presentations on health care issues impacting providers may be found on our website. And, of course, we would be happy to discuss these developments—and their implications for your business—with you. I. DOJ Enforcement Activity A. False Claims Act Enforcement Activity Between January 1 and June 30, 2018, DOJ announced approximately $201 million in FCA recoveries through settlements with health care providers, significantly below the $817 million figure recovered by DOJ through settlements as of June 30, 2017.[1] This is likely due to the fact that in the first half of 2017, DOJ settled eight cases for more than $30 million (the approximate amount of the single highest settlement in the first half of 2018) including one for $155 million.[2] The total of forty health care provider settlements announced by DOJ during the first half of 2018 is also considerably lower than the fifty-four health care provider settlements announced during the first half of 2017, the forty-nine settlements announced during the first half of 2016, and the fifty-seven settlements announced during the first half of 2015. Given the long road most FCA matters take to resolution—the average FCA case can take two years or more to investigate before the government decides whether to pursue it—it is hard to tell if the lower number of settlements in the first half of 2018 compared to last year is a result of a change in DOJ policies or priorities. But there is reason to think providers may have success pushing back on aggressive FCA enforcement going forward, if the Brand Memo and related statements by DOJ are any indication. The January 25, 2018 Brand Memo cabined the ability of prosecutors to use non-compliance with agency guidance as the basis of an FCA claim.[3] Specifically, the Brand Memo prohibits (1) using non-compliance with other agencies’ “guidance documents as a basis for proving violations of applicable law” in affirmative civil enforcement cases, and (2) using an agency’s “enforcement authority to effectively convert agency guidance documents into binding rules.” The Brand Memo applies to administrative guidance issued by DOJ or any other executive agency. The Brand Memo may have particular relevance to providers in medical necessity cases, which frequently involve non-binding guidance and recommendations, such as where the government’s or relator’s theories are grounded in provisions of the Medical Benefit Policy Manual and/or contractors’ local coverage determinations (NCDs and LCDs). Although the memo’s author, Rachel Brand, has left DOJ, in a June speech, Acting Associate Attorney General Jesse Panuccio reiterated the Brand Memo’s importance to DOJ in its reform of FCA enforcement. As we described in more detail in our June 2018 Client Alert, he also highlighted other measures DOJ is undertaking, including formalizing cooperation credit processes, in an effort to improve FCA enforcement. We will continue to monitor these developments and settlement numbers and will report further in our 2018 Year-End Update. Notwithstanding the lower overall number of settlements, the FCA settlements announced so far this year have rested on the same mélange of legal theories as past years and have involved a number of different types of providers, including hospitals, clinics and single providers, skilled nursing and rehabilitation services, home health care services, and pharmacies. As indicated in the chart above, for the first half of 2018, the vast majority of FCA health care provider settlements have involved clinics and single providers; however, these settlements made up a disproportionately small amount of the financial recoveries—averaging roughly $2.3 million per case. Within this category, the majority of settlements have resolved actions primarily predicated on legal theories of services not provided (eleven cases), while smaller numbers of settlements included additional theories of medically unnecessary or unreasonable services (five cases), unqualified personnel providing care (four cases), upcoding (three cases), AKS claims (two cases), physician self-referral claims (one case), and the provision of sub-standard care (one case).[4] The second highest number of settlements were with “other” medical services, as depicted in the chart. These services included ambulance services, diagnostic laboratory testing, radiation services, ophthalmology services, intra-operative monitoring services, health management/mental health services, and wound care services. Consistent with the recent past, the most prevalent legal theory among health care provider settlements was that the provider had billed government health programs for items or services that were not medically necessary. In many of those cases, medical necessity was the sole underlying theory of liability, reflecting DOJ’s continued focus on issues of medical necessity. DOJ also commonly includes medical necessity allegations in broader and more complex allegations of misconduct. For example, an Arizona-headquartered health care organization, that owns and operates twenty-eight acute-care hospitals in multiple states, agreed to pay over $18 million to settle allegations that twelve of its hospitals in Arizona and Colorado had “knowingly submitted false claims to Medicare by admitting patients who could have been treated on a less costly outpatient basis.”[5] According to the press release, these twelve hospitals had knowingly overcharged Medicare patients for short-stay inpatient procedures that should have been billed on an outpatient basis. In addition to these medically unnecessary inpatient admissions, the hospitals allegedly provided falsified documentation in their reports to Medicare by artificially inflating the number of outpatient observation hours received by patients. In addition to the monetary settlement, the health care organization entered into a corporate integrity agreement with HHS OIG, requiring the company to engage in “significant compliance efforts” over the next five years, including retaining an independent review organization to review the accuracy of the company’s claims for services furnished to Medicaid and Medicare beneficiaries. Lack of medical necessity also served as the underlying legal theory in a settlement with a provider of opioids and other prescription pain killers, as part of the recent focus on cracking down on the nation’s opioid epidemic. In that case, a Tennessee chiropractor and his pain management company agreed to pay $1.45 million, and a pain clinic nurse practitioner agreed to pay $32,000 and surrender her DEA registration, to resolve claims that from 2011 through 2014, the chiropractor and his company “caused pharmacies to submit requests for Medicare and TennCare payments for pain killers, including opioids . . . which had no legitimate medical purpose.”[6] With respect to this settlement, Attorney General Jeff Sessions noted, “[i]f we’re going to end this unprecedented [opioid] drug crisis, which is claiming the lives of 64,000 Americans each year, doctors must stop overprescribing opioids and law enforcement must aggressively pursue those medical professionals who act in their own financial interests, at the expense of their patients’ best interests.”[7] We address the ongoing opioid enforcement efforts further below. In addition to the settlement involving the Arizona-based health care organization, the first half of 2018 saw a number of other settlements involving multiple-facility providers nationwide, many under more than one theory of liability. For example, in one case involving a Louisville, Kentucky-based company that owns and operates about 115 skilled nursing facilities, DOJ alleged that the company had “knowingly submitted false claims to Medicare for rehabilitation therapy services that were not reasonable, necessary and skilled.”[8] The settlement, which was initiated by two individuals under the qui tam provisions of the FCA, required the company to pay more than $30 million and also resolved allegations that the company had submitted forged pre-admission certifications of patient need for skilled nursing to the State of Tennessee’s Medicaid program. In another case, DOJ settled with a dental provider for $23.9 million following allegations that the company had, throughout clinics in seventeen states, submitted false claims for medically unnecessary dental procedures and for procedures not actually provided.[9] DOJ’s case was initiated by five lawsuits filed under the qui tam provision of the FCA. DOJ likewise settled for $22.51 million with a company that manages nearly 700 hospital-based wound care centers nationwide to resolve allegations that the company had knowingly caused wound care centers to bill Medicare for medically unnecessary and unreasonable procedures.[10] That case arose from two separate lawsuits filed by former employees of the company under the qui tam provision of the FCA. The first half of 2018 also saw a relatively high number of resolutions resting on theories of services not provided, including nine settlements based on allegations that services billed for were not provided at all. In one settlement, which involved the coordinated effort of the Alaska Medicaid Fraud Control Unit, HHS OIG, and the Alaska Medicaid Program, an Anchorage-based provider of services to individuals with intellectual and developmental disabilities agreed to pay nearly $2.3 million to resolve allegations it had billed for services not provided and for overlapping services with the same provider.[11] The settlement also required the health care provider to enter into a five-year corporate integrity agreement with HHS OIG. Finally, in one of the largest civil resolutions of the first half of 2018,[12] a judge found a Houston-area laboratory liable for nearly $30.6 million for overbilling Medicare for services (transportation miles) that the company’s lab technicians had never actually traveled.[13] B. FCA-Related Case Law Developments 1. Developments in Implied False Certification Theory Our previous updates discussed in detail the unanimous 2016 Supreme Court decision in Universal Health Services, Inc. v. United States ex rel. Escobar,[14] affirming the validity of an “implied certification” theory for FCA liability following a “rigorous” and “demanding” analysis of whether the alleged fraud was “material” to the government’s decision to pay the claim at issue. Courts have continued to interpret Escobar and unpack the meaning of “materiality” in this context. In January 2018, the Middle District of Florida overturned a $350 million jury verdict on the grounds that the evidence did not support a finding of FCA materiality and scienter where the government continued making payments to the defendants despite being on notice of defendants’ alleged misconduct.[15] Plaintiffs alleged that the defendants, operators of a chain of skilled nursing facilities and a management services organization, misrepresented the conditions of and treatments provided to patients in its facilities. In support of these allegations, plaintiffs presented a variety of paperwork containing defects such as missing dates or signatures. The judge noted that while the defective paperwork was demonstrably non-compliant with contractual requirements for comprehensive care plans, the government nonetheless made payments and took no steps to enforce compliance. With these facts in mind, the judge concluded there was no reason to believe the deviations from the terms of the comprehensive care plans were material to payment, and that overturning the jury verdict was consistent with Escobar which “rejects a system of government traps, zaps, and zingers that permits the government to retain the benefit of a substantially conforming good or service but to recover the price entirely—multiplied by three—because of some immaterial contractual or regulatory non-compliance.”[16] An appeal of this ruling was filed in early July and is pending in the Eleventh Circuit. Courts nationwide continue to disagree about the extent to which government payment after awareness of non-compliance defeats the materiality standard. We will continue to watch as the Supreme Court considers whether to hear at least one cert petition seeking clarification of that precise issue, in United States ex rel. Campie v. Gilead Sciences, Inc., during the 2018 term.[17] 2. Developments in “Objective Falsity” Jurisprudence As we have discussed in prior updates, courts continue to consider the animating logic of the March 2016 AseraCare case, in which the District Court for the Northern District of Alabama, after the government prevailed in the first phase of a bifurcated trial, granted summary judgment sua sponte for the hospice provider on the grounds that the government failed to show evidence of an objective falsehood. In support of its allegation that the defendant hospice provider submitted false claims for services where the patient did not qualify for hospice care, the government had proffered a trial expert’s review of patient medical records. The district court found that a “contradiction based on clinical judgment or opinion alone [i.e. between the government’s expert and another expert or the treating physician] cannot constitute falsity under the FCA as a matter of law.”[18] Other courts have similarly declined to find objective falsity in cases where the challenged care and services were the product of providers’ clinical judgment. For example, in a December 2017 decision, the Central District of California reached a similar conclusion in United States ex rel. Winter v. Gardens Regional Hospital and Medical Center, finding no basis for liability in pleadings premised on questions of medical judgment regarding the appropriateness of hospital admissions.[19] In a similar vein, in June 2017, the district court in United States ex rel. Dooley v. Metic Transplantation Lab held that defendants could only be found to have submitted objectively false claims if they, in their medical opinion, knew that they were selecting medically unnecessary tests.[20] Two recent circuit court decisions, however, held that medical judgments can be challenged as false or fraudulent for purposes of the FCA, at least in certain circumstances. First, in United States v. Paulus, the Sixth Circuit rejected a district court’s decision to overturn the conviction of a medical doctor for allegedly fraudulently ordering an unusually high number of angiograms, and then finding high levels of stenosis based on erroneous and exaggerated readings of those angiograms.[21] The district judge found that the medical interpretation of the amount of stenosis shown on angiograms was “incapable of confirmation or contradiction” and not an “objectively verifiable fact,”[22] but the Sixth Circuit strongly disagreed, stating “[w]e believe we were clear then, but we make it explicit now: The degree of stenosis is a fact capable of proof or disproof.”[23] The Department of Justice lauded the Paulus decision, filing a letter with the Eleventh Circuit stating that Paulus “squarely rejected” the reasoning of AseraCare. In a responsive filing, AseraCare argued that the cases are distinguishable due to the factual nature of the determinations being made—while Paulus involved a factual determination about the measurable degree of blockage in arteries, the judgments in AseraCare centered on life expectancy, which AseraCare describes as a judgment that “necessarily and by law involves a subjective opinion.” The Eleventh Circuit heard oral arguments in AseraCare in March 2017, and a decision is forthcoming. Second, in United States ex rel. Polukoff v. St. Mark’s Hospital,[24] a Tenth Circuit panel held that certifications of “reasonable and necessary” care can be deemed false for purposes of FCA liability if procedures are found to be “not reasonable and necessary under the government’s definition of the phrase.”[25] This decision overturned a District of Utah opinion declaring that a doctor’s opinion regarding the potential uses for patent formen ovale (“PFO”) closures could not be objectively false since the doctor exercised his professional medical judgment in reaching this conclusion.[26] Although PFO closures are typically conducted only on patients who have previously endured a stroke, the provider-defendant believed they had the potential to serve as a “preventative measure” for patients with an “elevated risk of stroke.”[27] As a result of his view that PFO closures had broader potential usage, the doctor performed PFO closures far more often than normal in the industry: in a time period where the Cleveland Clinic performed 37 PFO closures, the defendant performed 861.[28] The Tenth Circuit unanimously rejected the district court’s decision that the doctor’s view of the wider usefulness of PFO closures was sufficient to defeat a finding of falsity, emphasizing that providers cannot use professional judgment as a shield against liability for unnecessary procedures. Rather, for purposes of determining whether a claim is reimbursable, the Tenth Circuit found that government guidance such as the Medicare Program Integrity Manual provides a reliable rulebook for what constitutes “reasonable and necessary” under the FCA.[29] The case will now return to the district court for reconsideration. The extent to which a disagreement in professional opinion can be construed as an indicator of falsity is not fully settled. Following recent cases, it is clear that prosecutors must provide evidence of falsity beyond mere disagreement of another health professional. Nonetheless, the Paulus and Polukoff decisions suggest that providers’ medical judgment may not be protected when other factors suggest that they veer significantly from the mainstream. The Tenth Circuit’s statements about using government manuals to define “reasonable and necessary” for FCA purposes may prompt particular controversy because as other courts have recognized, these manuals lack the force of law, and in any event, they, too, have vague standards that are susceptible to multiple interpretations. In that regard, key questions remain about the parameters of defining falsity in medical necessity determinations; we will continue to monitor pending litigation in this area and will report on further judicial developments. 3. Developments Regarding the Use of Statistical Sampling As noted in prior updates, dating back to our 2014 Year-End Update, we continue to track developments in the use of statistical evidence and sampling to support wide-scale FCA allegations, especially against multi-site providers. Two courts recently rejected plaintiffs’ attempts to use statistical data to establish fraud under the FCA. In United States ex rel. Wollman v. The General Hospital Corporation, the District of Massachusetts granted defendants’ motion to dismiss on the grounds that relator’s allegations based on statistical data fell short of pleading specific details regarding the actual submission of claims.[30] Although the First Circuit generally has relaxed pleading standards and allows the use of statistical evidence to strengthen an inference of fraud, the Wollman court found that relators’ use of statistical data fell short of creating any inference that surgeons committed fraud by billing Medicare and Medicaid for “overlapping” surgeries.[31] Similarly, in April 2018, in United States ex rel. Conroy v. Select Medical Corporation, a magistrate judge in the Southern District of Indiana rejected a relator’s attempt to use statistical sampling to determine “the number of fraudulent Medicare claims and the damages flowing from them.”[32] The court held that the plaintiffs failed to provide any evidence in support of the proposition that showing “a particular Medicare reimbursement claim was fraudulent based on a theory of lack of medical necessity can be done by a random-sampling method.” Instead, the court found that a case-by-case analysis would be necessary to “evaluate whether each particular claim for which the plaintiffs seek relief was actually knowingly false within the meaning of the FCA.”[33] DOJ, despite initially declining to intervene in the case, filed a letter of interest challenging the magistrate judge’s discovery order as “contrary to long-established precedent recognizing statistical sampling as admissible and valid method of proof” in contexts applicable to the FCA.[34] The court has not yet addressed DOJ’s letter. As the government and FCA relators continue to attempt to support region-wide or nationwide cases against multi-facility providers using statistical sampling evidence, these issues are sure to have an important presence in the FCA case law, and we will continue to monitor and report on them. C. Opioid Crisis Enforcement Efforts The government continues to aggressively target the opioid crisis in its criminal, as well as civil, enforcement efforts, with the initial focus on opioid manufacturers widening to include prescribers, and even pharmacy dispensers, of opioids. On June 6, the CEO of a health care company and four physicians were charged in a superseding indictment as part of an investigation into an alleged $200 million health care fraud scheme involving the distribution of medically unnecessary controlled substances and injections that resulted in patient harm.[35] The indictment alleges that the physicians prescribed over 4.2 million dosage units of medically unnecessary controlled substances to Medicare beneficiaries, including some who were addicted to narcotics. Further, the physicians allegedly required the Medicare beneficiaries to consent to medically unnecessary injections, which were billed to Medicare in order to increase revenue for all defendants. Trial in the Eastern District of Michigan is scheduled to begin at the end of July. In our 2017 Mid-Year Update, we highlighted DOJ’s announcement of what was then the largest-ever health care fraud enforcement action, involving charges against more than 400 defendants for more than $1.3 billion in fraud. The enforcement action focused heavily on the prescription and distribution of medically unnecessary prescription drugs, including opioids and other narcotics. On June 28, DOJ announced a new record for the largest health care fraud enforcement action in history.[36] This enforcement action involved charges against 601 individuals across 58 federal districts, allegedly responsible for over $2 billion in fraud losses. Of the individuals charged, 162 defendants (including seventy-six doctors) were charged for playing a role in prescribing and distributing opioids and other narcotics. In the press release, Attorney General Jeff Sessions described the underlying conduct as “despicable crimes” that led DOJ to take “historic new steps to go after fraudsters, including hiring more prosecutors and leveraging the power of data analytics.”[37] Attorney General Sessions emphasized that “[t]his is the most fraud, the most defendants, and the most doctors ever charged in a single operation—and we have evidence that our ongoing work has stopped or prevented billions of dollars’ worth of fraud.”[38] The enforcement action involved coordinated efforts by DOJ’s Criminal Division and Health Care Fraud Unit, HHS OIG, the Drug Enforcement Administration, the Centers for Medicare and Medicaid Services, IRS Criminal Investigations, the Department of Labor, State Medicaid Fraud Control Units, and others. HHS Secretary Alex Azar lauded the “Takedown Day” as “a significant accomplishment for the American people,” stating that every dollar recovered in the operation is “a dollar that can go toward providing healthcare for Americans in need[.]”[39] In the middle of July, DOJ announced Operation Synthetic Opioid Surge, or Operation S.O.S., in an effort to target distribution of synthetic opioids in the districts with the highest rates of overdose deaths.[40] U.S. Attorney’s Offices in key districts will identify a county in which it will prosecute “every readily provable case involving . . . synthetic opioids, regardless of drug quantity.” The goal of the intensive effort, which will be coordinated with the DEA Special Operations Division, is to use these smaller prosecutions to identify larger distribution networks for synthetic opioids and ultimately reduce overdose deaths. The recent takedown and Operation S.O.S. initiative are further evidence of DOJ’s continued prioritization of the opioid crisis by criminally targeting fraudulent distribution of prescription medications; however, DOJ continues to target these issues through civil remedies as well. On February 27, 2018, DOJ announced the formation of a Prescription Interdiction and Litigation Task Force designed to enforce compliance with federal regulations created to prevent improper prescribing of medications. In his speech announcing the Task Force formation, Attorney General Sessions noted that the Task Force would coordinate with various agencies and employ a wide range of enforcement tools—including the FCA—to crack down on illegal prescriptions. II. HHS Enforcement Activity A. HHS OIG Activity 1. 2017 and 2018 Developments and Trends In the period between October 1, 2017, and March 31, 2018, HHS OIG reported 424 criminal actions, a decrease of approximately 9% from the 468 criminal actions reported in the first half of FY 2017.[41] HHS OIG experienced a larger drop—nearly 25%—in the number of civil actions, reporting 349 in the first half of FY 2018, compared to 461 in the first half of FY 2017.[42] While the yearly number of criminal actions has fluctuated over the past several years (see the chart below), the yearly number of civil actions has been steadily rising—a streak which may break in 2018 based on first-half numbers. In the first half of FY 2018, HHS OIG also reported expected investigative recoveries of $1.46 billion.[43] In the first half of FY 2017, by contrast, this figure was approximately $2.04 billion.[44] These recovery figures suggest that FY 2018 may continue the general downward shift in HHS OIG’s yearly expected recoveries over the last several years, as depicted in the chart below. This downward trend may be due in part to decreases in the frequency and magnitude of large settlements with pharmaceutical companies. In FY 2012 and FY 2013, for example, HHS OIG’s year‑end reports highlighted a total of approximately $4.35 billion in settlements with pharmaceutical companies, whereas HHS OIG’s year‑end reports for FY 2014 through FY 2017 highlighted a total of only about $1.32 billion in settlements with pharmaceutical companies.[45] 2. Significant HHS OIG Enforcement Activity a) Exclusions HHS is required to exclude from participation in the federal health care programs any individual or entity that is (1) convicted of a crime related to Medicare, (2) convicted of a crime related to patient abuse or neglect, (3) convicted of felony health care fraud, or (4) convicted of a felony related to the manufacturing, distribution, prescription, or dispensing of a controlled substance.[46] HHS also has permissive authority to exclude individuals and entities falling into sixteen other categories, including those convicted of fraudulent conduct related to health care, those excluded or suspended from a state health care program, and those HHS determines have paid kickbacks as defined by the Anti‑Kickback Statute.[47] In the first half of calendar year 2018, HHS OIG reported 1,525 exclusions from the federal health care programs.[48] Of that number, thirty exclusions were of entities, a 9% drop compared to the same period in calendar year 2017 and a 3% drop compared to the same period in calendar year 2016.[49] Notably, this number is an increase as compared to calendar years 2015 and 2014. The entity exclusions included thirteen pharmacies and four entities identified as either community mental health centers or psychology practices.[50] The remaining 1,495 exclusions reported in the Exclusions Database for the first half of FY 2018 were of individuals, 158 of whom were classified as business owners or executives, and 104 of whom were classified as physicians.[51] Among business owners or executives, approximately 25% were affiliated with home health agencies, approximately 7% with pharmacies, and approximately 12% with clinics.[52] Of the excluded physicians, approximately 66% were family practitioners, general practitioners, internists, or psychiatrists.[53] Consistent with HHS OIG’s focus on pharmacies and on combating the illegal provision of opioids, HHS OIG’s semiannual report to Congress covering the first half of FY 2018 highlighted an exclusion case involving a pharmacy owner in Kentucky who was convicted of illegally dispensing oxycodone, hydrocodone, and pseudoephedrine and was sentenced to thirty years in prison. The pharmacy owner’s exclusion from the federal health care programs will last at least fifty years.[54] b) Civil Monetary Penalties Compared to the same period in calendar year 2017, the first half of calendar year 2018 witnessed an uptick in civil monetary penalties (“CMPs”) as a result of settlement agreements and voluntary self‑disclosures. HHS OIG announced 61 CMPs totaling approximately $46 million,[55] marking an increase of nearly 30% in the number of cases, and a 100% increase in total recovery amount, compared to the first half of calendar year 2017.[56] CMPs resulting from self‑disclosures represented approximately 86% of the CMPs, in terms of dollar value, in the first half of the 2018 calendar year, with the largest self‑disclosure settlement representing approximately six times the amount of the largest settlement not involving self‑disclosure. Self‑disclosure cases also accounted for eight of the top ten settlements by dollar amount. Consistent with the trend in the first half of last year, cases involving allegedly false claims or improper billing practices accounted for the lion’s share—thirty-one cases totaling nearly $35 million— of CMPs imposed by HHS OIG. Employment of individuals who had been excluded from the federal health care programs was the second most common basis for CMPs, accounting for fourteen cases totaling nearly $1.9 million. However, these cases were overshadowed in terms of dollar amount by the eight CMPs involving alleged AKS or Stark Law violations and amounting to nearly $8.9 million in penalties and settlements. The three largest CMPs assessed against providers in the first half of 2018 are summarized below: Northwell Health Inc. (Northwell): On February 13, 2018, after self-disclosing conduct, Northwell agreed to pay approximately $12.7 million to resolve allegations from HHS OIG that Northwell submitted Medicare claims that lacked sufficient documentation for a certain Medicare Local Coverage Determination, “Vertebroplasty and Vertebral Augmentation – Percutaneous, L26439.”[57] Shands Jacksonville Medical Center, Inc. (Shands) and University of Florida Jacksonville Physicians, Inc. (UF JPI): Shands and UF JPI made a self‑disclosure to HHS OIG, and on January 30, 2018, reached a settlement of approximately $4.5 million to resolve allegations that Shands and UF JPI submitted Medicare and Medicaid claims for ophthalmology surgical procedures that were not medically necessary.[58] Nazareth Hall (Nazareth): Following a self‑disclosure, on February 23, 2018, Nazareth reached a settlement of approximately $4 million to resolve HHS OIG allegations that Nazareth submitted Change of Therapy forms for rehabilitative therapy services without following Medicare requirements.[59] c) Corporate Integrity Agreements Although we frequently make observations regarding the types of integrity agreements entered into by HHS OIG, the Government Accountability Office (“GAO”) issued a report earlier this year that provides a comprehensive survey of these agreements from the period spanning from July 2005 through July 2017.[60] The report found that, during this period, HHS OIG entered into 652 agreements[61] with thirty types of entities, but that individual or small group practices, hospitals, and skilled nursing facilities together accounted for over half of all agreements.[62] Cases that ended with integrity agreements most often started with allegations that the relevant entity or individual billed for medically unnecessary services or for services not provided.[63] Significantly, the report also noted that DOJ settlements accompanied 619 of the 652 integrity agreements reached in the period reviewed.[64] Overall, however, the total number of integrity agreements in effect decreased by 44% from 2006 to 2016,[65] as a result of HHS OIG’s self‑described efforts to prioritize entities that pose the most significant fraud risks.[66] In the first half of calendar year 2018, HHS OIG entered into thirteen corporate integrity agreements (“CIAs”), down from twenty-four in the same period in 2017.[67] In one particularly notable example, an Anchorage, Alaska, non‑profit organization that provides services to individuals with developmental disabilities entered into a five‑year CIA with HHS OIG. Under the agreement, the organization was required to implement significant compliance enhancements, including the appointment of a compliance officer and the establishment of a compliance committee, as well as the implementation of specific compliance controls and review procedures at the board of directors level.[68] HHS OIG has signaled that it views these sorts of requirements as a floor, not a ceiling, for providers’ compliance programs. For example, in a case involving a non‑profit hospital operator accused of violating the FCA by seeking Medicare reimbursement for inpatient services that could have been provided on a less costly outpatient basis,[69] HHS OIG imposed a five‑year CIA that specified similar board- and management-level compliance enhancements, despite the fact that the entity had “voluntarily established a Compliance Program” before the CIA was executed.[70] The agreement specified that the procedures it imposed on the hospital operator were to be treated as minimum requirements for its compliance program.[71] In other instances, HHS OIG has used CIAs to require significant compliance undertakings more closely tailored to the alleged conduct at issue. For example, in a CIA that involved a parallel settlement with DOJ, a radiation therapy provider that allegedly violated the AKS was required to implement an oversight program to ensure that certain contractual arrangements were “supported by and consistent with fair market valuation reports conducted by independent, objective, and qualified individuals or entities with fair market valuation expertise[.]”[72] Fair market valuations help provide shelter from liability under AKS and the Stark Law for certain contractual arrangements, such as employment compensation arrangements, as they support the relevant arrangement as an arm’s-length transaction that does not account for the value or volume of referrals. Notably, several of the CIAs entered into so far this year involved individuals in addition to entities. For example, in February, HHS OIG reached a three‑year CIA with a North Carolina eye-care provider and its physician-owner that requires, among other provisions: enhanced training and education, the retention of an independent review organization (“IRO”), and enhanced screening processes for employees and third-party service providers. The physician-owner is required to submit certifications of the practice’s compliance in conjunction with the IRO’s review and reporting activities.[73] In another case, the individual owner of a hospice provider was made a party to a CIA with the provider itself, which imposes a five‑year term and the implementation of a detailed set of management‑level compliance enhancements and controls.[74] And, in at least one case, HHS OIG put in place a CIA that imposes obligations on an individual only, without placing parallel obligations on any entity affiliated with the individual.[75] The agreement requires the individual to do the following, among other things: undergo training on billing, coding, and record documentation, and ensure that the individual’s employees and contractors received such training; engage an IRO to audit the individual’s claims submitted to Medicare and Medicaid; screen the individual’s employees and contractors to ensure their eligibility to participate in the federal health care programs, and remove any individuals who have been excluded from participation; and track and communicate certain “reportable events” to HHS OIG.[76] Under the agreement, breach of any of these obligations would trigger a daily stipulated penalty of $1,000 or $1,500, depending on the obligation breached—as well as the possibility of exclusion from the federal health care programs in the event of certain material breaches.[77] B. CMS Activity 1. Transparency and Data Accessibility Over the past few years, CMS has prioritized improving access to data related to the use of Medicare and Medicaid services. On April 13, 2018, CMS released the seventh update of the Market Saturation and Utilization Tool.[78] This tool provides interactive maps and related data sets showing provider services and utilization data for selected health services, and is one of many tools used by CMS to monitor and manage market saturation as a means to help prevent potential fraud, waste, and abuse. The seventh update includes a trend analysis graphing tool that shows the percentage change and trend over time across the available metrics and health service areas. CMS explained that in addition to serving as a monitoring tool to prevent potential fraud and abuse, “[t]he data can also be used to reveal the degree to which use of a service is related to the number of providers servicing a geographic region.”[79] CMS noted that one of the secondary objectives of making the data public is to “assist health care providers in making informed decisions about their service locations and the beneficiary population they serve.”[80] 2. Continued Implementation of Moratoria As we’ve described in past updates, the Patient Protection and Affordable Care Act authorizes CMS to impose moratoria on certain regions to prevent new provider enrollments in certain geographic areas identified as fraud “hot spots.” The moratoria are imposed after consultation with DOJ and HHS OIG and reviewed for continued necessity every six months. The moratoria, which block any new provider enrollments for Medicare Part B non-emergency ground ambulance providers and Medicare home health agencies in Florida, Illinois, Michigan, Texas, Pennsylvania, and New Jersey, were reviewed and extended again for a six-month period on January 29, 2018.[81] C. OCR and HIPAA Enforcement 1. HIPAA Enforcement Actions HHS’s Office of Civil Rights (“OCR”) reported that as of June 30, 2018, it had reviewed and resolved over 184,614 Health Information Portability and Accountability Act (“HIPAA”) complaints since HIPAA privacy rules went into effect in April 2003.[82] OCR has resolved 96% of these cases (177,194).[83] Since January, OCR has reported only two settlements and one decision from an HHS Administrative Law Judge (“ALJ”), amounting to approximately $7.9 million in fines.[84] If OCR’s enforcement continues at this pace, 2018 will see a dramatic decline in HIPAA enforcement actions. In the 2017 calendar year, OCR announced ten settlements amounting to approximately $19.4 million in fines, and in 2016, OCR reported thirteen settlements totaling approximately $23.5 million.[85] It remains to be seen whether the downtick in enforcement during the first half of 2018 signals a change in priorities, or whether we will see an acceleration of HIPAA settlements in the second half of the year. On February 1, 2018, OCR announced the first HIPAA settlement of the year, with Fresenius Medical Care North America (“FMCNA”), a nationwide dialysis provider that also runs labs, urgent care centers, and post-acute practices. FMCNA agreed to pay $3.5 million and adopt a comprehensive corrective action plan in order to settle potential HIPAA violations in connection with five data breaches that occurred at separate FMCNA-owned entities over a five-month period in 2012, which impacted 521 individuals.[86] Following an investigation, OCR found that FMCNA “failed to conduct an accurate and thorough risk analysis of potential risks and vulnerabilities to the confidentiality, integrity, and availability of all its [electronic protected health information (PHI)].”[87] OCR Director Roger Severino commented, “[t]he number of breaches, involving a variety of locations and vulnerabilities, highlights why there is no substitute for an enterprise-wide risk analysis for a covered entity.”[88] A corrective action plan requires the company to complete a risk analysis and risk management plan, revise policies and procedures, develop an encryption report, and provide employee education on policies and procedures.[89] Less than two weeks later, OCR announced a $100,000 settlement with Filefax, Inc. (“Filefax”), a company that stored and delivered medical records. The case came to the attention of the authorities in February 2015 when OCR received an anonymous complaint alleging that an individual took paper files out of an unlocked dumpster outside of a Filefax office in Illinois and brought it to a nearby paper shredding shop, hoping to receive payment for providing recyclable material. The complaint led to an OCR investigation. Filefax dissolved during the course of the investigation, which ultimately concluded that “Filefax impermissibly disclosed the PHI of 2,150 individuals by leaving the PHI in an unlocked truck in the Filefax parking lot, or by granting permission to an unauthorized person to remove the PHI from Filefax, and leaving the PHI unsecured outside the Filefax facility.”[90] This settlement cautions against the careless handling of PHI and demonstrates that companies cannot escape obligations under the law for HIPAA violations even after closing for business. The receiver appointed to liquidate the assets of Filefax, has agreed to pay the $100,000 and properly store and dispose the remaining medical records in a HIPAA-compliant manner.[91] On June 18, 2018, an HHS ALJ granted summary judgment against the University of Texas MD Anderson Cancer Center (“MD Anderson”), requiring the provider to pay $4.3 million in civil monetary penalties for HIPAA violations.[92] This is the fourth largest amount awarded to OCR by an ALJ or secured in a settlement for HIPAA violations; it is also the second summary judgment victory in OCR’s history of HIPAA enforcement.[93] The litigation arose out of three data breaches from 2012 and 2013 involving the theft of an unencrypted laptop from an MD Anderson employee and the loss of two unencrypted USB thumb drives containing the information of 33,500 individuals. MD Anderson “failed to adopt an effective mechanism” to protect patient data.[94] The ALJ rejected the argument that stolen information is only disclosed when it is viewed by a third party, holding, “The plain language of the regulation doesn’t suggest that. Moreover, to interpret the regulation so narrowly as Respondent suggests would render its prohibitions against unauthorized disclosure to be meaningless.”[95] In a statement regarding the decision, Director Severino underscored that “OCR is serious about protecting health information privacy and will pursue litigation, if necessary, to hold entities responsible for HIPAA violations.”[96] 2. Cybersecurity Protection of patients’ confidential information, and electronically stored information in particular, continues to be a high priority for HHS enforcement, just as cybersecurity and data privacy issues explode in complexity and public attention. As discussed in past updates,[97] OCR continues to issue monthly “Cybersecurity Newsletters” in order to provide guidance on what specific security measures providers can take to decrease exposure to various security threats and vulnerabilities that exist in the health care sector, and how to reduce breaches of electronic-protected health information (“ePHI”).[98] HHS has not said that following the measures outlined in these newsletters creates any kind of safe harbor; rather, the newsletters are designed to “assist” the regulated community to become more knowledgeable about risk areas. Providers would do well to adhere to this guidance to avoid being caught in the crosshairs of OCR.[99] Brief summaries of the newsletters that have been issued so far this year are below. The January newsletter discusses the issue of cyber extortion, which may include stealing sensitive data such as ePHI, and explains what organizations can do to prevent falling victim to attackers, including implementing an organization-wide risk analysis and risk management program, training employees, patching systems, and encrypting sensitive data. Organizations are encouraged to remain vigilant for new and emerging cyber threats.[100] OCR’s February newsletter warns against the dangers of “phishing,” a type of cyberattack used to trick individuals to disclose sensitive information electronically by impersonating a trustworthy source, and provides tips on avoiding phishing attacks.[101] The purpose of the April newsletter is to provide a concise explanation of the differences between a “risk analysis” required by the HIPAA Security Rule’s regulatory requirement and a “gap analysis.” In short, a risk analysis is a comprehensive, enterprise-wide evaluation to identify the ePHI and the risks and vulnerabilities to the ePHI; the results of a risk analysis may be used to make enterprise-wide modifications to ePHI systems. By contrast, a gap analysis is a narrower examination of an enterprise to assess whether certain controls or safeguards required by the Security Rule have been implemented and to spot “gaps.”[102] The May newsletter reminds organizations about the importance of the physical security of workstations to safeguard access to ePHI, which OCR notes is often overlooked. OCR warns that “[f]ailure to take reasonable steps regarding physical security may have serious consequences,” citing investigations that have resulted in hefty fines for violations of HIPAA’s Security Rule.[103] Finally, the June newsletter provides guidance on software vulnerabilities and the necessity of patching software bugs to close security vulnerabilities and prevent hackers from gaining unauthorized access to a user’s computer or an organization’s network. OCR sets forth the responsibilities of HIPAA-covered entities and business associates to conduct a risk analysis of the potential vulnerabilities to the confidentiality of the ePHI they hold; this includes identifying and mitigating risks and vulnerabilities that unpatched software poses to an organization’s ePHI.[104] III. Anti-Kickback Statute During the first six months of 2018, the AKS has remained one of the most prominent theories of liability in health care enforcement actions. That is perhaps unsurprising, since the government typically takes the position that the damages resulting from AKS liability are the full amount of the claims supposedly “tainted” by the alleged kickbacks. But given the interplay between the AKS and the FCA, the numerous resulting elements of proof for an AKS case, and the complexities of the AKS’s many safe harbors, AKS theories also continue to be actively debated in the health law field and in the courts. Below, we summarize the guidance and case law developments that explore the scope of that potential liability. A. Notable HHS OIG Advisory Opinions HHS OIG issued a number of advisory opinions discussing the AKS in the first half of 2018. Notably, the Office gave its imprimatur to each arrangement on which companies requested its input, from sharing savings generated from cost-reduction measures with health care providers to providing support resources to caregivers of patients with chronic conditions. On January 5, HHS OIG considered an arrangement under which neurosurgeons implementing cost-reduction measures with respect to spinal fusion surgeries split the savings from these measures with the medical center in which they operate.[105] These cost-reduction measures included a shift to using certain products only on an as-needed basis and standardizing the selection of certain devices and supplies based on price.[106] In concluding that this arrangement presented a low risk of AKS violations, HHS OIG noted approvingly safeguards designed to reduce neurosurgeons’ incentive to increase referrals to the medical center. These safeguards included distributing the incentive payments on a per-surgeon, rather than per-patient, basis; reviewing patient data to confirm a historically consistent selection of patients; reserving a portion of the savings for administrative expenses that would otherwise be distributed to the neurosurgeons; and tying incentive payments to verifiable cost savings attributable to each recommendation implemented in a procedure.[107] On May 31, HHS OIG opined that an arrangement under which a not-for-profit health center would use state Department of Health grant funds to give a county clinic a computer, videoconferencing software, and other telemedicine items to enable the county clinic to provide health care consultation services remotely would present a low risk of AKS violations.[108] The agency noted that this donation of equipment could conceivably induce the county clinic to refer patients to the health center, but found that the risk of such referrals was low given the clinic would not recommend the health center, or any other specific health care provider, to patients, and that the health center was located 80 miles from the county clinic.[109] On June 14, HHS OIG analyzed the use of a preferred hospital network as part of Medicare Supplemental Health Insurance (“Medigap”) policies, whereby insurance companies would contract with hospitals for discounts on Medicare inpatient deductibles for their policyholders and then provide a $100 credit to policyholders who utilized an in-network hospital for their inpatient stay.[110] HHS OIG first concluded that the arrangement did not meet the requirements for protection under either the safe harbor for waivers of beneficiary coinsurance and deductible amounts or the safe harbor for reduced premium amounts offered by health care plans.[111] The safe harbor for coinsurance and deductible waivers specifically excludes such waivers when they are part of an agreement with insurers, and the safe harbor for reduced premium amounts requires that all enrollees be offered the same cost‑sharing or reduced premium amounts.[112] HHS OIG then concluded that, notwithstanding the absence of safe harbor protection, the arrangement presented a low risk of AKS violations because neither the discounts nor the premium credits would increase per-service Medicare payments, the arrangement would have little impact on patient utilization, and physicians would receive no remuneration as a result of the arrangement.[113] On June 18, HHS OIG issued an opinion regarding whether a non-profit medical center may provide support resources and services to family members and other caregivers who care for patients with chronic conditions.[114] The provider proposed to give those caregivers, among other things, educational sessions, support groups, rental iPods, and low-fee stress reduction workshops.[115] HHS OIG noted that certain services the provider made available to the caregivers alleviated the caregivers’ financial burdens in providing care and could influence the caregivers to refer patients to the provider, and HHS OIG determined that no exception to the Beneficiary Inducements CMP or AKS applied.[116] However, HHS OIG determined that it would not impose sanctions on the provider, because (1) the services mostly benefitted caregivers, and posed a low risk of influencing them to select the provider for any particular federally reimbursable services; (2) all caregivers could access the services; (3) the provider did not “actively market” the services; and (4) the provider’s practices posed little risk of increasing costs incurred by the federal health care programs. For these reasons, HHS OIG concluded that the provider’s conduct would not subject it to sanctions under the AKS.[117] B. Notable Case Law Involving the AKS While the first half of 2018 was relatively quiet with respect to AKS case law, there were a couple of notable opinions. In particular, the Third Circuit rejected a “but for” causation standard for establishing FCA liability predicated on alleged AKS violations, while an Illinois district court rejected an AKS theory as too speculative. We discuss both below. In January, the Third Circuit affirmed a U.S. District Court for the District of New Jersey ruling granting summary judgment to a pharmaceutical company accused of FCA and AKS violations in United States ex rel. Greenfield v. Medco Health Solutions, Inc.[118] The relator alleged that a pharmacy (Accredo Health Group), which provided home care for patients with hemophilia, violated the AKS, and in turn the FCA, when it made donations to two charities that then recommended the company to hemophilia patients.[119] The District Court denied the relator’s motion for summary judgment and granted the company’s, on the ground that the relator was unable to show that the charities’ referral of several federally insured patients resulted from the pharmacy’s charitable contributions.[120] On appeal, the relator argued that the District Court erred in requiring a “direct link” between the contributions and the referrals.[121] The government filed an amicus brief contending that the Court erred “to the extent that it required relator to prove a causal connection between the kickbacks and the claims.”[122] In other words, “the district court incorrectly appeared to believe it was necessary for relator to show that the kickbacks in fact corrupted the charities’ decision to refer patients to” the pharmacy, and that “those referrals and recommendations in fact corrupted the patients’ decisions to use” the company’s services.[123] Instead, the government urged the Court to hold that “relator is not required to prove that the kickbacks caused the charities to make the referrals and recommendations or that the referrals and recommendations caused the patients to use” the pharmacy’s services.[124] The Third Circuit affirmed the District Court’s grant of summary judgment in favor of the company, holding that a relator must, at minimum, show that at least one of the patients for whom the company provided services and submitted reimbursement claims was “exposed to” a referral from one of the charities to which the company donated.[125] Addressing the parties’ respective arguments about what suffices as FCA proof in the AKS context, the Third Circuit explained that “[i]t is not enough . . . to show temporal proximity between [the company’s] alleged kickback plot and the submission of claims for reimbursement. Likewise, it is too exacting to follow [the company’s] approach, which requires a relator to prove that federal beneficiaries would not have used the relevant services absent the alleged kickback scheme.”[126] The Third Circuit therefore largely adopted the government’s view that a “but for” causation standard would be unworkable in this context, holding instead that relators must present “some record evidence that shows a link between the alleged kickbacks and the medical care received by at least one of” the company’s federally insured patients.[127] In United States v. United Healthcare Ins. Co., the U.S. District Court for the Northern District of Illinois granted a health care insurer’s motion to dismiss a relator’s complaint alleging FCA violations predicated on alleged AKS violations.[128] The defendant was a Medicare Advantage plan that offered, among other services, in-home physical examinations to its patients and $25 Walmart gift cards to patients who accepted offers to join the in-home program.[129] The relator, a patient of the company who participated in the in-home program, alleged that the program violated the FCA because the in-home visits were not medically necessary and led to the procurement of risk adjustment data that could lead to a patient receiving a higher risk designation by CMS, thereby increasing the per-month payment the company would receive from the government for that patient.[130] The Court rejected the relator’s theory as too speculative. The Court noted that the company “ha[d] neither received a kickback for its remunerations nor has Medicare been injured through increased reimbursements.”[131] Rather, the company “paid for the in-home examinations itself, and then provided services to its plan participants free of charge. This does not violate the purpose of the Anti-Kickback Statute—’to prevent kickbacks from influencing the provision of services that are charged to Medicare.'”[132] IV. Stark Law The federal physician self-referral law, commonly known as the Stark Law, provides for strict liability for any physician who refers to an entity with which it has a “financial relationship,” which is broadly defined, and even more broadly interpreted by DOJ and HHS OIG. The Stark Law has been a frequent target of proposed reforms for many years (as discussed in our previous alerts ), reflecting industry and regulator recognition that the Stark Law sometimes creates unintentional and unnecessary restrictions on innovative and efficient health care arrangements. But in the main, those reform efforts have stalled and died before offering meaningful relief. During the first half of 2018, however, there were several notable developments relating to the Stark Law that may finally result in actual reform. A. Regulatory and Legislative Updates In January 2018, CMS Administrator Seema Verma announced that CMS, DOJ, and HHS OIG would undertake an inter-agency review of the Stark Law.[133] The review was spurred by feedback from providers as part of CMS’s “Patients Over Paperwork” Initiative,[134] which sought industry feedback about how to reduce burdensome regulations. According to Administrator Verma, the Stark Law was one of the most commonly identified of the “burdensome regulations and burdensome issues.”[135] Administrator Verma noted that the Stark Law was “developed a long time ago” and that there is a “need to bring along some of those regulations” to account for modern developments in payment models and health delivery systems.[136] Although Administrator Verma acknowledged that the solution may require “Congressional intervention,” she confirmed that CMS is committed to “working through it.”[137] In June, CMS requested feedback on possible regulatory changes to the Stark Law, suggesting a willingness to act, separate from any Congressional action.[138] The agency stated that lowering Stark Law hurdles would support coordinated care.[139] Eric Hargan, Deputy Secretary at HHS, further stated that “[r]emoving unnecessary government obstacles to care coordination is a key priority for this Administration.”[140] CMS explained that it is interested in addressing “real or perceived” obstacles to coordinated care that are caused by the Stark Law.[141] Beyond simply clarifying or simplifying the current law, the agency asked commenters whether the existing exceptions to the Stark law are useful and whether the agency should create new exceptions.[142] It also requested that commenters share ideas for defining important concepts such as “commercial reasonableness” and “fair market value” within exceptions to the Stark Law.[143] CMS also asked whether increased transparency could address problems, suggesting that transparency measures could include disclosures about pricing or a physician’s financial relationships. Among other related items, CMS is seeking suggestions regarding: Existing or potential arrangements that involve designated health service (“DHS”) entities and referring physicians that participate in “alternative payment models or other novel financial arrangements,” regardless of whether such models and financial arrangements are sponsored by CMS; Exceptions to the Stark Law that would protect financial arrangements between DHS entities and referring physicians who participate in the same alternative payment model; Exceptions to the Stark Law that would protect financial arrangements that involve “integrating and coordinating care outside of an alternative payment model”; and Addressing the application of the Stark Law to financial arrangements among providers in “alternative payment models and other novel financial arrangements.”[144] B. Notable Stark Law Enforcement There were also two notable Stark Law enforcement actions in the first half of 2018. In January, two California urologists agreed to pay more than $1 million to settle allegations that they had violated the Stark Law and the AKS.[145] The doctors, who own and operate both a urology practice and a radiation oncology center, allegedly submitted and caused the submission of false claims to Medicare for image-guided radiation therapy by billing for their own image-guided radiation therapy referrals to their oncology center. The two practices were separate entities, even though both owned by the urologists, and the financial arrangements did not comply with any exceptions to the Stark Law.[146] This case is a warning for providers who own businesses that provide complementary services. In March, University of Pittsburgh Medical Center Hamot (“Hamot”), a Pennsylvania hospital, and Medicor Associates Inc. (“Medicor”), a cardiology group, agreed to pay $20.75 million to settle allegations that they violated a number of statutes, including the AKS and the Stark Law.[147] DOJ alleged that they orchestrated a kickback scheme for patient referrals when Hamot paid Medicor up to $2 million per year under twelve physician and administrative services arrangements that had been created to secure patient referrals from the cardiology group. Hamot allegedly had no legitimate need for the contracted services, and in some instances the services were duplicative or not performed at all.[148] Notably, the claims were brought by a whistleblower, and the federal government initially declined to intervene. The whistleblower proceeded on his own and won summary judgment on his claims that some of the arrangements violated the Stark Law, which in turn caused false claims to be knowingly submitted to federal health programs in violation of the FCA.[149] The whistleblower received over $6 million as part of the settlement.[150] The whistleblower’s post-declination success may encourage other whistleblowers to proceed on their own, even in complicated Stark Law cases such as this one. V. CONCLUSION As these issues and others important to the health care provider community continue to develop, we will track them and report back in our 2018 Year-End Update.   [1] See Gibson Dunn 2017 Mid-Year FDA and Health Care Compliance and Enforcement Update – Providers (Sept. 4, 2017) [hereinafter “Gibson Dunn 2017 Mid‑Year Update”]. [2] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Electronic Health Records Vendor to Pay $155 Million to Settle False Claims Act Allegations (May 31, 2017), https://www.justice.gov/opa/pr/electronic-health-records-vendor-pay-155-million-settle-false-claims-act-allegations. [3] U.S. Dep’t of Justice, Associate Attorney General Rachel Brand, Limiting Use of Agency Guidance Documents In Affirmative Civil Enforcement Cases (Jan. 25, 2018), https://www.justice.gov/file/1028756/download. [4] The total is greater than twenty-one because some cases had multiple claims. [5] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Banner Health Agrees to Pay Over $18 Million to Settle False Claims Act Allegations (Apr. 12, 2018), https://www.justice.gov/opa/pr/banner-health-agrees-pay-over-18-million-settle-false-claims-act-allegations. [6] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Tennessee Chiropractor Pays More Than $1.45 Million to Resolve False Claims Act Allegations (Jan. 24, 2018), https://www.justice.gov/opa/pr/tennessee-chiropractor-pays-more-145-million-resolve-false-claims-act-allegations. [7] About a month later, at the end of February, Attorney General Sessions announced that there would be a new, special task force devoted to targeting opioid drug manufacturers and distributors who were fueling the opioid epidemic. Dan Mangan, Attorney General Jeff Sessions Announces New Opioid Task Force to Target Drug Manufacturers, Distributors Who Fuel Prescription Painkiller Epidemic, CNBC (Feb. 27, 2018), https://www.cnbc.com/2018/02/27/attorney-general-jeff-sessions-announces-new-opiod-task-force.html. [8] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Signature HealthCARE to Pay More Than $30 Million to Resolve False Claims Act Allegations Related to Rehabilitation Therapy (June 8, 2018), https://www.justice.gov/opa/pr/signature-healthcare-pay-more-30-million-resolve-false-claims-act-allegations-related. [9] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Dental Management Company Benevis and Its Affiliated Kool Smiles Dental Clinics to Pay $23.9 Million to Settle False Claims Act Allegations Relating to Medically Unnecessary Pediatric Dental Services (Jan. 10, 2018), https://www.justice.gov/opa/pr/dental-management-company-benevis-and-its-affiliated-kool-smiles-dental-clinics-pay-239. [10] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Healogics Agrees to Pay Up to $22.51 Million to Settle False Claims Act Liability for Improper Billing of Hyperbaric Oxygen Therapy (June 20, 2018), https://www.justice.gov/opa/pr/healogics-agrees-pay-2251-million-settle-false-claims-act-liability-improper-billing. [11] Press Release, Alaska Dep’t of Law, The ARC of Anchorage to Pay Nearly $2.3 Million Dollars to Settle Medicaid False Claims Act Allegations (Apr. 24, 2018), http://www.law.state.ak.us/press/releases/2018/042418-MFCU.html. [12]Amount not reflected in the data above because the case went to trial. [13]United States ex rel. Drummond v. BestCare Laboratory Services, LLC., No. CV H-08-2441, 2018 WL 1609578, at *3 (S.D. Tex. Apr. 3, 2018). [14] 136 S. Ct. 1989 (2016). [15] United States ex rel. Ruckh v. Salus Rehabilitation, LLC, 304 F. Supp. 3d 1258 (M.D. Fla. 2018). [16] Id. at 1263. [17] In our 2017 Year-End Update, we discussed Gilead Sciences’ petition for certiorari to the Supreme Court, asking for review of the Ninth Circuit’s decision in United States ex rel. Campie v. Gilead Sciences, Inc. The Court has yet to issue a decision on whether they will grant the petition. See Pet. for a Writ of Cert., Gilead Sciences Inc. v. United States ex rel. Campie (filed Dec. 26, 2017). [18] United States ex rel. Paradies v. AseraCare, Inc., 176 F. Supp. 3d 1282 (N.D. Ala. 2016). [19] United States ex rel. Winter v. Gardens Regional Hospital and Medical Center, No. 14-CV-08850, 2017 WL 8793222 (C.D. Cal. Dec. 29, 2017). [20] United States ex rel. Dooley v. Metic Transplantation Lab, No. 13-CV-07039, 2017 WL 4323142 (C.D. Cal. June 27, 2017). [21] United States v. Paulus, 894 F.3d 267 (6th Cir. 2018). [22] United States v. Paulus, 2017 WL 908409 (E.D. Ky. Mar. 7, 2017), rev’d in part, vacated in part, 894 F.3d 267 (6th Cir. 2018). [23] Paulus, 894 F.3d, at 275. [24] United States ex rel. Polukoff v. St. Mark’s Hospital, No. 17-cv-4014, 2018 WL 3340513 (10th Cir. July 9, 2018). [25] Id. [26] United States ex rel. Polukoff v. St. Mark’s Hospital, No. 2:16-cv-00304, 2017 WL 237615 (D. Utah Jan. 19, 2017), rev’d and remanded sub nom. United States ex rel. Polukoff v. St. Mark’s Hospital, No. 17-cv-4014, 2018 WL 3340513 (10th Cir. July 9, 2018). [27] Id. [28] Polukoff, No. 17-cv-4014, 2018 WL 3340513, at *4. [29] Id. at *8. [30] United States ex rel. Wollman v. The General Hospital Corporation, No. 1:15-cv-11890, 2018 WL 1586027 (D. Mass. Mar. 30, 2018). [31] Id. [32] United States ex rel. Conroy v. Select Med. Corp., 307 F. Supp. 3d 896, 905 (S.D. Ind. 2018). [33] Id. [34] The United States’ Statement of Interest in Support of Relators’ Objection to Magistrate Judge’s April 2, 2018 Order Concerning the Use of Statistical Sampling, 307 F. Supp. 3d 896, (S.D. Ind. 2018). [35] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Health Care CEO and Four Physicians Charged in Superseding Indictment in Connection with $200 Million Health Care Fraud Scheme Involving Unnecessary Prescription of Controlled Substances and Harmful Injections (June 6, 2018), https://www.justice.gov/opa/pr/health-care-ceo-and-four-physicians-charged-superseding-indictment-connection-200-million. [36] See Press Release, Office of Pub. Affairs, US Dep’t of Justice, National Health Care Fraud Takedown Results in Charges Against 601 Individuals Responsible for Over $2 Billion in Fraud Losses (June 28, 2018), https://www.justice.gov/opa/pr/national-health-care-fraud-takedown-results-charges-against-601-individuals-responsible-over. [37] Id. [38] Id. [39] Id. [40] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Attorney General Jeff Sessions Announces the Formation of Operation Synthetic Opioid Surge (S.O.S.) (July 12, 2018), https://www.justice.gov/opa/pr/attorney-general-jeff-sessions-announces-formation-operation-synthetic-opioid-surge-sos. [41] See U.S. Dep’t of Health & Human Servs., Office of the Inspector Gen., Semiannual Report to Congress, at 4 (Oct. 1, 2017 – Mar. 31, 2018), https://oig.hhs.gov/reports-and-publications/archives/semiannual/2018/sar-spring-2018.pdf [hereinafter “2018 SA Report”]; U.S. Dep’t of Health & Human Servs., Office of the Inspector Gen., Semiannual Report to Congress, at ix (Oct. 1, 2016 – Mar. 31, 2017), https://oig.hhs.gov/reports-and-publications/archives/semiannual/2017/sar-spring-2017.pdf [hereinafter “2017 SA Report”]. [42] See 2018 SA Report at 4; 2017 SA Report at ix. [43] See 2018 SA Report at 4. [44] See 2017 SA Report at ix. [45] See U.S. Dep’t of Health & Human Servs., Office of the Inspector Gen., Semiannual Report to Congress (Apr. 1, 2012 – Sept. 30, 2012), https://oig.hhs.gov/reports-and-publications/archives/semiannual/2012/fall/sar-f12-fulltext.pdf ; U.S. Dep’t of Health & Human Servs., Office of the Inspector Gen., Semiannual Report to Congress (Apr. 1, 2013 – Sept. 30, 2013), https://oig.hhs.gov/reports-and-publications/archives/semiannual/2013/SAR-F13-OS.pdf ; U.S. Dep’t of Health & Human Servs., Office of the Inspector Gen., Semiannual Report to Congress (Apr. 1, 2014 – Sept. 30, 2014), https://oig.hhs.gov/reports-and-publications/archives/semiannual/2014/sar-fall2014.pdf ; U.S. Dep’t of Health & Human Servs., Office of the Inspector Gen., Semiannual Report to Congress (Apr. 1, 2015 – Sept. 30, 2015), https://oig.hhs.gov/reports-and-publications/archives/semiannual/2015/sar-fall15.pdf ; U.S. Dep’t of Health & Human Servs., Office of the Inspector Gen., Semiannual Report to Congress (Apr. 1, 2016 – Sept. 30, 2016), https://oig.hhs.gov/reports-and-publications/archives/semiannual/2016/sar-fall-2016.pdf ; U.S. Dep’t of Health & Human Servs., Office of the Inspector Gen., Semiannual Report to Congress (Apr. 1, 2017 – Sept. 30, 2017), https://oig.hhs.gov/reports-and-publications/archives/semiannual/2017/sar-fall-2017.pdf. [46] 42 U.S.C. § 1320a‑7(a). [47] 42 U.S.C. § 1320a‑7(b). [48] See U.S. Dep’t of Health & Human Servs., Office of the Inspector Gen., LEIE Downloadable Databases, https://oig.hhs.gov/exclusions/exclusions_list.asp (last visited June 28, 2018) [hereinafter “Exclusions Database”]. [49] See Gibson Dunn 2017 Mid‑Year Update. [50] See Exclusions Database. [51] See id. [52] See id. [53] See id. [54] See 2018 SA Report at 6, 36. [55] Data gathered through HHS OIG press releases and publicly available information. See generally U.S. Dep’t of Health & Human Servs., Office of the Inspector Gen., Civil Monetary Penalties and Affirmative Exclusions, http://oig.hhs.gov/fraud/enforcement/cmp/index.asp (last visited July 24, 2018) [hereinafter “CMP Assessments”]; U.S. Dep’t of Health & Human Servs., Office of the Inspector Gen., Provider Self-Disclosure Settlements, http://oig.hhs.gov/fraud/enforcement/cmp/psds.asp (last visited July 24, 2018) [hereinafter “Provider Self-Disclosure Settlements”]. [56] See Gibson Dunn 2017 Mid‑Year Update at II.A.3.b (stating that “[i]n the first half of the 2017 calendar year, HHS OIG announced 47 CMPs as a result of settlement agreements and self-disclosures and recovered nearly $23 million”). [57] Provider Self‑Disclosure Settlements, supra note 55. [58] Id. [59] Id. [60] See U.S. Gov’t Accountability Office, GAO-18-322, Dep’t of Health & Human Servs.: Office of Inspector General’s Use of Agreements to Protect the Integrity of Federal Health Care Programs (Apr. 2018), https://www.gao.gov/assets/700/691349.pdf. [61] Id. at 8. [62] Id. at 11-12. [63] See id. at 16-17. [64] Id. at 10. [65] Id. (GAO used partial-year data for 2005 and 2017, so compared the full-year data from 2006 through 2016.) [66] Id. [67] See U.S. Dep’t of Health & Human Servs., Office of Inspector Gen., Corporate Integrity Agreement Documents, https://oig.hhs.gov/compliance/corporate-integrity-agreements/cia-documents.asp#cia_list (last visited July 3, 2018) [hereinafter “CIA Documents”]. [68] See Corporate Integrity Agreement Between the Office of Inspector Gen. of the Dep’t of Health & Human Servs. & Arc of Anchorage 1-16 (Apr. 23, 2018), https://oig.hhs.gov/fraud/cia/agreements/Arc_of_Anchorage_04232018.pdf. [69] See Press Release, U.S. Dep’t of Justice, Banner Health Agrees to Pay Over $18 Million to Settle False Claims Act Allegations (Apr. 12, 2018), https://www.justice.gov/opa/pr/banner-health-agrees-pay-over-18-million-settle-false-claims-act-allegations. [70] Corporate Integrity Agreement Between the Office. of Inspector Gen. of the Dep’t of Health & Human Servs. & Banner Health 1 (Apr. 9, 2018), https://oig.hhs.gov/fraud/cia/agreements/Banner_Health_04092018.pdf. [71] Id. [72] Corporate Integrity Agreement between the Office of Inspector Gen. of the Dep’t of Health & Human Servs. & Integrated Oncology Network Holdings, LLC, et al. 22 (Mar. 19, 2018). See also Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Radiation Therapy Company Agrees to Pay up to $11.5 Million to Settle Allegations of False Claims and Kickbacks (Mar. 29, 2018), https://www.justice.gov/opa/pr/radiation-therapy-company-agrees-pay-115-million-settle-allegations-false-claims-and. [73] See Integrity Agreement Between the Office of Inspector Gen. of the Dep’t of Health & Human Servs., Albemarle Eye Center, PLLC, & Jitendra Swarup, M.D. 1-5, 11-13 (Feb. 5, 2018). [74] See Corporate Integrity Agreement Between the Office of Inspector Gen. of the Dep’t of Health & Human Servs. and 365 Hospice, LLC and John C. Rezk 1-15 (Feb. 8, 2018). [75] See generally Integrity Agreement Between the Office of Inspector Gen. of the Dep’t of Health & Human Servs. & Sureshkumar Muttath, M.D. (May 11, 2018), https://oig.hhs.gov/fraud/cia/agreements/Sureshkumar_Muttath_MD_05112018.pdf. [76] Id. at 2-9. [77] See id. at 15-16. [78] Ctrs. for Medicare & Medicaid Servs., Market Saturation and Utilization Dataset 2018-04-13 (Apr. 13, 2018), https://data.cms.gov/Special-Programs-Initiatives-Program-Integrity/Market-Saturation-And-Utilization-Dataset-2018-04-/x3vv-caiy. [79] Ctrs. for Medicare & Medicaid Servs., Market Saturation and Utilization Data Tool (Apr. 13, 2018), https://www.cms.gov/Newsroom/MediaReleaseDatabase/Fact-sheets/2018-Fact-sheets-items/2018-04-13.html. [80] Id. [81] Medicare, Medicaid, and Children’s Health Insurance Programs: Announcement of the Extension of Temporary Moratoria, 83 Fed. Reg. 4147 (Jan. 29, 2018), https://www.federalregister.gov/documents/2018/01/30/2018-01783/medicare-medicaid-and-childrens-health-insurance-programs-announcement-of-the-extension-of-temporary ; see also The Patient Protection and Affordable Care Act of 2010, Pub. L. No. 111-148, § 6401(a) (Mar. 23, 2010). [82] U.S. Dep’t of Health & Human Servs., Health Information Privacy, Enforcement Highlights as of May 31, 2018 (last updated June 13, 2018), https://www.hhs.gov/hipaa/for-professionals/compliance-enforcement/data/enforcement-highlights/index.html. [83] Id. [84] Data gathered through HHS press releases and other publicly available information. See generally U.S. Dep’t of Health & Human Servs., HIPAA News Releases & Bulletins, https://www.hhs.gov/hipaa/newsroom (last visited July 25, 2018). [85] Id.; see also 2016 Year-End Health Care Compliance and Enforcement Update – Providers. [86] Press Release, U.S. Dep’t of Health & Human Servs., Five breaches add up to millions in settlement costs for entity that failed to heed HIPAA’s risk analysis and risk management rules (Feb. 1, 2018), https://www.hhs.gov/about/news/2018/02/01/five-breaches-add-millions-settlement-costs-entity-failed-heed-hipaa-s-risk-analysis-and-risk.html. [87] Id. [88] Id. [89] Id. [90] Press Release, U.S. Dep’t of Health & Human Servs., Consequences for HIPAA violations don’t stop when a business closes (Feb. 13, 2018), https://www.hhs.gov/about/news/2018/02/13/consequences-hipaa-violations-dont-stop-when-business-closes.html. [91] Id. [92] Press Release, U.S. Dep’t of Health & Human Servs., Judge rules in favor of OCR and requires a Texas cancer center to pay $4.3 million in penalties for HIPAA violations (June 18, 2018), https://www.hhs.gov/about/news/2018/06/18/judge-rules-in-favor-of-ocr-and-requires-texas-cancer-center-to-pay-4.3-million-in-penalties-for-hipaa-violations.html. [93] Id. [94] Director of the Office for Civil Rights v. The University of Texas MD Anderson Cancer Center, No. C-17-854 at 9 (June 1, 2018), https://www.hhs.gov/sites/default/files/alj-cr5111.pdf. [95] Id. at 10. [96] Press Release, supra note 92. [97] See 2017 Mid-Year FDA and Health Care Compliance and Enforcement Update – Providers. [98] U.S. Dep’t of Health & Human Servs., Security Rule Guidance Material, https://www.hhs.gov/hipaa/for-professionals/security/guidance/index.html (last visited July 25, 2018). [99] Id. [100] U.S. Dep’t of Health & Human Servs., Office of Civil Rights, Cyber Extortion (Jan. 2018), https://www.hhs.gov/sites/default/files/cybersecurity-newsletter-january-2018.pdf. [101] U.S. Dep’t of Health & Human Servs., Office of Civil Rights, Phishing (Feb. 2018), https://www.hhs.gov/sites/default/files/cybersecurity-newsletter-february-2018.pdf. [102] U.S. Dep’t of Health & Human Servs., Office of Civil Rights, Risk Analyses vs. Gap Analyses – What is the difference? (Apr. 2018), https://www.hhs.gov/sites/default/files/cybersecurity-newsletter-april-2018.pdf. [103] U.S. Dep’t of Health & Human Servs., Office of Civil Rights, Workstation Security: Don’t Forget About Physical Security (May 2018), https://www.hhs.gov/sites/default/files/cybersecurity-newsletter-may-2018-workstation-security.pdf. [104] U.S. Dep’t of Health & Human Servs., Guidance on Software Vulnerabilities and Patching (June 2018), https://www.hhs.gov/sites/default/files/cybersecurity-newsletter-june-2018-software-patches.pdf. [105] U.S. Dep’t of Health & Human Servs., Office of Inspector Gen., OIG Advisory Op. 17-09 at 1 (Dec. 29, 2017), https://oig.hhs.gov/fraud/docs/advisoryopinions/2017/AdvOpn17-09.pdf. [106] Id. at 4‑5. [107] Id. at 11. [108] U.S. Dep’t of Health & Human Servs., Office of Inspector Gen., OIG Advisory Op. 18-03 at 2, 7 (May 24, 2018), https://oig.hhs.gov/fraud/docs/advisoryopinions/2018/AdvOpn18-03.pdf. [109] Id. at 6. [110] U.S. Dep’t of Health & Human Servs., Office of Inspector Gen., OIG Advisory Op. 18-04 at 1 (June 7, 2018), https://oig.hhs.gov/fraud/docs/advisoryopinions/2018/AdvOpn18-04.pdf. [111] Id. at 5. [112] Id. [113] Id. at 5-6. [114] Office of Inspector Gen., Dep’t of Health & Human Servs., Advisory Op. No. 18‑05 at 2 (June 18, 2018), https://oig.hhs.gov/fraud/docs/advisoryopinions/2018/AdvOpn18-05.pdf. [115] Id. at 2-3. [116] Id. at 6-7. [117] Id. at 7-9. [118] United States ex rel. Greenfield v. Medco Health Sols., Inc., 880 F.3d 89 (3d Cir. 2018). [119] Id. at 91. [120] See id. at 93. [121] Id. at 93. [122] Id.; see also Brief for the United States of America as Amicus Curiae in Support of Neither Party 9, United States ex rel. Greenfield v. Medco Health Sols., Inc., No. 17-1152 (3d Cir. Apr. 17, 2017), ECF No. 003112595460. [123] Id. at 15. [124] Id. at 23. [125] 880 F.3d at 100. [126] Id. [127] Id. [128] United States v. United Healthcare Ins. Co., No. 15-CV-7137, 2018 WL 2933674, at *11 (N.D. Ill. June 12, 2018). [129] Id. at *3. [130] See id. at 3. [131] Id. at *10. [132] Id. (quoting United States v. Patel, 778 F.3d 607, 616-17 (7th Cir. 2015)). [133] Remarks of Seema Verma, Administrator, CMS, American Hospital Association: Regulatory Relief Town Hall Webcast (Jan. 18, 2018), available at https://youtu.be/vrtey7QPAYg. [134] Ctrs. For Medicare & Medicaid Servs., Patients Over Paperwork, https://www.cms.gov/Outreach-and-Education/Outreach/Partnerships/PatientsOverPaperwork.html (last accessed July 24, 2018, 11:39 a.m.). [135] Remarks of Seema Verma, supra note 133. [136] Id. [137] Id. [138] See Ctrs. For Medicare & Medicaid Servs., Medicare Program; Request for Information Regarding the Physician Self-Referral Law, 83 Fed. Reg. 29524 (June 25, 2018), https://www.federalregister.gov/documents/2018/06/25/2018-13529/medicare-program-request-for-information-regarding-the-physician-self-referral-law. [139] Id. at 29524. [140] Press Release, Ctrs. For Medicare & Medicaid Servs., CMS seeks public input on reducing the regulatory burdens of the Stark Law (June 20, 2018), https://www.cms.gov/Newsroom/MediaReleaseDatabase/Press-releases/2018-Press-releases-items/2018-06-20-2.html. [141] 83 Fed. Reg. at 29524. [142] Id. at 29525–26. [143] Id. at 29526. [144] Id. at 29525–26. [145] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Two California Urologists Agree to Pay More than $1 Million to Settle False Claim Act Allegations Related to Radiation Therapy Referrals (Jan. 23, 2018), https://www.justice.gov/opa/pr/two-california-urologists-agree-pay-more-1-million-settle-false-claims-act-allegations. [146] Id. [147] Press Release, Office of Pub Affairs, U.S. Dep’t of Justice, Pennsylvania Hospital and Cardiology Group Agree to Pay $20.75 Million to Settle Allegations of Kickbacks and Improper Financial Relationships (Mar. 7, 2018), https://www.justice.gov/opa/pr/pennsylvania-hospital-and-cardiology-group-agree-pay-2075-million-settle-allegations. [148] Id. [149] Id. [150] Id. The following Gibson Dunn lawyers assisted in the preparation of this client update:  Steve Payne, Jonathan Phillips, John Partridge, Julie Schenker, Reid Rector, Stevie Pearl, Susanna Schuemann, Naomi Takagi, Michael Dziuban, Jacob Rierson, and Emily Riff. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work or any of the following members of the firm’s FDA and Health Care practice group: Washington, D.C. Stephen C. Payne, Chair, FDA and Health Care Practice Group (+1 202-887-3693, spayne@gibsondunn.com) F. Joseph Warin (+1 202-887-3609, fwarin@gibsondunn.com) Marian J. Lee (+1 202-887-3732, mjlee@gibsondunn.com) Daniel P. Chung (+1 202-887-3729, dchung@gibsondunn.com) Jonathan M. Phillips (+1 202-887-3546, jphillips@gibsondunn.com) Los Angeles Debra Wong Yang (+1 213-229-7472, dwongyang@gibsondunn.com) San Francisco Charles J. Stevens (+1 415-393-8391, cstevens@gibsondunn.com) Winston Y. Chan (+1 415-393-8362, wchan@gibsondunn.com) New York Alexander H. Southwell (+1 212-351-3981, asouthwell@gibsondunn.com) Denver Robert C. Blume (+1 303-298-5758, rblume@gibsondunn.com) John D. W. Partridge (+1 303-298-5931, jpartridge@gibsondunn.com) Ryan T. Bergsieker (+1 303-298-5774, rbergsieker@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

July 11, 2018 |
2018 Mid-Year False Claims Act Update

Click for PDF Six months ago, we remarked in these pages on the largely unchanged and unrelenting pace of False Claims Act (“FCA”) enforcement under the Trump Administration.  Now, with another half-year behind us, the Administration has started to put its stamp on FCA enforcement and to signal openness to less draconian FCA enforcement, at least on the margins.  In a series of internal guidance memoranda and public speeches, high-ranking Department of Justice (“DOJ”) officials have indicated their recognition of the very real costs of overly aggressive and unchecked FCA enforcement by qui tam whistle-blowers and DOJ itself, and laid out some steps they plan to take.  It is still too early to tell what effect, if any, these announcements will have in practice.  But the next six months and beyond are likely to provide telling indications of whether DOJ matches its shift in tone with a real shift in tactics. For now, however, broader FCA trends appear unaffected by these recent developments.  DOJ announced a typically robust, albeit slightly reduced, set of eight- and nine-figure settlements and judgments, including at least two that topped $100 million apiece, over the course of the last six months.  Meanwhile the courts continued to explore the important intricacies and nuances of FCA jurisprudence, with nearly a dozen notable circuit court cases released in just the last half-year.  The Supreme Court also indicated that it might engage again with the FCA by inviting the views of the Solicitor General on important issues arising from the Court’s last seminal decision in Universal Health Services v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016).  And there were also a handful of regulatory and state-law changes that could affect the scope of FCA enforcement going forward. We address all of these and other developments in greater depth below.  We discuss enforcement activity at the federal and state levels first, turn to activity on the legislative front, and then conclude with an analysis of significant court decisions from the past six months.  As always, Gibson Dunn’s recent publications on the FCA may be found on our website, including in-depth discussions of the FCA’s framework and operation, industry-specific presentations, and practical guidance to help companies avoid or limit liability under the FCA.  And, of course, we would be happy to discuss these developments—and their implications for your business—with you. I.    NOTEWORTHY DOJ ENFORCEMENT ACTIVITY DURING THE FIRST HALF OF 2018 The first half of 2018 saw several notable developments in DOJ enforcement activities, including both positive and not-so-positive developments for companies facing FCA exposure.  On the one hand, several internal DOJ guidance documents suggested that the current leadership at DOJ is considering a less aggressive approach to FCA enforcement than we have seen develop increasingly over the last 10 years.  But on the other hand, DOJ also continued to announce significant settlements and stringent enforcement programs, aimed at a wide variety of industries, under a wide variety of theories.  We explore these developments below. A.    DOJ Releases Important Guidance on FCA Enforcement and Signals More Changes to Come Though many have advocated for FCA reform as the number of qui tam cases and enforcement efforts have exploded in recent years, those efforts have not proven too fruitful.  But the new Administration may be a more receptive audience, as recent guidance from DOJ signals the first significant policy changes in recent memory that recognize the burden of FCA exposure.  As we reported in our client alerts on these topics (available here and here), there were three major announcements during the last six months that introduced current, and forthcoming, changes from DOJ. First, on January 10, 2018, Michael Granston, the Director of the Fraud Section of DOJ’s Civil Division, issued a memorandum (the “Granston Memo”) directing government lawyers evaluating a recommendation to decline intervention in a qui tam FCA action to “consider whether the government’s interests are served . . . by [also] seeking dismissal [of the underlying qui tam] pursuant to 31 U.S.C. § 3730(c)(2)(A).”[1]  The memorandum notes that DOJ “has seen record increases in qui tam actions” filed under the FCA, and while the “number of filings has increased substantially over time,” DOJ’s “rate of intervention has remained relatively static.”  Emphasizing that DOJ “plays an important gatekeeper role in protecting the False Claims Act,” the memorandum identifies dismissal of non-intervened cases as “an important tool to advance the government’s interests, preserve limited resources, and avoid adverse precedent.”  The memo then sets forth seven factors that prosecutors should consider when evaluating whether seeking dismissal of a declined qui tam action is appropriate.  Although those factors all stem from existing precedent in cases where DOJ has previously moved for dismissal, the fact that DOJ issued the Granston Memo indicates that DOJ may be more willing to go beyond merely declining unmeritorious cases.  By taking additional steps to dismiss such cases, DOJ may mitigate the extreme burden caused by unbridled qui tam plaintiffs.. Second, on January 25, 2018, then-Associate Attorney General Rachel Brand, the Department’s third-ranking official, issued a memorandum (the “Brand Memo”) that prohibits DOJ from using noncompliance with other agencies’ “guidance documents as a basis for proving violations of applicable law in” affirmative civil enforcement cases and from using “its enforcement authority to effectively convert agency guidance documents into binding rules.”[2]  Agencies commonly issue guidance documents interpreting legislation and regulations, and the government has sometimes employed evidence that a defendant violated such guidance to prove a violation of the underlying statute or regulation—which, in turn, may support a showing that a defendant’s claims or statements were “false” under the FCA.  The memorandum explicitly prohibits DOJ attorneys from engaging in this practice, although it is careful to note that prosecutors can continue to use such guidance as evidence that a defendant knew of its obligations under the law.  The Brand Memo builds on an earlier memo from Attorney General Jeff Sessions, from November 2017, that prohibited DOJ from issuing “guidance documents that purport to create rights or obligations binding on persons or entities outside the Executive Branch” without adhering to rulemaking processes as required by the Administrative Procedure Act (the “Sessions Memo”).[3]  Together, the Brand Memo and Sessions Memo reflect the Administration’s efforts to reign in administrative and regulatory requirements, with the Brand Memo signaling the Administration’s determination to extend that broader policy agenda in the FCA space. Third, DOJ has continued to reinforce its interest in taking measures to promote a more fair and consistent application of the FCA.  In a June 14 speech, Acting Associate Attorney General Jesse Panuccio described five policy initiatives being undertaken by DOJ to reform FCA enforcement, including the Brand and Granston memos highlighted above, as well as three additional areas: (i) cooperation credit; (ii) compliance program credit; and (iii) preventing “piling on.”  As to the latter three, Panuccio noted that DOJ is working on formalizing its practices with regard to cooperation credit and suggested that formal cooperation credit might be expanded to cover situations outside of those in which the defendant makes a self-disclosure.  Cooperation credits in FCA cases have traditionally been less well spelled-out than in some other contexts (e.g., under the Foreign Corrupt Practices Act), and Panuccio’s speech is a step towards formalizing those processes.  He also explained that DOJ will “reward companies that invest in strong compliance measures,” and that to prevent piling on, DOJ attorneys will promote coordination within the agency and with other regulatory bodies to ensure that defendants are subject to fair punishment and receive the benefit of finality that should accompany a settlement. DOJ’s continued focus on these efforts, led by officials at the highest levels within DOJ, suggests that FCA enforcement reform is a priority for the Department. B.    Opioid Enforcement Efforts Continue In our 2017 Year-End FDA and Health Care Compliance and Enforcement Update – Drugs and Devices, we noted the surge in enforcement activities surrounding the opioid epidemic.  From public pronouncements to criminal indictments, the current Administration has demonstrated widespread commitment to enforcement efforts around opioid issues.  The focus is unlikely to let up soon. For the time being, many of the enforcement efforts with regard to opioids have been on the criminal side and not directly related to the FCA.  But given DOJ’s close coordination between its criminal and civil divisions, widespread criminal enforcement efforts against an industry are often correlated with current, or imminent, FCA enforcement. The intense focus on the criminal side can hardly be overstated.  In June, the chief executive officer of a health care company and four physicians were charged in a superseding indictment with numerous crimes, including conspiracy to commit wire fraud and money laundering, as part of an ongoing investigation into the defendants’ alleged $200 million fraudulent health care scheme involving Michigan- and Ohio-based pain clinics, laboratories, and other providers.[4]  This was followed later in June by a DOJ announcement regarding the “National Health Care Fraud and Opioid Takedown.”[5]  Attorney General Sessions announced that DOJ was “charging 601 people, including 76 doctors, 23 pharmacists, 19 nurses, and other medical personnel with more than $2 billion in medical fraud.”[6]  DOJ also announced it has a “new data analytics program that focuses specifically on opioid-related health care fraud.”[7]  DOJ has also made forays into civil litigation by filing a statement of interest in a high-stakes multi-district action against opioid manufacturers and distributors that is premised on allegedly false, deceptive, or unfair marketing practices for prescription opioid drugs.[8] FCA enforcement is not far behind.  On May 15, 2018, for example, an unsealed complaint revealed that the United States had intervened in five lawsuits accusing an Arizona-based opioid manufacturer of paying kickbacks to induce physicians and nurses to prescribe the company’s opioid painkiller for their patients.  The lawsuits allege that these kickbacks took the form of payments for sham speaking engagements, jobs for the prescribers’ friends and relatives, and extravagant meals and other entertainment.  The lawsuits likewise allege that the manufacturer improperly encouraged physicians to prescribe its opioids to patients who did not have cancer—the approved use of the drug—and that company employees also lied to insurers in order to obtain reimbursement under Medicare and TRICARE.[9] C.    Notable Settlements All told, DOJ has announced more than approximately $600 million in settlements this year.  This amount represents a decrease from previous years at the same point, largely because there have been comparatively fewer blockbuster settlements during the last six months.  Still, the cadence of enforcement activity has continued to be steady. 1.    Health Care and Life Sciences Industries On January 10, a dental management company and more than 130 of its affiliated dental clinics agreed to pay $23.9 million, plus interest, to settle allegations that the companies knowingly submitted false claims to state Medicaid programs for unnecessary services on Medicaid-insured youth.  DOJ alleged that the companies incentivized and disciplined dentists to meet goals on procedures performed, ignoring when dentists complained about overutilization.  DOJ alleged that the companies submitted false Medicaid claims in 17 states, and also submitted false claims to an additional program, the Texas Medicaid Program for First Dental Home.  The federal government will receive approximately $14.2 million, plus interest, and states will receive approximately $9.7 million, plus interest.  This investigation was initiated by five whistle-blower lawsuits.  Three of the whistle-blowers, former employees of the dental clinics, will receive a total of more than $2.4 million from the federal portion of the settlement.[10] On March 7, a Pennsylvania hospital and cardiology group agreed to pay approximately $20.8 million combined to resolve claims that the two engaged in improper financial relationships to secure physician referrals.  Specifically, the government alleged that the hospital paid the cardiology group up to $2 million per year under physician and administrative service arrangements for services that were duplicative, not performed, or not needed.  The whistle-blower, a doctor in the cardiology group, received approximately $6 million of the recovered amount.[11] On March 23, a medical device manufacturer and its domestic subsidiary agreed to pay approximately $33.2 million to resolve claims that the subsidiary caused hospitals to submit false claims to government health care programs by knowingly selling materially unreliable point-of-care diagnostic testing devices.  The government claimed that the subsidiary received customer complaints that put it on notice that devices it sold produced erroneous results and failed to take corrective action until FDA inspections prompted a nationwide product recall.  The whistle-blower, a former senior quality control analyst at the subsidiary, will receive approximately $5.6 million of the recovered amount.[12] On March 28, a Virginia ambulance services provider agreed to pay $9 million to settle allegations that it submitted false or fraudulent claims to Medicare, Medicaid, and TRICARE for ambulance transports that were not medically necessary, that did not qualify as Specialty Care Transports, and that should have been billed to other payers.  As part of the settlement, the company entered into a five-year corporate integrity agreement with HHS OIG.[13] On March 29, a Texas company operating radiation therapy centers nationwide, along with its acquirer, agreed to pay up to $11.5 million to settle allegations that the Texas company paid kickbacks to physicians for referring patients to its cancer treatment centers.  The companies also agreed to enter into a five-year corporate integrity agreement with HHS OIG, which includes internal and external monitoring of relationships between the companies and referring physicians.  The Texas company allegedly distributed a share of the profits through a series of leasing companies in which referring physicians were permitted to invest.  The whistle-blower will receive up to $1.7 million as part of the settlement.[14] On April 12, a Florida respiratory equipment supplier agreed to pay approximately $9.7 million to settle allegations that it knowingly submitted false claims for portable oxygen contents to Medicare between January 2009 and March 2012.  Specifically, the government alleged that the company billed Medicare without verifying that beneficiaries used or needed the oxygen, and without obtaining the requisite proof of delivery.  The whistle-blower will receive approximately $1.6 million as part of the settlement.[15] On April 12, an Arizona company that owns acute-care hospitals agreed to pay over $18 million to resolve allegations that 12 of its hospitals knowingly overcharged Medicare patients for short-stay, inpatient procedures that should have been billed on a less costly outpatient basis.  The settlement also resolved claims that the company inflated the number of hours for which patients received outpatient observation in its reports to Medicare.  As part of the settlement, the company entered into a five-year corporate integrity agreement with HHS OIG, which includes the requirement to retain an independent review organization to review the accuracy of claims submitted to federal health care programs.  The whistle-blower, a former employee of the company, will receive approximately $3.3 million of the recovered amount.[16] On April 19, a California diagnostics laboratory agreed to pay $2 million to settle claims that it submitted and caused the submission of false claims to Medicare for Breast Cancer Index tests that were not reasonable and necessary.  The government alleged the company promoted and performed the tests for patients who had not been in remission for five years and who had not been taking tamoxifen.  The government claimed performing tests under such circumstances is medically unnecessary based on published clinical trial data and clinical practice guidelines.[17] On May 10, a Cincinnati-based nonprofit company operating several health care facilities in Ohio and Kentucky agreed to pay $14.25 million to settle allegations that the company provided compensation to six referring physicians in excess of the fair market value for the physicians’ services.  Per the government’s announcement, these issues were self-reported by the nonprofit hospital system.[18] On May 24, a large pharmaceutical company agreed to pay $23.85 million to resolve claims that the company illegally paid the co-pays of Medicare patients taking three of the company’s drugs.  The alleged scheme involved the use of a foundation as a conduit for the remuneration.[19] On May 31, two owners of a Philadelphia pharmacy agreed to pay $3.2 million to resolve claims that over the course of roughly seven years the pair fraudulently billed Medicare for prescription medications that their pharmacy did not actually dispense to its patients.[20] On June 8, a Kentucky-based health care company that owns and operates roughly 115 skilled nursing facilities in several states agreed to pay more than $30 million to resolve allegations that it knowingly submitted false claims to Medicare for medically unreasonable or unnecessary rehabilitation therapy services.  As part of the agreement, the State of Tennessee will receive a portion of the final settlement.  The two relators who initially brought the suit will also receive a yet undetermined portion of the eventual settlement.[21] On June 20, a national wound-care provider agreed to pay $22.5 million to settle allegations that it billed the government for unnecessary and unreasonable hyperbaric oxygen therapy, which is a therapy indicated for certain chronic wounds.  According to the government, the company billed for these unnecessary treatments for five years, between 2010 and 2015.  In addition to the monetary settlement, the company entered into a five-year corporate integrity agreement that subjects the company to independent reviews.[22] On June 25, a hospice chain agreed to pay $8.5 million to resolve allegations that it improperly billed the federal government for hospice services.  The government alleged that the company provided hospice care to patients who were not terminally ill (and therefore ineligible for the services), despite repeated warnings that ineligible patients were being admitted.[23] 2.    Government Contracting and Defense/Procurement On March 15, a Japanese fiber manufacturer and its American subsidiary agreed to pay approximately $66 million to resolve claims that they sold defective Zylon fiber used in bulletproof vests, which the United States purchased for law enforcement agencies.  The government alleged that between 2001 and 2005, the companies knew that Zylon degraded quickly in normal heat and humidity, rendering it unfit for use in bulletproof vests.  Yet, according to the government, the companies published misleading degradation data that understated the defect and engaged in a marketing campaign that advocated for the continued sale of Zylon-containing vests after a body armor manufacturer recalled such vests.  The whistle-blower will receive over $5.7 million as part of the settlement.[24]  The settlement resolves part of a long-running series of FCA cases related to allegedly defective bulletproof vests that goes back several decades and involved several companies.[25] On April 19, a former professional cyclist agreed to pay $5 million to resolve allegations that he submitted millions of dollars in false claims for sponsorship payments to the U.S. Postal Service (“USPS”), which sponsored his cycling team.  The government claimed that the cyclist violated the terms of his team’s USPS sponsorship by using performance enhancing drugs (“PEDs”), as well as making numerous false statements—including statements under oath—denying his PED use to induce the USPS to renew and increase its sponsorship.  The whistle-blower, a former teammate, will receive $1.1 million as part of the settlement.[26] On May 29, a foreign-based federal contractor and several of its subsidiaries agreed to pay $20 million to resolve allegations that the companies knowingly overbilled the United States Navy under contracts to provide ship husbanding services in numerous ports around the world.  As part of the resolution, the whistle-blowers in the case, three former employees of the contractor, will receive approximately $4.4 million.[27] 3.    Financial Services On February 28, an audit firm agreed to pay $149.5 million to resolve potential FCA claims related to the firm’s role as the independent outside auditor for a now-defunct originator of mortgage loans that were insured by the Federal Housing Administration (“FHA”) under the Department of Housing and Urban Development (“HUD”).  As part of a HUD program, the mortgage company was considered to be a Direct Endorsement Lender, and could submit claims to the United States to recover any losses that occurred as a result of a default on a loan insured by the FHA that the company had underwritten and endorsed.  To maintain Direct Endorsement Lender status, the mortgage company was required to submit annual audited financial statements in compliance with HUD requirements.  The audit firm issued audit reports on the mortgage company’s annual financial statements for fiscal years 2002 through 2008.  The United States alleged that the mortgage company was engaged in a fraudulent scheme involving the alleged sale of “fictitious or double-pledged” loans, leading to financial statements that failed to accurately reflect that the company was in financial distress.  The United States also alleged that the audit firm did not identify the mortgage company’s fraudulent conduct and alleged that by continuing to issue audit reports notwithstanding the mortgage company’s misconduct, the company was able to continue originating the insured loans until the mortgage company declared bankruptcy in 2009.  A number of officials from the mortgage company were criminally convicted in connection with the conduct at issue as well. [28] 4.    Other On January 16, a home furnishings company agreed to pay $10.5 million to settle claims that it knowingly made false statements on customs declarations forms to avoid paying antidumping duties on imported bedroom furniture from China.  The company classified the furniture as non-bedroom furniture, which was not subject to the antidumping duties. In connection with the FCA settlement, a whistle-blower will receive approximately $1.9 million.[29] D.    Notable Verdicts and Judgments In addition to the settlements noted above, there were several notable verdicts and judgments in FCA cases during the last six months. On January 11, a federal district court in Florida reversed a $350 million FCA jury verdict.  The jury reached a verdict that a nursing home operator had submitted false claims by allegedly failing to maintain a comprehensive care plan that was “ostensibly required by Medicaid regulation,” alongside other relatively minor infractions.  United States v. Salus Rehab., LLC, 304 F. Supp. 3d 1258, 1260 (M.D. Fla. 2018).  The court overturned the verdict, holding that “[t]he record fatally wants for evidence of materiality and scienter.”  In so holding, the court took umbrage that “relator won judgments for almost $350 million based” only on the theory that “a handful of paperwork defects” and “failure to maintain care plans made” defendants’ claims to Medicare and Medicaid false or fraudulent.  Id.  The court explained that “the relator offered no meaningful and competent proof that the federal or the state government, if either or both had known of the disputed practices (assuming that either or both did not know), would have regarded the disputed practices as material to each government’s decision to pay the defendants and, consequently, that each government would have refused to pay the defendants.”  Id.  It also disagreed that there was any evidence the defendants acted knowingly.  Id.  In so holding, the court affirmed the importance of the Supreme Court’s Escobar decision and its role in enforcing the FCA’s materiality standard. On May 29, the United States District Court in the District of South Carolina entered a judgment totaling approximately $114 million against three individuals found liable under the FCA of paying kickbacks to physicians in exchange for patient referrals.  The underlying claims were initially brought as part of three lawsuits filed by four whistle-blowers, alleging that the kickback scheme caused two blood testing laboratories in Virginia and California to bill federal health care programs for medically unnecessary tests.  The whistle-blowers’ share of the judgment has not yet been determined.[30] II.    LEGISLATIVE ACTIVITY A.    Federal Legislation As with the latter half of 2017, the first half of 2018 has seen little to no federal legislative activity affecting the FCA.  While President Trump’s plan to repeal and replace the Affordable Care Act (“ACA”) could have affected the ACA’s amendments to the FCA—as discussed in our 2017 Mid-Year False Claims Act Update[31]—Congress has not shown any signs that it will pass such a bill in the near future, though some commentators have speculated that Senate Republicans may attempt such a feat in an effort to rally the base for the 2018 elections.[32]  Senator Lindsey Graham (R-S.C.) announced in May that he is working on a new repeal-and-replace bill, but no new bills have been introduced in Congress and Senator Graham’s “effort appears to have little, if any, chance of passing this year.”[33] In a February speech on the Senate floor, Senator Chuck Grassley laid out his views about problems arising from the Supreme Court’s 2016 Escobar decision that are “getting some defendants, and judges, tied in knots.”[34]  In particular, Senator Grassley criticized courts for applying the Supreme Court’s instruction regarding so-called “government knowledge”—that continued government payment, in the face of government knowledge of non-compliance with regulatory or contractual requirements, may be strong evidence that the violation is not material.  According to Grassley, the Court “did not say that in every case, if the government pays a claim despite the fact that someone, somewhere in the bowels of the bureaucracy might have heard about allegations that the contractor may have done something wrong, the contractor is automatically off the hook.”[35]  And he set forth his views of how courts should apply Escobar without “piling on bogus restrictions that are just not in the law.”[36]  Notably, the issue of the interplay between government knowledge and materiality is back before the Supreme Court on a petition for certiorari in United States ex rel. Campie v. Gilead Sciences. Inc., 862 F.3d 890 (9th Cir. 2017), as discussed below.  If the Court takes that case, and rules in a way that bolsters its Escobar decision instead of the viewpoint espoused by Senator Grassley, we will be watching closely to see if the Court’s interpretation prompts a Congressional response. Consistent with the Trump administration’s agenda, Federal regulatory activity implicating the FCA has also remained stagnant.  As noted in our 2017 Year-End False Claims Act Update,[37] the FDA proposed a regulation in January 2017 that would amend and expand the agency’s definition of “intended use” for drugs and devices codified in 21 C.F.R. § 201.128 and 21 C.F.R. § 801.4, but that rule’s effective date was delayed until March 19, 2018 after opposition from industry.[38]  On March 16, the FDA delayed indefinitely the effective date of the portions of the rule relating to intended use “to allow further consideration of the substantive issues raised in the comments received regarding the amendments.”[39] On March 23, 2018, President Trump signed an omnibus appropriations bill authorizing $1.3 trillion in spending, $654.6 billion of which was designated for the Department of Defense—a $60 billion increase from 2017 defense spending.[40]  The bill also includes a $21.2 billion appropriation for infrastructure spending.  This law does not amend the FCA or substantively alter enforcement, but the increase in spending may invite greater FCA enforcement scrutiny or relator actions for the defense and construction contractors who work with the federal government. B.    State Legislation In 2005, Congress created financial incentives for states to enact their own False Claims Acts and make them as effective as the federal FCA in facilitating qui tam lawsuits.  If a state meets this standard, it may be eligible to “receive a 10-percentage-point increase in [its] share of any amounts recovered under such laws.”[41]  The Department of Health and Human Services Office of Inspector General (“HHS OIG”) is tasked with assessing whether a state’s law qualifies.  As reported in our last Mid-Year update,[42] HHS OIG notified 15 states at the end of 2016 that their laws required amendment to meet the federal standard, and it set a “grace period” through the end of 2018 to bring state law into compliance or risk losing the 10% financial incentive.[43]  Since our Year-End update: A Michigan bill that would amend the civil penalties in the Michigan Medicaid False Claims Act to mirror penalties allowed under the federal FCA has not progressed beyond its November 28, 2017 referral to the Senate Judiciary Committee.[44] A similar New York bill died in the Senate and was returned to the Assembly on January 3, 2018.[45] A similar North Carolina bill has not progressed since it was re-referred to the Committee on Rules and Operations of the Senate in April 2017.[46] Other notable state legislative developments include: A Florida bill to exempt information from disclosure under the state’s public records law that is related to an “investigation of violation of Florida False Claims Act” was approved by the governor on March 21, 2018.[47]  As noted in our 2017 Year-End Update, this bill exempts the Florida FCA’s under seal requirements from review and potential repeal under the Sunset Review Act.[48] There has been no action on a Michigan bill that would create a general Michigan False Claims Act since it was referred to the state’s Senate Committee on the Judiciary in January 2017.[49]  The bill would expand Michigan’s current Medicaid False Claims Act beyond the Medicaid context. No action has been taken on a Pennsylvania bill that would create a state False Claims Act; the bill has been in the House Judiciary Committee since March 2017.[50] We expect to see additional state legislative activity in the second half of 2018, as the HHS OIG “grace period” draws to an end.  To date, HHS OIG has informed 12 states that their laws meet the federal standard (Colorado, Connecticut, Illinois, Indiana, Iowa, Massachusetts, Montana, Nevada, Oklahoma, Tennessee, Texas, and Vermont) and has informed 14 states that their laws do not meet the federal standard (California, Delaware, Florida, Georgia, Hawaii, Michigan, Minnesota, New Hampshire, New York, North Carolina, Rhode Island, Virginia, Washington, and Wisconsin).[51]  Three other states were informed prior to recent federal amendments that their state laws did not meet the old federal standard (Louisiana, New Jersey, and New Mexico).[52] III.    NOTABLE CASE LAW DEVELOPMENTS Thus far in 2018, courts have continued to advance the body of FCA case law.  The appellate courts have issued nearly a dozen notable cases in the first part of the year, including decisions that explored the meaning of the Supreme Court’s decision in Universal Health Services, v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), the FCA’s statute of limitations, and the public disclosure bar.  These decisions clarified some areas of the law, yet deepened splits in others.  As always, we have closely monitored these developments and summarize the most notable decisions below. A.    Post-Escobar Developments Now two years since it was decided, courts continue to grapple with the Supreme Court’s landmark decision in Escobar.  As we have previously discussed in depth (including here), in Escobar, the Supreme Court held that an implied false certification theory of liability under the FCA is actionable when: (1) a claim “does not merely request payment, but also makes specific representations about the goods or services provided” and (2) the defendant’s failure to disclose noncompliance with some “material statutory, regulatory, or contractual requirement[] makes those representations misleading half-truths.”  Id. at 2001.  The Escobar Court further instructed courts to apply a “rigorous” and “demanding” materiality standard, necessitating the plaintiff show something akin to that the government actually refused payment, or would have refused payment had it known of the alleged misrepresentations regarding compliance.  Id. at 2002–03. Since Escobar, lower courts have worked to determine the precise requirements for establishing materiality at the pleading stage.  The fact-intensive analysis involved with materiality has produced some useful guidance for FCA defendants.  For example, conclusory statements by a plaintiff that the government would not have paid had it known of the alleged false statement are insufficient to survive a pleadings challenge, United States ex rel. Mateski v. Raytheon Co., No. 2:06-cv-03614, 2017 WL 3326452, at *7 (C.D. Cal. Aug. 3, 2017), yet, pleading that the government has previously terminated eligibility for similar falsities may be sufficient, depending upon the other allegations asserted, see United States ex rel. Lacey v. Visiting Nurse Serv. of N.Y., No. 14-cv-5739, 2017 WL 5515860, at *10 (S.D.N.Y. Sept. 26, 2017). As in prior years, the appellate courts continued to grapple with the application of Escobar’s “rigorous” and “demanding” materiality requirement in the first half of 2018. 1.    The Sixth Circuit Considers Government Payment Practices In Escobar, the Supreme Court explained that “proof of materiality can include, but is not necessarily limited to, evidence that the defendant knows that the Government consistently refuses to pay claims in the mine run of cases based on noncompliance with the particular statutory, regulatory, or contractual requirement.”  Escobar, 136 S. Ct. at 2003.  The Sixth Circuit recently weighed in on the question of what is required to adequately allege materiality at the pleading stage in such cases. United States ex rel. Prather v. Brookdale Senior Living Communities, Inc., 892 F.3d 822 (6th Cir. 2018) involved alleged false claims for home health services.  Specifically, the relator alleged that the defendant home health provider failed to timely obtain provider physician certifications in violation of a regulation requiring such certifications to “be obtained at the time the plan of care is established or as soon thereafter as possible.”  Id. at 825.  Despite concluding that compliance with the timing regulation was an express condition of payment, the district court had dismissed the claim for failure to adequately allege materiality under the standards articulated in Escobar.  Id. at 826, 832.  The district court reasoned that the complaint failed to identify any instance in which the government denied reimbursement for a similar violation in the entire 50-plus year history of the regulation, which suggested the government did not view violations of the certification regulation as material.  Id. at 834.  In addition, the relator cited materials suggesting the government’s concern focused on ensuring the services were medically necessary, not that the certification was made at a particular time.  Id. 847–48 (J. McKeague, dissenting). By a 2 to 1 vote, the Sixth Circuit reversed.  Id. at 825.  The court faulted the lower court for drawing “a negative inference from the absence of any allegations about past government action.”  Id. at 834.  The majority explained that a relator is “not required to make allegations regarding past government action,” and so absent the government’s actual knowledge of the alleged fraud being pled, its past payment practices were irrelevant to whether an FCA plaintiff has adequately pled materiality in their complaint.  Id.  The court went on to find that the relator adequately alleged materiality, including based on the fact that the timing requirement was an express condition of payment.  Id. at 836.  The majority also concluded that the relator had adequately alleged scienter.  Id. at 838. In contrast, a vigorous dissent took the majority to task for failing to faithfully apply Escobar and for not requiring materiality to be alleged with particularity under Federal Rule of Civil Procedure 9(b) despite the fact that “every [other] Circuit to address this question agrees that Rule 9(b) governs materiality allegations.”  Id. at 845.  As the dissent pointed out, the relator failed to allege that the government routinely refuses to pay claims based on the alleged violations, or that it would have refused to pay particular claims under the circumstances, which ran afoul of Escobar’s guidance that “[t]he government’s payment habits are, by far, the best evidence of materiality.”  Id.  Moreover, the dissent faulted the court for “equating negligence with fraud”; as the dissent pointed out, the complaint alleged facts that were, at best, “only consistent with recklessness” and therefore did not adequately allege scienter.  Id. at 852–53. 2.    The Eleventh Circuit Revives an Implied False Certification Claim  The Eleventh Circuit similarly revived an FCA claim predicated on an implied false certification theory in Marsteller ex rel. United States v. Tilton, 880 F.3d 1302 (11th Cir. 2018).  Marsteller involved allegations that a defense contractor had certified compliance with code of business ethics and conduct requirements applicable to government contractors, but that the company did not comply with those requirements because it failed to disclose evidence of purportedly unethical acts of bribery, and that it provided the government with incomplete pricing data in violation of the Truth in Negotiations Act, 10 U.S.C. § 2306a.  Id.  In a pre-Escobar decision, the district court had dismissed the complaint, after declining the government’s suggestion in a statement of interest “to limit the restrictive reading of the implied certification theory found in” prior precedent, and instead ruling that the theory only encompassed claims for payment made “despite a knowing failure to comply” with an express condition of payment.  Id. at 1309–10. On appeal, the Eleventh Circuit held that the line of cases relied upon by the district court was no longer good law in light of Escobar and remanded the case for the lower court to consider whether “in fairness to the relators, they should have an opportunity to replead their allegations in light of the Supreme Court’s guidance” in Escobar.  Id. at 1312–14.  As the court emphasized, Escobar directs the materiality inquiry towards “whether [the] Government would have attached importance to the violation in determining whether to pay the claim” at issue.  Id. at 1313. In both Marsteller and Prather, the government filed a statement of interest regarding the district court’s materiality analysis, despite having declined to intervene.  In Marsteller, although the Government took no position on the viability of the complaint itself, it nevertheless “respectfully urge[d]” the district court “not to adopt the atextual position that implied certification False Claims Act liability for non-compliance with a contract provision (including regulatory or statutory provisions incorporated therein) necessarily hinges on the presence of an express statement within that provision that payment is conditioned on its compliance.”  880 F.3d at 1309 n.15.  Likewise in Prather, although the government took no position on the complaint at issue in the case, it argued that an express condition of payment is not required under Escobar, and further argued that Escobar does not require an FCA plaintiff to plead prior government denials of payments for similar violations.  United States’ Statement of Interest Regarding Defendants’ Motion To Dismiss Third Amended Complaint at 2–3, 6, Prather, 892 F.3d 822 (No. 17-5826).  If these cases are any indication, FCA defendants can expect to face the government’s opposition in future cases that turn on allegations of materiality. 3.    The Supreme Court Invites the Government’s Views on Gilead In our 2017 Mid-Year False Claims Act Update, we addressed the Ninth Circuit’s materiality analysis in United States ex rel. Campie v. Gilead Sciences. Inc., 862 F.3d 890 (9th Cir. 2017).  As a reminder, in Gilead, the Ninth Circuit reversed dismissal of an implied certification claim.  Id. at 895.  In doing so, the court rejected the argument that the alleged violation was immaterial because the FDA was aware of the falsity and yet did not withdraw product approval.  Id. at 906.  This decision was appealed and the petition for certiorari is currently pending.  See Petition for Writ of Certiorari, Gilead, 862 F.3d 890 (No. 17-936). In April, the Supreme Court invited the U.S. Solicitor General to file a brief expressing the government’s views on the case.  This may signal the Court’s interest in reviewing the matter to provide more guidance on the impact of government acquiescence.  Clarification here would be welcomed, as we have previously noted that a circuit split is developing in this area.  However, in recent years the Supreme Court has asked for the Solicitor General’s views on key FCA issues only to go on to deny certiorari anyway.  See, e.g., United States ex rel. Nathan v. Takeda Pharm., 707 F.3d 451 (4th Cir. 2013), cert. denied 81 U.S.L.W. 3650 (U.S. Mar. 31, 2014) (No. 12-1349). B.    The Eleventh Circuit Deepens a Circuit Split Regarding When the FCA’s Extended Statute of Limitations Applies For most FCA relators, the statute of limitations requires a suit be brought within six years of the underlying alleged violation.  31 U.S.C. § 3731(b)(1).  However, an extended limitations period of up to ten years applies in select cases.  31 U.S.C. § 3731(b)(2) (permitting actions for “3 years after the date when facts material to the right of action are known or reasonably should have been known by the official of the United States charged with responsibility to act in the circumstances, but in no event more than 10 years after the date on which the violation is committed”).  Circuits are split in determining whether this greater, up to ten-year period is only available when the government files or intervenes in the FCA suit, as opposed to being pursued only by the relator after the government declines intervention.  Currently, most courts only apply the extended statute of limitations to suits brought by the government itself, as well as qui tam actions in which the government chooses to intervene.  See United States ex rel. Sanders v. North American Bus Indus. Inc., 546 F.3d 288, 295 (4th Cir. 2008) (holding that “only a subset of civil actions may benefit from the extended limitations period in Section 3731(b)(2)—those in which the government is a party”); United States ex rel. Sikkenga v. Regence Bluecross Blueshield of Utah, 472 F.3d 702, 725–26 (10th Cir. 2006) (“[W]e hold that § 3731(b)(2) was not intended to apply to private qui tam relators at all.”); but see United States ex rel. Hyatt v. Northrop Corp., 91 F.3d 1211, 1214 (9th Cir. 1996) (“[T]here is nothing in the entire statute of limitations subsection which differentiates between private and government plaintiffs at all.”). The Eleventh Circuit recently went the other way, however, in an opinion holding that relators can utilize the extended statute of limitations period even in qui tam cases where the government has declined to intervene.  In United States ex rel. Hunt v. Cochise Consultancy Inc., 887 F.3d 1081 (11th Cir. 2018), the court considered this issue as a matter of first impression in the circuit.  Id. at 1083.  First, the court emphasized that “nothing in § 3731(b)(2) says that its limitations period is unavailable to relators when the government declines to intervene.”  Id. at 1089.  The court also found that “the legislative history provides no convincing support for [the defendant’s] position” that the greater limitations period is only available where the government files suit or intervenes.  Id. at 1097.  The court recognized its decision “is at odds with the published decisions of two other circuits,” but found those opinions unpersuasive because those cases “reflexively applied the general rule that a limitations period is triggered by the knowledge of a party” while failing to consider “the unique role that the United States plays even in a non-intervened qui tam case.”  Id. at 1092. In reaching this decision, the Eleventh Circuit departs from the Fourth and Tenth circuits but largely aligns with the Ninth Circuit.  See Hyatt, 91 F.3d at 1214.  However, on the question of the knowledge required to trigger the limitations period, the Eleventh Circuit concluded, contrary to the Ninth Circuit, that “it is the knowledge of a government official, not the relator, that triggers the limitations period,” further complicating the circuit split.  Hunt, 887 F.3d at 1096. C.    The Third Circuit Examines the Public Disclosure Bar The FCA’s public disclosure bar instructs courts to dismiss a relator’s FCA action if “substantially the same allegations or transactions” were previously publicly disclosed in certain enumerated sources.  31 U.S.C. § 3730(e)(4).  The “original source” exception to this rule, which allows relators to proceed on publicly disclosed allegations if they have “knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions,” 31 U.S.C. § 3730(e)(4)(B), was the subject of a recent Third Circuit decision. In United States ex rel. Freedom Unlimited, Inc. v. City of Pittsburgh, No. 17-1987, 2018 WL 1517159 (3d Cir. Mar. 28, 2018), the district court had dismissed the case at the pleading stage under the public disclosure bar, concluding that the relator “filed a qui tam suit based on information that the city revealed” publicly.  Id. at *3.  The Third Circuit reversed, and in doing so, emphasized the sometimes factual nature of whether there “has been a public disclosure within the meaning of the FCA and whether a relator qualifies as an original source.”  Id. (internal quotations omitted).  In particular, the court noted that the relator claimed to have “directly observed” the defendant’s alleged conduct and had “independent knowledge” of the falsity.  Id.  While taking care to avoid suggesting that dismissal would never be appropriate at the pleading stage, the Third Circuit concluded the lower court “should have given the parties an opportunity to develop the facts in discovery inasmuch as appellants claim that they did not rely on public disclosures.”  Id.  Additionally, because the district court’s opinion pre-dated Escobar, the Third Circuit directed the district court to “rely on the factors set forth in Escobar in making a materiality decision,” to the extent the complaint survived the public disclosure bar.  Id. at *4. D.    Updates to the Causation Standard in Retaliation Claims The FCA’s anti-retaliation provision provides remedies to employees if “discharged, demoted, suspended, threatened, harassed, or in any other manner discriminated against in the terms and conditions of employment because of lawful acts” conducted in furtherance of an FCA claim.  31 U.S.C. § 3730(h)(1).  In a series of recent decisions, several courts have addressed the question of what an employee must show to demonstrate that an adverse action was “because of” the employee’s activity protected under the FCA. In DiFiore v. CSL Behring, LLC, 879 F.3d 71 (3d Cir. 2018), the Third Circuit provided guidance on the causation standard.  There, the district court had required the plaintiff to show “protected activity was the ‘but-for’ cause of an adverse action.”  Id. at 76.  On appeal, the plaintiff argued that the FCA only requires proof that “protected activity was a ‘motivating factor’ in the adverse action[].”  Id.  Rejecting this argument, the Third Circuit affirmed, relying on the Supreme Court’s analysis in a pair of decisions regarding the causation standard in age discrimination and Title VII claims respectively.  Id. (citing Gross v. FBL Financial Services, Inc., 129 S.Ct 2343 (2009) and University of Texas Southwestern Medical Center v. Nassar, 133 S.Ct 2517 (2013)).  As the court noted, the FCA used the “same ‘because of’ language” found in both the Age Discrimination in Employment Act and Title VII that had “compelled the Supreme Court to require ‘but-for’ causation.” Id. at 78.  As a result, in the Third Circuit, a plaintiff must show that he would not have faced the relevant adverse employment action “but for” his alleged protected activity. The Sixth and Seventh Circuits similarly recently indicated a willingness to adopt a “but-for” causation standard in FCA retaliation claims.  In Heath v. Indianapolis Fire Dept., 889 F.3d 872 (7th Cir. 2018), the Seventh Circuit affirmed the district court’s grant of summary judgment for the defendant.  Id. at 874.  The opinion was more notable, however, because—even though the Seventh Circuit had previously adopted a “motivating factor” standard—the Heath court nevertheless raised the question of whether that is the proper standard.  Id.  The court discussed the Supreme Court’s opinion in Nassar and hinted that the similarity between the statutory language in Title VII and the FCA compels the conclusion that a plaintiff must show the adverse employment action was the “but for” result of activity protected under the FCA.  Id. Meanwhile, in Smith v. LHC Group Inc., No. 17-5850, 2018 WL 1136072 (6th Cir. Mar. 2, 2018), the Sixth Circuit reversed dismissal of an FCA retaliation claim and concluded an employer’s subjective intent need not be established to prevail on a theory of constructive discharge.  Id. at *2.  Although the panel’s majority did not address causation, a concurring opinion expressed the view that causation requires a showing of “but-for” causation under Supreme Court’s Nassar and Gross decisions.  Id. at *9 (citing DiFiore). E.    The Third Circuit Explores the Link Between the FCA and the Anti-Kickback Statute The AKS prohibits companies and individuals from offering, paying, soliciting, or receiving “remuneration” to induce or reward referrals of business that will be paid for by Medicare, Medicaid, or other federal health care programs.  42 U.S.C. § 1320a-7b(b).  By submitting a claim resulting from a violation of the AKS, an entity or individual also violates the FCA.  See 42 U.S.C. § 1320a-7b(g) (“[A] claim that includes items or services resulting from a violation of [the AKS] constitutes a false or fraudulent claim for purposes of [the FCA].”) The Third Circuit recently addressed the evidentiary requirement to link FCA claims with violations of the Anti-Kickback Statute.  United States ex rel. Greenfield v. Medco Health Sol’s, Inc., 880 F.3d 89 (3d Cir. 2018).  In Greenfield, a relator claimed a pharmacy (Accredo Health Group) illegally donated to specific charities in order to exclusively receive patient referrals in return.  Id. at 91.  The pharmacy then allegedly violated the FCA by falsely certifying that it complied with the Anti-Kickback statute when seeking reimbursement for the care provided to referred patients.  Id. at 92. The district court entered summary judgment for the defendant-pharmacy, finding the relator “failed to provide evidence of even a single federal claim for reimbursement . . . that was linked to the alleged kickback scheme.”  Id. at 91.  In reaching its conclusion, the district court assumed that even if there was an Anti-Kickback Statute violation, there was an insufficient link to establish an FCA violation.  Id. at 93  Specifically, the district court stated the relator needed to establish a causal link between the pharmacy’s donations and a patient’s subsequent decision to patron the pharmacy.  Id. at 95. On appeal, the Third Circuit affirmed.  The panel first rejected the District Court’s reasoning and concluded that a relator need not provide “proof that the underlying medical care would not have been provided but for a kickback.”  Id. at 100.  Reviewing the legislative history of the FCA and Anti-Kickback Statute, the court concluded that “Congress intended both statutes to reach a broad swath of ‘fraud and abuse’ in the federal healthcare system” and “neither requires a plaintiff to show that a kickback directly influenced a patient’s decision to use a particular medical provider.”  Id. at 96–97. However, the court also rejected the notion that “the taint” of the alleged kickbacks automatically “renders every reimbursement claim false” and concluded that to prevail on summary judgment, it is not enough for a relator to show merely that the defendant “submitted federal claims while allegedly paying kickbacks.”  Id. at 99–100.  In the court’s view, “[a] kickback does not morph into a false claim unless a particular patient is exposed to an illegal recommendation or referral and a provider submits a claim for reimbursement pertaining to that patient.”  Id. at 100.  Instead, the court held, a relator must therefore demonstrate at least one false claim, i.e., “at least one claim that covered a patient who was recommended or referred” in violation of the Anti-Kickback Statute.  Id.  Absent “evidence . . . link[ing the] alleged kickback scheme to any particular claim” in this manner, an FCA defendant is entitled to summary judgment.  Id. IV.    CONCLUSION The first half of 2018 saw developments that could portend important changes on the horizon.  We will monitor these developments, along with other FCA legislative activity, settlements, and jurisprudence throughout the year.  You can look forward to a comprehensive summary in our 2018 False Claims Act Year-End Update, which we will publish in January 2018. [1]      See Memo, U.S. Dep’t of Justice, Factors for Evaluating Dismissal Pursuant to 31 U.S.C. 3730(c)(2)(A) (Jan. 10, 2018), https://assets.documentcloud.org/documents/4358602/Memo-for-Evaluating-Dismissal-Pursuant-to-31-U-S.pdf (emphasis added). [2]      See Memo, U.S. Dep’t of Justice, Limiting Use of Agency Guidance Documents In Affirmative Civil Enforcement Cases (Jan. 25, 2018), https://www.justice.gov/file/1028756/download. [3]      See Memo, U.S. Dep’t of Justice, Prohibition on Improper Guidance Documents (Nov. 16, 2017), https://www.justice.gov/opa/press-release/file/1012271/download. [4]      See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Health Care CEO and Four Physicians Charged in Superseding Indictment in Connection with $200 Million Health Care Fraud Scheme Involving Unnecessary Prescription of Controlled Substances and Harmful Injections (June 6, 2018), https://www.justice.gov/opa/pr/health-care-ceo-and-four-physicians-charged-superseding-indictment-connection-200-million. [5]      See Speech, U.S. Dep’t of Justice, Attorney General Sessions Delivers Remarks Announcing National Health Care Fraud and Opioid Takedown (June 28, 2018), https://www.justice.gov/opa/speech/attorney-general-sessions-delivers-remarks-announcing-national-health-care-fraud-and. [6]      Id. [7]      Id. [8]      See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Justice Department to File Statement of Interest in Opioid Case (Feb. 27, 2018), https://www.justice.gov/opa/pr/justice-department-file-statement-interest-opioid-case. [9]      See Press Release, Office of Pub. Affairs, United States Intervenes in False Claims Act Lawsuits Accusing Insys Therapeutics of Paying Kickbacks and Engaging in Other Unlawful Practices to Promote Subsys, A Powerful Opioid Painkiller (May 15, 2018), https://www.justice.gov/opa/pr/united-states-intervenes-false-claims-act-lawsuits-accusing-insys-therapeutics-paying. [10]     See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Dental Management Company Benevis and Its Affiliated Kool Smiles Dental Clinics to Pay $23.9 Million to Settle False Claims Act Allegations Relating to Medically Unnecessary Pediatric Dental Services (Jan. 10, 2018), https://www.justice.gov/opa/pr/dental-management-company-benevis-and-its-affiliated-kool-smiles-dental-clinics-pay-239. [11]   See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Pennsylvania Hospital and Cardiology Group Agree to Pay $20.75 Million to Settle Allegations of Kickbacks and Improper Financial Relationships (Mar. 7, 2018), https://www.justice.gov/opa/pr/pennsylvania-hospital-and-cardiology-group-agree-pay-2075-million-settle-allegations. [12]   See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Alere to Pay U.S. $33.2 Million to Settle False Claims Act Allegations Relating to Unreliable Diagnostic Testing Devices (Mar. 23, 2018), https://www.justice.gov/opa/pr/alere-pay-us-332-million-settle-false-claims-act-allegations-relating-unreliable-diagnostic. [13]   See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Ambulance Company to Pay $9 Million to Settle False Claims Act Allegations (Mar. 28, 2018), https://www.justice.gov/opa/pr/ambulance-company-pay-9-million-settle-false-claims-act-allegations. [14]   See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Radiation Therapy Company Agrees to Pay Up to $11.5 Million to Settle Allegations of False Claims and Kickbacks (Mar. 29, 2018), https://www.justice.gov/opa/pr/radiation-therapy-company-agrees-pay-115-million-settle-allegations-false-claims-and. [15]   See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Rotech Agrees to Pay $9.68 Million to Settle False Claims Act Liability Related to Improper Billing for Portable Oxygen (Apr. 12, 2018), https://www.justice.gov/opa/pr/rotech-agrees-pay-968-million-settle-false-claims-act-liability-related-improper-billing. [16]   See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Banner Health Agrees to Pay Over $18 Million to Settle False Claims Act Allegations (Apr. 12, 2018), https://www.justice.gov/opa/pr/banner-health-agrees-pay-over-18-million-settle-false-claims-act-allegations. [17]   See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, San Diego Laboratory Agrees to Pay $2 Million to Settle False Claims Act Allegations Related to Unnecessary Breast Cancer Testing (Apr. 19, 2018), https://www.justice.gov/opa/pr/san-diego-laboratory-agrees-pay-2-million-settle-false-claims-act-allegations-related. [18]     See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Ohio Hospital Operator Agrees to Pay United States $14.25 Million to Settle Alleged False Claims Act Violations Arising From Improper Payments to Physicians (May 10, 2018), https://www.justice.gov/opa/pr/ohio-hospital-operator-agrees-pay-united-states-1425-million-settle-alleged-false-claims-act. [19]     See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Drug Maker Pfizer Agrees to Pay $23.85 Million to Resolve False Claims Act Liability for Paying Kickbacks (May 24, 2018), https://www.justice.gov/opa/pr/drug-maker-pfizer-agrees-pay-2385-million-resolve-false-claims-act-liability-paying-kickbacks. [20]     See Press Release, U.S. Atty’s Office for the Eastern Dist. of Pa., U.S. Dep’t of Justice, Pharmacy owners agree to pay $3.2 million to resolve False Claims case (May 31, 2018), https://www.justice.gov/usao-edpa/pr/pharmacy-owners-agree-pay-32-million-resolve-false-claims-case. [21]     See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Signature HealthCARE to Pay More Than $30 Million to Resolve False Claims Act Allegations Related to Rehabilitation Therapy (June 8, 2018), https://www.justice.gov/opa/pr/signature-healthcare-pay-more-30-million-resolve-false-claims-act-allegations-related. [22]     See Press Release, U.S. Atty’s Office for the Middle Dist. Of Fla., U.S. Dep’t of Justice, Healogics Agrees To Pay Up To $22.51 Million To Settle False Claims Act Liability For Improper Billing Of Hyperbaric Oxygen Therapy (June 20, 2018), https://www.justice.gov/usao-mdfl/pr/healogics-agrees-pay-2251-million-settle-false-claims-act-liability-improper-billing. [23]     See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Caris Agrees to Pay $8.5 Million to Settle False Claims Act Lawsuit Alleging That it Billed for Ineligible Hospice Patients (June 25, 2018), https://www.justice.gov/opa/pr/caris-agrees-pay-85-million-settle-false-claims-act-lawsuit-alleging-it-billed-ineligible. [24]   See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Japanese Fiber Manufacturer to Pay $66 Million for Alleged False Claims Related to Defective Bullet Proof Vests (Mar. 15, 2018), https://www.justice.gov/opa/pr/japanese-fiber-manufacturer-pay-66-million-alleged-false-claims-related-defective-bullet. [25]     See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Point Blank Pays U.S. $1 Million for the Sale of Defective Zylon Bulletproof Vests (Nov. 7, 2011), https://www.justice.gov/opa/pr/point-blank-pays-us-1-million-sale-defective-zylon-bulletproof-vests; Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, U.S. Sues First Choice Armor & Equipment for Providing Defective Bullet-Proof Vests to Law Enforcement Agencies (Aug. 3, 2009), https://www.justice.gov/opa/pr/us-sues-first-choice-armor-equipment-providing-defective-bullet-proof-vests-law-enforcement. [26]   See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Lance Armstrong Agrees to Pay $5 Million to Settle False Claims Allegations Arising From Violation of Anti-Doping Provisions of U.S. Postal Service Sponsorship Agreement (Apr. 19, 2018), https://www.justice.gov/opa/pr/lance-armstrong-agrees-pay-5-million-settle-false-claims-allegations-arising-violation-anti. [27]     See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, United States Settles Lawsuit Alleging That Contractor Falsely Overcharged the U.S. Navy for Ship Husbanding Services (May 29, 2018), https://www.justice.gov/opa/pr/united-states-settles-lawsuit-alleging-contractor-falsely-overcharged-us-navy-ship-husbanding. [28]     See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Deloitte & Touche Agrees to Pay $149.5 Million to Settle Claims Arising From Its Audits of Failed Mortgage Lender Taylor, Bean & Whitaker (Feb. 28, 2018), https://www.justice.gov/opa/pr/deloitte-touche-agrees-pay-1495-million-settle-claims-arising-its-audits-failed-mortgage. [29]     See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Bassett Mirror Company Agrees to Pay $10.5 Million to Settle False Claims Act Allegations Relating to Evaded Customs Duties (Jan. 16, 2018), https://www.justice.gov/opa/pr/bassett-mirror-company-agrees-pay-105-million-settle-false-claims-act-allegations-relating. [30]     See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, United States Obtains $114 Million Judgment Against Three Individuals for Paying Kickbacks for Laboratory Referrals and Causing Claims for Medically Unnecessary Tests (May 29, 2018), https://www.justice.gov/opa/pr/united-states-obtains-114-million-judgment-against-three-individuals-paying-kickbacks. [31]   2017 Mid-Year False Claims Act Update, Gibson Dunn (July 12, 2017), https://www.gibsondunn.com/2017-mid-year-false-claims-act-update/. [32]   See, e.g., Quin Hillyer, Obamacare Repeal May Be Closer Than You Think, Wash. Examiner (Apr. 26, 2018), https://www.washingtonexaminer.com/opinion/obamacare-repeal-may-be-closer-than-you-think. [33]   Peter Sullivan, Graham Working on New ObamaCare Repeal Bill, The Hill (May 16, 2018), http://thehill.com/policy/healthcare/388000-graham-working-on-new-obamacare-repeal-bill. [34]     Prepared Senate Floor Statement by Senator Chuck Grassley of Iowa, Interpreting the False Claims Act; S. Comm. on the Judiciary (Feb. 13, 2018), https://www.grassley.senate.gov/news/news-releases/interpreting-false-claims-act. [35]     Id. [36]     Id. [37]   2017 Year-End False Claims Act Update, Gibson Dunn (Jan. 5, 2018), https://www.gibsondunn.com/2017-year-end-false-claims-act-update/. [38]   Industry opponents worried that expanding the definition of “intended use” could “spawn[] a flurry of unwarranted FCA lawsuits.”  Id. [39]   See Clarification of When Products Made or Derived From Tobacco Are Regulated as Drugs, Devices, or Combination Products; Amendments to Regulations Regarding “Intended Uses”; Partial Delay of Effective Date, U.S. Dep’t of Health & Human Servs.—Food and Drug Admin. (Mar. 16, 2018), https://s3.amazonaws.com/public-inspection.federalregister.gov/2018-05347.pdf.  The portions of the rule relating to the regulation of tobacco products went into effect on March 19, 2018. [40]   Mark A. Rush, David I. Kelch & Isaac T. Smith, The False Claims Act in 2017: The Year in Review and What to Watch in 2018, BNA (Apr. 25, 2018), https://www.bna.com/false-claims-act-n57982091498/; see also Pub. L. No. 115-141 (2018) (final law). [41]   State False Claims Act Reviews, Dep’t of Health & Human Servs.—Office of Inspector Gen., https://oig.hhs.gov/fraud/state-false-claims-act-reviews/index.asp. [42]   See supra note 37. [43]   See supra note 41 (collecting letters to states). [44]   S.B. 0669, 2017 Reg. Sess. (Mich. 2017), http://www.legislature.mi.gov/(S(y01pr1bmjos4hv4bgw5wcuid))/mileg.aspx?page=getobject&objectname=2017-SB-0669&query=on. [45]   A.B. A07989, 2017-2018 Leg. Sess. (N.Y. 2017), http://nyassembly.gov/leg/?default_fld=&leg_video=&bn=A07989&term=2017&Summary=Y&Actions=Y. [46]   S.B. 378, 2017-2018 Reg. Sess. (N.C. 2017), https://www2.ncleg.net/BillLookup/2017/s378. [47]   H.B. 7013, 2017 Reg. Sess. (Fla. 2017), https://www.flsenate.gov/Session/Bill/2018/7013. [48]   See supra note 37. [49]   S.B. 0065, 2017 Reg. Sess. (Mich. 2017), http://www.legislature.mi.gov/(S(2eethmzh3ynmq4revoals1xd))/mileg.aspx?page=GetObject&objectname=2017-SB-0065. [50]   H.B. 1027, 2017-2018 Reg. Sess. (Penn. 2017), http://www.legis.state.pa.us/cfdocs/billInfo/billInfo.cfm?sYear=2017&sInd=0&body=H&type=B&bn=1027. [51]     See supra note 41. [52]     See id. The following Gibson Dunn lawyers assisted in preparing this client update: F. Joseph Warin, Stephen Payne, Robert Blume, Timothy Hatch, Alexander Southwell, Charles Stevens, Joseph West, Benjamin Wagner, Stuart Delery, Winston Chan, Andrew Tulumello, Karen Manos, Monica Loseman, Robert Walters, Reed Brodsky, John Partridge, James Zelenay, Jonathan Phillips, Ryan Bergsieker, Jeremy Ochsenbein, Sean Twomey, Reid Rector, Allison Chapin, Eva Michaels, Joshua Rosario, Jasper Hicks, and Trenton Van Oss. Gibson Dunn’s lawyers have handled hundreds of FCA investigations and have a long track record of litigation success.  Among other significant victories, Gibson Dunn successfully argued the landmark Allison Engine case in the Supreme Court, a unanimous decision that prompted Congressional action.  See Allison Engine Co. v. United States ex rel. Sanders, 128 S. Ct. 2123 (2008).  Our win rate and immersion in FCA issues gives us the ability to frame strategies to quickly dispose of FCA cases.  The firm has more than 30 attorneys with substantive FCA expertise and more than 30 former Assistant U.S. Attorneys and DOJ attorneys.  For more information, please feel free to contact the Gibson Dunn attorney with whom you work or the following attorneys. Washington, D.C. F. Joseph Warin (+1 202-887-3609, fwarin@gibsondunn.com) Stuart F. Delery (+1 202-887-3650, sdelery@gibsondunn.com) Joseph D. West (+1 202-955-8658, jwest@gibsondunn.com) Andrew S. Tulumello (+1 202-955-8657, atulumello@gibsondunn.com) Karen L. Manos (+1 202-955-8536, kmanos@gibsondunn.com) Stephen C. Payne (+1 202-887-3693, spayne@gibsondunn.com) Jonathan M. Phillips (+1 202-887-3546, jphillips@gibsondunn.com) New York Reed Brodsky (+1 212-351-5334, rbrodsky@gibsondunn.com) Alexander H. Southwell (+1 212-351-3981, asouthwell@gibsondunn.com) Denver Robert C. Blume (+1 303-298-5758, rblume@gibsondunn.com) Monica K. Loseman (+1 303-298-5784, mloseman@gibsondunn.com) John D.W. Partridge (+1 303-298-5931, jpartridge@gibsondunn.com) Ryan T. Bergsieker (+1 303-298-5774, rbergsieker@gibsondunn.com) Dallas Robert C. Walters (+1 214-698-3114, rwalters@gibsondunn.com) Los Angeles Timothy J. Hatch (+1 213-229-7368, thatch@gibsondunn.com) James L. Zelenay Jr. (+1 213-229-7449, jzelenay@gibsondunn.com) Palo Alto Benjamin Wagner (+1 650-849-5395, bwagner@gibsondunn.com) San Francisco Charles J. Stevens (+1 415-393-8391, cstevens@gibsondunn.com)Winston Y. Chan (+1 415-393-8362, wchan@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

June 27, 2018 |
Webcast: Defending Medical Necessity Enforcement Actions

Gibson Dunn and BDO provides an overview of significant trends and key issues in government enforcement actions and litigation involving allegations that services or items billed to government health programs were not medically necessary. Topics Discussed: Enforcement trends and updates, including: False Claims Act case law update, including the latest in the AseraCare line of cases Application of DOJ’s Brand Memo to medical necessity theories Expansion of medical necessity theories to actions involving pharmaceutical and medical device manufacturers An expert’s perspective: Practical lessons from expert chart reviews in medical necessity cases The role and evolution of payor reimbursement policies View Slides [PDF] PANELISTS: Dr. Karen Meador is Managing Director and Senior Physician Executive of BDO. She is a board-certified pediatrician with 25 years of healthcare experience, and has served in numerous clinical and administrative leadership roles within healthcare systems and primary care organizations. Karen has extensive experience in leading collaborative multidisciplinary teams in creating and expanding innovative high-quality programs and services that transform and integrate clinical care, research and education and that engage physicians and patients in hospital and community settings. Sam Nazzaro is Global Forensics Managing Director of BDO. As top-level compliance counsel, former federal prosecutor and forensic advisor, Sam has more than 20 years of experience in regulatory and legal compliance, domestic and international advocacy, complex forensic investigations, and litigation. He assists global companies, healthcare providers and others in investigating fraud and corruption and managing/mitigating risk. He has successfully investigated, managed and led healthcare fraud/false claims matters, complex AML investigations and sensitive high-profile international governance projects. Stephen Payne is a partner in the Washington, D.C. office of Gibson Dunn. He is Chair of the firm’s FDA and Health Care practice group, and is a member of the Life Sciences practice group. His practice focuses on FDA and health care compliance, enforcement, and False Claims Act litigation for pharmaceutical and medical device clients. He has significant experience in the areas of fraud and abuse, product diversion and counterfeiting, good manufacturing practice regulations, product recalls and product promotion. Jonathan Phillips is a partner in the Washington, D.C. office of Gibson Dunn, and is a member of the firm’s Litigation Department. His practice focuses on FDA and health care compliance, enforcement, and litigation, as well as other white collar enforcement matters and related litigation. He has substantial experience representing pharmaceutical, medical device, and health care provider clients in investigations by the DOJ, FDA, and Department of Health and Human Services Office of Inspector General. MCLE CREDIT INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.50 credit hours, of which 1.50 credit hours may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.50 hours. California attorneys may claim “self-study” credit for viewing the archived version of this webcast. No certificate of attendance is required for California “self-study” credit.

June 20, 2018 |
Acting Associate AG Panuccio Highlights DOJ’s False Claims Act Enforcement Reform Efforts

Click for PDF On June 14, 2018, Acting Associate Attorney General Jesse Panuccio gave remarks highlighting recent enforcement activity and policy initiatives by the Department of Justice (“DOJ”).  The remarks, delivered at the American Bar Association’s 12th National Institute on the Civil False Claims Act and Qui Tam Enforcement, included extensive commentary about DOJ’s ongoing efforts to introduce reforms to promote a more fair and consistent application of the False Claims Act (“FCA”).  While the impact of these policy initiatives remains to be seen, DOJ’s continued focus on these efforts, led by officials at the highest levels within DOJ, suggests that FCA enforcement reform is a priority for the Department. After giving an overview of several FCA settlements from the last eighteen months—apparently designed to demonstrate that this DOJ recognizes the importance of the FCA in a breadth of traditional enforcement areas—Mr. Panuccio discussed two particular priorities: the opioid epidemic and the nation’s elderly population.  He emphasized that DOJ would “actively employ” the FCA against any entity in the opioid distribution chain that engages in fraudulent conduct.  He then highlighted the crucial role of the FCA in protecting the nation’s elderly from fraud and abuse, citing examples of enforcement against a nursing home management company, hospices, and skilled rehabilitation facilities. The majority of Mr. Panuccio’s remarks focused, however, on policy initiatives DOJ is undertaking to ensure that enforcement “is fair and consistent with the rule of law.”  Mr. Panuccio alluded to general reform initiatives by the department, such as the ban on certain third-party payments in settlement agreements, before expanding on reforms specific to the FCA.  Mr. Panuccio highlighted that the recent FCA reform efforts have been spearheaded by Deputy Associate Attorney General Stephen Cox; Mr. Cox had delivered remarks at the Federal Bar Association Qui Tam Conference in February of this year that had provided insight into the positions articulated in the Brand and Granston memoranda.  In his speech, Mr. Panuccio described five policy initiatives being undertaken by DOJ to reform FCA enforcement: (i) qui tam dismissal criteria; (ii) the use of guidance in FCA cases; (iii) cooperation credit; (iv) compliance program credit; and (v) preventing “piling on.” Qui tam dismissals Mr. Panuccio acknowledged the tremendous increase in the number qui tam cases that are filed each year, which includes cases that are not in the public interest.  Recognizing that DOJ expends significant resources to monitor cases even when it declines to intervene, Mr. Panuccio noted that DOJ attorneys have been instructed to consider whether moving to dismiss the action would be an appropriate use of prosecutorial discretion under the FCA.  While DOJ previously exercised this authority only rarely, consistent with the Granston memo, Mr. Panuccio suggested that, going forward, DOJ may use that authority more frequently in order to free up DOJ’s resources for matters in the public interest. Although defendants generally may not yet be experiencing significant differences regarding the possibility of dismissal at the DOJ line level, the continued public discussion of the potential use of DOJ’s dismissal authority by high-level officials suggests that DOJ appreciates the problems caused by frivolous qui tams and may ultimately be more receptive to dismissal of actions lacking merit. Guidance As stated in the Brand Memorandum, DOJ will no longer use noncompliance with agency guidance that expands upon statutory or regulatory requirements as the basis for an FCA violation.  Mr. Panuccio explained that, in an FCA case, evidence that a party received a guidance document would be relevant in proving that the party had knowledge of the law explained in that guidance.  However, DOJ attorneys have been instructed “not to use [DOJ’s] enforcement authority to convert sub-regulatory guidance into rules that have the force or effect of law.” Cooperation With respect to cooperation credit, Mr. Panuccio indicated that DOJ is working on formalizing its practices and that modifications to prior practices should be expected.  That notwithstanding, Mr. Panuccio provided assurances that DOJ will continue to “expect and recognize genuine cooperation” in both civil and criminal matters.  He also noted that the extent of the discount provided when negotiating a settlement would depend on the nature of the cooperation, how helpful it was, and whether it helped identify individual wrongdoers. Though DOJ’s new policies on cooperation credit are still forthcoming, Mr. Panuccio’s remarks suggest that formal cooperation credit might be expanded to cover situations outside of those in which the defendant makes a self-disclosure. Compliance In recognition of the challenges of running large organizations, DOJ will “reward companies that invest in strong compliance measures.”  How this may differ, if at all, from current ad hoc considerations remains to be seen. Piling On Mr. Panuccio acknowledged that, when multiple regulatory bodies pursue a defendant for the same or substantially the same conduct, “unwarranted and disproportionate penalties” can result. In order to avoid this “piling on,” DOJ attorneys will promote coordination within the agency and other regulatory bodies to ensure that defendants are subject to fair punishment and receive the benefit of finality that should accompany a settlement.  Moreover, Mr. Panuccio remarked that DOJ attorneys should not “invoke the threat of criminal prosecution solely to persuade a company to pay a larger settlement in a civil case,” which really is simply a restatement of every attorney’s existing ethical duty.  Whether DOJ leadership’s interest here will result in significant practical developments is uncertain.  Such developments, though perhaps unlikely, could include eliminating the cross-designation of Assistant U.S. Attorneys as both Civil and Criminal; limiting the ability of Civil Division attorneys to invite Criminal Division lawyers to participate in meetings without the request or consent of defendants; or perhaps even somehow inhibiting the Civil Division from using the FCA, with its mandatory treble damages and per-claim penalties, following criminal fines and restitution. We will continue to monitor and report on these important developments. The following Gibson Dunn lawyers assisted in preparing this client update: Stephen Payne, Jonathan Phillips and Claudia Kraft. Gibson Dunn’s lawyers have handled hundreds of FCA investigations and have a long track record of litigation success.  Among other significant victories, Gibson Dunn successfully argued the landmark Allison Engine case in the Supreme Court, a unanimous decision that prompted Congressional action.  See Allison Engine Co. v. United States ex rel. Sanders, 128 S. Ct. 2123 (2008).  Our win rate and immersion in FCA issues gives us the ability to frame strategies to quickly dispose of FCA cases.  The firm has more than 30 attorneys with substantive FCA expertise and more than 30 former Assistant U.S. Attorneys and DOJ attorneys.  For more information, please feel free to contact the Gibson Dunn attorney with whom you work or the following attorneys. Washington, D.C. F. Joseph Warin (+1 202-887-3609, fwarin@gibsondunn.com) Stuart F. Delery (+1 202-887-3650, sdelery@gibsondunn.com) Joseph D. West (+1 202-955-8658, jwest@gibsondunn.com) Andrew S. Tulumello (+1 202-955-8657, atulumello@gibsondunn.com) Karen L. Manos (+1 202-955-8536, kmanos@gibsondunn.com) Stephen C. Payne (+1 202-887-3693, spayne@gibsondunn.com) Jonathan M. Phillips (+1 202-887-3546, jphillips@gibsondunn.com) New York Reed Brodsky (+1 212-351-5334, rbrodsky@gibsondunn.com) Alexander H. Southwell (+1 212-351-3981, asouthwell@gibsondunn.com) Denver Robert C. Blume (+1 303-298-5758, rblume@gibsondunn.com) Monica K. Loseman (+1 303-298-5784, mloseman@gibsondunn.com) John D.W. Partridge (+1 303-298-5931, jpartridge@gibsondunn.com) Ryan T. Bergsieker (+1 303-298-5774, rbergsieker@gibsondunn.com) Dallas Robert C. Walters (+1 214-698-3114, rwalters@gibsondunn.com) Los Angeles Timothy J. Hatch (+1 213-229-7368, thatch@gibsondunn.com) James L. Zelenay Jr. (+1 213-229-7449, jzelenay@gibsondunn.com) Palo Alto Benjamin Wagner (+1 650-849-5395, bwagner@gibsondunn.com) San Francisco Charles J. Stevens (+1 415-393-8391, cstevens@gibsondunn.com)Winston Y. Chan (+1 415-393-8362, wchan@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

May 30, 2018 |
Federal Circuit Update (May 2018)

Click for PDF This May 2018 edition of Gibson Dunn’s Federal Circuit Update discusses the proposed elimination of the broadest reasonable interpretation standard during post-issuance proceedings before the PTAB, provides a summary of the pending WesternGeco case before the Supreme Court regarding extraterritorial damages, and briefly summarizes the differences between precedential and non-precedential opinions. This Update also provides a summary of the pending en banc case involving the PTO’s ability to recover attorneys’ fees.  Also included are summaries of recent decisions regarding the burden in venue disputes, the pleading standard for patent infringement following the abrogation of Form 18, and whether equitable estoppel applies after substantial claim amendments. Federal Circuit News On May 8, 2018, the PTO announced proposed rulemaking that would change its prior policy of using the broadest reasonable interpretation (BRI) standard for construing unexpired and proposed amended patent claims in post-issuance proceedings before the PTAB.  Instead, the PTAB would use the Phillips standard applied in district courts and ITC proceedings.  The Notice of Proposed Rulemaking states:  “The Office’s goal is to implement a fair and balanced approach, providing greater predictability and certainty in the patent system.” Judges Prost, Moore, O’Malley and Reyna, who dissented from the denial of the petition for rehearing en banc in In re Cuozzo Speed Technologies, and Judge Newman, who dissented in the panel opinion and from the denial of the petition for rehearing en banc, have historically supported the use of the Phillips standard in post-issuance proceedings.  The notice of proposed rulemaking is available here. On April 26, 2018, the PTO also released guidance on the impact of SAS Institute Inc. v. Iancu, where the Supreme Court mandated that “the Board [] address every claim the petition has challenged.  138 S. Ct. 1348, 1354, 1358 (2018).  In light of this decision, the PTO announced that the Board will now “institute as to all claims or none” and, in addition, if the Board institutes, it “will institute on all challenges raised in the petition.”  Furthermore, “[t]he final written decision will address, to the extent claims are still pending at the time of decision, all patent claims challenged by the petitioner and all new claims added through the amendment process.”  For pending trials that had only been partially instituted, the panels may “issue an order supplementing the institution decision to institute on all challenges raised in the petition” and “may take further action to manage the trial proceeding, including, for example, permitting additional time, briefing, discovery, and/or oral argument, depending on various circumstances and the stage of the proceeding” and even, in some cases, extend the statutory 12-month deadline.  The PTO’s guidance is available here. Supreme Court.  The Supreme Court has decided two cases from the Federal Circuit this Term (Oil States v. Greene’s Energy and SAS v. Iancu); we are awaiting the Court’s decision on a third case: Case Status Issue WesternGeco LLC (Schlumberger) v. ION Geophysical Corp., No. 16-1011 Argued on Apr. 16, 2018 Recoverability of lost profits for foreign use in cases where patent infringement is proven under 35 U.S.C. § 271(f) Upcoming En Banc Federal Circuit Cases NantKwest, Inc. v. Matal, No. 16-1794 (Fed. Cir.):  Whether the PTO can recover attorneys’ fees in litigation under 35 U.S.C. § 145. After the PTAB affirmed the examiner’s rejection of NantKwest’s patent application, NantKwest appealed to the district court.  The PTO prevailed on the merits of the appeal and moved to recover both attorneys’ fees and expert fees.  Section 145 provides that “[a]ll the expenses of the proceedings shall be paid by the applicant.”  Applying this provision, the district court granted the PTO’s request for expert fees, but rejected the PTO’s request for attorneys’ fees.  A panel of the Federal Circuit reversed the district court’s holding as to attorneys’ fees, holding that the “[a]ll expenses of the proceedings” provision under § 145 authorizes an award of attorneys’ fees.  (Decision available here.) The Federal Circuit sua sponte ordered that the panel decision be vacated and that the case be reheard en banc.  Seven amicus briefs were filed, five in support of NantKwest (the International Trademark Association, the Intellectual Property Owners Association, the Intellectual Property Law Association of Chicago, the Association of Amicus Counsel, and the American Bar Association) and two in support of neither party (Federal Circuit Bar Association and American Intellectual Property Law Association).  Oral argument was held on March 8, 2018.  (Audio recording is available here.) Question presented: Did the panel in NantKwest, Inc. v. Matal, 860 F.3d 1352 (Fed. Cir. 2017) correctly determine that 35 U.S.C. § 145’s “[a]ll the expenses of the proceedings” provision authorizes an award of the United States Patent and Trademark Office’s attorneys’ fees? Federal Circuit Practice Update Precedential vs. Non-Precedential Opinions. Internal Operating Procedure (“IOP”) No. 10 governs the use of precedential opinions vs. non-precedential opinions and Rule 36 affirmances.  IOP No. 10 provides that “the purpose of a precedential disposition is to inform the bar and interested persons other than the parties.”  IOP No. 10 at ¶ 2.  Precedential opinions should not be used merely to explain the reasons for the disposition to the parties; that can be conveyed through the use of a non-precedential opinion.  Id. The IOP identifies fourteen situations in which a precedential opinion is appropriate.  See id. at ¶ 4.  Reasons include:  resolution of an issue of first impression; the criticism, clarification, alteration, or modification of an existing rule of law; an actual or apparent conflict in or with past holdings of the court or other courts that is created, resolved or continued; the correction of procedural errors; or the case has been returned by the Supreme Court for disposition, requiring more than mere ministerial obedience to directions of the Supreme Court.  Id. The decision to make an opinion non-precedential is generally governed by a majority vote of the panel.  But, if the decision includes a dissenting opinion, the judge authoring the dissenting opinion may elect to have the entire opinion issue as precedential, regardless of the preferences of the majority judges.  Id. at ¶ 6.  All three judges must agree to use a Rule 36 judgment in order to do so.  Id. Key Case Summaries (April – May 2018) In re ZTE (USA) Inc., No. 18-113 (Fed. Cir. May 14, 2018) (Motion Panel Order):  Burden of persuasion for venue for foreign defendants. American GNC filed a complaint against ZTE in the Eastern District of Texas, and ZTE moved to dismiss for improper venue under 28 U.S.C. § 1406.  While that motion was pending, ZTE moved to transfer to the Northern District of Texas or the Northern District of California under 28 U.S.C. § 1404(a).  The first magistrate judge denied ZTE’s motion to transfer.  A second magistrate judge denied ZTE’s motion to dismiss for improper venue after finding that ZTE failed to show it did not have a regular and established place of business in the Eastern District of Texas.  The magistrate judge noted the lack of uniformity among courts in who bears the burden of proof with respect to venue but determined that, under Fifth Circuit law, the burden lies with the objecting defendant.  Over ZTE’s objections regarding the burden of proof, the district court denied ZTE’s motion to dismiss. ZTE petitioned for a writ of mandamus, which the Federal Circuit granted.  The Court first determined that Federal Circuit—not regional circuit—law governs the placement of the burden of persuasion on the propriety of venue under § 1400(b).  It then held as a matter of Federal Circuit law that, upon motion by the Defendant challenging venue in a patent case, the Plaintiff bears the burden of establishing proper venue and that this holding  “best aligns with the weight of historical authority among the circuits and best furthers public policy.”  The Court remanded to the district court to consider whether venue was proper in light of its holding that the plaintiff, American GNC, bears the burden. Disc Disease Solutions Inc. v. VGH Solutions, Inc., No. 2017-1483 (Fed. Cir. May 1, 2018):  Pleading standard for patent infringement following the abrogation of Form 18. In December 2015, certain amendments to the Federal Rules of Civil Procedure took effect.  Among them was the abrogation of Rule 84 (stating that the “Forms in the Appendix suffice under these rules”) and Form 18 (a form adequate to plead a direct patent infringement claim).  Absent Form 18, complaints now must meet the Iqbal/Twombly standard for pleading to survive a 12(b)(6) motion. Disc Disease filed its complaint the day before the 2015 amendments became effective.  The district court determined that Iqbal/Twombly—not Form 18—applied to Disc Disease’s complaint and dismissed the complaint for failure to state a claim.  The district court later denied reconsideration because it did not view the 2015 amendments to be an intervening change in the law. The Federal Circuit reversed.  The Federal Circuit did not address whether Form 18 or Iqbal/Twombly governed because, it held, the district court erred in dismissing Disc Disease’s complaint even under Iqbal/Twombly‘s pleading standard.  The Court noted that the case “involves simple technology” with only four independent claims in the asserted patents.  Disc Disease’s complaint “specifically identified the three accused products—by name and by attaching photos of the product packaging as exhibits—and alleged that the accused products meet each and every element of at least one claim” of the asserted patents.  This was sufficient to state a claim for patent infringement in these circumstances. John Bean Technologies Corp. v. Morris & Associates, Inc., No. 17-1502 (Fed. Cir. Apr. 19, 2018):  Equitable estoppel when claims are substantively amended or added following ex parte reexamination. John Bean (and its predecessor) and Morris are competitors in the poultry chiller market.  After the patent-in-suit issued to John Bean, Morris sent John Bean’s counsel a demand letter on June 27, 2002, informing him that John Bean had been contacting Morris’s customers and asserting that Morris’s equipment infringes the recently issued patent.  The letter demanded that John Bean stop telling Morris’s customers that Morris’s products infringe John Bean’s patent and advised John Bean that the patent was invalid over a specific prior art reference.  John Bean did not respond, and Morris continued to develop and sell its product. Eleven years later, on December 18, 2013, John Bean filed a request for ex parte reexamination of the patent-in-suit.  During reexamination, John Bean amended the two original claims and added six additional claims in response to a rejection by the PTO.  Shortly after the reexamination certificate issued, John Bean filed a complaint in the U.S. District Court for the Eastern District of Arkansas against Morris for patent infringement.  The district court granted summary judgment in favor of Morris that John Bean’s infringement action was barred by equitable estoppel given John Bean’s silence after the demand letter. The Federal Circuit (Reyna, J.) reversed, holding that the district court abused its discretion in applying equitable estoppel to bar John Bean’s infringement action without considering how the ex parte reexamination affected the patent claims.  The Court explained that the amendments made during reexamination in this case were both substantial and substantive, including by adding new limitations.  As a result, the asserted claims did not exist at the time of Morris’s demand letter.  But the Court recognized that there may be other cases where the asserted claims may be considered identical for the purposes of infringement and also for applying equitable estoppel.  The Court also acknowledged that Morris may have recourse under the affirmative defenses of absolute and intervening rights. Upcoming Oral Argument Calendar For a list of upcoming arguments at the Federal Circuit, please click here. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Federal Circuit.  Please contact the Gibson Dunn lawyer with whom you usually work or the authors of this alert: Blaine H. Evanson – Orange County (+1 949-451-3805, bevanson@gibsondunn.com) Blair A. Silver – Washington, D.C. (+1 202-955-8690, bsilver@gibsondunn.com) Please also feel free to contact any of the following practice group co-chairs or any member of the firm’s Appellate and Constitutional Law or Intellectual Property practice groups: Appellate and Constitutional Law Group: Mark A. Perry – Washington, D.C. (+1 202-887-3667, mperry@gibsondunn.com) Caitlin J. Halligan – New York (+1 212-351-4000, challigan@gibsondunn.com) Nicole A. Saharsky – Washington, D.C. (+1 202-887-3669, nsaharsky@gibsondunn.com) Intellectual Property Group: Josh Krevitt – New York (+1 212-351-4000, jkrevitt@gibsondunn.com) Wayne Barsky – Los Angeles (+1 310-552-8500, wbarsky@gibsondunn.com)Mark Reiter – Dallas (+1 214-698-3100, mreiter@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

April 17, 2018 |
FDA Releases Draft Guidance Proposing a Significant Expansion of the Abbreviated 510(k) Pathway for Medical Devices

Click for PDF On April 12th, 2018, the Food and Drug Administration (“FDA”) released draft guidance proposing a significant expansion of the abbreviated 510(k) pathway for medical devices that would allow applicants to rely on performance characteristics rather than direct comparisons to predicate devices (“Draft Guidance”).[1]  FDA plans to maintain a list of device types appropriate for the Expanded Abbreviated 510(k) program on the FDA website and to issue additional guidance on specific performance criteria.[2]  Prior comments by FDA Commissioner Scott Gottlieb suggest that the new program could focus on device types with older predicate devices where direct testing has become challenging, and on “well-understood technologies like ultrasound imaging machines, common in vitro diagnostic devices, and blood pressure monitors.”[3] A 510(k) is a premarket submission to demonstrate that a proposed device for marketing is at least as safe and effective, that is, “substantially equivalent,” to a “predicate device,” which is a legally marketed device that is not subject to FDA’s premarket approval (“PMA”) requirements.[4]  Under the Abbreviated 510(k) clearance pathway, applicants could use conformity to FDA-recognized consensus standards or FDA guidance to demonstrate some of the performance characteristics necessary to support a finding of substantial equivalence to a predicate device.[5] The new Expanded Abbreviated 510(k) program would allow a submitter to use FDA guidance, FDA-recognized consensus standards, special controls, and other information to demonstrate all of the performance characteristics necessary to show substantial equivalence.  FDA reasons that “[i]f a legally marketed device performs at certain levels relevant to its safety and effectiveness, and a new device meets or exceeds those levels of performance for the same characteristics, FDA could find that the new device is as safe and effective as the legally marketed device.”[6]  In other words, direct head-to-head comparisons, including testing, against predicate devices would not be required to demonstrate substantial equivalence under the Expanded Abbreviated 510(k) program.[7]  An applicant would be required to submit a declaration of conformity, a summary of the data, and/or the underlying data, depending on the performance criteria specified for the device at issue. The Draft Guidance was foreshadowed by comments from Commissioner Gottlieb in an FDA Voice blog post in December 2017.  In that post, Commissioner Gottlieb explained that, as a result of significant advances in technology, device manufacturers were increasingly encountering challenges when they tested new devices against older predicate devices, many of which had been marketed for decades.  In light of this, the Commissioner announced that FDA would undertake steps to modernize 510(k) review, permitting increased flexibility and facilitating a streamlined process that could potentially accelerate the rate at which new innovations are brought to market.  In addition, the Commissioner noted that FDA’s new guidance would be consistent with requirements under the 21st Century Cures Act to use the “least burdensome” means available to demonstrate substantial equivalence.[8] FDA is accepting comments on the Draft Guidance until July 11, 2018.    [1]   FDA, Draft Guidance for Industry and FDA Staff: Expansion of the Abbreviated 510(k) Program: Demonstrating Substantial Equivalent Through Performance Criteria (Apr. 12, 2018).    [2]   FDA, Draft Guidance for Industry at 7.    [3]   Commissioner Scott Gottlieb, Advancing Policies to Promote Safe, Effective MedTech Innovation (FDA Voice Blog, Dec. 11, 2017), https://blogs.fda.gov/fdavoice/index.php/2017/12/advancing-policies-to-promote-safe-effective-medtech-innovation/.    [4]   21 U.S.C. § 360c(i).    [5]   FDA, Final Guidance: The New 510(k) Paradigm: Alternate Approaches to Demonstrating Substantial Equivalence in Premarket Notifications (Mar. 20, 1998).    [6]   FDA, Draft Guidance for Industry at 6.    [7]   Id. at 7.    [8]   Gottlieb, Advancing Policies to Promote Safe, Effective MedTech Innovation. The following Gibson Dunn lawyers assisted in the preparation of this client update:  Marian Lee, Stephen Payne and Claudia Kraft. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work or any of the following members of the FDA and Health Care practice group: Washington, D.C. Stephen C. Payne, Chair, FDA and Health Care Practice (+1 202-887-3693, spayne@gibsondunn.com) Marian J. Lee (+1 202-887-3732, mjlee@gibsondunn.com) F. Joseph Warin (+1 202-887-3609, fwarin@gibsondunn.com) Daniel P. Chung (+1 202-887-3729, dchung@gibsondunn.com) Jonathan M. Phillips (+1 202-887-3546, jphillips@gibsondunn.com) Claudia D. Kraft (+1 202-887-3794, ckraft@gibsondunn.com) Los Angeles Debra Wong Yang (+1 213-229-7472, dwongyang@gibsondunn.com) San Francisco Charles J. Stevens (+1 415-393-8391, cstevens@gibsondunn.com) Winston Y. Chan (+1 415-393-8362, wchan@gibsondunn.com) New York Alexander H. Southwell (+1 212-351-3981, asouthwell@gibsondunn.com) Denver Robert C. Blume (+1 303-298-5758, rblume@gibsondunn.com) John D. W. Partridge (+1 303-298-5931, jpartridge@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles, CA 90071 Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

March 29, 2018 |
Federal Circuit Update (March 2018)

Click for PDF This March 2018 edition of Gibson Dunn’s Federal Circuit Update discusses the three pending Federal Circuit cases before the Supreme Court that consider issues regarding inter partes review proceedings and extraterritorial damages, and a brief summary of the process for seeking an interlocutory appeal.  This Update also provides a summary of the pending en banc case involving attorneys’ fees for litigation involving the PTO.  Also included are summaries of recent decisions regarding the fair use defense to copyright infringement, factual issues underlying patent eligibility under 35 U.S.C. § 101, and the jurisdiction of the Federal Circuit over Walker Process antitrust claims. Federal Circuit News On Friday, March 16, 2018, the Judicial Conference of the U.S. Court of Appeals for the Federal Circuit was held in Washington, D.C.  At the Conference, Judge Pauline Newman was recognized with the 2018 American Inns of Court Professionalism Award.  Judge Newman has served on the Federal Circuit in active status for the past 34 years. Supreme Court.  The Supreme Court has heard oral argument on two cases from the Federal Circuit this term, and recently granted certiorari on a third case: Case Status Issue WesternGeco LLC (Schlumberger) v. ION Geophysical Corp., No. 16-1011 Certiorari granted Jan. 12, 2018; Argument Apr. 16, 2018 Recoverability of lost profits for foreign use in cases where patent infringement is proven under 35 U.S.C. § 271(f) Oil States Energy Services, LLC v. Greene’s Energy Group, LLC, No. 16-712 Argued on Nov. 27, 2017 Constitutionality of inter partes review under Article III and the Seventh Amendment SAS Institute Inc. v. Matal, No. 16-969 Argued on Nov. 27, 2017 The number of claims that must be addressed by the Patent Trial and Appeal Board in a final written decision during inter partes review Upcoming En Banc Federal Circuit Cases NantKwest, Inc. v. Matal, No. 16-1794 (Fed. Cir.):  Whether the PTO can recover attorneys’ fees in litigation under 35 U.S.C. § 145. After the PTAB affirmed the examiner’s rejection of NantKwest’s patent application, NantKwest appealed to the United States District Court for the Eastern District of Virginia under 35 U.S.C. § 145.  The PTO prevailed on the merits of the appeal and moved to recover both attorneys’ fees and expert fees.  Section 145 provides that “[a]ll the expenses of the proceedings shall be paid by the applicant.”  Applying this provision, the district court granted the PTO’s request for expert fees, but rejected the PTO’s request for attorneys’ fees.  A panel of the Federal Circuit reversed the district court’s holding as to attorneys’ fees, holding that the “[a]ll expenses of the proceedings” provision under § 145 authorizes an award of attorneys’ fees.  (Decision available here.) The Federal Circuit sua sponte ordered that the panel decision be vacated and that the case be reheard en banc.  Seven amicus briefs were filed, five in support of NantKwest (the International Trademark Association, the Intellectual Property Owners Association, the Intellectual Property Law Association of Chicago, the Association of Amicus Counsel, and the American Bar Association) and two in support of neither party (Federal Circuit Bar Association and American Intellectual Property Law Association).  Oral argument was held on March 8, 2018.  (Audio recording is available here.) Question presented: Did the panel in NantKwest, Inc. v. Matal, 860 F.3d 1352 (Fed. Cir. 2017) correctly determine that 35 U.S.C. § 145’s “[a]ll the expenses of the proceedings” provision authorizes an award of the United States Patent and Trademark Office’s attorneys’ fees? Federal Circuit Practice Update How to Appeal from an Interlocutory Decision.  The Federal Circuit has exclusive jurisdiction over interlocutory orders in patent law cases.  See 28 U.S.C. § 1292(c)(1).  Interlocutory orders are appealable as of right if they relate to an injunction, receivers, or certain admiralty cases.  See § 1292(a)(1)–(3).  All other interlocutory appeals are discretionary and require that both the district court and the appeals court agree to hear the issue on appeal. The district court judge must first certify that the issue “involves a controlling question of law as to which there is substantial ground for difference of opinion and that an immediate appeal from the order may materially advance the ultimate termination of the litigation.”  28 U.S.C. § 1292(b).  There is no deadline after the substantive order to move for certification under section 1292(b), but the prospective appellant should move promptly.  If the district court declines to issue such a certification order, that is the end of the road (absent mandamus or other extraordinary relief). If the district court certifies an issue for interlocutory appeal, the appeals court has discretion to permit the appeal.  See § 1292(b); see also Regents of U. of Cal. v. Dako N. Am., Inc., 477 F.3d 1335, 1336 (Fed. Cir. 2007) (“Ultimately, this court must exercise its own discretion in deciding whether it will grant permission to appeal an interlocutory order certified by a trial court.”).  A party has ten days after the district court’s certification order to petition the court of appeals.  See § 1292(b); see also Fed. R. App. P. 5(a)(3).  The petition must contain a summary of relevant facts, the question presented, the relief sought, a statement of the reasons why the appeal should be allowed, and copies of the relevant district court orders.  Fed. R. App. P. 5(b)(1)(A)–(E).  A party then has ten days to file an answer in opposition to the petition.  Fed. R. App. P. 5(b)(2).  The petition is decided without the benefit of oral argument, unless the court of appeals orders otherwise.  Fed. R. App. P. 5(b)(3). Key Case Summaries (February – March 2018) Oracle Am., Inc. v. Google LLC, Nos. 17-1118, 17-1202 (Fed. Cir. Mar. 27, 2018):  Direct copying of a copyrighted work for use in a competing platform using the material for the same purpose and function did not, on the facts of the case, amount to fair use. After a jury had determined that Google’s use of Oracle’s copyright in Java API packages was a fair use, the district court denied Oracle’s post-trial motions for judgment as a matter of law and for a new trial.  Applying the four factors for fair use from 17 U.S.C. § 107, the district court held that a reasonable jury could have concluded that the use was fair because:  (1) the purpose and character of Google’s use was transformational; (2) the nature of the copyrighted work was not “highly creative”; (3) the amount and substantiality of the portion used was only as much of the work as was necessary for its transformative use; and (4) Google’s use of the code did not cause harm to the potential market for the copyrighted work. The Federal Circuit (O’Malley, J.) reversed.  At the outset, the Federal Circuit discussed the standard of review and found that fair use is “primarily a legal exercise” and thus, under the Supreme Court’s recent decision in U.S. Bank Nat’l Ass’n ex rel. CWCapital Asset Mgmt. LLC, No. 15-1509 (U.S. Mar. 5, 2018), the inferences to be drawn from the fair use factors are legal in nature and subject to de novo review. In analyzing the first factor, the court found that Google’s use of the Java APIs to create its Android platform was commercial under Ninth Circuit law even though Google gave a free open source license to Android because direct economic benefit is not required, and Google profited indirectly from the platform.  The court also found that Google’s use was not transformative because Google (1) used the API packages for the same purpose as they were used in the Java platform, (2) made no alterations to the expressive content of the copyrighted material, and (3) did not adapt the material for a “new context” when it provided Android for smartphones.  As to the second factor, the court found that the evidence presented at trial would allow reasonable jurors to conclude that functional considerations were substantial and important.  Addressing the third factor, the court noted that Google directly copied 37 API packages and 11,500 lines of code, even though only 170 lines of code were necessary to write in the Java language.  Although the amount of code was a small percentage of the roughly 2.86 million lines of code in Java libraries, the court found the copying qualitatively substantial because it copied 37 APIs in their entirety—even though Google admitted they could have written their own APIs—in order to make the Android platform familiar and attractive to Java programmers.  Turning to the fourth factor, the court noted that Android competed directly with Oracle’s Java platform and that the free nature of Android caused significant market harm to Oracle’s efforts to license Java. Based on those findings, the court noted that the second factor favored a finding of fair use, whereas the first and fourth factors weighed “heavily against” a finding of fair use.  The court considered the third factor to be neutral “at best.”  In balancing these factors, the court concluded that the factors weighed against a finding of fair use, and the court explained that “[t]here is nothing fair about taking a copyrighted work verbatim and using it for the same purpose and function as the original in a competing platform.”  The court added the caveat that it was “not conclud[ing] that a fair use defense could never be sustained in an action involving the copying of computer code.” Berkheimer v. HP Inc., No. 2017-1437 (Fed Cir. Feb. 8, 2018):  Patent eligibility under section 101 presents issues of fact and, under the facts of that case, summary judgment was not appropriate. The Federal Circuit held that the second prong of the Alice ineligibility inquiry under 35 U.S.C. § 101—whether the claim elements “transform the nature of the claim” into patent-eligible subject matter if they “involve more than performance of well-understood, routine, [and] conventional activities previously known to the industry”—is “a factual determination” that may not be suitable for summary judgment if facts are disputed. The district court ruled on summary judgment that eight claims from U.S. Patent No. 7,447,713 were directed to abstract ideas and thus ineligible for patenting under section 101.  The ‘713 Patent describes a means of digitally processing and archiving files by “parsing” the files into multiple parts, comparing those parts, and eliminating redundant material to allegedly improve storage efficiency and reduce storage costs. The Federal Circuit (Moore, J.) reversed.  Berkheimer alleged that the claims at issue covered linking data so as to facilitate “one-to-many” editing (i.e., allowing a single edit to populate to multiple points that use the same data).  The patentee asserted that this “inventive feature” operated in an “unconventional manner” versus mere “copy-and-paste” functionality in the prior art.  Although the panel agreed that all the challenged claims were directed to the abstract ideas of parsing and comparing data—the first prong of the Supreme Court’s Alice test—the panel reversed the district court’s ruling on the second Alice prong for four claims on the basis that the second prong “is a question of fact.”  Specifically, the Federal Circuit panel held that whether the “one-to-many” editing feature was “well-understood, routine, and conventional” was a disputed factual question that could not be decided on summary judgment.  In light of this, the Federal Circuit panel held that whether this added feature was “well-understood, routine, and conventional” was a disputed factual question that could not be decided on summary judgment. On March 12, HP petitioned for rehearing en banc, supported by several amici curiae.  On March 15, the Federal Circuit invited a response to HP’s petition. Aatrix Software, Inc. v. Green Shades Software, Inc., No. 2017-1452 (Fed. Cir. Feb. 14, 2018):  Patent eligibility presents issues of fact not amenable to a Rule 12 motion to dismiss. Following Berkheimer, the Federal Circuit (Moore, J.) issued a parallel ruling concerning the appropriateness of deciding patent eligibility at the Rule 12 stage.  Judge Reyna wrote separately in partial dissent. Aatrix Software asserted two patents directed to systems and methods for importing data onto a computer to allow that data to be processed and viewed.  The district court granted defendant’s motion to dismiss, holding that the claims were not directed to patentable subject matter. On appeal, the Federal Circuit reversed, holding that the complaint set forth a question of fact as to patentability because the complaint alleged that “the claimed software uses less memory, and results in faster processing speed” and thus is patent eligible because “the claimed invention is directed to an improvement in the computer technology itself.” Judge Reyna dissented, challenging the practical implications of the ruling and arguing that Federal Circuit precedent “is clear that the § 101 inquiry is a legal question” and a question “that can be appropriately decided on a motion to dismiss.” Xitronix Corp. v. KLA-Tencor Corp., No. 2016-2746 (Fed. Cir. Feb. 9, 2018):  Jurisdiction over Walker Process-antitrust claims is in the regional circuits, not the Federal Circuit. Under 28 U.S.C. § 1295(a)(1), the Federal Circuit has appellate jurisdiction over actions arising under “any Act of Congress relating to patents.”  Walker Process claims involve allegations that enforcing a patent procured by fraud on the PTO constitutes an antitrust violation under the Sherman Act.  The Federal Circuit has historically treated such claims as presenting “a substantial question of patent law” and thus accepted jurisdiction over them. In Gunn v. Minton, the Supreme Court held that a state law claim alleging legal malpractice in handling a patent case—which likewise implicates U.S. Patent law—did not itself “arise under” or depend on a question of patent law sufficient to convey jurisdiction to federal courts.  568 U.S. 251, 258 (2013). In Xitronix, both sides asserted that the Federal Circuit had appellate jurisdiction over the Walker Process claim under appeal in that case.  No other patent-related claim was asserted on which to base Federal Circuit jurisdiction.  The Federal Circuit, however, raised the question of jurisdiction sua sponte, ruling that, given the Supreme Court’s analogous view in Gunn, jurisdiction for Walker Process claims rested with the regional circuits.  Accordingly, the Federal Circuit overruled its prior contrary precedent and transferred the appeal to the Fifth Circuit. Upcoming Oral Argument Calendar For a list of upcoming arguments at the Federal Circuit, please click here. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Federal Circuit.  Please contact the Gibson Dunn lawyer with whom you usually work or the authors of this alert: Blaine H. Evanson – Orange County (+1 949-451-3805, bevanson@gibsondunn.com) Blair A. Silver – Washington, D.C. (+1 202-955-8690, bsilver@gibsondunn.com) Please also feel free to contact any of the following practice group co-chairs or any member of the firm’s Appellate and Constitutional Law or Intellectual Property practice groups: Appellate and Constitutional Law Group: Mark A. Perry – Washington, D.C. (+1 202-887-3667, mperry@gibsondunn.com) Caitlin J. Halligan – New York (+1 212-351-4000, challigan@gibsondunn.com) Nicole A. Saharsky – Washington, D.C. (+1 202-887-3669, nsaharsky@gibsondunn.com) Intellectual Property Group: Josh Krevitt – New York (+1 212-351-4000, jkrevitt@gibsondunn.com) Wayne Barsky – Los Angeles (+1 310-552-8500, wbarsky@gibsondunn.com)Mark Reiter – Dallas (+1 214-698-3100, mreiter@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

January 23, 2018 |
2017 Year-End FDA and Health Care Compliance and Enforcement Update – Drugs and Devices

Click for PDF As 2016 came to a close, pharmaceutical and medical device companies waited expectantly and wondered aloud about what 2017 and the arrival of the Trump Administration would bring.  With 2017 behind us, we now have initial indications—and some answers—about what the arrival of this new Administration means for drug and device companies. On the enforcement front, the Department of Justice (“DOJ”), the Department of Health and Human Services, Office of Inspector General (“HHS OIG”), and the Food and Drug Administration (“FDA”) showed no signs of scaling back their efforts.  Instead, 2017 marked yet another year of massive recoveries from drug and device companies to settle the standard mélange of allegations under the False Claims Act (“FCA”), Anti-Kickback Statute (“AKS”), Federal Food, Drug, and Cosmetic Act (“FDCA”), Foreign Corrupt Practices Act (“FCPA”), and other enforcement statutes.  Although some of these settlements were leftovers from the Obama Administration, we have seen no evidence that the enforcement agencies are pulling punches under President Trump. On the regulatory front, meanwhile, the picture is more complicated.  On the one hand, pharmaceutical and medical device companies have yet to see the type of regulatory roll-back that the Trump Administration has promised—and started to deliver—in certain other industries.  On the other hand, there have been nascent efforts by the new Administration to reign in burdensome regulations.  For example, the Administration has undertaken efforts to streamline review processes for medical devices.  As the new Administration hits its stride, and (perhaps) leaves the oxygen-consuming debate over repeal of the Affordable Care Act in the past, it remains to be seen just how much regulatory relief pharmaceutical and medical device companies can expect. Below, we cover the most important regulatory and enforcement developments affecting drug and device manufacturers.  As in past updates, we begin with an overview of government enforcement efforts against drug and device companies under the FCA, the FDCA, and other laws.  We then address evolving regulatory guidance and action on topics of note to drug and device companies: promotional activities, manufacturing practices, and the AKS.  And we conclude with a discussion of developments of particular note to device manufacturers. As always, we would be happy to discuss these developments—and their implications for your business—with you. I.     DOJ ENFORCEMENT IN THE PHARMACEUTICAL AND MEDICAL DEVICE INDUSTRIES Despite a new Administration, DOJ remains committed to enforcing the FCA and other statutes against entities in the health care industry, and in the drugs and devices sectors in particular.  In sum, DOJ obtained more than $3.7 billion in civil settlements and judgments under the FCA during the 2017 fiscal year.[1]  With nearly 800 new FCA cases filed in 2017 and roughly $1.5 billion in federal recoveries alone from drug and device companies,[2] DOJ (and qui tam relators) have shown no sign of turning their attention elsewhere. FCA resolutions continue to drive the government’s recoveries from drug and device companies.  In 2017, those resolutions included Shire Pharmaceuticals LLC’s settlement for more than $200 million in January and Mylan Inc.’s $465 million settlement in August. Although recent federal FDCA and FCPA enforcement activity against drug and device companies has been relatively quiet, several of DOJ’s FCA resolutions involved FDCA-related allegations, and several high-profile FCPA investigations continue apace.  We address these and other notable developments in the enforcement arena, including the Trump Administration’s efforts to address the opioid crisis, in more detail below.      A.     False Claims Act Surpassing last year’s recoveries of $1.4 billion, approximately $1.5 billion of the FCA recoveries in 2017 stemmed from resolutions with drug and device manufacturers.  The total number of FCA cases settled by DOJ with these manufacturers (16) nearly matched that from last year (15), but the proportion of device-to-pharmaceutical settlements flipped.  In comparison with last year, in which DOJ settled twice as many cases against device manufacturers as against pharmaceutical manufacturers, DOJ settled 9 cases with pharmaceutical companies and only 6 cases with device manufacturers in 2017.  In addition, the vast majority of DOJ’s settlement recoveries this year—over 95%—resulted from cases against pharmaceutical companies.[3] As illustrated below,[4] DOJ continues to pursue FCA actions under multiple theories, including improper billing resulting from alleged violations of various federal health care program rules, illegal kickbacks under the AKS, and, to a much lesser extent, off-label promotion.  Of note, there were no off-label promotion recoveries this year against device manufacturers.     1.     Settlements in FCA Matters Relating to Federal Health Program Rules The largest recovery of the past six months came from DOJ’s settlement in August with Mylan Inc. and Mylan Specialty L.P. (collectively “Mylan”).[5]  Mylan, which markets numerous drugs and devices including EpiPen, agreed to pay $465 million to resolve allegations that it knowingly misclassified EpiPen as a generic drug to avoid paying rebates under the Medicaid Drug Rebate Program (and also secured large increases in the price of the drug on the private market).[6]  As part of the settlement, Mylan agreed to enter into a five-year corporate integrity agreement requiring independent annual review of its Medicaid drug rebate program practices.[7]  The case originated with a complaint by another pharmaceutical manufacturer, Sanofi-Aventis US LLC, which will receive approximately $38.7 million from the federal recovery.[8] In September, drug maker Aegerion also agreed to pay more than $35 million to settle allegations that it violated the FCA, FDCA, and the Health Insurance Portability and Accountability Act (“HIPAA”) through activities associated with its drug, Juxtapid.[9]  As described in further detail below, the government alleged that the drug was misbranded due to the company’s failure to comply with a Risk Evaluation and Mitigation Strategy (“REMS”).  According to the government, the company caused the submission of false claims through its alleged promotion of the drug for patients for whom the drug was not indicated, purportedly false and misleading statements to doctors regarding the appropriateness of using the drug for certain patients, and alleged falsification of medical necessity statements and prior authorizations submitted to federal health care programs.[10]  The settlement also resolved allegations that the company paid patients’ copay obligations with funds channeled through a purported non-profit patient assistance organization.  Of the total settlement, $28.8 million will go toward the resolution of federal and state FCA charges.  Further, Aegerion entered into a separate deferred prosecution agreement to resolve criminal allegations that it conspired to obtain patient health information for commercial gain without patient authorization in violation of HIPAA.[11] 2.     Settlements in AKS-Related FCA Matters As reported in our Mid-Year Update, 2017 began with the largest-ever FCA recovery in a kickback case involving a medical device.  Significant AKS-related enforcement actions in the latter half of 2017 included United Therapeutics’ $210 million settlement.  From 2010 to 2014, a tax-exempt non-profit foundation purportedly used donations made by the Maryland-based pharmaceutical company to pay Medicare patient copays for the company’s pulmonary arterial hypertension drugs; according to the government, this amounted to inducing patients to purchase the company’s drugs.[12]  The government claimed that, when deciding on donations, United Therapeutics obtained data from the foundation detailing the amounts spent by the foundation on patients who were using each of the company’s drugs.  The settlement is just one of a number of recent developments reflecting increased scrutiny of patient assistance programs by DOJ and HHS OIG, discussed further in Section V below. In addition to the settlement with Aegerion discussed above, DOJ reached two other notable AKS-related settlements with pharmaceutical and medical device companies in the last six months of 2017: In August, the government agreed to a $12 million settlement with Sightpath Medical, Inc., TLC Vision Corporation, and their former CEO, James Tiffany.[13]  According to the complaint, Sightpath and Cameron-Ehlen Group (the subject of an underlying lawsuit that the government likewise joined) allegedly provided kickbacks to ophthalmologists in the form of luxury ski vacations and other high-end fishing, golfing, and hunting trips to persuade the physicians to use the companies’ intraocular lenses and ophthalmic surgical equipment.[14] In September, Galena Biopharma agreed to pay more than $7.55 million to resolve allegations that it induced doctors to prescribe its fentanyl-based drug Abstral through free meals, speaker fees, and an advisory board planned and attended by Galena’s sales team, as well as through payments to a physician-owned pharmacy under a performance-based rebate agreement.[15]  The government also contended that Galena compensated doctors for referring patients to Galena’s RELIEF patient registry study—purportedly a sham program designed to obtain data on patients’ experiences with the company’s drug.[16]  Two of the doctors who allegedly received the kickbacks have been tried and convicted in the Southern District of Alabama for offenses related to their subsequent prescribing of the drug.[17] 3.     Resolution of Off-Label Promotion Investigations As reported in last year’s Year-End Update, developing case law has imposed potentially significant First Amendment obstacles to the enforcement of off-label promotion claims under the FCA.  In spite of this trend, however, DOJ has continued to recover settlements based on off-label theories. In July, for example, New Jersey-based pharmaceutical manufacturer Celgene Corp. agreed to a $280 million settlement to resolve allegations that the company promoted two of its cancer drugs for uses that were not approved by FDA or covered by federal and state health care programs.[18]  The settlement also resolved allegations that Celgene paid kickbacks to physicians and made false and misleading statements about the drugs. The government also reached a settlement with pharmaceutical manufacturer Novo Nordisk, Inc. in early September.  In addition to alleged FDCA violations discussed in further detail below, the settlement resolved allegations that the company promoted its Type II diabetes drug Victoza for use by adult patients who do not suffer from Type II diabetes—a use that FDA had not approved as safe and effective.[19]  Roughly $47 million of the $58 million total settlement will go towards resolving FCA allegations under theories of off-label promotion and other purported conduct.[20] 4.     Developments in the Implied Certification Theory’s Materiality Requirement Our 2016 Year-End and 2017 Mid-Year Updates discussed at length recent efforts to interpret the materiality requirement set forth by the Supreme Court in Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016).  In particular, courts have continued to grapple with what, if any, impact continued government payments may have on the materiality analysis.  As recent case law developments have shown, how lower courts interpret Escobar will have particular relevance to drug and device companies, who are subject to a wide range of regulatory requirements that are steps removed from government payment but potentially could be subject to FCA actions under an implied certification theory. In September, the Fifth Circuit issued a per curiam opinion in United States ex rel. King v. Solvay Pharmaceuticals, Inc. hinting at potential new materiality obstacles that courts might erect in the way of the government or relators attempting to prove materiality in off-label cases under the FCA.  Among other purported violations, the relator in King alleged that the defendant caused false claims to be submitted under the FCA by promoting three of its drugs for off-label uses.[21]  Despite supposed evidence that the company discussed off-label drug uses with physicians and sponsored off-label use studies, the court found there was insufficient evidence to show that the company’s actions caused any false claims.[22] Affirming the district court’s grant of summary judgment as to the off-label claims on those grounds, the court went further, suggesting that it harbored doubts that mere allegations of off-label promotions would satisfy Escobar‘s materiality standard.[23]  Because “Medicaid pays for claims without asking whether the drugs were prescribed for off-label uses or asking for what purpose the drugs were prescribed[,]” and “given that it is not uncommon for physicians to make off-label prescriptions,” the Fifth Circuit reasoned that “it is unlikely that prescribing off-label is material to Medicaid’s payment decisions under the FCA.”[24]  Although dicta, those comments build upon the Supreme Court’s holding in Escobar that certain federal health care program requirements are not material where the government pays the claims despite knowing of violations of these requirements.[25]  Further, the Fifth Circuit’s observation may suggest it is receptive to arguments that failure of the government to take affirmative steps in assessing reimbursement requirements could undermine its materiality arguments.  In any event, King may prove a strong foothold for drug and device makers battling FCA claims predicated upon alleged off-label promotion in Medicaid and similar cases. The Supreme Court soon may have occasion to elaborate on the materiality requirements outlined in Escobar and on the implications of government action—or inaction—in particular.  In a recent petition for certiorari, Gilead Sciences asked the Supreme Court to review the Ninth Circuit’s decision in United States ex rel. Campie v. Gilead Sciences, Inc. As discussed in our 2017 Mid-Year Update, the relators in that case alleged that Gilead fraudulently obtained approval for certain of its drugs by making false statements to FDA about the manufacturing source of the drugs’ active ingredient and purported later contamination by that supplier.[26]  After finding that the defendant’s proprietary drug names could constitute actionable “specific representations,” and after concluding that fraud on one agency constitutes fraud on a separate agency as long as the two are “overseen” by the same cabinet secretary,[27] the court concluded that the relators adequately pled materiality.  Reasoning that “FDA approval is ‘the sine qua non‘ of federal funding here” and noting that the company had stopped using the manufacturing site in question, the Ninth Circuit rejected Gilead’s arguments focusing on the government’s continued drug reimbursements even after relators brought suit.  The Ninth Circuit also determined it was premature to decide whether the government paid despite knowing of the defendant’s noncompliance.[28]  Gilead’s petition for certiorari focuses narrowly on whether the government’s decision to continue reimbursement even “after learning of alleged regulatory infractions” would suffice to undermine the relators’ materiality arguments.[29]  Gilead takes issue with the potential impact on defendants’ ability to dismiss a complaint on materiality grounds at the motion to dismiss stage, as contemplated by Escobar.[30]  Given the brewing disagreement among federal circuit and district courts as to how to apply Escobar‘s materiality standard, the Supreme Court may well seize this opportunity to provide clarity on the subject of materiality and government knowledge. 5.     Rule 9(b) Particularity As detailed in our 2017 Mid-Year Update, federal circuit and district courts also have continued to take differing approaches as to how Federal Rule of Civil Procedure 9(b)’s heightened pleading requirements should be applied to FCA claims at the motion to dismiss stage.  Rule 9(b) requires FCA plaintiffs to plead allegations with particularity.  But questions about the extent of detail required to meet this standard have remained open to debate, especially in cases against drug and device manufacturers where there are allegations about the manufacturers’ conduct but scant details about the claims submitted by third-party physicians or pharmacies. The Sixth Circuit recently addressed this issue in United States ex rel. Ibanez v. Bristol-Myers Squibb Co., in affirming the lower court’s dismissal and denying leave to amend where relators failed to plead a specific, representative false claim submitted to the government for payment.[31]  Brought by former employees, the case involved allegations that Bristol-Myers Squibb and Otsuka America Pharmaceuticals Inc. engaged in an illegal nationwide scheme to promote the antipsychotic drug Abilify for off-label uses.[32]  Although the relators alleged some details regarding the purported promotional scheme, the lower court nonetheless dismissed the relators’ suit after finding that they failed to allege at least one representative claim submitted to the government that stemmed directly from the defendants’ allegedly illegal practices.[33] The Sixth Circuit agreed with the district court and refused to apply the “personal knowledge” exception to the Circuit’s otherwise strict application of Rule 9(b)’s particularity requirements.  Because the relators’ allegations only involved personal knowledge of an allegedly fraudulent scheme rather than of the defendant’s billing practices, the Sixth Circuit refused to allow the complaint to proceed based solely on other “reliable indicia” that claims actually were submitted.[34]  In so holding, the Sixth Circuit explained that the complaint must “adequately allege the entire chain—from start to finish—to fairly show defendants cause[d] false claims to be filed,” including any “specific intervening conduct” along the chain.[35]  For example, the complaint must allege that a physician targeted by the allegedly improper promotion “prescribed the medication for an off-label use or because of an improper inducement,” a patient filled the prescription, and the filling pharmacy submitted a claim “for reimbursement on the prescription.”[36]  The court also held that the relator’s proposed third amended complaint similarly failed to provide sufficient allegations to meet either the relaxed or strict particularity requirements.[37] Another FCA case from the First Circuit charted a different course in evaluating Rule 9(b)’s particularity standard.  In United States ex rel. Nargol v. DePuy Orthopaedics, Inc., the relators alleged that Depuy Orthapaedics, Inc., and related entities caused third parties to submit fraudulent claims after purportedly distributing implants with latent defects.[38]  Although the First Circuit typically has applied a “strict” Rule 9(b) pleading standard, the court accepted that a complaint can meet Rule 9(b) requirements where it “essentially alleges facts showing that it is statistically certain that [the defendant] cause[d] third parties to submit many false claims to the government.”[39]  Although the complaint did not allege specific information regarding submitted claims, the court reasoned that the doctors would not have been on notice not to subsequently bill federal health care programs since there was no reason to believe that anyone other than the defendants knew of the purported defects or that they could have been readily discovered during surgery.[40]  According to the First Circuit, because doctors presumably sought reimbursement for the defective devices, every sale of the devices likely “was accompanied by an express or plainly implicit representation” that the product was FDA-approved and not a “materially deviant version,” and because it was “highly likely” that uninsured patients did not bear the expense in most cases, it was “virtually certain that the insurance provider in many cases was Medicare, Medicaid, or another government program.”[41]  As such, the court distinguished the alleged scheme from other off-label promotion allegations and agreed that a different, “more flexible” Rule 9(b) standard of particularity was appropriate.[42]  Because the complaint alleged “the details of the scheme with reliable indicia that le[]d to a strong inference that claims were actually submitted,” the court overturned the district court’s dismissal of the relators’ claim.[43]             B.     Developments in Enforcement Actions Against Opioid Manufacturers and Distributors The nation’s opioid crisis and promises by the Trump Administration to take a more aggressive approach triggered a new DOJ initiative in 2017.  Attorney General Jeff Sessions announced the formation of the Opioid Fraud and Abuse Detection Unit—a DOJ pilot program aimed at “ulitiz[ing] data to help combat the devastating opioid crisis that is ravaging families and communities across America.”[44]  To aid this mission, DOJ announced that it has selected twelve districts across the country to participate in the program and has assigned a dozen prosecutors to focus entirely on investigating and prosecuting opioid-related health care fraud cases.[45]  Attorney General Sessions also announced increased funding for state and local law enforcement agencies,[46] as well as plans to designate “opioid coordinators” in each U.S. Attorney’s Office to advance DOJ’s “anti-opioid mission[.]”[47] The widespread DOJ scrutiny of opioid manufacturers and distributors already has led to several public enforcement actions.  In October, DOJ announced its first ever indictments against Chinese manufacturers of Fentanyl and other opioid substances.[48]  The indictments charge two Chinese nationals and their North American-based distributor counterparts with conspiracies to distribute large quantities of Fentanyl, Fentanyl analogues, and other opiate substances throughout the United States.[49]  Both Chinese nationals face potentially significant jail time and millions of dollars in fines.[50] Soon after, DOJ announced the arrest of John N. Kapoor—the founder and majority owner of Insys Therapeutics—for allegedly heading a nationwide conspiracy to illegally distribute a Fentanyl spray originally intended for cancer patients.[51]  The charges against Mr. Kapoor include conspiracy under the Racketeer Influenced and Corrupt Organizations Act (“RICO”), as well as conspiracy to violate the AKS and to defraud health insurance providers who initially were hesitant about approving the spray for non-cancer patients.[52]  Superseding indictments also leveled charges against numerous other executives of the company, which itself faced DOJ enforcement actions for allegedly deceptive marketing practices earlier this year.[53]  Although the final details of the company’s earlier settlement are not yet available, Insys has announced that it expects to face a nearly $150 million liability and pay out any settlement over the course of five years.[54]             C.     Notable Developments in FDCA Enforcement Several resolutions discussed above also involved FDCA-focused theories.  Novo Nordisk, for example, resolved alleged FDCA violations from 2010 to 2012 regarding its purported failure to comply with its required REMS.[55]  Specifically, the government alleged that the company obscured the REMS-required message about a risk of taking Novo Nordisk’s Type II diabetes drug Victoza for patients with a rare form of cancer known as Medullary Thyroid Carcinoma, thus rendering the drug “misbranded” under the FDCA.[56]  According to the complaint, Novo Nordisk instructed its sales force to provide statements to doctors that downplayed the potential risk rather than increasing awareness about it.  As part of the agreement, Novo Nordisk agreed to disgorge roughly $12.2 million for the alleged FDCA violations.[57] DOJ likewise resolved several misbranding allegations against Aegerion Pharmaceuticals Inc.[58]  Roughly one-fifth of the company’s overall $35 million settlement stemmed from allegations that Aegerion failed to provide complete and accurate information to health care providers regarding how Juxtapid—a drug approved to treat patients with a rare cholesterol-related condition—also may cause liver toxicity.[59]  The complaint further alleged that Aegerion violated the FDCA by distributing Juxtapid as a treatment for high cholesterol generally without providing adequate instructions for such use.[60] Apart from the FDCA settlements discussed above, DOJ also obtained several injunctions in the last six months against pharmaceutical manufacturers and distributors to prevent the distribution of allegedly unapproved and misbranded drugs.  In September, for example, DOJ announced that the U.S. District Court for the District of New Jersey entered a consent decree and permanent injunction against Flawless Beauty LLC, RDG Imports LLC, and two related individuals.[61]  DOJ alleged that the products distributed by the defendants were misbranded because they had been marketed with false and misleading claims, including that the products “contribute to good liver function” and “clinically treat degenerative brain and liver diseases[.]”[62] DOJ also secured permanent injunctions in October against Philips North America LLC and two executives of the company preventing Philips from distributing certain of its external defibrillators until the company takes remedial steps to comply with deficiencies discovered by FDA inspectors at one of its facilities in 2015, including the company’s purported failure to establish procedures for implementing corrective and preventive actions following customer complaints.[63]            D.     FCPA Investigations As we discussed in our 2016 Year-End Update, last year ended with the largest-ever FCPA payment by a pharmaceutical company (specifically, the U.S. government’s $519 million resolution with Teva Pharmaceuticals Industries Ltd.).  By comparison, the last six months of FCPA enforcement have not seen any resolutions involving drug and device makers.  Although DOJ and SEC investigations into the foreign sales practices of many drug and device companies (e.g., Alexion Pharmaceuticals Inc.) remain ongoing,[64] DOJ and SEC did not announce any major FCPA settlements with pharmaceutical and medical device manufacturers in the latter half of the year. Despite the recent dearth of settlements in this space, companies would do well to remain cautious.  As suggested in a July 25, 2017 speech by Sandra Moser, Principal Deputy Chief of DOJ’s Fraud Section, DOJ plans to ramp up its enforcement of the FCPA in the health care arena,[65] and FCPA prosecutors will partner with prosecutors from the Healthcare Fraud Unit’s Corporate Strike Force to scrutinize health care company practices abroad.[66] II.     PROMOTIONAL ISSUES Continuing the trend noted in our Mid-Year Update, 2017 was relatively quiet regarding the regulation of promotion of drugs and devices as compared to prior years.  And, once again, the year came and went with minimal progress in FDA’s long-awaited overhaul of its regulatory policies regarding truthful and non-misleading promotional speech.  Indeed, in January 2018, FDA announced yet again that it is delaying its controversial proposed rule that would allow the agency to consider the “totality of the evidence” when evaluating intended use under the FDCA.  But a number of other regulatory and enforcement developments in the latter half of 2017 show that promotional issues continue to receive a lot of government attention, even if they may not be as top-of-mind as they were in earlier years.  Below, we discuss the regulatory enforcement and guidance, jurisprudence, and legislative action concerning promotion of drugs and devices during the last six months of 2017. As discussed below, FDA’s enforcement and regulatory activity over the past six months focused largely on addressing misleading or deceptive advertisements, which FDA Commissioner Scott Gottlieb identified as a priority for the agency in remarks in December in connection with the issuance of the promotional guidance discussed below.  Commissioner Gottlieb’s remarks recognized that “[p]romotional material that drug makers share with patients and providers can be a helpful tool for encouraging patients to seek medical care and raising awareness about new and different treatment options.”[67]  At the same time, he cautioned that a key aspect of FDA’s oversight lies in combatting “claims in prescription drug promotion that have the potential to deceive or mislead consumers and healthcare professionals.”  Calling FDA’s efforts “part of an ongoing policymaking process aimed at making sure our practices protect consumers[,]” Commissioner Gottlieb recognized the need for “clear rules for how sponsors can present certain information, even elements as straightforward as the product name, and do so without introducing features that could mislead patients.”[68]  How the agency sharpens its focus on misleading or deceptive promotional practices, particularly against the backdrop of the new Administration’s general deregulatory posture, surely will be a key issue to watch in 2018.            A.     FDA Enforcement Activity—Advertising and Promotion The latter half of the year saw a slight uptick in FDA’s enforcement activity in this area, with the Office of Prescription Drug Promotion (“OPDP”) issuing three Warning Letters, up from the one letter issued during the first half of the year.[69]  The year’s grand total of just four letters represents a notable decrease in enforcement activity as compared to the eleven letters issued in 2016 and the nine letters issued in 2015.  As FDA’s agenda and priorities under the new Administration continue to take shape into 2018, they will continue to shed light on whether this decline in enforcement activity is a temporary artifact of the agency’s leadership transition, or represents the new normal. Each of the three Warning Letters issued during the past six months concerned the misleading omission of risk information in a drug’s promotional materials, which has been the focus of a majority of letters issued by OPDP in the past few years, as well as failure to include information concerning limitations on use contained in the FDA-approved indication for the product.  In contrast to OPDP’s prior focus on electronic advertising, the letters issued in the past six months pertained largely to product information contained in print materials directed at medical professionals, such as professional detail aids and exhibits at annual medical conferences. In an August 24, 2017 Warning Letter to Cipher Pharmaceuticals Inc., OPDP asserted that the company’s professional detail aid for a prescription opioid medication made false or misleading representations because it advertised the drug’s efficacy for pain relief without referencing any of the risks associated with the product, including the heightened risk of addiction, abuse, and misuse.[70]  OPDP further contended that the detail aid omitted material facts by failing to include the portion of the FDA-approved indication limiting the drug’s intended use solely to instances where alternative treatment options are inadequate.[71] In a November 14, 2017 Warning Letter addressed to both Amherst Pharmaceuticals, LLC and Magna Pharmaceuticals, Inc., OPDP raised similar objections with respect to the presentation of a prescription sleep aid on Amherst’s company website and on Magna’s exhibit panels at an annual conference on sleep medicine.[72]  According to OPDP, the materials contained false or misleading representations because they made claims about the drug’s efficacy while omitting any risk information.[73]  Additionally, OPDP concluded that the materials were false or misleading because they failed to cite references or data to support claims of efficacy and omitted material information regarding the FDA-approved indication for use.[74] Finally, in a December 19, 2017 Warning Letter to Avanthi, Inc., OPDP asserted that the company presented false or misleading information in an exhibit for a weight loss medication displayed at two annual medical conferences.[75]  As with the two letters issued earlier in the year, OPDP asserted that the promotional materials were misleading by making claims about the benefits of the product without communicating any information about the drug’s risks and omitting the limitations on use in the FDA-approved product indication.[76]            B.     FDA’s Promotional Guidance FDA did not deliver in 2017 on its promise to provide new promotional guidance for the industry regarding off-label promotion of drugs and devices, which FDA first pledged to issue more than three years ago as part of a comprehensive review of its policies in the face of rising First Amendment concerns.  Apart from the January 2017 memorandum in which FDA identified and rejected 12 alternative approaches to off-label promotion under the First Amendment, and the related commentary period discussed in our Mid-Year Update, the year saw no further public progress towards FDA’s announced goal.  We will continue to monitor FDA’s progress in the upcoming year. As 2017 came to a close, FDA issued one final guidance document on promotional issues—part of what Commissioner Gottlieb described at the time as FDA’s “ongoing” efforts to protect consumers against deceptive or misleading prescription drug advertising claims by setting “clear rules for how sponsors can present” such information in a non-misleading manner, as noted above.[77] Issued on December 11, 2017, FDA’s guidance clarifies the requirements for product name placement, size, prominence, and frequency in promotional labeling and advertising for prescription drugs, including biological drug products.[78]  The new guidance focuses specifically on the juxtaposition of the proprietary and established names of a drug and the frequency with which to use the established name on promotional materials.  The guidance applies to promotional labeling and advertisements across a range of media, including print, audiovisual, broadcasting, and electronic and computer-based materials.[79] With respect to drugs containing one active ingredient, the guidance provides specific recommendations for complying with the various requirements set forth in regulations 21 C.F.R. §§ 201.10(g)(1) and (2), and 202.1(b)(1) and (2), concerning the appropriate juxtaposition of proprietary and established names, the size of proprietary and established names on labeling and advertisements, the prominence of the established name in relation to the proprietary name, and frequency of disclosure of the proprietary and established names using various media.  With respect the last category, the guidance identifies examples in which FDA “does not intend to object” to fewer references to the established name, so long as certain criteria are met.[80] With respect to drugs containing two or more active ingredients, the guidance provides recommendations of how to appropriately reference proprietary and established names as set forth in regulations 21 C.F.R. §§ 201.10(h)(1) and 202.1(c) and (d)(1), in situations where a product “might not have a single established name corresponding to the proprietary name” or in which “a proprietary name might refer to a combination of active ingredients present in more than one preparation (e.g., individual preparations differing from each other as to quantities of active ingredients and/or the form of the finished preparation), and there might not be an established name corresponding to the proprietary name.”[81] As we noted in our 2017 Mid-Year Update, in January 2017, as part of the Obama Administration’s last-minute efforts to shape FDA promotional policies, FDA issued two draft guidance documents relating to promotional practices, the first being a “Questions and Answers” guidance entitled “Medical Product Communications That Are Consistent with the FDA-Required Labeling,”[82] and the second draft guidance document addressing communication of health care economic information to payors about both approved and investigational drugs and devices.[83]  As of the end of 2017, FDA has not taken further action with respect to these guidance documents, both of which remain in draft form. Finally, on January 12, 2018, FDA announced that it was yet again delaying—this time, “until further notice”—the effective date of a controversial final rule that would amend the agency’s definition of “intended use” for drugs and devices to allow the agency “additional time” for further consideration of the rule.[84]  The final rule, issued in January 2017, shortly prior to the change of administration, would adopt a “totality of the evidence” standard for assessing how a manufacturer intended for its product to be used by doctors and patients, carrying significant implications for drug and device manufacturers regarding promotional activities and related enforcement of the FDCA and its implementing regulations.  The proposed rule has been met with heavy criticism from the industry, including that it imposes an unworkably vague standard—a concern Commissioner Gottlieb expressly recognized in a statement issued in connection with the delay, in which he conceded that the regulation “wasn’t clear” and pledged that the agency would “ensure the clarity of our rules on the subject.”[85]  In the meantime, he noted, FDA was “reverting to the agency’s existing and longstanding regulations and interpretations on determining intended use for medical products.”[86]  FDA has opened a comment period through February 5, 2018, to solicit input on the decision to indefinitely delay the rule.[87] We will report on further developments in the coming year in regards to whether FDA modifies the final rule or permanently abandons its efforts to redefine the intended use standard.             C.     Notable Litigation Pertaining to Promotional Issues Although 2017 saw little in the way of jurisprudence concerning the intersection of promotional issues and the First Amendment, it produced several other notable cases. Opinions dismissing FCA actions predicated on off-label promotion from the Fifth Circuit in United States ex rel King v. Solvay Pharm., Inc.,[88] and Sixth Circuit in United States ex rel. Ibanez v. Bristol-Myers Squibb Co.,[89] discussed in detail above, underscored the importance of and difficultly involved in pleading and proving the causal chain in such cases.  The complex series of events involved create significant hurdles to pleading and proving that it was the defendant’s alleged off-label promotion that actually caused the submission of any false claims—i.e., that a physician to whom a product was allegedly improperly promoted prescribed the medication to a patient for an off-label use because of that promotion, resulting in the patient filling the prescription at a pharmacy, and the filling pharmacy then submitting a claim to the government for reimbursement.  Although these judicial opinions do not entirely foreclose any theory of FCA liability predicated on off-label promotion, they provide a useful tool for drug and device manufacturer defendants to assert lack of causation arguments. Based on similar causation principles, the Seventh Circuit held, in Sidney Hillman Health Ctr. of Rochester v. Abbott Labs., that as a matter of law third-party payors may not recover treble damages under RICO’s civil liability provision based on a manufacturer’s allegedly unlawful off-label representations made to physicians.[90]  There, two welfare benefit plans that paid for some off-label drug uses brought a suit seeking civil RICO recovery against the manufacturer following its 2012 guilty plea and payments to settle a criminal investigation and qui tam actions.  Joining the majority of circuit courts to have addressed the issue, the Seventh Circuit held that the causal chain involved in such a claim was “too long” and too rife with “independent decisions” to pass muster under Supreme Court precedent,[91] because it would require showing that physicians who received the off-label communications changed the medication they would have otherwise prescribed to certain patients as a result of the communications, that some of those patients were worse off as opposed to better, that payors bore some of the cost, and that those payors were made worse off to the extent the drug at issue was more expensive than the alternative drug.[92]            D.     Legislative Developments On the whole, 2017 saw relatively little legislative activity relating to off-label promotion at the state or federal levels. For its part, Congress took no further action on two draft bills on which we reported in our 2017 Mid-Year Update: (1) the Pharmaceutical Information Exchange Act, which would give drug and device manufacturers’ greater freedom to share economic information about expected cost-effectiveness with insurers prior to FDA approval of a product;[93] and (2) the Medical Product Communications Act of 2017, which would enable manufacturers to proactively discuss certain off-label information with health care provider, so long as the information is supported by competent and reliable scientific evidence and accompanied by various disclaimers.[94] The House Energy & Commerce Committee held hearings on both bills in July, at which time some lawmakers and industry groups expressed support for the proposed clarification concerning off-label communications and for providing for more information to payers and health-care decision makers aimed at improving patient access to new treatments.[95]  Other lawmakers and industry groups, however, expressed concern that the bills, and the Medical Product Communications Act in particular, would undermine efforts to prevent marketing of unsafe or ineffective medical products and could ultimately put patient health and safety at risk.[96]  To date, neither bill has advanced out of committee. At the state level, as we reported in our Mid-Year Update, Arizona became the first state to allow drug and device manufacturers to communicate directly with physicians and insurers about off-label uses of FDA-approved prescription drugs.  Although Arizona remains alone for the time being, that may change in the coming year as industry advocates continue to pursue the introduction of similar measures in other state legislatures.[97]            E.     Settlements One notable recent settlement this year also demonstrated the states’ interest and capacity for enforcement actions targeting off-label promotion as misleading or deceptive advertising under state law.  On December 20, 2017, Boehringer Ingelheim Pharmaceuticals, Inc. agreed to pay $13.5 million to all 50 states and the District of Columbia to resolve claims asserted under various state consumer protection laws predicated on its alleged off-label marketing and certain allegedly misleading representations it made in promoting the drugs at issue.[98]  Several years earlier BIPI resolved claims under the federal FCA based on the same alleged off-label marketing and alleged misrepresentations in a $93 million settlement with the federal government.[99] III.     DEVELOPMENTS IN CGMP REGULATIONS AND OTHER MANUFACTURING ISSUES In 2017, FDA continued the robust scrutiny of drug companies’ current good manufacturing practice (“cGMP”) compliance that we have come to expect in recent years.  These developments, which include relevant enforcement actions and new draft guidance, are discussed below.         A.     Notable cGMP Compliance and Enforcement Activity 1.     Executive of Pharmaceutical Company Pleads Guilty In June 2017, the owner/president, Paul Elmer, and compliance director, Caprice Bearden, of Indiana pharmacy Pharmakon Pharmaceuticals, Inc., were indicted for allegedly introducing adulterated drugs into interstate commerce by manufacturing and selling drugs whose potency differed than what was reflected on the label.[100]  According to DOJ, the officers’ actions resulted in several infants being given morphine sulfate that was nearly 25 times more potent than indicated, leading to severe health problems for at least one of the infants.  Although both initially pled not guilty, in November 2017, Bearden pled guilty to introducing adulterated drugs into interstate commerce and conspiracy to defraud the United States by obstructing FDA’s lawful functions.[101]  Commissioner Gottlieb called the case “an egregious example of how harmful conduct can result in risk to patients” and added that FDA “will not tolerate substandard practices, like failing to meet federal manufacturing standards like those found at Pharmakon” relating to out-of-specification drug potency test results, “that put patients at risk and will aggressively pursue individuals that put profit ahead of patient safety.”[102] 2.     Consent Decrees Involving Two Drug Manufacturers, One Device Manufacturer During the last six months, DOJ announced three notable consent decrees of permanent injunction entered by federal district courts against manufacturers to stop the distribution of unapproved, misbranded, and adulterated drugs and devices.  On July 5, 2017, the U.S. District Court for the Southern District of Alabama enjoined Medistat RX LLC, its owners, production manager, and quality manager from manufacturing, holding or distributing drugs until they comply with the FDCA and its regulations.[103]  The government alleged that the defendants failed to comply with cGMP because, after identifying a microbial contamination, they failed to adequately investigate or take sufficient corrective action, resulting in the contamination of certain sterile areas within the facility. On August 3, the U.S. District Court for the District of Utah entered a consent decree including a permanent injunction against Isomeric Pharmacy Solutions, LLC and three affiliated individuals, including the Chief Operating Officer.[104]  FDA accused the defendants of distributing drugs that had visible “black particles” in them, despite passing visual inspections conducted by the defendants’ employees.  The complaint alleged that the defendants’ manufacturing methods did not conform to cGMP because they failed to verify the drug products’ safety, identity, strength, and quality and purity characteristics, as required by the FDCA.  FDA also alleged that the company had a history of manufacturing drug products under suboptimal conditions and demonstrated an unwillingness or inability to take corrective actions to ensure the sterility of its products.  Consequently, the consent decree prohibits Isomeric from distributing drug products until they hire a consultant who makes a determination that the company is in compliance with cGMP requirements. Lastly, on October 31, the U.S. District Court for the District of Massachusetts enjoined Philips North America LLC and two of its executives from distributing certain medical devices until remedial steps are taken to bring the company in compliance with cGMP.[105]  FDA alleged that the company failed to establish and maintain adequate procedures for implementing corrective and preventative action in response to complaints about the performance of a certain defibrillator and cardiopulmonary resuscitation device.  The consent decree requires Philips to institute a number of remedial measures, including hiring an expert consultant to inspect its units and ensure that the devices are complying with cGMP regulations. 3.     cGMP-Based Warning Letters FDA’s Office of Manufacturing Quality in the Center for Drug Evaluation and Research (“CDER”) issued 22 warning letters in the second half of 2017 for a total of 48 letters for the year, exceeding the 44 letters it issued in 2016.[106]  In the latter half of this year, FDA focused primarily on companies’ failure to maintain adequate quality control units, incomplete testing procedures, subpar sterilization and sanitation techniques, and inadequate testing procedures. Consistent with prior years, FDA has continued its foreign-inspection activity, issuing warning letters to companies in Korea, Canada, China, India, Philippines, and Italy.  Notably, only one of the letters FDA issued in 2017 was to a U.S.-based company.[107]  Several of the more notable warning letters from the second half of the year are summarized below. One of the more common complaints by FDA in the latter half of this year was companies’ failure to maintain adequate quality control units: In October, Chinese drugmaker Guangdong Zhanjiang Jimin Pharmaceutical Co., Ltd., received a warning letter stating that it had failed to establish an adequate quality control unit and consequently used the wrong active pharmaceutical ingredient (API) in one of its products.[108]  Although the company recalled all of the product distributed in the U.S., it failed to document its investigation into the mistake or a plan to prevent its recurrence, nor did it have a program in place to monitor process controls.  As such, FDA strongly recommended that the company engage a consultant to assist with cGMP requirements. In December, FDA issued a warning letter to South Korean drug-maker Seindni Co. Ltd. for failing to establish a quality control unit that could oversee packaging, labeling, and other elements of drug production.[109]  Notably, FDA stressed the particular importance of such a unit in light of the company’s use of contract manufacturers to manufacture its over-the-counter (OTC) drug products.  FDA ordered Seindni to provide written procedures establishing an adequate quality control unit with the authority to carry out various responsibilities, including batch review and release processes and supplier and contractor qualification, selection, and oversight. Many of FDA’s warning letters this year focused on companies’ failure to adequately test and verify the identity of each component of their drug products. In August, FDA issued a warning letter to Canadian homeopathic manufacturer Homeolab USA Inc. in connection with toddler teething tablets that contained belladonna, a toxic substance also known as deadly nightshade.[110]  The letter alleged numerous cGMP violations, including the company’s failure to perform adequate testing for the purity, strength, and quality of components used in its manufacturing process.  It also stated that, during FDA’s inspection of the company’s facilities, a Homeolab employee “impeded the inspection by preventing [the] investigator from photographing” a piece of equipment.  FDA recommended that Homeolab hire a cGMP consultant to assist the company in meeting cGMP regulations. South Korean drug-maker Dasan E&T Co. Ltd. received a warning letter in September for failing to analyze glycerin raw material from a supplier prior to approving the material for use in its drug products.[111]  Specifically, it alleged that Dasan failed to screen for the presence of diethylene glycol (DEG), a chemical found in antifreeze that “has resulted in various lethal poisoning incidents in humans worldwide.”  FDA directed Dasan to develop a detailed risk assessment regarding glycerin-containing products. More recently, in November, Dae Young Foods Company, a Korean manufacturer of homeopathic smoking cessation gum and lozenges, received a warning letter alleging that the company failed to test drug components for identity, purity, strength, and quality.[112]  It also alleged that the suppliers Dae Young used were not properly vetted.  FDA ordered the company to provide a scientific justification for how it will ensure that all of its components will meet appropriate specifications before use in manufacturing, as well as a risk assessment for any drug product batches that were not already adequately tested. FDA also issued numerous letters identifying issues relating to the sanitization and/or sterilization of equipment and utensils involved in the manufacturing of drug products: In July 2017, FDA asserted that India-based Vista Pharmaceuticals violated cGMP by, among other things, failing to maintain several pieces of manufacturing equipment, which were observed to have “holes and corrosion.”[113]  The letter noted that FDA had received a claim that metal was found in one of its isoxsuprine hydrochloride tablets and, during a subsequent inspection, FDA was told that the company’s employee who investigated the claim “failed to consider whether the poor condition of [the] equipment may have contributed to the problem.”  Consequently, FDA directed the company to submit an evaluation of all production equipment to ensure that it is in appropriate condition for manufacturing. Similarly, on December 18, FDA sent a warning letter to Deserving Health International, a Canadian homeopathic drug manufacturer, stating that the company failed to implement an appropriate manufacturing process that could ensure the sterility of its Symbio Muc Eye Drops 5X, an ophthalmic product.[114]  Specifically, the letter claimed that the method used “to attempt sterilization” was not suitable for its intended use, and that the product was manufactured using “unsuitable water.”  The letter noted that FDA placed Deserving Health International on Import Alert on November 2 of this year and recommended that the company employ a cGMP consultant to assist in undertaking a “comprehensive assessment” of the company’s manufacturing operations to ensure compliance with cGMP regulations.              B.     cGMP Rulemaking and Guidance Activity 1.     FDA Draft Guidance While FDA has continued to be quite active in enforcement of manufacturing standards, since June, it has issued just one final guidance document pertaining to manufacturing and quality issues. Expiration Dating.  On August 8, 2017, FDA issued revised draft guidance addressing the repackaging of prescription and OTC solid oral dosage form drugs into individual unit-dose containers by commercial pharmaceutical repackaging firms.[115]  Under current FDA cGMP regulations, each drug product must have an expiration date determined by appropriate stability testing relating to storage conditions on the label, as determined by stability studies.  As the guidance observes, the increase in unit-dose repackaging over the last few decades has raised questions about the stability and expiration dates for such repackaged products.  Consequently, the latest draft guidance amends an earlier draft guidance published in 2005 to accomplish a number of objectives:  “shorten[ing] the expiration date to be used under certain conditions for solid oral dosage forms repackaged in unit-dose containers”; “provid[ing] an expiration date exceeding 6 months if supportive data from appropriate studies are available and other conditions are met”; “exclud[ing] from the scope of the guidance products repackaged by State-licensed pharmacies, Federal facilities, and outsourcing facilities”; “exclud[ing] from the scope of the guidance all dosage forms other than solid oral dosage forms”; and “provid[ing] for the use of containers meeting USP [] Class B standards if certain conditions are met.”[116] IV.     ANTI-KICKBACK STATUTE As the enforcement statistics discussed above make clear, compliance with the AKS remains one of the highest risk areas for pharmaceutical and medical device companies, with notable large settlements in AKS being announced virtually every year, including in 2017.  There were several notable developments in AKS enforcement during the second-half of 2017—from the courts and regulatory agencies—that affect and define the stakes.         A.     AKS-Related Case Law First, federal courts issued several noteworthy decisions interpreting the AKS during the second half of 2017 on the topics of causation and scienter. In September, the Fifth Circuit affirmed summary judgment for Solvay Pharmaceuticals, dismissing allegations that the company violated the FCA through off-label marketing efforts (as discussed above) and kickbacks to physicians.[117]  In addition to the Fifth Circuit’s rulings regarding off-label promotion theories, the Fifth Circuit also summarily dismissed the relator’s AKS allegations after finding no credible evidence on summary judgment that payments to physician-consultants caused those physicians to write prescriptions that were reimbursed by Medicaid.[118]  Evidence submitted to the court showed that physicians participated in Solvay speaker programs in which they were compensated for consultations or presentations.[119]  The court explained that “[t]here was nothing illegal about paying physicians for their participation in these types of [marketing] programs and there is no evidence that participation was conditioned upon prescribing Solvay’s drugs to Medicaid patients.”[120]  Although the court acknowledged that Solvay likely “intended these programs to boost prescriptions”―as is true with most marketing practices, of course―the court nonetheless held that “it would be speculation to infer that compensation for professional services legally rendered actually caused the physicians to prescribe Solvay’s drugs to Medicaid patients.”[121]  This is clearly at odds with DOJ’s persistent position that the payment of a kickback “taints” physician decision-making and that allegations of improper payments do not need to show that prescriptions or referrals were “caused” by the kickback.  For example, in 2015, DOJ reached a settlement with Novartis based on allegations that the company made payments to influence specialty pharmacies to provide patients one-sided advice about their product, without disclosing potentially serious side effects.  Then U.S. Attorney for Manhattan stated that that the AKS “was enacted to ensure that the medical treatment and advice patients receive, and federal programs pay for, are free from the taint of corporate kickbacks.”[122]  We will continue monitoring this development to see if courts continue to require a showing of cause, not mere “taint,” and DOJ’s response. In United States v. Nerey, meanwhile, the Eleventh Circuit reached a less favorable conclusion for the defendant in an alleged kickback scheme, holding that the government had sufficiently proved willful conduct in connection with a federal health care program because of the defendant’s attempts to hide illegal kickbacks.[123]  In so holding, the court reaffirmed that proving “willful conduct” under the AKS requires strong evidence of scienter, requiring that the act was “committed voluntarily and purposely, with the specific intent to do something the law forbids, that is with a bad purpose, either to disobey or disregard the law.”[124]  But the court had no problem finding willful conduct in light of the “overwhelming” evidence that the defendant explicitly sought cash payments to avoid a paper trail, attempted to funnel kickbacks by masking them as therapy services, referred to kickbacks by code names because of their illegal nature, pre-arranged a fallback story in the event of a Medicare audit, and was caught saying that it would be nice to “break [a suspected confidential informant’s] head.”[125]            B.     Guidance and Regulations 1.     HHS OIG Increases Scrutiny of Patient Assistance Programs For years, pharmaceutical and device manufacturers have supported, directly and indirectly, various patient assistance programs that help needy patients access their products.  And for years, OIG has approved of these arrangements, subject to certain recommended contours, through formal and informal guidance reflecting that these programs meet important access-to-care goals. Recently, however, OIG has issued updated guidance to refine its views on patient assistance programs and strongly suggest that it is taking a closer look at how these programs are organized and operated.  While the OIG formerly viewed these programs as important safety nets for patients who face chronic illnesses and high drug costs, newer guidance suggests that OIG is concerned that patient assistance programs that are limited to specific diseases or products—often with the support of pharmaceutical and medical device companies—pose a high risk of abuse.  That trend continued in 2017 amidst a broader landscape of DOJ enforcement actions, as discussed in Section I above. First, in March, HHS OIG revised previous guidance to address aspects of patient assistance programs that it has newly determined are “problematic.”[126]  Specifically, HHS OIG modified a prior advisory opinion to require that a non-profit operator of patient assistance programs make three new certifications to remain in compliance with the AKS:  (1) that the charity “will not define its disease funds by reference to specific symptoms, severity of symptoms, method of administration of drugs, stages of a particular disease, type of drug treatment, or any other way of narrowing the definition of widely recognized disease states”; (2) that the charity will “not maintain any disease fund that provides copayment assistance for only one drug or therapeutic device, or only the drugs or therapeutic devices made or marketed by one manufacturer or its affiliates”; and (3) that the charity will not limit its assistance to high-cost or specialty drugs.[127] Next, in November, HHS OIG took the unprecedented step of rescinding guidance it had previously issued related to a patient assistance program operated by the industry-funded charity Caring Voice Coalition (CVC).[128]  HHS OIG explained that the charity had allegedly breached two commitments related to independence from donors, which opened the door to steering Medicare beneficiaries toward specific prescription drugs.[129]  In one alleged breach, the charity gave patient-specific data to one or more donors, enabling them to “correlate the amount and frequency of their donations with the number of subsidized prescriptions or orders for their products.”[130]  In a second alleged breach, the charity “allowed donors to directly or indirectly influence the identification or delineation of [r]equestor’s disease categories.”[131]  According to HHS OIG, these violations “materially increased the risk that [r]equestor served as a conduit for financial assistance from a pharmaceutical manufacturer donor to a patient, and thus increased the risk that the patients who sought assistance from [r]equestor would be steered to federally reimbursable drugs that the manufacturer donor sold.”[132]  HHS OIG expressed concern that this steering can provide manufacturers with a greater ability to raise the prices of their drugs while protecting patients from the effects of the price increases, leaving federal programs and taxpayers to bear the cost.[133] HHS OIG and DOJ are clearly taking a hard look at these types of issues industry-wide, and the results of this scrutiny are beginning to show in more than just HHS OIG advisory opinions.  For example, as noted above, United Therapeutics Corp. paid $210 million to resolve allegations that it used a nonprofit organization as a conduit to give improper benefits to thousands of patients who used its medications from 2010 to 2014.[134]  Specifically, the government alleged that United Therapeutics donated money to CVC, which in turn paid the copay obligations of thousands of Medicare patients taking drugs manufactured by the company.[135]  Several other companies have reported being subject to similar probes in the past year, all launched by the U.S. Attorney’s Office for the District of Massachusetts.[136] Yet, even as DOJ and HHS OIG seek to reign in alleged abuses in patient assistance programs, HHS OIG, at least, has nevertheless continued to encourage manufacturers to provide access to free drugs for needy patients.  After its unprecedented action against CVC, which led CVC to announce it would not offer any financial assistance in 2018, HHS OIG wrote immediately to Pharmaceutical Research and Manufacturers of America (“PhRMA”) to urge pharmaceutical companies to offer free drugs to former CVC beneficiaries.[137]  To incentivize companies to participate in this stop-gap measure, HHS OIG promised that it “will not pursue administrative sanctions against any Drug Company for providing free drugs during 2018 to federal health care program beneficiaries who were receiving cost sharing support for those drugs from CVC as of November 28, 2017,” provided certain conditions are met, including that: (1) the “drugs are provided in a uniform and consistent manner to Federal health program beneficiaries” who were receiving drugs from CVC at the time of CVC’s decision; (2) “[t]he free drugs are awarded without regard to the beneficiary’s choice of provider, practitioner, supplier or health plan[;]” (3) “[t]he free drugs are not billed to any Federal health care program” or a third party payor; (4) “[t]he provision of free drugs is not contingent on future purchases” of drugs; and (5) the Drug Company maintains complete and accurate records of the free drugs provided to Federal health care program beneficiaries.[138]  Even with this significant policy statement early in the year, there may well be additional fallout for manufacturers’ charitable programs in 2018, given the government’s clear enforcement focus on this area. 2.     HHS OIG clarifies scope of warranty safe harbor The AKS makes it a criminal offense to knowingly and willfully exchange anything of value in an effort to induce the referral of services which are payable by a federal program, but the statute and its implementing regulations also create certain safe-harbors against liability.[139]  For example, the “warranty safe harbor” shields from penalty certain written warranties offered by drug and device companies, including (1) a written affirmation that relates to the nature of the material or workmanship of a product and that affirms or promises that the material or workmanship is defect-free or will meet a specified level of performance over a specified period of time; or (2) any undertaking in writing by a supplier to take remedial action if a product fails to meet the promises set forth by the supplier of a consumer product.[140]  Previous HHS OIG guidance had limited the scope of the warranty safe harbor to product failure.[141] In a new advisory opinion issued in August, however, HHS OIG seemingly expanded the scope of the warranty safe harbor.  Specifically, HHS OIG considered a “pharmaceutical manufacturer’s proposal to replace products that require specialized handling that could not be administered to patients for certain reasons, at no additional charge to the purchaser[.]”[142]  According to the opinion, the requestor sells a variety of products, some of which “are sensitive to temperature changes, direct sunlight, or movement[.]”[143]  Under the arrangement, the pharmaceutical manufacturer would replace products that had spoiled or otherwise become unusable after purchase so long as the customer had not administered the product or billed for it.[144] HHS OIG analyzed the proposal under the safe harbor for warranties, which it explained “protects remedial actions by suppliers to address products that fail to meet bargained-for requirements.”[145]  Although HHS OIG concluded that the proposal did not fall squarely within either of the safe harbor’s definitions, it nonetheless concluded that the proposed arrangement posed a “low risk of fraud and abuse under the [AKS].”[146]  HHS OIG reached this conclusion for a number of reasons.  First, the replacement would be restricted to unintentional circumstances.  Second, there was low risk that this arrangement would lead to increased cost or overutilization because, if the customer administered the product or billed for the product, then a replacement product would not be available.  Third, even though the proposed arrangement could affect competition, there was an acceptably low risk that a customer would choose products based on this arrangement.  Last, the proposed arrangement bears some similarity to an insurance policy and the cost of this can be built into the cost of the product.[147]  HHS OIG also noted that the proposal could increase patient safety and care.[148] This guidance expands the number of warranty types for which the OIG has recognized the availability of the warranty safe harbor, thereby affording manufacturers greater flexibility to tie product pricing to performance, further incentivizing providers to deal with product sellers and manufacturers who are willing to stand behind the performance of their products by sharing the risk on outcomes. 3.     HHS OIG permits pilot program to provide Medicare Advantage pharmacists with real-time access to patient discharge information In December, HHS OIG approved a proposal to allow a vendor to develop and make available an interface that would allow pharmacists to view relevant clinical data in real-time during discharge for Medicare Advantage plan beneficiaries who were admitted with one of five eligible diagnoses.[149]  The pilot program aims to “gain insight into the degree to which technology that provides . . . pharmacists with real-time access to discharge information can help improve transitions of care and decrease re-hospitalizations.”[150] HHS expressed concern that the interface would have an independent value, and therefore be an improper remuneration, because it would remove an administrative burden and that pharmacists would be in a position to influence which medications a patient is prescribed.[151]  Ultimately, HHS OIG concluded that it would not impose sanctions under the AKS.  Importantly, the manufacturer protected against the risk that the pharmacist would recommend the manufacturer’s product by including language in the agreements and operative documents that the collaboration would have no bearing on formulary recommendations or referrals of business, and ensuring that nothing in the interface would guide the pharmacist to choose one product over another.[152]  HHS OIG also focused on patient care and patient outcomes.  OIG concluded that the proposed arrangement would be unlikely to lead to increased costs or overutilization of federally reimbursable services because the Medicare Advantage plan, “as the payor, has a strong incentive for its members to receive the most appropriate and cost-effective treatment to promote their recovery and good health.”[153]  Further, the proposal would be unlikely to have a negative outcome on patient quality of care.[154]  And lastly, HHS OIG concluded that the small scale of the program—limited to approximately 200 patients and five diagnoses—reduces the risk that the remuneration involved would influence referrals to or recommendations for the manufacturer’s products.[155] V.     MEDICAL DEVICES After a relatively quiet start to the year, the second half of 2017 brought a number of guidance documents and enforcement actions concerning medical device manufacturers.  We begin this section with an overview of notable guidance issued by FDA before walking through recent device-related enforcement activity.            A.     FDA Guidance In the past six months, FDA issued guidance on several noteworthy subjects, including digital health, pre-market approval standards, and expedited approval processes.  As continued technological advances continue to pave the way for new clinical opportunities, FDA has emphasized its focus on streamlining the review process and providing access to newly vetted medical devices. In addition to the topics discussed in detail below, President Trump in August 2017 signed into law the FDA Reauthorization Act (“FDARA”), which, among other things, reauthorizes the Medical Device User Fee Amendments through fiscal year 2022.[156]  With the return of the Affordable Care Act’s medical device tax on the horizon in 2018, a new user fee will be assessed under FDARA for de novo classification requests, and user fees will be adjusted annually for inflation.[157]  FDARA also sets forth a risk-based inspection schedule for establishments engaged in the manufacture, propagation, compounding, or processing of devices and requires FDA to establish uniform inspection processes and standards.[158]  Be on the lookout in the coming year for possible inspection-related draft guidance.[159] 1.     Digital Health On July 27, 2017, FDA took a step into a new digital-health era with the announcement of its Digital Health Innovation Action Plan and the launch of its “Pre-Cert for Software Pilot Program.”[160]  Framed as FDA’s response to the “revolution in health care,” driven by technology such as mobile medical apps, fitness trackers, and decision-supporting software, the Action Plan outlines the Center for Devices and Radiological Health’s (“CDRH”) “vision for fostering digital health innovation while continuing to protect and promote the public health.”[161]  The plan contemplates providing guidance on the 21st Century Cures legislation’s medical software provisions, as well as launching a pilot pre-certification program that focuses on the developer instead of the product in the hopes of “replac[ing] the need for a premarket submission for certain products,” decreasing the required submission content, and speeding up the review of marketing submissions.[162]  FDA plans to share updates about the program at a public workshop in January 2018.[163] As anticipated by the Action Plan, on December 7, 2017, FDA announced three draft and final guidance documents that further clarify its approach to digital devices: Clinical and Patient Decision Support Software.  The revised definition of “medical device” in the 21st Century Cures Act excluded certain types of software intended to provide clinical decision support.  The first draft guidance describes FDA’s interpretation of this revised definition and generally extends this interpretation to patient decision support software.[164]  The guidance states that FDA will continue to regulate clinical decision support (“CDS”) software “intended to acquire, process, or analyze a medical image, a signal from an in vitro diagnostic device, or a pattern or signal from a signal acquisition system,” but it will not regulate software that provides health care professionals with recommendations or treatment decisions that are consistent with the FDA-required labeling or clinical guidelines and that the professionals could have made independently.[165]  The critical factor, in FDA’s interpretation, is that the user should be able to reach independently the clinical recommendation provided by the software.  Furthermore, the sources for the software recommendation should be publicly available, such as in the published scientific literature.  Likewise, with respect to software intended to support patient decision-making, FDA does not intend to focus its regulatory oversight on “low-risk” software that offers patients recommendations they could have reached independently without the software.[166] Changes to Medical Software Policies After the Cures Act.  In this draft guidance, FDA addressed the software functions that were excluded from the definition of “medical device” by the 21st Century Cures Act:  hospital administrative functions, software intended for maintaining or encouraging a healthy lifestyle, electronic health records, and software for transferring, storing, or displaying data [167]  As a result of the statutory amendments, certain types of software that were previously under FDA enforcement discretion are no longer classified as “medical devices” under the Federal Food, Drug, and Cosmetic Act.  The guidance clarifies that Laboratory Information Management Systems are not devices and reiterates that FDA does not intend to examine or regulate “low-risk general wellness products,” such as a mobile application that plays music to relieve stress.[168]  In describing its approach to such products, FDA references the General Wellness Guidance detailed in our 2016 Year-End Update[169] and offers examples illustrating when electronic patient record software and Medical Device Data Systems do not qualify as devices.[170]  FDA is updating the prior software-specific guidances to reflect the 21st Century Cures Act. Clinical Evaluation of Software as a Medical Device (SaMD).  On December 8, 2017, FDA issued final guidance on its approach to Software as a Medical Device (“SaMD”), which is software intended to be used for one or more medical purposes that perform these purposes without being part of a hardware medical device.[171]  This guidance adopts the principles set forth by the International Medical Device Regulators Forum (“IMDRF”), a group of international medical device regulators focused on harmonization of device regulation.  These principles address risk-based analysis and assessments of SaMD and considerations to use in evaluating the safety and effectiveness of SaMD.[172]  The guidance discusses the assessment of: (1) the clinical association between the SaMD and the targeted clinical condition; (2) the SaMD’s ability to correctly process data to provide accurate, reliable, and precise output data; and (3) the use of the output data to achieve the intended purpose in clinical care.  The guidance explains when independent review of a clinical evaluation of a SaMD may be necessary, offers considerations for continuous learning throughout a SaMD’s lifecycle, and provides a comparison of the SaMD clinical evaluation process to the process for generating clinical evidence for in vitro diagnostic medical devices.[173] 2.      “Least Burdensome Approach” Guidance In keeping with its focus on streamlined review processes, FDA issued new draft guidance on December 15, 2017, detailing updates to the “least burdensome approach” used during premarket review of devices.[174]  Commissioner Gottlieb and CDRH Director Dr. Jeffrey Shuren have touted the benefits of the program, emphasizing the ability to devote resources to the “issues of highest public health concern” and to approve greater numbers of medical devices.[175] The draft guidance defines “least burdensome” to be “the minimum amount of information necessary to adequately address a regulatory question or issue through the most efficient manner at the right time,”[176] and it encourages application of the “least burdensome” principle “widely . . . to all activities in the premarket and postmarket settings” in order to minimize “unnecessary burdens so that patients can have earlier and continued access to high quality, safe, and effective devices.”[177]  The guidance applies to all devices[178] and provides a number of examples and suggestions for the industry, such as using peer-reviewed literature in lieu of or to supplement other data, using real-world evidence or non-clinical data, and accepting alternative approaches to regulatory issues.[179]  In familiar fashion, FDA also emphasizes the use of benefit-risk assessments in regulatory decision-making,[180] and the guidance references a number of tools and practices to reduce administrative burden, including Medical Device Development Tools (i.e., qualified methods to assess the effectiveness of a device), on which FDA also finalized guidance in August.[181] 3.     Program to Expedite the Approval of “Breakthrough” Medical Devices On October 25, 2017, FDA also issued draft guidance on a voluntary “Breakthrough Devices Program,” which provides priority review to designated submissions for devices subject to premarket approval, 501(k) clearance, and de novo classification processes.[182]  Continuing with the emphasis on access to care, the guidance is aimed at expediting patient access to “breakthrough” medical devices that provide for “more effective treatment” or diagnosis of life-threatening or irreversibly debilitating conditions.[183] To be designated as “breakthrough” under the Program, a device must (1) “provide for more effective treatment or diagnosis of life-threatening or irreversibly debilitating human disease or conditions”; and (2) represent breakthrough technologies that offer significant advantages over existing alternatives, for which no approved or cleared alternatives exist, or that are in the best interest of patients.[184]  For sponsors of such devices, FDA details options including “sprint” discussions, coordination to reach early agreement on a Data Development Plan, a mechanism for obtaining written agreement for clinical protocols, and regular status updates.[185] 4.     Additional Guidance In addition to the above categories, FDA announced several other draft and final guidance documents on various topics throughout the latter half of the year. On September 6, 2017, FDA announced a final guidance on the importance of “interoperability,” or the ability of electronic medical devices to safely and effectively interact with each other and exchange and use information.[186]  The guidance directs medical device manufacturers to focus on interoperability when designing systems, and it recommends that premarket submissions include, among other elements, discussions of a device’s externally-facing electronic interfaces, what type of information a device will exchange and how, potential risks, and interface testing results.[187] Later on October 25, 2017, FDA finalized two draft guidance documents regarding when manufacturers should submit a 510(k) for changes made to existing devices or software.[188]  Declining to implement a significant policy shift on 501(k) submissions, FDA clarified that changes significantly affecting the safety or effectiveness of a device—whether intended or not—will require a new 510(k), as will complex changes to software infrastructure and changes to hard device control mechanisms, operating principles, or energy types.[189] Rounding out the year in December 2017, FDA finalized guidance on technical considerations specific to 3-dimensional printing devices, or “additive manufacturing (AM)” devices.[190]  To respond efficiently to frequently asked questions, FDA also issued a final guidance on what it generally considers in determining whether to classify a product as a drug or device,[191] as well as a final guidance on how it intends to approach the regulation of device “accessories” going forward.[192]  The latter guidance clarifies that accessories with a “lower risk profile” than their parent devices may be regulated in a lower class, and it explains pathways for classifying or reclassifying accessories.[193]              B.     Enforcement Letters In a busy second half of the year, FDA issued 23 device-related warning letters, with CDRH issuing 9 of those.[194]  Overall, enforcement activity in the second half of 2017 suggests that FDA will continue to actively enforce regulations governing manufacturing practices, Quality System Regulation issues, and submissions requirements.  The issued letters also indicate that FDA will continue to exercise broad jurisdiction over foreign companies that market products in the United States, a trend we noted in our 2016 Year-End Update and one that FDA shows no signs of ending in the new year. In July, CDRH issued a warning to a manufacturer in Netherlands alleging that the firm did not have an approved application for premarket approval (“PMA”) in effect, or an approved application for an investigational device exemption (“IDE”).[195]  FDA also chastised the manufacturer for allegedly failing to submit a premarket notification before introducing the product into interstate commerce and requested that the manufacturer cease distribution of the unapproved device, noting that FDA already took steps to refuse entry of the devices into the United States.[196] In September, FDA took issue with a manufacturer of an attention task performance recorder for not only allegedly failing to have an approved application for PMA or IDE, but also for promoting the device for uses not cleared under its initial 510(k)—specifically, for promoting therapeutic or rehabilitation effects when the device allegedly was cleared for use as a “measurement of reaction time.”[197]  In addition, CDRH followed up with three foreign companies regarding inadequate responses to alleged Quality System Regulation issues previously discovered at foreign manufacturing facilities located in Germany, Sweden, and France.[198] October brought several additional letters relating to manufacturing and Quality System Regulation issues and warnings regarding alleged failures to have approved applications for PMAs or IDEs,[199] and CDRH issued a lengthy warning letter to Telemed regarding manufacturing practices at a facility in Lithuania.[200]  Also in November, FDA rebuked a California-based manufacturer for its alleged failure to report to FDA that its bone fixation fashioner device may have caused or contributed to a death or serious injury.[201]  The activity slowed in December, with only one warning issuing regarding an alleged lack of an approved PMA.[202] VI.     CONCLUSION We expect the year ahead to provide more answers about what the Trump Administration will mean, long term, for the pharmaceutical and medical device industries.  We will continue to monitor the developments discussed above, and others, and report on them in our 2018 Mid-Year Update. [1] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Justice Department Recovers Over $3.7 Billion From False Claims Act Cases in Fiscal Uear 2017 (Dec. 21, 2017), https://www.justice.gov/opa/pr/justice-department-recovers-over-37-billion-false-claims-act-cases-fiscal-year-2017; see also U.S. Dep’t of Justice, Civil Div., Fraud Statistics – Overview (Dec. 19, 2017), https://www.justice.gov/opa/press-release/file/1020126/download. [2] Id. [3] In 2017, two cases involved both AKS and improper billing claims.  In such cases in which multiple theories are alleged, the case (and the settlement amount) are counted in the totals for each theory.  See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Oxygen Equipment Provider Pays $11.4 Million to resolve False Claims Act Allegations (April 25, 2017), https://www.justice.gov/opa/pr/oxygen-equipment-provider-pays-114-million-resolve-false-claims-act-allegations; Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Drug Maker Aegerion Agrees to Plead Guilty; Will Pay More than $35 million to Resolve Criminal Charges and Civil false Claims Allegations (Sept. 22, 2017), https://www.justice.gov/opa/pr/drug-maker-aegerion-agrees-plead-guilty-will-pay-more-35-million-resolve-criminal-charges-and. [4] The number of cases indicated by this table—18—is two more than the total number of cases for the reasons explained supra note 3. [5] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Mylan Agrees to Pay $465 Million to Resolve False Claims Act Liability for Underpaying EpiPen Rebates (Aug. 17, 2017), https://www.justice.gov/opa/pr/mylan-agrees-pay-465-million-resolve-false-claims-act-liability-underpaying-epipen-rebates. [6] Id. [7] Id. [8] Id. [9] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Drug Maker Aegerion Agrees to Plead Guilty; Will Pay More Than $35 Million to Resolve Criminal Charges and Civil False Claims Allegations (Sept. 22, 2017), https://www.justice.gov/opa/pr/drug-maker-aegerion-agrees-plead-guilty-will-pay-more-35-million-resolve-criminal-charges-and. [10] Id. [11] Id. [12] Press Release, U.S. Dep’t of Justice, Drug Maker United Therapeutics Agrees to Pay $210 Million to Resolve False Claims Act Liability for Paying Kickbacks (Dec. 20, 2017), https://www.justice.gov/opa/pr/drug-maker-united-therapeutics-agrees-pay-210-million-resolve-false-claims-act-liability. [13] Press Release, U.S. Dep’t of Justice, U.S. Attorney’s Office, D. of Minn., United States Recovers More Than $12 Million In False Claims Act Settlements For Alleged Kickback Scheme (Aug. 21, 2017), https://www.justice.gov/usao-mn/pr/united-states-recovers-more-12-million-false-claims-act-settlements-alleged-kickback. [14] Id. [15] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Galena Biopharma Inc. to Pay More Than $7.55 Million to Resolve Alleged False Claims Related to Opioid Drug (Sept. 8, 2017), https://www.justice.gov/opa/pr/galena-biopharma-inc-pay-more-755-million-resolve-alleged-false-claims-related-opioid-drug. [16] Id. [17] Id. [18] Press Release, U.S. Dep’t of Justice, U.S. Attorney’s Office, C.D. of Cal., Celgene Agrees to Pay $280 Million to Resolve Fraud Allegations Related to Promotion of Cancer Drugs For Uses Not Approved by FDA (July 24, 2017), https://www.justice.gov/usao-cdca/pr/celgene-agrees-pay-280-million-resolve-fraud-allegations-related-promotion-cancer-drugs. [19] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Novo Nordisk Agrees to Pay $58 Million for Failure to Comply with FDA-Mandated Risk Program (Sept. 5, 2017), https://www.justice.gov/opa/pr/novo-nordisk-agrees-pay-58-million-failure-comply-fda-mandated-risk-program. [20] Id. [21] United States ex rel King v. Solvay Pharm., Inc., 871 F.3d 318, 323 (5th Cir. 2017). [22] Id. at 330–31. [23] Id. at 329 n.9. [24] Id. [25] Universal Health Servs., Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989, 2003–04 (2016). [26] 862 F.3d 890, 895–96 (9th Cir. 2017). [27] Id. at 902–03. [28] Id. at 905–06 (citation omitted). [29] Pet. for a Writ of Cert., Gilead Sciences, Inc. v. United States ex rel. Campie, at i (filed Dec. 26, 2017). [30] Id. at 19, 22. [31] United States ex rel. Ibanez v. Bristol-Myers Squibb Co., 874 F.3d 905, 917, 921 (6th Cir. 2017). [32] Id. at 912. [33] Id. at 915. [34] Id. at 915–16 (citation omitted).   [35] Id. at 914–15. [36] Id. at 915. [37] Id. at 920–21. [38] United States ex rel. Nargol v. DePuy Orthopaedics, Inc., 865 F.3d 29, 31–32 (1st Cir. 2017). [39] Id. (discussing the standard from United States ex rel. Duxbury v. Ortho Biotech Prods., L.P., 579 F.3d 13 (1st Cir. 2009)). [40] Id. at 40–41. [41] Id. [42] Id. at 41. [43] Id. at 39, 42. [44] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Attorney General Sessions Announces Opioid Fraud and Abuse Detection Unit, https://www.justice.gov/opa/pr/attorney-general-sessions-announces-opioid-fraud-and-abuse-detection-unit. [45] Id. [46] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Attorney General Jeff Sessions Delivers Remarks Announcing New Tools to Combat the Opioid Crisis, https://www.justice.gov/opa/speech/attorney-general-jeff-sessions-delivers-remarks-announcing-new-tools-combat-opioid-crisis. [47] Id. [48] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Justice Department Announces First Ever Indictments Against Designated Chinese Manufacturers of Deadly Fentanyl and Other Opiate Substances, https://www.justice.gov/opa/pr/justice-department-announces-first-ever-indictments-against-designated-chinese-manufacturers. [49] Id. [50] Id. [51] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Founder and Owner of Pharmaceutical Company Insys Arrested and Charged with Racketeering (Oct. 26, 2017), https://www.justice.gov/opa/pr/founder-and-owner-pharmaceutical-company-insys-arrested-and-charged-racketeering. [52] Id. [53] Id. [54] Insys Therapeutics, Inc., Quarterly Report (10-Q), at 14 (Nov. 3, 2017). [55] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Novo Nordisk Agrees to Pay $58 Million for Failure to Comply with FDA-Mandated Risk Program (Sept. 5, 2017), https://www.justice.gov/opa/pr/novo-nordisk-agrees-pay-58-million-failure-comply-fda-mandated-risk-program. [56] Id. [57] Id. [58] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Drug Maker Aegerion Agrees to Plead Guilty; Will Pay More Than $35 Million to Resolve Criminal Charges and Civil False Claims Allegations (Sept. 22, 2017), https://www.justice.gov/opa/pr/drug-maker-aegerion-agrees-plead-guilty-will-pay-more-35-million-resolve-criminal-charges-and. [59] Id. [60] Id. [61] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, District Court Enters Permanent Injunction Against Two New Jersey Companies and Two Individuals to Stop Distribution of Unapproved and Misbranded Drugs (Sept. 26, 2017), https://www.justice.gov/opa/pr/district-court-enters-permanent-injunction-against-two-new-jersey-companies-and-two. [62] Id. [63] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, District Court Enters Permanent Injunction Against Philips North America and Two Executives to Limit Distribution of Adulterated External Defibrillators (Oct. 31, 2017), https://www.justice.gov/opa/pr/district-court-enters-permanent-injunction-against-philips-north-america-and-two-executives. [64] Alexion Pharmaceuticals, Inc., Quarterly Report (Form 10-Q), at 19 (Oct. 26, 2017). [65] Sandra Moser, Remarks at the America Conference Institute’s 8th Global Forum on Anti-Corruption in High Risk Markets (July 25, 2017). [66] Id. [67] U.S. Food & Drug Admin., FDA In Brief: FDA takes new steps to help ensure clear presentation of health information in prescription drug promotion (Dec. 11, 2017), https://www.fda.gov/NewsEvents/Newsroom/FDAInBrief/ucm588419.htm. [68] Id. [69] Warning Letters 2017: Office of Prescription Drug Promotion, U.S. Food & Drug Admin (last updated Dec. 14, 2017). [70] Warning Letter from Andrew Haffer, Dir., Div. of Advert. & Promotion Review, Office of Prescription Drug Promotion, U.S. Food & Drug Admin. to Robert D. Tessarolo, President and Chief Exec. Officer, Cipher Pharmaceuticals Inc. (Aug. 24, 2017). [71] Id. at 3. [72] Warning Letter from Andrew Haffer, Dir., Div. of Advert. & Promotion Review, Office of Prescription Drug Promotion, U.S. Food & Drug Admin. to Ira Weisberg, President and CEO, Amherst Pharmaceuticals, Inc. and Dr. Warren P. Lesser, President and CEO, Magna Pharmaceuticals, Inc. (Nov. 14, 2017). [73] Id. at 2. [74] Id. at 3–4. [75] Warning Letter from Robert Dean, Dir., Div. of Advert. & Promotion Review, Office of Prescription Drug Promotion, U.S. Food & Drug Admin. to Vidya Vepuri, Dir., AVANTHI, INC. (Dec. 19, 2017). [76] Id. at 2. [77] U.S. Food & Drug Admin., FDA In Brief: FDA takes new steps to help ensure clear presentation of health information in prescription drug promotion (Dec. 11, 2017), https://www.fda.gov/NewsEvents/Newsroom/FDAInBrief/ucm588419.htm. [78] U.S. Food & Drug Admin., Guidance for Industry: Product Name, Placement, Size, and Prominence in Promotional Labeling and Advertisements (Dec. 2017),  https://www.fda.gov/downloads/Drugs/GuidanceComplianceRegulatoryInformation/Guidances/UCM375784.pdf. [79] Id. at 2. [80] Id. at 5–6. [81] Id. at 6. [82] U.S. Food & Drug Admin., Draft Guidance for Industry: Medical Product Communications That Are Consistent With the FDA-Required Labeling—Questions and Answers (Jan. 2017), https://www.fda.gov/downloads/Drugs/GuidanceComplianceRegulatoryInformation/Guidances/UCM537130.pdf. [83] U.S. Food & Drug Admin., Draft Guidance for Industry and Review Staff:  Drug and Device Manufacturer Communications With Payors, Formulary Committees, and Similar Entities—Questions and Answers (Jan. 2017), https://www.fda.gov/downloads/Drugs/GuidanceComplianceRegulatoryInformation/Guidances/UCM537347.pdf. [84] U.S. Food & Drug Admin., Statement from FDA Commissioner Scott Gottlieb, M.D., on FDA decision to seek additional time to reassess rule that would have changed longstanding practices for how the agency determined the ?intended use’ of medical products (Jan. 12, 2018), https://www.fda.gov/NewsEvents/Newsroom/PressAnnouncements/ucm592358.htm. [85] Id. [86] Id. [87] U.S. Food & Drug Admin., Clarification of When Products Made or Derived From Tobacco Are Regulated as Drugs, Devices, or Combination Products; Amendments to Regulations Regarding “Intended Uses”; Proposed Partial Delay of Effective Date (Jan. 16, 2018), https://www.federalregister.gov/documents/2018/01/16/2018-00555/clarification-of-when-products-made-or-derived-from-tobacco-are-regulated-as-drugs-devices-or (83 Fed. Reg. 2092). [88] United States ex rel King v. Solvay Pharm., Inc., 871 F.3d 318, 329 (5th Cir. 2017) (per curiam). [89] United States ex rel. Ibanez, 874 F.3d at 915. [90] Sidney Hillman Health Ctr. of Rochester v. Abbott Labs., 873 F.3d 574, 578 (7th Cir. 2017). [91] Hemi Grp v. City of New York, 559 U.S. 1 (2010). [92] Sidney Hillman Health Ctr. of Rochester, 873 F.3d at 578 (7th Cir. 2017) (citing Sergeants Benevolent Ass’n Health and Welfare Fund v. Sanofi-Aventis U.S. LLP, 806 F.3d 71 (2d Cir. 2015), and UFCW Local 1776 v. Eli Lilly & Co., 620 F.3d 121 (2d Cir. 2010)). [93] Pharmaceutical Information Exchange Act, H.R. 2026, 115th Cong. (2017),  https://www.congress.gov/bill/115th-congress/house-bill/2026. [94] Medical Product Communications Act of 2017, H.R. 1703, 115th Cong. (2017),  https://www.congress.gov/bill/115th-congress/house-bill/1703/text. [95] Press Release, #SubHealth Reviews Legislation Addressing Medical Product Manufacturer Communications, H. Subcomm. on Health of the H. Comm. on Energy & Commerce (Jul. 12, 2017), https://energycommerce.house.gov/news/press-release/subhealth-reviews-legislation-addressing-medical-product-manufacturer-communications/. [96] Jeff Overley, Off-Label Drug Bills Get Little Traction On Capitol Hill, Law360, (Jul. 12, 2017), https://www.law360.com/health/articles/943303/off-label-drug-bills-get-little-traction-on-capitol-hill. [97] Michael Ollove, Pressure mounts to lift FDA restrictions on off-label drugs, Washington Post, (Oct. 8, 2017), https://www.washingtonpost.com/national/health-science/pressure-mounts-to-lift-fda-restrictions-on-off-label-drugs/2017/10/06/568204a0-a2f6-11e7-8cfe-d5b912fabc99_story.html?. [98] News Release, New Jersey Dept. of Justice, New Hampshire Joins $13.5 Million Consumer Settlement with Boehringer Ingelheim Pharmaceuticals, Inc. Concerning Its Off-Label Promotion of Four Prescription Drugs (Dec. 20, 2017), https://www.doj.nh.gov/media-center/press-releases/2017/20171220-boehringer-ingelheim-pharmaceuticals.htm [99] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Boehringer Ingelheim to Pay $95 Million to Resolve False Claims Act Allegations, (Oct. 25, 2012) https://www.justice.gov/opa/pr/boehringer-ingelheim-pay-95-million-resolve-false-claims-act-allegations. [100] United States v.Paul J. Elmer and Caprice R. Bearden, No. 1:17-cr-0113 (S.D. Ind. Jun. 20, 2017). [101] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Former Pharmacy Compliance Director Pleads Guilty to Introducing Adulterated Drugs into Interstate Commerce and Conspiracy to Defraud the United States (Nov. 22, 2017), https://www.justice.gov/opa/pr/former-pharmacy-compliance-director-pleads-guilty-introducing-adulterated-drugs-interstate. [102] Id. [103] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, District Court Enters Permanent Injunction Against Alabama Pharmacy and Individuals to Prevent Distribution of Adulterated and Misbranded Drugs and Unapproved New Drugs (Jul. 5, 2017), https://www.justice.gov/opa/pr/district-court-enters-permanent-injunction-against-alabama-pharmacy-and-individuals-prevent. [104] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, District Court Enters Permanent Injunction Against Utah Pharmacy and its Executives to Prevent Distribution of Adulterated, Misbranded and Unapproved New Drugs (Aug. 7, 2017), https://www.justice.gov/opa/pr/district-court-enters-permanent-injunction-against-utah-pharmacy-and-its-executives-prevent. [105] Press Release, District Court Enters Permanent Injunction Against Philips North America and Two Executives to Limit Distribution of Adulterated External Defibrillators (Oct. 31, 2017), https://www.justice.gov/opa/pr/district-court-enters-permanent-injunction-against-philips-north-america-and-two-executives. [106] See U.S. Food & Drug Admin., Warning Letters 2017 (Dec. 21, 2017), https://www.fda.gov/Drugs/GuidanceComplianceRegulatoryInformation/default.htm (follow “Enforcement Activities by FDA” hyperlink; then follow “Warning Letters and Notice of Violation Letters to Pharmaceutical Companies” hyperlink; then follow “Warning Letters 2017” hyperlink). [107] See Warning Letter from Thomas J. Cosgrove, Dir., Office of Mfg. Quality, U.S. Food & Drug Admin. to Mr. Rajiv Malik, President, Mylan Pharmaceuticals, Inc. (Apr. 3, 2017), https://www.fda.gov/ICECI/EnforcementActions/WarningLetters/2017/ucm550326.htm. [108] Warning Letter from Francis Godwin, Acting Dir., Office of Mfg. Quality, U.S. Food & Drug Admin. to Mr. Guangjian Feng, Manager of Marketing, Guangdong Zhanjiang Jimin Pharmaceutical Co., Ltd. (Oct. 30, 2017), https://www.fda.gov/ICECI/EnforcementActions/WarningLetters/2017/ucm583939.htm. [109] Warning Letter from Francis Godwin, Acting Dir., Office of Mfg. Quality, U.S. Food & Drug Admin. to Mr. Il Chong Chung, President and Owner, Seindni Co., Ltd. (Dec. 5, 2017), https://www.fda.gov/ICECI/EnforcementActions/WarningLetters/2017/ucm588215.htm. [110] Warning Letter from Thomas J. Cosgrove, Dir., Office of Mfg. Quality, U.S. Food & Drug Admin. to Ms. Michele Boisvert, CEO, Homeolab USA Inc. (Aug. 2, 2017), https://www.fda.gov/ICECI/EnforcementActions/WarningLetters/2017/ucm570461.htm. [111] Warning Letter from Thomas J. Cosgrove, Dir., Office of Mfg. Quality, U.S. Food & Drug Admin. to Ms. Jeong Soo Ahn, CEO, Dasan E&T Co., Ltd. (Sept. 22, 2017), https://www.fda.gov/ICECI/EnforcementActions/WarningLetters/2017/ucm577650.htm. [112] Warning Letter from Francis Godwin, Acting Dir., Office of Mfg. Quality, U.S. Food & Drug Admin. to Mr. JongWoo Kim, CEO, Dae Young Foods Company, Ltd. (Nov. 20, 2017), https://www.fda.gov/ICECI/EnforcementActions/WarningLetters/2017/ucm586501.htm. [113] Warning Letter from Thomas J. Cosgrove, Dir., Office of Mfg. Quality, U.S. Food & Drug Admin. to Dr. Dhananjaya Alli, Managing Director, Vista Pharmaceuticals Limited (July 5, 2017), https://www.fda.gov/ICECI/EnforcementActions/WarningLetters/2017/ucm565861.htm. [114] Warning Letter from Thomas J. Cosgrove, Dir., Office of Mfg. Quality, U.S. Food & Drug Admin. to Mr. Bernard Armani, President, Deserving Health International Corp. (Dec. 18, 2017), https://www.fda.gov/ICECI/EnforcementActions/WarningLetters/2017/ucm589455.htm. [115] U.S. Food & Drug Admin., Draft Guidance for Industry: Expiration Dating of Unit-Dose Repackaged Solid Oral Dosage Form Drug Products (Aug. 8, 2017), https://www.fda.gov/downloads/Drugs/GuidanceComplianceRegulatoryInformation/Guidances/UCM070278.pdf. [116] U.S. Food & Drug Admin., Expiration Dating of Unit-Dose Repackaged Solid Oral Dosage Form Drug Products; Revised Draft Guidance for Industry; Availability, 82 Fed. Reg. 37229 (Aug. 9, 2017). [117] U.S. ex rel. King v. Solvay Pharmaceuticals, Inc., 871 F.3d 318, 323 (5th Cir. 2017) (per curiam); 31 U.S.C. § 3729(a)(1)(A)–(B). [118] Id. at 331–32. [119] Id. at 331. [120] Id. at 332. [121] Id. (emphasis added). [122] Press Release, U.S. Dep’t of Justice, U.S. Atty’s Office, S.D.N.Y., Manhattan U.S. Attorney Announces $370 Million Civil Fraud Settlement Against Novartis Pharmaceuticals for Kickback Scheme Involving High-Priced Prescription Drugs, Along With $20 Million Forfeiture of Proceeds From The Scheme (Nov.r 20, 2015), https://www.justice.gov/usao-sdny/pr/manhattan-us-attorney-announces-370-million-civil-fraud-settlement-against-novartis. [123] United States v. Nerey, 877 F.3d 956, 969 (11th Cir. 2017). [124] Id. (quoting United States v. Vernon, 723 F.3d 1234, 1256 (11th Cir. 2013)). [125] Id. [126] U.S. Dep’t of Health and Human Servs., Office of Inspector Gen., Notice of Modification of OIG Advisory Opinion No. 02-01 at 1 (Mar. 3, 2017), https://oig.hhs.gov/fraud/docs/advisoryopinions/2017/AdvOpn02-1-mod.pdf. [127] Id. at 2–3. [128] U.S. Dep’t of Health and Human Servs., Office of Inspector Gen., Redacted Final Notice of Rescission 06-04 at 1 (Nov. 28, 2017), https://oig.hhs.gov/fraud/docs/advisoryopinions/2017/AdvOpnRescission06-04.pdf. [129] Id. [130] Id. [131] Id. [132] Id. at 2. [133] Id. [134] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Drug Maker United Therapeutics Agrees to Pay $210 Million to Resolve False Claims Act Liability for Paying Kickbacks (Dec. 20, 2017), https://www.justice.gov/opa/pr/drug-maker-united-therapeutics-agrees-pay-210-million-resolve-false-claims-act-liability. [135] See id. [136] Allison Noon, United Therapeutics Settles Charity-Kickback Claim for $210 Million, Law360 (Dec. 20, 2017), https://www.law360.com/articles/996916/united-therapeutics-settles-charity-kickback-claim-for-210m; see, e.g., Regeneron Pharmaceuticals, Inc., Form 10-K, at 58 (filed Feb. 9, 2017), http://investor.regeneron.com/secfiling.cfm?filingid=1532176-17-8&cik. [137] Letter from Gregory Demske, Chief Counsel to the Inspector General, U.S. Dep’t of Health and Human Servs., Office of Inspector Gen., to James Stansel, Executive Vice President and General Counsel, Pharmaceutical Research and Manufacturers of America (Jan. 04, 2018), https://dlbjbjzgnk95t.cloudfront.net/0999000/999154/stansel-letter.pdf. [138] Id. [139] 42 U.S.C. § 1320a-7b(b)(2)(A). [140] 15 U.S.C. § 2301(6) (defining written warranty); 42 C.F.R. § 1001.952(g) (setting out the safe harbor for warranties). [141] U.S. Dep’t of Health and Human Servs., Office of Inspector Gen., OIG Advisory Op. 02-06 at 5 (May 14, 2002), https://oig.hhs.gov/fraud/docs/advisoryopinions/2002/ao0206.pdf. [142] U.S. Dep’t of Health and Human Servs., Office of Inspector Gen., OIG Advisory Op. 17-03 at 1 (Aug.18, 2017), https://oig.hhs.gov/fraud/docs/advisoryopinions/2017/AdvOpn17-03.pdf. [143] Id. at 2. [144] Id. at 2–3. [145] Id. at 5. [146] Id. at 5. [147] See id. at 5–6. [148] See id. [149] U.S. Dep’t of Health and Human Servs., Office of Inspector Gen., OIG Advisory Op. 17-07 at 1–2 (Dec. 4, 2017) https://oig.hhs.gov/fraud/docs/advisoryopinions/2017/AdvOpn17-07.pdf.  The five diagnoses that would be eligible under the Hospital Readmission Reduction Program are pneumonia, congestive heart failure, acute myocardial infarction, chronic obstructive pulmonary disease, and elective total hip or knee arthoplasty.  Id. at 2. [150] Id. [151] Id. at 7–8. [152] Id. at 8­9.  Also important to HHS OIG’s determination is that the manufacturer does not make many products that apply to the specific diseases at issue. [153] Id. at 8. [154] Id. at 9. [155] Id. [156] See FDA Reauthorization Act of 2017, Pub. L. No. 115–52, § 203, 131 Stat. 1005, 1013–14 (2017). [157] See id. §§ 201–03, 131 Stat. at 1013–15. [158] See id. §§ 701–02, 131 Stat. at 1054–56. [159] See id. § 702(b), 131 Stat. at 1055–56. [160] See Scott Gottlieb, FDA Announces New Steps to Empower Consumers and Advance Digital Healthcare, FDA Voice (July 27, 2017), https://blogs.fda.gov/fdavoice/index.php/2017/07/fda-announces-new-steps-to-empower-consumers-and-advance-digital-healthcare/. [161] U.S. Food & Drug Admin., Digital Health Innovation Action Plan, at 1 (2017), https://www.fda.gov/downloads/MedicalDevices/DigitalHealth/UCM568735.pdf. [162] Id. at 1, 5. [163] Id. at 7. [164] U.S. Food & Drug Admin., Draft Guidance for Industry and Food and Drug Administration Staff: Clinical and Patient Decision Support Software (Dec. 8, 2017), https://www.fda.gov/downloads/MedicalDevices/DeviceRegulationandGuidance/GuidanceDocuments/UCM587819.pdf. [165] Id. at 5–9. [166] Id. at 11–13. [167] See U.S. Food & Drug Admin., Draft Guidance for Industry and Food and Drug Administration Staff: Changes to Existing Medical Software Policies Resulting from Section 3060 of the 21st Century Cures Act (Dec. 8, 2017), https://www.fda.gov/downloads/MedicalDevices/DeviceRegulationandGuidance/GuidanceDocuments/UCM587820.pdf. [168] See id. at 7–9. [169] See id. at 4, 7–9. [170] See id. at 9–14. [171] U.S. Food & Drug Admin., Guidance for Industry and Food and Drug Administration Staff: Software as a Medical Device (SAMD): Clinical Evaluation (Dec. 8, 2017), https://www.fda.gov/ucm/groups/fdagov-public/@fdagov-meddev-gen/documents/document/ucm524904.pdf. [172] See id. at FDA Preface, 4–5. [173] Id. at 16–21. [174] U.S. Food & Drug Admin., Draft Guidance for Industry and Food and Drug Administration Staff: The Least Burdensome Provisions: Concept and Principles (Dec. 15, 2017), https://www.fda.gov/downloads/MedicalDevices/DeviceRegulationandGuidance/GuidanceDocuments/UCM588914.pdf. [175] Scott Gottlieb and Jeffrey Shuren, New Steps to Facilitate Beneficial Medical Device Innovation, FDA Voice (Dec. 14, 2017), https://blogs.fda.gov/fdavoice/index.php/2017/12/new-steps-to-facilitate-beneficial-medical-device-innovation/. [176] U.S. Food & Drug Admin., Draft Guidance for Industry and Food and Drug Administration Staff: The Least Burdensome Provisions: Concept and Principles, at 4–5 (Dec. 15, 2017), https://www.fda.gov/downloads/MedicalDevices/DeviceRegulationandGuidance/GuidanceDocuments/UCM588914.pdf. [177] Id. at 7. [178] Id. [179] Id. at 9–14. [180] Id. at 16. [181] Id. at 16–17; see also U.S. Food & Drug Admin., Guidance for Industry, Tool Developers, and Food and Drug Administration Staff: Qualification of Medical Device Development Tools (Aug. 10, 2017), https://www.fda.gov/downloads/medicaldevices/deviceregulationandguidance/guidancedocuments/ucm374432.pdf. [182] U.S. Food & Drug Admin., Draft Guidance for Industry and Food and Drug Administration Staff: Breakthrough Devices Program (Oct. 25, 2017), https://www.fda.gov/ucm/groups/fdagov-public/@fdagov-meddev-gen/documents/document/ucm581664.pdf. [183] Id. at 1. [184] Id. at 11–12; see also id. at 12–17. [185] Id. at 7–11. [186] U.S. Food & Drug Admin., Guidance for Industry and Food and Drug Administration Staff: Design Considerations and Pre-market Submission Recommendations for Interoperable Medical Devices (Sept. 6, 2017), https://www.fda.gov/ucm/groups/fdagov-public/@fdagov-meddev-gen/documents/document/ucm482649.pdf. [187] See id. at 3, 13–16. [188] U.S. Food & Drug Admin., Guidance for Industry and Food and Drug Administration Staff: Deciding When to Submit a 510(k) for a Change to an Existing Device (Oct. 25, 2017), https://www.fda.gov/downloads/medicaldevices/deviceregulationandguidance/guidancedocuments/ucm514771.pdf; U.S. Food & Drug Admin., Guidance for Industry and Food and Drug Administration Staff: Deciding When to Submit a 510(k) for a Software Change to an Existing Device (Oct. 25, 2017), https://www.fda.gov/ucm/groups/fdagov-public/@fdagov-meddev-gen/documents/document/ucm514737.pdf. [189] See Change to an Existing Device, supra note 32, at 8–9, 25–31; Software Change to an Existing Device, supra note 32, at 5–6, 15. [190] U.S. Food & Drug Admin., Guidance for Industry and Food and Drug Administration Staff: Technical Considerations for Additive Manufactured Medical Devices (Dec. 5, 2017), https://www.fda.gov/ucm/groups/fdagov-public/@fdagov-meddev-gen/documents/document/ucm499809.pdf. [191] See U.S. Food & Drug Admin., Guidance for Industry and Food and Drug Administration Staff: Classification of Products as Drugs and Devices and Additional Product Classification Issues (Sept. 25, 2017), https://www.fda.gov/downloads/RegulatoryInformation/Guidances/UCM258957.pdf. [192] U.S. Food & Drug Admin., Guidance for Industry and Food and Drug Administration Staff: Medical Device Accessories – Describing Accessories and Classification Pathways (Dec. 20, 2017), https://www.fda.gov/ucm/groups/fdagov-public/@fdagov-meddev-gen/documents/document/ucm429672.pdf. [193] See id. at 3, 8–12. [194] See U.S. Food & Drug Admin., 2017 Warning Letters: Inspections, Compliance, Enforcement, and Criminal Investigations, https://www.fda.gov/ICECI/EnforcementActions/WarningLetters/2017/default.htm?Page=1. [195] Warning Letter from Alberto Gutierrez, Office Dir., Office of In Vitro Diagnostics and Radiological Health, Ctr. for Devices & Radiological Health, U.S. Food & Drug Admin. to Arjen Winkel, President and CEO, QLRAD Netherlands (July 20, 2017), https://www.fda.gov/ICECI/EnforcementActions/WarningLetters/2017/ucm574153.htm. [196] Id. [197] Warning Letter from Joseph Matrisciano, Jr., District Dir., Division 1/East, N.E. District, Office of Medical Device and Radiological Health Operations, U.S. Food & Drug Admin. to Mr. James Phillip Jones, Chief Executive Officer, Dynavision International, LLC (Sept. 5, 2017), https://www.fda.gov/ICECI/EnforcementActions/WarningLetters/2017/ucm574774.htm. [198] Warning Letter from Alberto Gutierrez, Office Dir., Office of In Vitro Diagnostics and Radiological Health, Ctr. for Devices & Radiological Health, U.S. Food & Drug Admin. to Wilhelm Sänger, General Manager, DRG Instruments GmbH (Sept. 19, 2017), https://www.fda.gov/ICECI/EnforcementActions/WarningLetters/2017/ucm580968.htm; Warning Letter from Alberto Gutierrez, Office Dir., Office of In Vitro Diagnostics and Radiological Health, Ctr. for Devices & Radiological Health, U.S. Food & Drug Admin. to Else Beth Trautner, Chief Executive Officer, Euro Diagnostica AB (Sept. 20, 2017), https://www.fda.gov/ICECI/EnforcementActions/WarningLetters/2017/ucm578374.htm; Warning Letter from Alberto Gutierrez, Office Dir., Office of In Vitro Diagnostics and Radiological Health, Ctr. for Devices & Radiological Health, U.S. Food & Drug Admin. to Christoph Gauer, CEO, ELITech Group SAS (Sept. 20, 2017), https://www.fda.gov/ICECI/EnforcementActions/WarningLetters/2017/ucm581033.htm. [199] See U.S. Food & Drug Admin., 2017 Warning Letters: Inspections, Compliance, Enforcement, and Criminal Investigations, https://www.fda.gov/ICECI/EnforcementActions/WarningLetters/2017/default.htm?Page=1. [200] Warning Letter from Donald J. St. Pierre, Acting Dir., Office of In Vitro Diagnostics and Radiological Health, Ctr. for Devices & Radiological Health, U.S. Food & Drug Admin. to Dmitry Novikov, TELEMED (Nov. 14, 2017), https://www.fda.gov/ICECI/EnforcementActions/WarningLetters/2017/ucm589996.htm. [201] Warning Letter from Kelly Sheppard, Acting Program Div. Dir., Division 3 West, L.A. District, Office of Medical Device and Radiological Health Operations, U.S. Food & Drug Admin. to Dr. John M. Agee, President and Owner, Hand Biomechanics Lab, Inc. (Nov. 16, 2017), https://www.fda.gov/ICECI/EnforcementActions/WarningLetters/2017/ucm587328.htm. [202] See U.S. Food & Drug Admin., 2017 Warning Letters: Inspections, Compliance, Enforcement, and Criminal Investigations, https://www.fda.gov/ICECI/EnforcementActions/WarningLetters/2017/default.htm?Page=1. The following Gibson Dunn lawyers assisted in the preparation of this client update:  Stephen Payne, Marian Lee, John Partridge, Jonathan Phillips, Sean Twomey, Reid Rector, Allison Chapin, Sarah Erickson-Muschko, Emily Riff, Jasper Hicks, Julie Hamilton, Lucie Duvall, and Stevie Pearl. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work or any of the following: Washington, D.C. Stephen C. Payne, Chair, FDA and Health Care Practice Group (+1 202-887-3693, spayne@gibsondunn.com) F. Joseph Warin (+1 202-887-3609, fwarin@gibsondunn.com) Marian J. Lee (+1 202-887-3732, mjlee@gibsondunn.com) Daniel P. Chung (+1 202-887-3729, dchung@gibsondunn.com) Jonathan M. Phillips (+1 202-887-3546, jphillips@gibsondunn.com) Los Angeles Debra Wong Yang (+1 213-229-7472, dwongyang@gibsondunn.com) San Francisco Charles J. Stevens (+1 415-393-8391, cstevens@gibsondunn.com) Winston Y. Chan (+1 415-393-8362, wchan@gibsondunn.com) New York Alexander H. Southwell (+1 212-351-3981, asouthwell@gibsondunn.com) Denver Robert C. Blume (+1 303-298-5758, rblume@gibsondunn.com) John D. W. Partridge (+1 303-298-5931, jpartridge@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

January 5, 2018 |
2017 Year-End False Claims Act Update

Click for PDF How will the Trump Administration alter enforcement of the False Claims Act (“FCA”)?  This is a question we fielded frequently at the end of 2016.  Our answer at the time:  We do not expect there to be significant changes in FCA enforcement, and we expect that the Department of Justice (“DOJ”) and private qui tam plaintiffs will continue to brandish the FCA as a powerful weapon.  Our answer today?  Enforcement of the FCA, although slightly less active during 2017 than 2016, shows little signs of a long-term letup.  To the contrary, the FCA remains a significant source of government-facing and private-plaintiff litigation. 2017 marked the eighth straight year in which the federal government has recovered more than $3 billion in FCA cases and in which more than 700 new FCA cases were filed.  To put that in historical context, each of those marks had been reached only once before this most-recent eight-year stretch.  Although federal recoveries dipped from 2016, this past year also marked the fourth-highest yearly haul ever for the federal government.  And despite hints from isolated elements of the Trump Administration that there may be some interest in reigning in perceived overreach with the FCA, top DOJ officials have reaffirmed their dedication to stringent enforcement of the statute. On the case law front, the U.S. Supreme Court’s 2016 landmark decision in Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), continued to reverberate through the lower courts.  Some courts have implemented the Escobar Court’s intent, barring FCA cases—at the summary judgment or even the pleading stage—when prior government actions demonstrate that the alleged misconduct at issue was not material to government payment.  But other courts have imposed different standards, parsing Escobar in plaintiff-friendly fashions.  Meanwhile, in Escobar‘s shadow, the lower federal courts have grappled with numerous other complex issues involving the FCA, including pleading standards, the public disclosure bar, the first-to-file bar, and more.  In fact, this last six months saw more than a dozen  significant circuit court decisions on issues relating to the FCA. Finally, on the legislative front, there is little to report.  As recently as mid-2016, legislative reform to reign in the FCA was the subject of Congressional hearings and murmurings by commentators.[1]  But today it seems no legislator—let alone a voting bloc—is eager to scale back a law intended to prevent “waste, fraud, and abuse.”  In the current political climate, it is perhaps hard to find blame in that decision. We address all of these and other developments in greater depth below.  We focus first on enforcement activity at the federal and state levels, turn to important FCA settlements and judgments that were announced in the second half of 2017, discuss the limited activity on the legislative front, and then conclude with an analysis of significant cases from the past six months. As always, Gibson Dunn’s recent publications on the FCA may be found on our website, including in-depth discussions of the FCA’s framework and operation, industry-specific presentations, and practical guidance to help companies avoid or limit liability under the FCA.  And, of course, we would be happy to discuss these developments—and their implications for your business—with you. II.     FCA ENFORCEMENT ACTIVITY A.     Total Recovery Amounts: 2017 Recoveries Exceed $3.7 Billion The federal government recovered more than $3.7 billion in civil settlements and judgments under the FCA during the 2017 fiscal year, the fourth-highest amount on record.[2]  There were also 799 new FCA cases filed in 2017, the fourth-highest number in any single year.  Of the more than $3.7 billion that the government recovered, almost $426 million—the second-highest amount ever—came from suits where the federal government declined to intervene and that were driven by private qui tam “whistleblower” plaintiffs.[3]  All in all, 2017 was the eighth consecutive year in which the government recovered more than $3 billion and where there were at least 700 new FCA matters. B.     Qui Tam Activity Last year, we suggested that the government’s record 2015 recovery in qui tam suits where the government declined to intervene may have been an aberration.[4]  But 2015 looks less like an anomaly, at least after this past year.  In 2017, the government recovered nearly $426 million in cases where it declined to intervene, the second-highest amount on record.  That amount, which quadrupled 2016’s haul in such cases, constituted 11% of all recoveries last year. The proportion of cases in 2017 initiated by a whistleblower (84% (674 of 799)) remained in line with historical averages; that proportion has vacillated between 77% and 88% every year since 2009.  Going back farther in time, however, it is important to recall that the total number, and proportion, of qui tam cases has increased substantially since Congress amended the FCA in 1986: from 1987 through 1991, only about a quarter of FCA cases were qui tam cases, but whistleblowers have now brought just shy of 12,000 qui tam cases since then (71% of the total). The chart below demonstrates both the increase in overall FCA litigation activity since 1986 and the distinct shift from government-driven investigations and enforcement to qui tam-initiated lawsuits.  Although there was a slight decline compared to 2016, the total number of FCA cases remains far higher than in the first decade of the new millennium, when approximately 470 cases (on average) were initiated each year. Number of FCA New Matters, Including Qui Tam Actions  Source: DOJ “Fraud Statistics – Overview” (Dec. 21, 2017)   When a whistleblower brings an FCA action, the government may choose to intervene, which it does about 20% of the time.[5]  Even if the government declines to intervene, at least 70% of any recovery still goes to the government.  In fiscal year 2017, that large majority of cases where the government declined to intervene accounted for 11% of all federal recoveries.  This may not seem like much, but it was just the second time that such recoveries exceeded 9%, as shown below. Settlement or Judgments in Cases Where the Government Declined Intervention as a Percentage of Total FCA Recoveries Source: DOJ “Fraud Statistics – Overview” (Dec. 21, 2017)    C.     The Trump Administration’s Statements on the FCA As we reported in our 2017 Mid-Year update, Trump Administration officials have publicly announced their intent to enforce the FCA vigorously, beginning with a January pledge by U.S. Attorney General Jeff Sessions to “make it a high priority of the [D]epartment [of Justice] to root out and prosecute fraud in federal programs and to recover any monies lost due to fraud or false claim[s].”  He also voiced support for whistleblower-driven FCA suits as a “healthy” and “effective” method of rooting out fraud.  Deputy Attorney General Rod Rosenstein also committed, in connection with his January nomination, to continue robust enforcement of the FCA and to ensure that DOJ attorneys work collaboratively with relators. This messaging from DOJ has continued on.  For example, in his remarks announcing that DOJ’s 2017 Health Care Fraud Takedown operation would be the largest ever in the program’s eight-year history, Attorney General Sessions pledged to “use every tool we have to stop criminals from exploiting vulnerable people and stealing our hard-earned tax dollars” and to “develop even more techniques to identify and prosecute wrongdoers.”[6]  Attorney General Sessions added that the takedown program—a coordinated nationwide effort between DOJ, the U.S. Department of Health and Human Services (“HHS”), and law enforcement—had charged 412 defendants, nearly 300 of which were in the process of being suspended or banned from participation in federal programs, as of July 2017. This is not to say that all statements from the Administration have been aligned.  For instance, while addressing criticism levied during a House Financial Services Committee meeting in October—specifically, that the government’s use of the FCA against Federal Housing Administration (“FHA”) lenders was driving lenders away from the program and increasing costs to borrowers—U.S. Department of Housing and Urban Development Secretary Ben Carson pledged to address the “ridiculous” rise of FCA actions against FHA lenders.[7]  Secretary Carson’s comments, which included a statement that the Administration was “already addressing that problem” with DOJ’s staff, suggests a potential check on FCA actions. Similarly, in October, the Director of the Fraud Section of DOJ’s Civil Division gave a speech that left some industry-watchers wondering if DOJ intended to revisit its practices with respect to seeking dismissal of qui tam FCA suits that it determined to be meritless.  By statute, DOJ has always had the authority to intervene and seek dismissal of qui tam cases.  Historically, however, DOJ has used this authority sparingly.  Acknowledging that “clearly meritless cases can serve only to increase the costs for the government and health care providers alike,” the DOJ official cautioned that “[w]hile qui tam cases will always remain a significant staple of the government’s False Claims Act efforts, we are mindful of the need to maximize the use of the government’s limited resources.”[8]  Initial press reports viewed these remarks as an indication that DOJ had updated its longstanding policy of intervening to seek dismissal of meritless FCA actions only infrequently.  But DOJ later clarified that the remarks had merely been commentary on DOJ’s authority to seek dismissal and did not reflect any actual changes to its enforcement policy.[9] The year also saw staffing changes at DOJ that could impact the government’s FCA enforcement practices.  In July, Attorney General Jeff Sessions downsized the Health Care Corporate Fraud Strike Force, which was created in 2015 to focus on pursuing complex cases involving corporate health care fraud.[10]  The personnel changes—apparently reflecting the Administration’s shift in favor of high-priority issues like the opioid epidemic—were swiftly reported in the media as significantly weakening the Corporate Fraud Strike Force.  But this change should not be seen as an end to corporate health care fraud prosecutions.  DOJ publicly disavowed any such notion, stating that the Health Care Corporate Strike Force is “going strong under steady leadership” and that DOJ is “continuing to vigorously investigate and hold accountable individuals and companies that engage in fraud.”[11]  And DOJ left in place the related Medicare Fraud Strike Force, which has an established expertise in complex health care cases and a long track record of pursuing health care FCA cases.  Thus, it is safe to say that DOJ remains committed to health care fraud cases more broadly, even as it has reorganized how it handles such cases internally. Although we will continue to track these developments in the upcoming year, we do not anticipate any significant slowdown from the Administration.  We certainly have not seen any shortfall of aggression from DOJ since the change in Administration, and efforts to combat “waste, fraud, and abuse” continue to draw bipartisan support. D.     Industry Breakdown The past year’s distribution of recoveries by industry remained consistent with prior years, as health care industry companies continued to pay the majority (67%) of all sums collected by the government.  The financial industry, too, remained a significant target even though more than eight years have passed since the 2008 financial crisis.  Notably, the government recovered more than $543 million stemming from alleged housing and mortgage fraud in 2017.[12] Settlement or Judgments by Industry in 2017   1.     Health Care and Life Sciences Industries The health care industry paid 67% of all federal FCA recoveries this past year, in line with its average annual proportion since 2010.  In 2017, that amounted to almost $2.5 billion, a slight decrease from $2.6 billion the year before.  Since 2010, these figures have been remarkably consistent, as the government has recovered between $2.4 billion and $2.7 billion from health care companies every year but two—in 2012 when it recovered $3.1 billion, and in 2015 when it recovered $2.1 billion. As in years past, a handful of disproportionately large settlements drove the ten-figure sum.  In a case that drew substantial media attention, a branded pharmaceutical maker paid $465 million to resolve government allegations that the company avoided paying Medicare rebates by misclassifying its life-saving emergency medication as a generic drug.[13]  Meanwhile, in a case that garnered relatively less attention, a company that sells electronic health records software settled with the government for $155 million after allegedly misrepresenting its software’s capabilities.[14] DOJ and qui tam actions are not the only area of risk for health care and life sciences companies.  In its Spring 2017 Semiannual Report to Congress, the U.S. Department of Health and Human Services, Office of Inspector General (“HHS OIG”) reported that it also commenced 458 civil actions (including but not limited to FCA actions) in the first half of the 2017 fiscal year,[15] an increase from the 379 it commenced during the first half of the 2016 fiscal year.[16] No description of DOJ’s and HHS OIG’s enforcement activities is complete without discussion of the Anti-Kickback Statute (“AKS”) and the Stark Law.  The AKS prohibits giving or offering—and requesting or receiving—any form of payment in exchange for referring a product or a service that is covered by federally funded health care programs.[17]  Since the Affordable Care Act of 2010, claims resulting from a violation of the AKS are deemed “false” for purposes of the FCA.  The Stark Law prohibits physicians from referring Medicare patients to a provider with which the physician has a financial relationship.[18] One of the largest health care industry FCA settlements of the year, a $350 million agreement, involved a medical device manufacturer that allegedly paid kickbacks to health care providers in exchange for agreeing to use its skin graft product.[19] In recent years, FCA recoveries from hospitals and hospital systems have taken a back seat to recoveries from pharmaceutical companies, medical device companies, and outpatient clinics.  However, in 2017, a large chain of hospitals paid $60 million after the government alleged that it overbilled various federal programs for services provided by claiming that it had actually provided other, more expensive, services.[20]  And two related Missouri hospitals agreed to pay $34 million for allegedly paying improper incentives to doctors who referred oncology patients to a chemotherapy infusion clinic.[21] 2.     Government and Defense Contracting Industry Recoveries from government contracting firms rebounded in 2017, up to $220 million from $122 million in 2016.[22]  Defense contractors, however, made up a smaller-than-usual percentage of government contracting enforcement actions in 2017, while contractors who provide more routine government services were more of a focus of FCA cases over the last year.  For example, a software company paid $45 million after the government alleged that it failed to disclose some of its discounting practices to the General Services Administration, resulting in overpayments.[23]  The government also continued in 2017 its recent trend of pursuing FCA theories based on evasion of import duties, for example, when it secured a settlement from a company and two individuals who allegedly evaded customs duties after they imported wood furniture from China.[24] 3.     Financial Industry Even as the 2008 financial crisis has begun to recede into memory, 2017 was a banner year for FCA recoveries from financial services companies who allegedly defrauded the government in the run-up to the crisis.  Most notably, the government won more than $296 million at trial against a company and its CEO who allegedly falsely certified the quality of thousands of mortgage loans and then recovered tens of millions of FHA insurance dollars when the loans failed.[25]  The government also secured a $74 million settlement from another mortgage lender who allegedly engaged in similar activities dating back to 2006.[26] III.     NOTEWORTHY SETTLEMENTS AND JUDGMENTS ANNOUNCED DURING THE SECOND HALF OF 2017 We summarize below a number of the notable FCA settlements and judgments announced during the past six months (we covered notable settlements and judgments from the first half of the year in our 2017 Mid-Year Update), including those in the health care and life sciences industries, government and defense contracting industry, and the financial industry.  These cases provide specific examples of the industries the government has targeted, as well as the theories of liability that the government and relators have advanced. A.     Settlements 1.     Health Care and Life Sciences Industries On July 17, 2017, three Ohio-based health care providers and their executives agreed to pay roughly $19.5 million to resolve allegations related to their alleged submission of false claims to Medicare for unnecessary rehabilitation and hospice services.  The government alleged that the companies provided therapy services at excessive levels to increase Medicare reimbursement and provided hospice services to patients who were ineligible for those Medicare benefits.  In addition, the individual executive defendants allegedly solicited and received kickbacks to refer patients from skilled nursing facilities managed by corporations they partially controlled or owned to a particular home health care services provider.  As part of the settlement, two defendants entered into a five-year corporate integrity agreement with HHS OIG.  The whistleblowers, three former employees of the corporate defendants, will receive almost $3.7 million for their share of the government’s recovery.[27] On August 17, 2017, two wholly owned subsidiaries of a pharmaceutical company headquartered in Pennsylvania agreed to pay $465 million to settle allegations that they knowingly misclassified a certain product as a generic drug to avoid rebate expenditures primarily owed to Medicaid.  The company also entered into a five-year corporate integrity agreement with HHS OIG, which requires an independent organization to conduct an annual review of the defendant’s practices regarding the Medicaid drug rebate program.  The whistleblower, a competing pharmaceutical manufacturer, will receive approximately $38.7 million as a relator’s share.[28] On August 21, 2017, two suppliers of ophthalmological goods and services, as well as their former chief executive officer, agreed to pay more than $12 million to resolve allegations that they paid unlawful kickbacks to physicians and thereby violated the AKS and FCA.  The alleged kickbacks included the provision of free travel, entertainment, and improper consulting agreements.  The government contended that by providing these items of value, the defendants knowingly induced physicians to utilize the defendants’ products and services, and subsequently submit false claims to the federal government.  In connection with the FCA settlement, the defendants agreed to a five-year corporate integrity agreement with HHS OIG.  The whistleblower will receive 19.5% of the amount recovered.[29] On August 28, 2017, two California-based companies and their two principal executives agreed to pay approximately $2 million to resolve federal and state allegations that they knowingly overbilled a program designed to serve Californians with developmental disabilities.  Specifically, defendants allegedly submitted claims for payment of services that were never provided, retained overpayments to which they knew they had no claim, and falsified documents to support their claims for services that were never performed.  The whistleblower will receive a 20% share of all proceeds paid to the federal government.[30] On September 1, 2017, a medical center located in New Mexico and its Texas-based partner agreed to pay approximately $12.24 million to settle allegations that they made illegal donations to county governments, which the counties used to fund the state share of Medicaid payments to the hospital.  Under New Mexico’s now discontinued Sole Community Provider program, the state provided supplemental Medicaid funds to hospitals, and the federal government reimbursed 75% of the expenditures.  Federal law mandated that the state or counties had to provide the remaining 25% of the funds; it was allegedly unlawful for private hospitals to do so.  The whistleblower, a former county health care administrator, will receive approximately $2.2 million of the recovery.[31] On September 5, 2017, a pharmaceutical manufacturer agreed to pay $58.65 million to settle allegations that it did not comply with U.S. Food and Drug Administration (“FDA”)-mandated Risk Evaluation and Mitigation Strategy (“REMS”) for its Type II diabetes medication.  The settlement includes disgorgement of $12.15 million for alleged violations of the Federal Food, Drug, and Cosmetic Act (“FDCA”), and $46.5 million for alleged violations of the FCA.  The FCA-related payment resolves specific allegations that the company caused the submission of false claims related to the drug by authorizing sales messages that could create a false or misleading impression with physicians that the REMS-required message was erroneous, irrelevant, or unimportant, and by encouraging use of the drug by adult patients who did not have Type II diabetes.  The federal government will receive approximately $43.1 million, and state Medicaid programs will receive more than $3.3 million; the amount to be recovered by private party whistleblowers is undecided.[32] On September 8, 2017, a California-based biopharmaceutical company agreed to pay more than $7.55 million to settle allegations that it paid kickbacks to doctors to induce them to prescribe a fentanyl-based drug.  The improper payments allegedly included (1) 85 free meals to doctors and staff from a high-prescribing practice; (2) paying doctors $5,000 and speakers $6,000 to attend an “advisory board” partly organized, and attended, by the defendant’s sales team members; (3) paying approximately $82,000 to a physician-owned pharmacy under a performance-based rebate program; and (4) payments to doctors to refer patients to the company’s patient registry study.  The whistleblower will receive more than $1.2 million of the amount recovered.[33] On September 11, 2017, a South Carolina chain of physician-owned family medicine clinics agreed to pay $1.56 million to settle allegations that it submitted false claims to the Medicare and TRICARE programs.  The principal owner and former chief executive officer, as well as the former laboratory director, also agreed to pay $443,000 to resolve the allegations, bringing the total settlement to over $2 million.  The government specifically alleged that the entity’s incentive compensation plan paid its physicians a percentage of the value of laboratory and other diagnostic tests that they ordered, which the entity then billed to Medicare in violation of the Stark Law.  In addition, the defendants allegedly submitted claims for medically unnecessary laboratory services by creating, and using, custom panels comprised of needless diagnostic tests, and programming accounting software to change billing codes for laboratory tests to ensure payment.  The entity and the principal owner also agreed to a corporate integrity agreement with HHS OIG, which ensures that the owner has no management role for five years and obligates the company to implement internal compliance reforms.[34] On September 13, 2017, a New York hospital operator agreed to pay $4 million to resolve allegations that it engaged in improper financial relationships with referring physicians.  The improper relationships included compensation and office lease arrangements that allegedly did not comply with requirements of the Stark Law, which restricts relationships between entities and referring physicians.  The whistleblower will receive $600,000 of the recovery.[35] On September 18, 2017, an Alaska state agency agreed to pay almost $2.5 million to resolve allegations that it submitted inaccurate quality control data and information to the U.S. Department of Agriculture and received unearned performance bonuses for fiscal years 2010 through 2013.  The inaccuracies occurred in connection with the agency’s implementation of the Supplemental Nutrition Assistance Program (formerly the Food Stamp Program).  The agency had contracted with a third-party consultant to provide recommendations to lower its quality control error rate, but the advice, as implemented by the agency, allegedly injected bias into the quality control process, which resulted in the reporting inaccuracies.  This is the third settlement with a state agency arising from the advice given by the consulting company.[36] On September 22, 2017, a Massachusetts-based pharmaceutical company agreed to pay more than $35 million to resolve criminal and civil charges related to the introduction of an alleged misbranded drug into interstate commerce.  The company also agreed to plead guilty to certain criminal charges, entered into a deferred prosecution agreement relating to its criminal liability under the Health Insurance Portability and Accountability Act of 1996, agreed to a civil consent decree and permanent injunction to prevent future violations of the FDCA, and entered into a corporate integrity agreement with HHS OIG.  Of the $35 million, the company will pay $28.8 million over three years to settle federal ($26.1 million) and state ($2.7 million) liability for allegedly (1) submitting claims to government health care programs arising from its improper promotion of the drug; (2) altering or falsifying statements of medical necessity and prior authorizations that were submitted to federal health care programs; and (3) defraying patients’ copayment obligations, in alleged violation of the AKS, by funneling funds through an entity that claimed to be a non-profit patient organization.  Three whistleblowers will receive $3.7 million from the federal proceeds.[37] On September 27, 2017, a hospital based in South Carolina agreed to pay more than $7 million to settle allegations that it submitted false Medicare claims.  The government contended that the defendant knowingly disregarded the statutory requirements for submitting Medicare claims for services, including radiation oncology services, emergency department services, and clinic services.  In particular, the hospital allegedly (1) billed for radiation oncology services when a qualified practitioner was not immediately available to provide direction throughout the radiation procedure; (2) billed for services provided at a minor care clinic as if it was an emergency department; and (3) billed emergency department services rendered by mid-level providers as if they were provided by a physician.  The whistleblower will receive more than $1.2 million of the recovery and will also receive over $850,000 to resolve her wrongful termination claims.[38] On October 19, 2017, a Tennessee-based nursing home operator agreed to pay $5 million to settle allegations that the company billed Medicare and Medicaid for allegedly worthless nursing home services and services that were never provided.  The company also agreed to enter into a corporate integrity agreement with HHS OIG.  The government’s investigation originated with claims by the whistleblower, a former nursing home employee, of patient abuse and neglect, substandard care, and denial of basic services.  The whistleblower will receive $1 million as part of the settlement.[39] On October 27, 2017, a New York-based health care provider agreed to pay $6 million to resolve allegations that a subsidiary submitted false claims to government health care programs for unnecessary rehabilitation therapy services.  The defendant also agreed to enter into a five-year corporate integrity agreement with HHS OIG.  The two whistleblowers will receive $990,000 of the recovery.[40] On October 30, 2017, an Ohio-based hospice care provider, and various wholly owned subsidiaries, agreed to pay $75 million to settle allegations that they submitted false claims for hospice services to Medicare.  The settlement also included a five-year corporate integrity agreement with HHS OIG.  The government alleged that the defendants submitted claims for services to hospice patients who were not terminally ill, and submitted claims for continuous home care services that were unnecessary, not provided, or not performed in line with Medicare requirements.  In addition, the government alleged that the provider rewarded employees with bonuses for the number of patients receiving hospice services, and pressured staff to increase the volume of continuous home care, regardless of need.  The settlement constitutes the largest recovery ever from a provider of hospice services under the FCA.[41] On December 1, 2017, a physician-owned hospital located in Texas agreed to pay $7.5 million to settle allegations that it paid physicians illegal kickbacks in the form of free marketing services in exchange for surgical referrals.  The marketing services included print, radio, and television advertisements, pay-per-click campaigns, billboards, website upgrades, brochures, and business cards.  The defendant also agreed to enter into a five-year corporate integrity agreement with HHS OIG.  The whistleblowers, two former employees in the defendant’s marketing department, will receive $1.1 million of the amount recovered.[42] On December 12, 2017, a Florida-based cancer care provider, and certain of its subsidiaries and affiliates, agreed to pay $26 million to resolve a Medicare compliance issue that the company had voluntarily disclosed regarding the submission of false attestations about the company’s use of electric health records software, as well as separate whistleblower allegations related to the submission of claims for services provided pursuant to referrals from physicians with whom the defendant allegedly had improper financial relationships.  The company also entered into a five-year corporate integrity agreement with HHS OIG.  The whistleblower, the company’s former interim vice president of financial planning, will receive a $2 million share of the government’s recovery.[43] On December 20, 2017, a Maryland-based pharmaceutical company agreed to pay $210 million to resolve allegations that it used a 501(c)(3) organization as a conduit to pay copays for Medicare patients taking the company’s pulmonary arterial hypertension drugs.  The company allegedly made donations to the foundation, which then used the donations to satisfy the copays.  The company also allegedly prohibited needy Medicare patients from participating in its free drug program; instead, the company allegedly referred these patients to the foundation, which allowed for Medicare claims.  In addition to the settlement, the company entered into a five-year corporate integrity agreement with HHS OIG.[45] On December 21, 2017, a Florida-based hospice company agreed to pay over $5 million to settle allegations that it knowingly billed the government for medically unnecessary and undocumented hospice services.  The whistleblower, a former employee, will receive approximately $900,000 of the recovered funds.[46] On December 22, 2017, an Illinois-based retailer agreed to pay $32.3 million to settle allegations that in-store pharmacies failed to report discounted prescription drug prices to Medicare, Medicaid, and TRICARE.  The government alleged that the corporation offered discounted generic drug prices to customers who paid cash through club programs, but knowingly failed to report the discounted prices to federal health care programs when reporting its usual and customary prices, which the government uses to determine reimbursement rates.  The settlement is part of a larger $59 million settlement that also resolves state Medicaid and insurance claims against the company.  The whistleblower will receive $9.3 million of the recovered funds.[47] 2.     Government and Defense Contracting Industry On August 10, 2017, a Virginia-based contractor and its subsidiaries agreed to pay $16 million to settle allegations that they knowingly conspired with, and caused, small businesses to submit false claims for payment related to fraudulently obtained small business contracts.  The defendant and its subsidiaries allegedly induced the government to award certain contracts by misrepresenting eligibility requirements, including the small businesses’ affiliation with the defendant, size, and standing as service-disabled or as qualified socially or economically disadvantaged businesses under federal business development programs.  In addition, the defendant allegedly engaged in bid rigging to distort or inflate prices charged to the government under the contracts.  The settlement is one of the largest involving alleged fraud implicating small business contract eligibility.  The whistleblower will receive a share of the recovery of approximately $2.9 million.[48] On August 15, 2017, a Virginia-based defense contractor agreed to a $9.2 million settlement to resolve allegations that it overbilled the government for labor on Navy and Coast Guard ships located at its shipyards in Mississippi.  The contractor allegedly mischarged labor to certain contracts when it was actually performed under other contracts, and billed the government for dive operations to support ship hull construction that did not actually occur.  The whistleblower will receive more than $1.5 million of the recovery.[49] On September 13, 2017, a Virginia-based contractor agreed to pay $5 million to settle allegations that it failed to properly vet personnel working in Afghanistan under a State Department contract for labor services.  The contract required the contractor to conduct extensive background checks on U.S. personnel in specific positions and to submit the names of non-U.S. personnel to the State Department for additional security clearance.  The government alleged that claims submitted by the contractor for labor services of the improperly vetted personnel, in violation of the background-check requirements, were false claims.  The whistleblower will receive $875,000 as his share of the recovery.[50] On October 3, 2017, three New York-based contractors, as well as two New York-based owners, agreed to pay more than $3 million to resolve allegations that they improperly obtained federal set-aside contracts reserved for service-disabled veteran-owned (“SDVO”) small businesses.  One of the three contractors allegedly recruited a service-disabled veteran to serve as a figurehead, received several SDVO small business contracts, and subcontracted almost all of the work to the other two entities rather than the veteran.  The two individual defendants allegedly executed the scheme by making, or causing to be made, false statements to the Department of Veterans Affairs (“VA”) regarding eligibility to participate in the SDVO small business contracting program and compliance with related requirements.  The whistleblower will receive $450,000 of the recovery.[51] On October 16, 2017, a Virginia-based defense contractor agreed to pay $2.6 million to resolve allegations that the company submitted false claims for payment to the Department of Defense for unqualified security guards stationed in Iraq.  The government alleged that the defendant knowingly billed the United States for security guards who failed to pass contractually required firearms proficiency tests, and concealed the guards’ inability to satisfy the requirements by creating false test scorecards.  The whistleblower, a former employee, will receive approximately $500,000 of the amount recovered.[52] On November 8, 2017, a Kentucky-based trucking company agreed to pay $4.4 million to settle allegations that it submitted claims for payment related to shipping contracts that were obtained by bribing government officials.  The whistleblower will receive $814,000 of the recovery.[53] 3.     Financial Industry On August 8, 2017, two mortgage originators and underwriters based in New Jersey, and a third based in Minnesota, agreed to pay more than $74 million to resolve allegations that they knowingly provided mortgage loans insured by the FHA, guaranteed by the VA, and purchased by Fannie Mae and Freddie Mac that did not meet origination, underwriting, and quality control requirements mandated by those entities.  Of the $74 million, $65 million will satisfy the FHA allegations, and $9.45 million will satisfy the remaining allegations.  The whistleblower who made some of the allegations, a former employee, will receive more than $9 million from the settlement.[54] On December 8, 2017, a banking conglomerate headquartered in Louisiana agreed to pay more than $11.6 million to settle allegations that it falsely certified compliance with federal requirements to obtain insurance on mortgage loans from the FHA.  The defendant, who participated as a direct endorsement lender in the FHA insurance program, admitted the following facts as part of the settlement: (1) it certified insurance mortgage loans that did not meet Department of Housing and Urban Development (“HUD”) requirements and were ineligible for FHA mortgage insurance, and HUD paid FHA insurance claims on some of these mortgages; (2) it advised HUD that it was no longer paying illegal commissions to underwriters and those who provided underwriting activities, but failed to disclose that it was making incentive payments; (3) it failed to timely self-report material violations of HUD requirements, including audit findings regarding substandard quality reviews; and (4) as a result of its conduct and omissions, HUD insured loans approved by the bank that were ineligible for FHA mortgage insurance that HUD would not have otherwise insured, and HUD incurred losses when it paid insurance on those loans.  The whistleblowers, two former employees of the bank, will receive a 20% share of the recovery.[55] 4.     Other On September 22, 2017, a California-based renewable energy company agreed to pay $29.5 million to resolve allegations that it submitted inflated claims on behalf of itself and affiliated investment funds to the Department of Treasury under Section 1603 of the American Recovery and Reinvestment Act of 2009 (“Section 1603”).  The company allegedly overstated the cost bases of its solar energy properties in its certified Section 1603 grant applications and received inflated payments from the Treasury as a result.  As part of the settlement, the defendant, and its affiliates, also agreed to release pending and future claims against the United States for Section 1603 payments.[56] On December 19, 2017, a Texas-based oil and gas corporation and its affiliates agreed to pay $2.25 million to settle allegations that they underpaid royalties owed on natural gas produced from federal lands in Wyoming.  The government alleged that the entities knowingly reduced the royalty amounts by deducting fees paid to other companies, including the cost of placing the gas in marketable condition.[57] B.     Judgments ·         On September 14, 2017, a federal judge in the Southern District of Texas awarded a $296 million judgment against two mortgage entities and a $25.3 million judgment against their president and chief executive officer for alleged fraudulent conduct while participating in the FHA mortgage insurance program.  In November 2016, a unanimous jury found that the defendants violated the FCA and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”).  Specifically, the jury determined that the defendants falsely certified that thousands of high-risk, low-quality loans were eligible for FHA insurance, and subsequently submitted claims to FHA when the loans defaulted.  The defendants were also found liable for allegedly originating FHA-insured loans from “shadow” branch offices without HUD approval, and submitting false quality control reports and certifications to HUD.  The court’s judgment trebled the jury’s $92 million FCA verdict and imposed additional statutory penalties under the FCA and FIRREA.[58] IV.     LEGISLATIVE ACTIVITY A.     Federal Legislation The federal legislative front was frankly uneventful during the latter half of 2017, with no new legislation significantly affecting the FCA enacted or introduced in Congress.  Additionally, at least for this year, Congress largely shelved consideration of President Trump’s plan to repeal and replace the Affordable Care Act (“ACA”) (except for the repeal of the individual mandate as part of the recent tax cut legislation), which could have affected the ACA’s amendments to the FCA, as discussed in our 2017 Mid-Year False Claims Act update. Federal regulatory activity implicating the FCA also remained quiet.  An FDA regulation proposed in January 2017—amending the agency’s definition of “intended use” for drugs and devices codified in 21 C.F.R. § 201.128 and 21 C.F.R. § 801.4, respectively—saw little progress during the past six months.[59]  As noted in our Mid-Year update, the rule’s effective date was delayed until March 19, 2018,[60] in response to a petition from industry opponents that argued against an expansion of the definition of “intended use,”[61] which could have spawned a flurry of unwarranted FCA lawsuits.  After expiration of the comment period on the issues raised by the petition, the FDA published an interim response to those concerns on July 28, 2017, noting that a decision is still forthcoming, pending further review and analysis by agency officials.[62] B.     State Legislation As noted in previous updates, HHS OIG is in the process of determining if state FCA laws appropriately mirror the federal FCA’s enforcement abilities so that they are deemed as effective as the federal FCA in facilitating qui tam actions; if HHS OIG finds that they do not, the states lose their ability to increase their share of recoveries in cases that prosecute Medicaid fraud by 10%.  In our Mid-Year update, we reported that HHS OIG notified 15 states that their state FCA laws needed to be amended to mirror the federal law’s increased civil penalties by no later than the end of 2018.  Since then, a few states have progressed toward that goal: On July 24, 2017, a bill that would amend the California False Claims Act to mirror penalties allowed under the federal FCA was signed by the Governor.[63] On August 25, 2017, a bill amending the Illinois False Claims Act to mirror penalties allowed under the federal FCA was approved by the Governor.[64] On November 28, 2017, a bill that would amend the civil penalties in the Michigan Medicaid False Claims Act to mirror penalties allowed under the federal FCA was referred to the Senate Judiciary Committee.[65] Bills that would have similarly amended the New York and North Carolina false claims act statutes remain under consideration and have not progressed since our last update.[66] Additionally, a number of states have either enacted into law, introduced, or failed to progress legislation making other notable changes to their respective state FCA laws.  Those developments include: Alabama passed a law amending its Medicaid fraud statute, which strengthened penalties for violations, but also introduced a requirement that violations be “knowing.”[67]  A related bill that would have established a broader state false claims act, on which we reported in our Mid-Year 2017 Update, failed to emerge from committee.[68] Florida introduced a bill that would remove the Florida False Claims Act from the ambit of the Open Government Sunset Review Act, a 1995 law that mandates periodic review and repeal of all exemptions to Florida’s open records law.  The amendment would exempt the Florida FCA’s under seal requirements from review and potential repeal under the Sunset Review Act.[69] Arkansas enacted a bill that updates and clarifies several definitions in the state’s Medical Fraud Act and Medicaid Fraud False Claims Act, but does not significantly alter the substance of the law.[70] In Michigan, a bill that would create a general Michigan False Claims Act remains in the state Senate’s Committee on the Judiciary.[71]  If enacted, the bill would expand Michigan’s current Medicaid False Claims Act beyond the Medicaid context.[72] A Pennsylvania law that would create the state’s False Claims Act remains in the House Judiciary Committee, where it has resided since March 2017.[73] North Dakota failed to pass House Bill 1174, which would have provided liability and a penalty for false claims for medical assistance made to the state.[74] We expect that the upcoming year will bring increased state legislative activity as the December 31, 2018 deadline set by HHS OIG approaches. V.     NOTABLE CASE LAW DEVELOPMENTS While the legislative front was uneventful, the jurisprudential front was just the opposite.  In 2017, courts continued to grapple with the Supreme Court’s seminal decision in Escobar, draw the boundaries of the public disclosure and first-to-file bars, and explore many other nuances of the FCA.  The results were dozens of cases that contribute meaningfully to the corpus of FCA case law.  As always, we summarize the most significant cases below. A.     Continued Development of the Materiality Requirement Post-Escobar Eighteen months after it was decided, the application of the Supreme Court’s landmark decision in Escobar continues to be an issue confronting courts throughout the country.  In particular, courts have been forced to determine how to apply the Escobar Court’s self-described “rigorous” and “demanding” materiality requirement.  136 S. Ct. at 2002–03. 1.     The Third Circuit Extends Escobar to Pre-2009 Claims In United States ex rel. Spay v. CVS Caremark Corp., 875 F.3d 746 (3d Cir. 2017), the Third Circuit addressed a question left unanswered by Escobar—whether the materiality standard also applies to conduct before the adoption of the Fraud Enforcement and Recovery Act of 2009 (“FERA”), which included a “material” standard in the FCA’s text for the first time.  After reviewing the Court’s analysis in Escobar, the Third Circuit reached the “unavoidable conclusion” that:  “(1) Section (a)(1) [of the FCA] has a materiality requirement, even though that requirement has never been expressed in the statute [prior to FERA], and (2) the standard used to measure materiality did not change in 2009 when Congress amended the FCA to include a definition of ‘material.'”  Spay, 875 F.3d at 763.  The Third Circuit further concluded “that the FCA has always included a materiality element . . . and the definition of ‘material,’ which is derived from the common law and was enshrined in the statute itself in 2009, has not changed.”  Id. The Third Circuit’s analysis is relevant to the small number of remaining cases that are premised on pre-2009 conduct.  But it has broader implications as well.  For example, the Third Circuit’s determination that the FCA and common law “both employ the same standard” for materiality suggests that the materiality analysis in Escobar applies to all theories of FCA liability, regardless of the statutory premise or theory of liability pursued by the government or relators. 2.     The Third, Fifth, and Seventh Circuits Address the Importance of the Government Continuing to Make Payments In recent months, three circuits have addressed the extent to which the government’s continued payment of claims establishes a lack of materiality following Escobar.  In Spay, the Third Circuit considered whether the general industry use of dummy prescriber information on authorized claims that “errored out” because of missing or incorrectly formatted prescriber information constituted material misstatements.  875 F.3d at 750.  The record established that government employees responsible for authorizing payments “knew that dummy identifiers were being used” and “the reason for using them,” but the government nevertheless paid for the prescriptions.  Id. at 764.  Because the misstatements at issue actually “allowed patients to get their medication,” the Third Circuit concluded that “they are precisely the type of ‘minor or insubstantial’ misstatements where ‘[m]ateriality . . . cannot be found.'”  Id. (quoting Escobar, 136 S. Ct. at 2003). The Fifth Circuit reached a similar conclusion in United States ex rel. Harman v. Trinity Industries Inc., 872 F.3d 645 (5th Cir. 2017).  In Harman, a contractor “inadvertently omitted” information about a design change to a guardrail system, which subsequently became eligible for federal-aid reimbursement in 2005.  Id. at 665.  In 2012, the Federal Highway Administration (“FHWA”) was advised of the design change, but continued to maintain the system’s eligibility for federal reimbursement, including by issuing a June 2014 memorandum that affirmed that the system remained eligible for reimbursement.  Id. at 649, 665.  Nevertheless, a federal jury found the contractor liable for the submission of false claims and imposed a verdict of more than $663 million—the largest judgment in the history of the FCA.  Id. at 651.  But the Fifth Circuit reversed that judgment, observing that, “though not dispositive,” the payment of claims despite knowledge of alleged fraud “substantially increased the burden . . . in establishing materiality.”  Id. at 663.  Because the evidence in the record was “insufficient to overcome” the “very strong evidence” that FHWA knew about the design changes and still authorized reimbursement, the court reversed and entered judgment as a matter of law for the defendant.  Id. at 668, 670.  In a recent amicus brief, DOJ cited the Harman case as an example of “circumstances in which a court may properly decide [materiality] as a matter of law.”  Brief for the United States as Amicus Curiae Supporting Appellant, United States ex rel. Prather v. Brookdale Senior Living Communities, 2017 WL 4769476, at *13 n.2. A more recent Seventh Circuit decision shows, however, that at least under some circumstances one court has found that continued payment of claims alone may not be dispositive on the question of materiality.  In United States v. Luce, 873 F.3d 999 (7th Cir. 2017), the defendant mortgage company owner allegedly falsely asserted that he had no criminal history in order to participate in a government insurance program.  Id. at 1002–03.  On appeal from the district court’s ruling granting summary judgment to the government, the Seventh Circuit considered whether the fact that the government-insured loans continued to be issued after defendant’s false statements became known was adequate evidence to preclude summary judgment in the government’s favor.  The Seventh Circuit concluded that it was not, stating that “[a]lthough new loans were issued, the Government also began debarment proceedings, culminating in actual debarment.  There was no prolonged period of acquiescence.”  Id. at 1008. 3.     District Courts Address Adequacy of Materiality Allegations at Pleadings Stage Post-Escobar  Before the Supreme Court’s decision in Escobar, the materiality element was often viewed as a fact-intensive issue that was difficult to contest at the summary judgment stage, let alone based on the pleadings.  In Escobar, however, the Supreme Court instructed that materiality is “[not] too fact intensive for courts to dismiss [FCA] cases on a motion to dismiss.”  136 S. Ct. at 2004 n.6. As a result, defendants have increasingly advanced materiality arguments as a basis for dismissal, including at the pleading stage.  While the courts are continuing to evaluate the precise requirements for alleging materiality, certain common themes have been developing.  For instance, district courts have repeatedly made clear that a conclusory allegation that the false statement is material to the government’s payment decision is inadequate to avoid dismissal.  See, e.g., United States ex rel. Payton v Pediatric Servs. of Am., Inc., No. cv416-102, 2017 WL 3910434, at *10 (S.D. Ga. Sept. 6, 2017) (holding that a complaint “must do something more than simply state that compliance is material”); United States v. Scan Health Plan, No. CV 09-5013-JFW, 2017 WL 4564722, at *6 (C.D. Cal. Oct. 5, 2017) (dismissing claim based “only [on] conclusory allegations that the [defendants’] conduct was material”). Thus, a conclusory statement that the government would not have paid if it had been aware of the alleged false statements is “insufficient” because “it does not show how [the] misrepresentations were material.”  United States ex rel. Mateski v. Raytheon Co., No. 2:06-cv-03614, 2017 WL 3326452, at *7 (C.D. Cal. Aug. 3, 2017).  In contrast, some district courts have determined that materiality has been adequately pleaded where complaints included allegations that:  the government had terminated eligibility for similar violations, see United States ex rel. Lacey v. Visiting Nurse Serv. of N.Y., No. 14-cv-5739, 2017 WL 5515860, at *10 (S.D.N.Y. Sept. 26, 2017); the defendant had been informed by the government that compliance was material, see Smith v. Carolina Med. Ctr., No. 11-2756, 2017 WL 3310694, at *11 (E.D. Pa. Aug. 2, 2017); regulatory language established a link between compliance and payment, see United States ex rel. LaPorte v. Premiere Educ. Grp., No. 11-3523, 2016 WL 2747195, at *17 (D.N.J. May 11, 2016), recons. denied, 2017 WL 4167434, at *4 (D.N.J. Sept. 20, 2017); the misrepresentation shifted the risks bargained for by the parties, see United States ex rel. Hussain v. CDM Smith, Inc., No. 14-CV-9107, 2017 WL 4326523, at *8 (S.D.N.Y. Sept. 27, 2017) (addressing allegations that contractor “was improperly shifting billables from fixed-fee to cost-plus-fee contracts”); and defendant’s conduct indicates a belief that fraudulent content “would be important,” see United States ex rel. Gelman v. Donovan, No. 12-cv-5142, 2017 WL 4280543, at *7 (E.D.N.Y. Sept. 25, 2017). Ultimately, while the cases make clear that more than a conclusory allegation is required to comply with Federal Rule of Civil Procedure 9(b), the case law has not definitively decided how much more will suffice.  Given the factual nature of the issue, courts may have a difficult time defining in the abstract what makes a materiality allegation adequate. B.     Updates on Rule 9(b) Pleading Standards As discussed in past updates, circuit courts have taken varying approaches to the application of the heightened pleading standards set forth by Rule 9(b) to FCA claims.  Although the circuits generally agree that Rule 9(b) applies to FCA claims, a circuit split has developed among those circuits that apply the standard strictly, see, e.g., United States ex rel. Clausen v. Lab. Corp. of Am., 290 F.3d 1301, 1311 (11th Cir. 2002) (requiring “some indicia of reliability . . . to support the allegation of an actual false claim for payment being made to the Government”), and those that apply a “relaxed” standard, see, e.g., United States ex rel. Grubbs v. Kanneganti, 565 F.3d 180, 190 (5th Cir. 2009) (requiring the allegation of “particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted”).  Thus, the question of how much detail is required to survive a motion to dismiss remains a hotly debated issue. 1.     The Second Circuit Claims the Circuit Split Is “Greatly Exaggerated” In United States ex rel. Chorches v. American Medical Response, 865 F.3d 71 (2d Cir. 2017), the Second Circuit downplayed the circuit split over the Rule 9(b) standard.  The court identified instances in which even those circuits that apply a “stricter” standard “declined to impose an ineluctable bright-line rule that every relator must allege details of actual claims submitted,” but instead took a more nuanced approach that evaluates the pleadings on a case-by-case basis.  Id. at 90–92.  Based on its reading of the requirement, the Second Circuit concluded that a relator must allege “specific and plausible facts from which [a court] may easily infer” that the defendant “systematically falsified its records to support false claims” and “that the false records were actually presented to the government for reimbursement.”  Id. at 84. 2.     The First Circuit Establishes an Exception to Its “Strict” Application of Rule 9(b) The First Circuit has applied the “stricter” standard.  See, e.g., United States ex rel. Karvelas v. Melrose-Wakefile Hosp., 360 F.3d 220, 233 (1st Cir. 2004) (holding that at least “some of th[e] information [e.g., the date or amount of claims or other details regarding the forms submitted] for at least some of the claims must be pleaded”) (internal quotations omitted).  However, in United States ex rel. Nargol v. DePuy Orthopaedics, Inc., 865 F.3d 29 (1st Cir. 2017), the First Circuit recognized an exception to this rule where a complaint “essentially alleges facts showing that it is statistically certain that [the defendant] cause[d] third parties to submit many false claims to the government.”  Id. at 41.  Nargol involved allegations that a manufacturer “palmed off latently defective versions of its FDA-approved [hip-replacement device] on unsuspecting doctors who sought government reimbursement for the defective products.”  Id. at 31. The First Circuit determined that the complaint’s absence of specific information regarding claims was not fatal for several reasons.  First, there was no reason to suggest that the defects “were known to the doctors, the patients, or the government” or that they could have been readily discovered during surgery.  Id. at 40.  Second, there was no reason to suspect that physicians did not seek reimbursement for defective devices.  Id.  Third, it was likely that every sale of the device “was accompanied by an express or plainly implicit representation that the product being supplied was the FDA-approved product, rather than a materially deviant version of that product.”  Id. at 40–41.  Finally, the First Circuit found that it was “highly likely that the expense is not one that is primarily borne by uninsured patients in most instances.”  Id. at 41.  Given these facts, and the allegations that thousands of devices were sold, it was “virtually certain that the insurance provider in many cases was Medicare, Medicaid, or another government program.”  Id.  Under these circumstance, the First Circuit saw “little reason for Rule 9(b) to require Relators to plead false claims with more particularity than they have done” as the complaint “alleges the details of a fraudulent scheme with ‘reliable indicia that lead to a strong inference that claims were actually submitted.'”  Id. (quoting United States ex rel. Duxbury v. Ortho Biotech Prods., L.P., 579 F.3d 13, 29 (1st Cir. 2009)). 3.     The Sixth Circuit Requires the Entire Chain Linking Defendant’s Conduct to the Eventual Submission of Claims to Be Pleaded With Particularity In United States ex rel. Ibanez v. Bristol-Myers Squibb Co., 874 F.3d 905 (6th Cir. 2017), the Sixth Circuit considered the application of Rule 9(b) to allegations involving “a long chain of causal links from defendants’ conduct to the eventual submission of claims.”  Id. at 914.  Ibanez involved allegations of false claims stemming from an off-label promotion scheme of Abilify, “an antipsychotic drug approved for various prescriptive uses by the FDA.”  Id. at 912.  Specifically, the relator alleged that the defendant improperly promoted Abilify to a physician, who then prescribed the medication to a patient for an off-label use.  That patient thereafter filled the prescription at a pharmacy, with the pharmacy subsequently submitting a claim to the government for reimbursement of the prescription.  Id. at 915.  The Sixth Circuit held that the complaint must “adequately allege the entire chain—from start to finish—to fairly show defendants cause[d] false claims to be filed,” including “alleg[ing] specific intervening conduct” along the chain.  Id. at 914–15.  Because relators failed to provide details of “any representative claim that was actually submitted to the government for payment,” the district court’s dismissal of the claim was upheld.  Id. at 915. Additionally, in Ibanez, the Sixth Circuit further clarified the boundaries of the circuit’s “personal knowledge exception” for applying a “relaxed Rule 9(b) pleading standard,” established in United States ex rel. Prather v. Brookdale Senior Living Communities, Inc., 838 F.3d 750 (6th Cir. 2016).  Ibanez, 874 F.3d at 915 (internal quotations omitted).  The Sixth Circuit held that the exception only “applies in limited circumstances . . . where the relator was specifically employed to review [the] documentation allegedly submitted to [the government].”  Id. at 915.  It was this knowledge, paired with specific allegations regarding payment requests, “that satisfied a relaxed 9(b) standard.”  Id. at 915–16.  Based on this decision, along with a decision earlier this year in United States ex rel. Hirt v. Walgreen Co., 846 F.3d 879 (6th Cir. 2017), it appears that outside of the specific circumstance in Prather, the Sixth Circuit will employ a “strict” Rule 9(b) analysis in FCA cases. C.     Developments in the FCA’s Public Disclosure Bar As amended by the Affordable Care Act in 2010, the public disclosure bar states that a court “shall dismiss” an FCA action if “substantially the same allegations or transactions were publicly disclosed” through listed sources, as long as the relator does not qualify as an “original source.”  31 U.S.C. § 3730(e)(4) (2010).  A relator is an “original source” when he or she “has knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions.”  Id. § 3730(e)(4)(B). Courts have grappled with the extent to which their precedent interpreting the prior version of the statute survived the 2010 amendments, including when assessing whether the bar remains jurisdictional (which the prior version of the statute had indicated), how similar allegations must be to previous disclosures before triggering the bar, and how much detail a relator must add to qualify as an original source. 1.     The Seventh Circuit Interprets the Public Disclosure Bar and Original Source Standards The Seventh Circuit assessed the as-amended language in Bellevue v. Universal Health Services of Hartgrove, Inc., 867 F.3d 712, 721 (7th Cir. 2017), in which it dismissed claims that the defendant submitted false certifications to the government.  Analyzing both versions of the statute, the Seventh Circuit noted that it was “unclear” whether the amended public disclosure bar remained jurisdictional (like its predecessor), but ultimately declined to reach the issue, choosing instead to apply the jurisdictional bar under the pre-amendment framework because some of the alleged conduct occurred before 2010.  Id. at 717–18.  Turning to the substantive impact of the amendments, the Seventh Circuit explained that the amended version of the statute “expressly incorporates the ‘substantially similar’ standard” previously used by the Seventh and other circuits when assessing whether the current action was “based upon” previous public disclosures.  Id. at 718.  The court also held that the amendment to the “original source” definition was a “clarification rather than a substantive change,” and thus would apply retroactively to conduct occurring before 2010.  Id.  With regard to the disclosure, the court explained that allegations are publicly disclosed for purposes of the bar “when the critical elements exposing the transaction as fraudulent are placed in the public domain.”  Id. (internal citation omitted).  Rejecting the relator’s argument that the prior public disclosure found in audit reports and letters did not reference any knowing misrepresentation of facts, the court clarified that it is enough to be able to “infer, as a direct and logical consequence of the disclosed information,” that a defendant knowingly submitted false claims to the government.  Id. at 718–19 (internal citation omitted).  The court distinguished other case law involving “qualitative judgments” as to appropriate standards of care, for example, and found that the allegations had been publicly disclosed where the “audit report and letters provided a sufficient basis to infer that [the defendant] was presenting false information to the government.”  Id. at 719. In assessing whether the allegations were “substantially similar,” the court listed several factors to consider, including whether a relator alleged “a different kind of deceit,” presented allegations that “required independent investigation and analysis to reveal any fraudulent behavior,” or alleged information involving “an entirely different time period.”  Id. (internal citation omitted).  Ultimately, the court found that the alleged conduct was “based upon” allegations publicly disclosed through the audit report and letters.  Id. at 720. As to whether the relator qualified as an original source, the court applied the as-amended standard, which requires that the relator have knowledge that “is independent of and materially adds to the publicly disclosed allegations or transactions.”  Id. (quoting 31 U.S.C. § 3730(e)(4)(B) (2010)).  The court concluded that the relator had “not ‘materially added’ to the publicly disclosed allegations,” and therefore did not address the question of whether the relator had independent knowledge, indicating a deficiency in either element undermines a relator’s original source status.  Id.  2.     The Fifth Circuit Assesses Pre-Filing Disclosure Requirements Under the Public Disclosure Bar Before a relator brings an FCA claim in the name of the government, the relator must disclose to the government information on which the allegations are based, in order to qualify as an “original source.”  31 U.S.C. § 3730(e)(4)(A).  This is in addition to another pre-filing disclosure requirement found in the FCA.  Id. § 3730(b)(2).  In United States ex rel. King v. Solvay Pharmaceuticals, Inc., 871 F.3d 318 (5th Cir. 2017), the Fifth Circuit clarified that not just any “disclosure” to the government will satisfy the “original source” pre-filing disclosure requirement.  Instead, the disclosure must “suggest an FCA violation” to qualify.  Id. at 327.  Specifically, in affirming dismissal of the action at issue, the Fifth Circuit found that the relators “failed to present any evidence indicating that their pre-suit disclosure connected the knowledge of [the defendant’s] conduct to false claims made to the government.”  Id. at 326.  The court explained that the disclosure “must—at a minimum—connect direct and independent knowledge of information about [the defendant’s] conduct to false claims submitted to the government.”  Id. at 327.  Because the pre-suit disclosure at issue, although providing details regarding alleged FDCA and AKS violations, was “completely devoid of any indication connecting such information with false claims presented to the government,” the court found the disclosure insufficient to satisfy the FCA’s “original source” pre-filing disclosure requirement. 3.     The Sixth Circuit Analyzes How the Public Disclosure Bar May Apply to Allegations of Later Conduct The Sixth Circuit assessed whether a relator’s claims may move forward despite public disclosures of similar conduct if the allegations in the current action pertain to a different time period.  In Ibanez, the court determined that the “common principle” that a “public disclosure occurs when enough information exists in the public domain to expose the fraudulent transaction” survived the amendments to the statute.  874 F.3d at 918.  But the court disagreed with the defendant’s claim that the government’s previous FCA actions and related corporate integrity agreements with the defendant publicly disclosed the allegedly improper promotion of the product at issue.  Id. at 919.  Rather, the Sixth Circuit found that allegations—like those asserted by the relator—”that [a] scheme either continued despite the agreements or was restarted after the agreements”—would not be precluded by the allegations previously disclosed through corporate integrity agreements, even if the present allegations resembled those of the previously resolved scheme.  Id.  The court clarified that this conclusion “may be true only to the extent that the new allegations are temporally distant from the previously resolved conduct.” Id. at 919 n.4. 4.     The Eighth Circuit Interprets the Original Source Standard Interpreting the original source exception under the pre-amendment version of the public disclosure bar, the Eighth Circuit found in In re Baycol Products Litigation, 870 F.3d 960, 962 (8th Cir. 2017), that in some circumstances a relator need not have direct and independent knowledge of a defendant’s allegedly false communications to the government.  The defendant argued that lawsuits, news articles, public filings, and medical literature publicly disclosed the relator’s allegations that the defendant concealed drug risks through its marketing efforts, and that the relator did not qualify as an original source.  Disagreeing with the defendant’s arguments, the court emphasized that a relator need only “possess direct and independent knowledge of the ‘information’ on which her allegations are based, not of the ‘transaction.'”  Id. As such, the court relied upon precedent to explain that the bar does not require a relator to have direct and independent knowledge of “‘all of the vital ingredients to a fraudulent transaction.'”  Id. (quoting United States ex rel. Springfield Terminal Ry. Co. v. Quinn, 14 F.3d 645, 656–57 (D.C. Cir. 1994)).  In light of the statute’s specific wording and the fact that the government “already knows about communications made to [it] by an alleged defrauder,” the court concluded that a relator’s “‘direct and independent knowledge of any essential element of the underlying fraud transaction'” is enough to afford “original-source status under the [FCA].”  Id. (quoting Springfield, 14 F.3d at 657).  The Eighth Circuit ultimately remanded the matter to the district court to determine whether the relator possessed direct and independent knowledge of the “true state of the facts,” specifically whether the defendant had evidence of the inefficacy and risks of the product at issue.  Id. D.     Developments in Application of the First-to-File Bar The FCA’s so-called “first-to-file bar” limits the ability of qui tam relators to bring an action based on facts already at issue in another pending FCA matter.  Specifically, the statute provides that, when a qui tam action is “pending,” “no person other than the Government may intervene or bring a related action based on the [same] facts.”  31 U.S.C. § 3730(b)(5).  In the past six months, the Fourth and D.C. Circuits weighed in on what, if any, impact the resolution of the original action would have on an ongoing suit that otherwise would run afoul of the first-to-file bar, as well as the ability of relators to avoid the first-to-file bar by amending the later-filed complaint. In United States ex rel. Carter v. Halliburton Co., 866 F.3d 199, 203 (4th Cir. 2017), following a complicated procedural history that culminated in an appeal before the Supreme Court, the Fourth Circuit faced both of these questions.  The Fourth Circuit first found the bar applies, even if the earlier-filed action has since been dismissed.  The Court held that the “appropriate reference point for a first-to-file analysis is the set of facts in existence at the time that the FCA action under review is commenced,” and that “[f]acts that may arise after the commencement of a relator’s action, such as the dismissals of earlier-filed, related actions pending at the time the relator brought his or her action, do not factor into this analysis.”  Id. at 207.  Referencing the Supreme Court, which described the first-to-file rule as “one of ‘a number of [FCA] provisions that do require, in express terms, the dismissal of a relator’s action,'” the Fourth Circuit held that it must dismiss the action without prejudice, even though the statute of limitations could prevent the relator from re-filing.  Id. at 209 (quoting State Farm Fire & Cas. Co. v. United States ex rel. Rigsby, 137 S.Ct. 436, 442–43 (2016)).  Next, the Fourth Circuit rejected the argument that a relator could propose amendments to the complaint (to file after the earlier case had been dismissed) and that such would cure the first-to-file bar:  the “proposed amendment simply adds detail to [the relator’s] damages theories,” instead of “address[ing] any matters potentially relevant to the first-to-file rule, such as the dismissals of the [other actions].”  Id. at 210. The D.C. Circuit, in United States ex rel. Shea v. Cellco Partnership, 863 F.3d 923, 930 (D.C. Cir. 2017), came to a similar conclusion.  There, the court held that the relator’s action “was incurably flawed from the moment he filed it,” because the relator’s earlier-filed separate action was still pending at the time.  This was true even though the earlier-filed action was subsequently settled and dismissed.  Id. at 927.  On appeal, a divided panel affirmed, interpreting the bar to apply even when the initial action was no longer pending, since it had been “pending” at the time the second action was actually filed.  Id. at 928.  The D.C. Circuit also agreed with the district court that the relator could not amend his complaint, holding that it could not salvage his claims from the first-to-file bar and that the relator would need to re-file a new action if he wanted to litigate further.  Id. These cases stand in contrast to United States ex rel. Gadbois v. PharMerica Corp., 809 F.3d 1, 6 (1st Cir. 2015), discussed in a previous update, which effectively found a relator could amend his complaint, after a prior case had been dismissed, to avoid the first-to-file bar.  This sets up a potential split of authority that may eventually reach the Supreme Court. E.     The Ninth Circuit Examines the Scope of the Government-Action Bar Although the public disclosure bar and first-to-file bar are more commonly litigated, they are not the only bars that apply in FCA cases.  The related “government-action bar” prohibits a relator from bringing a qui tam suit “based upon allegations or transactions which are the subject of a civil suit . . . in which the Government is already a party.”  31 U.S.C. §3730(e)(3).  In a case of first impression, the Ninth Circuit recently clarified the reach of the government-action bar in a decision with potentially important ramifications for companies facing FCA liability.  United States ex rel. Bennett v. Biotronik, Inc., 876 F.3d 1011 (9th Cir. 2017). The case concerned a relator who tried to bring an FCA suit against a company that had already settled similar allegations with the government in a different suit, brought by a separate relator.  Id. at 1014–15.  The second relator argued that, because the first suit was no longer pending, the government-action bar no longer barred his subsequent suit.  Affirming summary judgment for the defendant company, the Ninth Circuit held “that the government-action bar applies even when the Government is no longer an active participant in an ongoing qui tam lawsuit.”  Id. at 1016.  In so holding, the court rejected arguments that the government was no longer a “party” in a suit it has settled.  Id. at 1019–20. Notably, the court also held that when the government-action bar applies, it applies to all claims that overlap with the earlier-settled suit, regardless of whether those specific claims were part of the government settlement.  In other words, if the government settles a qui tam action, that settlement bars subsequent suits based on any of the theories advanced by the original suit, regardless of whether those specific theories were investigated and included in the settlement.  Id. at 1020–21.  According to the Ninth Circuit, so long as “the Government was made aware of the claims it ultimately chose not to settle,” the government became “a ‘party’ to the suit as a whole,” and the government-action bar therefore likewise applies to the “suit as a whole.”  Id. at 1021. This provides an important point of reference for defendants, particularly those who face repeated FCA actions, to evaluate how earlier FCA actions may affect the viability of new cases.  Based on Bennett, claims that were involved in—but not settled by—government-settled cases may be off limits from further litigation by other relators. F.     The Fifth and Seventh Circuits Explore Causation Under the FCA For years, the Seventh Circuit stood as the sole circuit to apply a “but for” causation standard for damages in FCA cases, allowing plaintiffs to recover for those events that were “but for” caused by the alleged misconduct, even if the alleged misconduct was not a predominant or primary cause of the event at issue.  In Luce, discussed above, the Seventh Circuit finally joined its sister circuits by requiring that plaintiffs also show proximate causation, not just “but for” causation, to establish damages in an FCA matter. The case involved allegations that the defendant “had defrauded the Government by falsely asserting that he had no criminal history so that his company could participate in the FHA’s insurance program.”  873 F.3d at 1000.  The district court, applying the Seventh Circuit’s prior “but for” causation standard, granted summary judgment for the government, finding the defendant could be liable for government-insured loans that later went into default because, without the defendant’s initial alleged false assertion, defendant would not have been able to participate in the program.  The district court found this should be the case, even if the loans went into default for reasons unrelated to the defendant’s actions (such as because of reasons associated with borrower hardship or other borrower-related reasons).  Id.  On appeal, the Seventh Circuit reversed, and reversed its view on causation.  The Seventh Circuit, recognizing the unfair and inappropriate aspects of “but for” causation, found that a plaintiff should have to prove proximate causation, by showing both that the “defendant’s conduct was a material element and a substantial factor in bringing about the injury,” (cause in fact) and that “the injury is of a type that a reasonable person would see as a likely result of his or her conduct” (legal cause).  Id. at 1012 (internal citations and quotations marks omitted).  The Seventh Circuit remanded the case for further proceedings on the issue of proximate causation. Meanwhile, in King, also discussed above, the Fifth Circuit affirmed a grant of summary judgment for a defendant pharmaceutical company based on causation, because the relator failed to show that alleged off-label marketing and kickbacks caused any false claims.  Although there allegedly was evidence that the company discussed off-label uses with physicians and sponsored studies on off-label uses, among other activities, the court held there was insufficient evidence to show that these efforts caused any false claims.  871 F.3d at 330–31.  Likewise, the court held that there was no evidence that the company’s legal payments to physicians for consulting and speaker fees actually caused “those physicians to prescribe to Medicaid patients.”  Id. at 332. Notably, in ruling on the off-label issues, the Fifth Circuit also planted the seed for a more far-reaching defense against off-label promotion claims, at least in Medicaid cases.  According to the Fifth Circuit, because “Medicaid pays for claims without asking whether the drugs were prescribed for off-label uses,” and “given that it is not uncommon for physicians to make off-label prescriptions,” then “it [is] unlikely that prescribing off-label is material to Medicaid’s payment decisions under the FCA.”  Id. at 329 n.9.  Defendants in the Fifth Circuit, and across the country, are sure to push this defense in future Medicaid cases. G.     The Ninth Circuit Declines to Enforce Arbitration Agreement in FCA Case The Ninth Circuit weighed in this year on the relationship between arbitration agreements and the FCA, and in the process provided defendants a guide to what they should—and should not—include in arbitration agreements if they wish for the agreements potentially to cover FCA claims. In United States ex rel. Welch v. My Left Foot Children’s Therapy, LLC, 871 F.3d 791 (9th Cir. 2017), the Ninth Circuit affirmed a district court’s ruling that a relator’s FCA claims were not subject to an arbitration agreement between the relator and her employer.  Although the district court’s decision was based on the broad principle that the arbitration agreement at issue may not apply in an FCA suit, the Ninth Circuit said it was avoiding the “interesting” question of “the enforceability of a relator’s agreement to arbitrate FCA claims,” and instead engaged in an “unremarkable textual analysis” to hold that the plain text of the arbitration agreement at issue did not cover FCA claims.  Id. at 798.  To reach this conclusion, the Ninth Circuit explained that the relator’s FCA claims did not “arise out of” or “relate to” her employment; the claims had “no direct connection with [her] employment because even if [she] ‘had never been employed by defendants, assuming other conditions were met, she would still be able to bring a suit against them for presenting false claims to the government.'”  Id. at 799 (quoting Mikes v. Strauss, 889 F. Supp. 746, 754 (S.D.N.Y. 1995)).  Likewise, the court held that relator’s FCA claims could not be considered claims relator herself “ha[d] against” her employer because “FCA fraud claims always belong to the government.”  Id. at 800. Notably, however, the Ninth Circuit opined that “had the parties wished to agree to arbitrate FCA claims, they were free to draft a broader agreement that covers ‘any lawsuits brought or filed by the employee whatsoever’ or ‘all cases [the employee] brings against [the company], including those brought on behalf of another party.'”  Id. at 800 n.3.  By including this instructional dicta, the Ninth Circuit provided defendants a potential guide on how to structure arbitration provisions. H.     The Eighth and Ninth Circuits Examine Sovereign Immunity and the FCA In two cases dealing with sovereign immunity and the FCA, the Eighth and Ninth Circuits explored when quasi-governmental entities and Indian tribes can be liable under the FCA. First, in United States ex rel. Fields v. Bi-State Development Agency of the Missouri-Illinois Metropolitan District, 872 F.3d 872 (8th Cir. 2017), the Eighth Circuit held that a bi-state transportation agency created by a compact between Illinois and Missouri was not entitled to Eleventh Amendment immunity from suit under the FCA.  Applying a six-factor test for determining the nature of the entity created by state law, the Eighth Circuit affirmed a previous ruling that the transportation agency was “more like a local governmental entity than an arm of Missouri and Illinois,” and therefore could be liable under the FCA.  Id. at 877. Second, in United States ex rel. Cain v. Salish Kootenai College, Inc., 862 F.3d 939 (9th Cir. 2017), the Ninth Circuit held that an Indian tribe is not a “person” for purposes of the FCA, and therefore is immune from FCA liability.  The court analogized the Indian tribe’s sovereign immunity to a state’s sovereignty, which the Supreme Court has previously held exempts states from FCA liability.  Id. at 942.  Because the FCA applies only to “any person” who violates one of its provisions, and a sovereign Indian tribe is not a “person,” the Ninth Circuit affirmed the district court’s dismissal of the case against the Indian tribe (but remanded for further proceedings on whether a college operated by the tribe also had immunity).  Id. at 943. I.     The Sixth Circuit Supports Attorney’s Fees Against DOJ for Inflated FCA Allegations The Sixth Circuit weighed in once more—and perhaps for the final time—on the long-running Circle C Construction litigation, this time to find that the defendants were entitled to attorney’s fees because of the government’s “unreasonable” positions.  United States ex rel. Wall v. Circle C Construction, LLC, 868 F.3d 466 (6th Cir. 2017).  As we discussed in the 2016 Mid-Year Update, the Sixth Circuit previously reversed a $763,000 damages award for false claims allegedly resulting from non-compliance with Davis-Bacon wage requirements, and instead awarded the government $14,478.  United States ex rel. Wall v. Circle C Construction, LLC, 813 F.3d 616 (6th Cir. 2016).  In reversing the damages award, the Sixth Circuit observed that the damages the government sought to recover were “fairyland rather than actual.”  Id. at 618.  Because the government’s theories were so aggressive and “unreasonable,” the Sixth Circuit held in this most recent decision that defendant was entitled to attorney’s fees, representing a significant win against over-aggressive DOJ enforcement of the FCA. VI.     CONCLUSION The FCA continues to be a high-stakes and fast-changing area of law, and we will continue to both monitor and shape developments in the FCA space.  As always, we will report back to you on the latest news mid-year, in early July. [1] See Oversight of the False Claims Act:  Hearing Before the Subcomm. on the Constitution and Civil Justice of the Comm. on the Judiciary, House of Rep., 114th Cong. 72 (2016), https://judiciary.house.gov/wp-content/uploads/2016/04/114-72_99945.pdf. [2] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Justice Department Recovers Over $3.7 Billion From False Claims Act Cases in Fiscal Year 2017 (Dec. 21, 2017), https://www.justice.gov/opa/pr/justice-department-recovers-over-37-billion-false-claims-act-cases-fiscal-year-2017 [hereinafter DOJ FY 2017 Recoveries Press Release]. [3] See Fraud Statistics Overview (Dec. 21, 2017), https://www.justice.gov/opa/press-release/file/1020126/download [hereinafter DOJ FY 2017 Stats]. [4] That amount was originally reported as over $1.1 billion, see Fraud Statistics Overview (Nov. 23, 2015), http://www.justice.gov/opa/file/796866/download, but has since been revised to $512 million, see DOJ FY 2017 Stats. [5] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Acting Assistant Attorney General Stuart F. Delery Speaks at the American Bar Association’s Ninth National Institute on the Civil False Claims Act and Qui Tam Enforcement (June 7, 2012), http://www.justice.gov/iso/opa/civil/speeches/2012/civ-speech-1206071.html. [6] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Attorney General Jeff Sessions Delivers Remarks at Press Conference Announcing 2017 Health Care Fraud Takedown (July 13, 2017), https://www.justice.gov/opa/speech/attorney-general-jeff-sessions-delivers-remarks-press-conference-announcing-2017-health. [7] The Future of Housing in America: Oversight of the Department of Housing and Urban Development (Oct. 12, 2017), https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=402415 at 3:12:40. [8] Daniel Wilson, DOJ Denies Claims of Change to FCA Dismissal Policy, (Nov. 17, 2017), https://www.law360.com/articles/986650/doj-denies-claims-of-change-to-fca-dismissal-policy. [9] Id. [10] Sue Reisinger and Kristen Rasmussen, As Priorities Shift at DOJ, Health Care Corporate Fraud Strike Force Gutted (July 10, 2017), The National Law Journal, https://www.law.com/nationallawjournal/almID/1202792591440/. [11] Id. [12] See DOJ FY 2017 Recoveries Press Release. [13] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Mylan Agrees to Pay $465 Million to Resolve False Claims Act Liability for Underpaying EpiPen Rebates (Aug. 17, 2017), https://www.justice.gov/opa/pr/mylan-agrees-pay-465-million-resolve-false-claims-act-liability-underpaying-epipen-rebates. [14] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Electronic Health Records Vendor to Pay $155 Million to Settle False Claims Act Allegations (May 31, 2017), https://www.justice.gov/opa/pr/electronic-health-records-vendor-pay-155-million-settle-false-claims-act-allegations. [15] See U.S. Dep’t of Health & Human Services, Office of Inspector Gen., Semiannual Report to Congress (October 1, 2016 – March 31, 2017) at 15, https://oig.hhs.gov/reports-and-publications/archives/semiannual/2017/sar-spring-2017.pdf. [16] See U.S. Dep’t of Health & Human Services, Office of Inspector Gen., Semiannual Report to Congress (October 1, 2015 – March 31, 2016) at 12, https://oig.hhs.gov/reports-and-publications/archives/semiannual/2016/SAR_Spring_2016.pdf. [17] See 42 U.S.C. § 1320a-7b. [18] See 42 U.S.C. § 1395nn. [19] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Shire PLC Subsidiaries to Pay $350 Million to Settle False Claims Act Allegations (Jan. 11, 2017), https://www.justice.gov/opa/pr/shire-plc-subsidiaries-pay-350-million-settle-false-claims-act-allegations. [20] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Healthcare Service Provider to Pay $60 Million to Settle Medicare and Medicaid False Claims Act Allegations (Feb. 6, 2017), https://www.justice.gov/opa/pr/healthcare-service-provider-pay-60-million-settle-medicare-and-medicaid-false-claims-act. [21] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Missouri Hospitals Agree to Pay United States $34 Million to Settle Alleged False Claims Act Violations Arising from Improper Payments to Oncologists (May 18, 2017), https://www.justice.gov/opa/pr/missouri-hospitals-agree-pay-united-states-34-million-settle-alleged-false-claims-act. [22] See DOJ FY 2017 Recoveries Press Release, supra note 2. [23] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, CA Inc. to Pay $45 Million for Alleged False Claims on Government-Wide Information Technology Contract (Mar. 10, 2017), https://www.justice.gov/opa/pr/ca-inc-pay-45-million-alleged-false-claims-government-wide-information-technology-contract. [24] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Import Merchandising Concepts L.P. and Two Individuals Agree to Pay $275,000 to Settle False Claims Act Liability for Evading Customs Duties (May 1, 2017), https://www.justice.gov/opa/pr/import-merchandising-concepts-lp-and-two-individuals-agree-pay-275000-settle-false-claims-act. [25] See DOJ FY 2017 Recoveries Press Release, supra note 2. [26] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, PHH Agrees to Pay Over $74 Million to Resolve Alleged False Claims Act Liability Arising from Mortgage Lending (Aug. 8, 2017), https://www.justice.gov/opa/pr/phh-agrees-pay-over-74-million-resolve-alleged-false-claims-act-liability-arising-mortgage. [27] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Three Companies and Their Executives Pay $19.5 Million to Resolve False Claims Act Allegations Pertaining to Rehabilitation Therapy and Hospice Services (July 17, 2017), https://www.justice.gov/opa/pr/three-companies-and-their-executives-pay-195-million-resolve-false-claims-act-allegations. [28] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Mylan Agrees to Pay $465 Million to Resolve False Claims Act Liability for Underpaying EpiPen Rebates (Aug. 17, 2017), https://www.justice.gov/opa/pr/mylan-agrees-pay-465-million-resolve-false-claims-act-liability-underpaying-epipen-rebates. [29] See Press Release, U.S. Atty’s Office for the Dist. of Minn., U.S. Dep’t of Justice, United States Recovers More Than $12 Million in False Claims Act Settlements for Alleged Kickback Scheme (Aug. 21, 2017), https://www.justice.gov/usao-mn/pr/united-states-recovers-more-12-million-false-claims-act-settlements-alleged-kickback. [30] See Press Release, U.S. Atty’s Office for the Eastern Dist. of Cal., U.S. Dep’t of Justice, Action for Defrauding a Program for Individuals with Developmental Disabilities Settles for Approximately $2 M (Aug. 28, 2017), https://www.justice.gov/usao-edca/pr/action-defrauding-program-individuals-developmental-disabilities-settles-approximately. [31] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, CHRISTUS St. Vincent Regional Medical Center and CHRISTUS Health to Pay $12.24 Million to Settle Medicaid False Claims Act Allegations (Sept. 1, 2017), https://www.justice.gov/opa/pr/christus-st-vincent-regional-medical-center-and-christus-health-pay-1224-million-settle. [32] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Novo Nordisk Agrees to Pay $58 Million for Failure to Comply with FDA-Mandated Risk Program (Sept. 5, 2017), https://www.justice.gov/opa/pr/novo-nordisk-agrees-pay-58-million-failure-comply-fda-mandated-risk-program. [33] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Galena Biopharma Inc. to Pay More Than $7.55 Million to Resolve Alleged False Claims Related to Opioid Drug (Sept. 8, 2017), https://www.justice.gov/opa/pr/galena-biopharma-inc-pay-more-755-million-resolve-alleged-false-claims-related-opioid-drug. [34] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, South Carolina Family Practice Chain, Its Co-Owner, and Its Laboratory Director Agree to Pay the United States $2 Million to Settle Alleged False Claims Act Violations for Illegal Medicare Referrals and Billing Unnecessary Medical Services (Sept. 11, 2017), https://www.justice.gov/opa/pr/south-carolina-family-practice-chain-its-co-owner-and-its-laboratory-director-agree-pay. [35] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, New York Hospital Operator Agrees to Pay $4 Million to Settle Alleged False Claims Act Violations Arising from Improper Payments to Physicians (Sept. 13, 2017), https://www.justice.gov/opa/pr/new-york-hospital-operator-agrees-pay-4-million-settle-alleged-false-claims-act-violations. [36] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Alaska Department of Health and Social Services to Pay Nearly $2.5 Million to Resolve Alleged False Claims for SNAP Funds (Sept. 18, 2017), https://www.justice.gov/opa/pr/alaska-department-health-and-social-services-pay-nearly-25-million-resolve-alleged-false. [37] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Drug Maker Aegerion Agrees to Plead Guilty; Will Pay More Than $35 Million to Resolve Criminal Charges and Civil False Claims Allegations (Sept. 22, 2017), https://www.justice.gov/opa/pr/drug-maker-aegerion-agrees-plead-guilty-will-pay-more-35-million-resolve-criminal-charges-and. [38] See Press Release, U.S. Atty’s Office for the Dist. of S.C., U.S. Dep’t of Justice, AnMed Health Agrees to Pay $7 Million to Settle False Claims Act Allegations (Sept. 27, 2017), https://www.justice.gov/usao-sc/pr/anmed-health-agrees-pay-7-million-settle-false-claims-act-allegations. [39] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Huntsville Nursing Home Pays the United States and the State of Texas $5 million to Settle Claims Alleging Poor Quality of Care (Oct. 19, 2017), https://www.justice.gov/usao-sdtx/pr/huntsville-nursing-home-pays-united-states-and-state-texas-5-million-settle-claims. [40] See Press Release, U.S. Atty’s Office for the Western Dist. of N.Y., U.S. Dep’t of Justice, Catholic Health to Pay $6,000,000 to Settle False Claims Act Allegations (Oct. 27, 2017), https://www.justice.gov/usao-wdny/pr/catholic-health-pay-6000000-settle-false-claims-act-allegations. [41] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Chemed Corp. and Vitas Hospice Services Agree to Pay $75 Million to Resolve False Claims Act Allegations Relating to Billing for Ineligible Patients and Inflated Levels of Care (Oct. 30, 2017), https://www.justice.gov/opa/pr/chemed-corp-and-vitas-hospice-services-agree-pay-75-million-resolve-false-claims-act. [42] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Dallas-Based Physician-Owned Hospital to Pay $7.5 Million to Settle Allegations of Paying Kickbacks to Physicians in Exchange for Surgical Referrals (Dec. 1, 2017), https://www.justice.gov/opa/pr/dallas-based-physician-owned-hospital-pay-75-million-settle-allegations-paying-kickbacks. [43] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, 21st Century Oncology to Pay $26 Million to Settle False Claims Act Allegations (Dec. 12, 2017), https://www.justice.gov/opa/pr/21st-century-oncology-pay-26-million-settle-false-claims-act-allegations. [45] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Drug Maker United Therapeutics Agrees to Pay $210 Million to Resolve False Claims Act Liability for Paying Kickbacks (Dec. 20, 2017), https://www.justice.gov/opa/pr/drug-maker-united-therapeutics-agrees-pay-210-million-resolve-false-claims-act-liability. [46] See Press Release, U.S. Atty’s Office for the Middle Dist. of Fla., U.S. Dep’t of Justice, United States Settles False Claims Allegations Against Haven Hospice For More Than $5 Million (Dec. 21, 2017), https://www.justice.gov/usao-mdfl/pr/united-states-settles-false-claims-allegations-against-haven-hospice-more-5-million. [47] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Kmart Corporation to Pay U.S. $32.3 Million to Resolve False Claims Act Allegations for Overbilling Federal Health Programs for Generic Prescription Drugs (Dec. 22, 2017), https://www.justice.gov/opa/pr/kmart-corporation-pay-us-323-million-resolve-false-claims-act-allegations-overbilling-federal. [48] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Defense Contractor ADS Inc. Agrees to Pay $16 Million to Settle False Claims Act Allegations (Aug. 10, 2017), https://www.justice.gov/usao-dc/pr/defense-contractor-ads-inc-agrees-pay-16-million-settle-false-claims-act-allegations. [49] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Defense Contractor Agrees to Pay $9.2 Million to Settle False Billing Allegations (Aug. 15, 2017), https://www.justice.gov/opa/pr/defense-contractor-agrees-pay-92-million-settle-false-billing-allegations. [50] See Press Release, U.S. Atty’s Office for the Dist. of Columbia, U.S. Dep’t of Justice, Pacific Architects and Engineers, LLC to Pay $5 Million in False Claims Act Settlement (Sept. 13, 2017), https://www.justice.gov/usao-dc/pr/pacific-architects-and-engineers-llc-pay-5-million-false-claims-act-settlement. [51] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Western New York Contractors and Two Owners to Pay More Than $3 Million to Settle False Claims Act Allegations (Oct. 3, 2017), https://www.justice.gov/opa/pr/western-new-york-contractors-and-two-owners-pay-more-3-million-settle-false-claims-act. [52] See Press Release, U.S. Atty’s Office for the Eastern Dist. of Va., U.S. Dep’t of Justice, Government Contractor Pays $2.6M to Settle False Claims Act Suit (Oct. 16, 2017), https://www.justice.gov/usao-edva/pr/government-contractor-pays-26m-settle-false-claims-act-suit. [53] See Press Release, U.S. Atty’s Office for the Middle Dist. of Ga., U.S. Dep’t of Justice, Mercer Transportation Company Agrees to Pay $4.4 Million to Resolve Alleged Violations of the False Claims Act (Nov. 8, 2017), https://www.justice.gov/usao-mdga/pr/mercer-transportation-company-agrees-pay-44-million-resolve-alleged-violations-false. [54] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, PHH Agrees to Pay Over $74 Million to Resolve Alleged False Claims Act Liability Arising from Mortgage Lending (Aug. 8, 2017), https://www.justice.gov/opa/pr/phh-agrees-pay-over-74-million-resolve-alleged-false-claims-act-liability-arising-mortgage. [55] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, IBERIABANK Agrees to Pay Over $11.6 Million to Resolve Alleged False Claims Act Liability for Submitting False Claims for Loan Guarantees (Dec. 8, 2017), https://www.justice.gov/opa/pr/iberiabank-agrees-pay-over-116-million-resolve-alleged-false-claims-act-liability-submitting. [56] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, SolarCity Agrees to Resolve Alleged False Claims Act Violations Arising From Renewable Energy Grant Claims to Treasury (Sept. 22, 2017), https://www.justice.gov/opa/pr/solarcity-agrees-resolve-alleged-false-claims-act-violations-arising-renewable-energy-grant. [57] See Office of Pub. Affairs, U.S. Dep’t of Justice, Citation Companies Agree to Pay $2.25 Million to Settle Civil False Claims Act Allegations (Dec. 19, 2017), https://www.justice.gov/opa/pr/citation-companies-agree-pay-225-million-settle-civil-false-claims-act-allegations. [58] See Press Release, U.S. Atty’s Office for the Southern Dist. of N.Y., U.S. Dep’t of Justice, Acting Manhattan U.S. Attorney Announces Award of $296 Million Judgment Against Allied Home Mortgage Entities For Civil Mortgage Fraud (Sept. 19, 2017), https://www.justice.gov/usao-sdny/pr/acting-manhattan-us-attorney-announces-award-296-million-judgment-against-allied-home. [59] See Clarification of When Products Made or Derived From Tobacco Are Regulated as Drugs, Devices, or Combination Products; Amendments to Regulations Regarding “Intended Uses,” 82 Fed. Reg. 2193 (Jan. 9, 2017), https://www.gpo.gov/fdsys/pkg/FR-2017-01-09/pdf/2016-31950.pdf. [60] See Petition Interim Response from FDA OP to MIWG (Aug. 1, 2017), available in Docket Nos. FDA-2011-P-0512, FDA-2013-P-1079, FDA-2015-N-2002, and FDA-2016-N-1149 at https://www.regulations.gov [hereinafter FDA Interim Response]. [61] See Petition to Stay and for Reconsideration, Ropes & Gray and Sidley Austin LLP on behalf of the Medical Information Working Group, the Pharmaceutical Research and Manufacturers of America, and the Biotechnology Innovation Organization (Feb. 8, 2017), available in Docket Nos. FDA-2011-P-0512, FDA-2013-P-1079, FDA-2015-N-2002, and FDA-2016-N-1149 at https://www.regulations.gov. [62] See FDA Interim Response, supra note 60. [63] S.B. 387, 2017-2018 Reg. Sess. (Cal. 2017), https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180SB387. [64] S.B. 1577, 100th Gen. Assembly (Ill. 2017),  http://www.ilga.gov/legislation/billstatus.asp?DocNum=1577&GAID=14&GA=100&DocTypeID=SB&LegID=104225&SessionID=91. [65] S.B. 0669, 2017 Reg. Sess. (Mich. 2017), http://legislature.mi.gov/doc.aspx?2017-SB-0669. [66] A.B. A7989, 2017-2018 Leg. Sess. (N.Y. 2017), https://www.nysenate.gov/legislation/bills/2017/a7989; S.B. 378, 2017-2018 Reg. Sess. (N.C. 2017), https://legiscan.com/NC/bill/S378/2017. [67] S.B. 85, 2017 Reg. Sess. (Ala. 2017), https://legiscan.com/AL/bill/SB85/2017. [68] S.B. 216, 2016 Reg. Sess. (Ala. 2016), https://legiscan.com/AL/bill/SB216/2016. [69] S.P.B. 7006, 2017 Reg. Sess. (Fla. 2017), https://www.flsenate.gov/Session/Bill/2018/7006/ByVersion. [70] S.B. 564, 91st Gen. Assembly (Ark. 2017), https://legiscan.com/AR/bill/SB564/2017. [71] S.B. 0065, 2017 Reg. Sess. (Mich. 2017), http://legislature.mi.gov/doc.aspx?2017-SB-0065. [72] See Mich. Comp. Laws § 400.607 (2009). [73] H.B. 1027, 2017-2018 Reg. Sess. (Penn. 2017), http://www.legis.state.pa.us/cfdocs/billInfo/billInfo.cfm?sYear=2017&sInd=0&body=H&type=B&bn=1027. [74] H.B. 1174, 2017 Leg. Sess. (N.D. 2017), http://www.legis.nd.gov/assembly/65-2017/bill-actions/ba1174.html. The following Gibson Dunn lawyers assisted in preparing this client update: F. Joseph Warin, Stephen Payne, Robert Blume, Timothy Hatch, Alexander Southwell, Charles Stevens, Joseph West, Benjamin Wagner, Stuart Delery, Winston Chan, Andrew Tulumello, Karen Manos, Monica Loseman, Robert Walters, Reed Brodsky, John Partridge, James Zelenay, Jonathan Phillips, Ryan Bergsieker, Jeremy Ochsenbein, Sean Twomey, Reid Rector, Allison Chapin, Justin Epner, Chelsea Ferguson, Ian Sprague, and Harper Gernet-Girard. Gibson Dunn’s lawyers have handled hundreds of FCA investigations and have a long track record of litigation success.  Among other significant victories, Gibson Dunn successfully argued the landmark Allison Engine case in the Supreme Court, a unanimous decision that prompted Congressional action.  See Allison Engine Co. v. United States ex rel. Sanders, 128 S. Ct. 2123 (2008).  Our win rate and immersion in FCA issues gives us the ability to frame strategies to quickly dispose of FCA cases.  The firm has more than 30 attorneys with substantive FCA expertise and more than 30 former Assistant U.S. Attorneys and DOJ attorneys.  For more information, please feel free to contact the Gibson Dunn attorney with whom you work or the following attorneys. Washington, D.C. F. Joseph Warin (+1 202-887-3609, fwarin@gibsondunn.com) Stuart F. Delery (+1 202-887-3650, sdelery@gibsondunn.com) Joseph D. West (+1 202-955-8658, jwest@gibsondunn.com) Andrew S. Tulumello (+1 202-955-8657, atulumello@gibsondunn.com) Karen L. Manos (+1 202-955-8536, kmanos@gibsondunn.com) Stephen C. Payne (+1 202-887-3693, spayne@gibsondunn.com) Jonathan M. Phillips (+1 202-887-3546, jphillips@gibsondunn.com) Caroline Krass (+1 202-887-3784, ckrass@gibsondunn.com) New York Reed Brodsky (+1 212-351-5334, rbrodsky@gibsondunn.com) Alexander H. Southwell (+1 212-351-3981, asouthwell@gibsondunn.com) Denver Robert C. Blume (+1 303-298-5758, rblume@gibsondunn.com) Monica K. Loseman (+1 303-298-5784, mloseman@gibsondunn.com) John D.W. Partridge (+1 303-298-5931, jpartridge@gibsondunn.com) Ryan T. Bergsieker (+1 303-298-5774, rbergsieker@gibsondunn.com) Dallas Robert C. Walters (+1 214-698-3114, rwalters@gibsondunn.com) Los Angeles Timothy J. Hatch (+1 213-229-7368, thatch@gibsondunn.com) James L. Zelenay Jr. (+1 213-229-7449, jzelenay@gibsondunn.com) Palo Alto Benjamin Wagner (+1 650-849-5395, bwagner@gibsondunn.com) San Francisco Charles J. Stevens (+1 415-393-8391, cstevens@gibsondunn.com)Winston Y. Chan (+1 415-393-8362, wchan@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

December 1, 2017 |
Elder Abuse Reporting Under Scrutiny

​San Francisco partner Winston Chan and associate Ian Long are the authors of “Elder Abuse Reporting Under Scrutiny,” [PDF] published in Provider Magazine in December 2017.

November 30, 2017 |
Federal Circuit Update (November 2017)

This November 2017 edition of Gibson Dunn’s Federal Circuit Update discusses the recent Friedman Lecture on Appellate Advocacy by Judge Alan Lourie, the two pending Federal Circuit cases before the Supreme Court that consider issues regarding inter partes review proceedings, and the Federal Circuit’s en banc procedures.  This Update also provides summaries of the two pending en banc cases involving judicial review of timeliness determinations in inter partes review proceedings and attorneys’ fees for litigation involving the PTO.  Also included is a summary of the recent en banc decision regarding motions to amend in inter partes review proceedings and a pair of decisions relating to patent venue and patent eligibility. Federal Circuit News On November 17, 2017, Judge Alan Lourie spoke at the Friedman Memorial Lecture on Excellence in Appellate Advocacy put on by the Federal Circuit Bar Association.  In his remarks, Judge Lourie chiefly addressed the Supreme Court’s recent reversal of a number of Federal Circuit decisions, such as TC Heartland LLC v. Kraft Foods Group Brands LLC.  Judge Lourie stated that the Federal Circuit “should not be affronted” by these reversals, as they have not necessarily occurred because the appellate court was “wrong.”  Instead, these reversals may be attributed to factors such as changes in technology and the Supreme Court’s apparent desire “to limit the continued existence of long-established rules specific to patent law, that set it apart from general law.”  Finally, Judge Lourie stated that he believes the Federal Circuit has been and continues to serve its purpose of providing uniformity in patent law. Supreme Court.  The Supreme Court has heard oral argument on two cases from the Federal Circuit this term: Case Status Issue Oil States Energy Services, LLC v. Greene’s Energy Group, LLC, No. 16-712 Argued on Nov. 27, 2017 Constitutionality of inter partes review under Article III and the Seventh Amendment SAS Institute Inc. v. Matal, No. 16-969 Argued on Nov. 27, 2017 The number of claims that must be addressed by the Patent Trial and Appeal Board in a final written decision during inter partes review Upcoming En Banc Federal Circuit Cases Wi-Fi One, LLC v. Broadcom Corp., No. 15-1944 (Fed. Cir.):  The Federal Circuit’s jurisdiction to review the PTAB’s determination that a petitioner is not time-barred under 35 U.S.C. § 315(b). The PTAB instituted an inter partes review proceeding against Wi-Fi One’s patent.  Wi-Fi One argued that Broadcom was time-barred under 35 U.S.C. § 315(b) from seeking review because Broadcom was in privity with time-barred district court litigants.  The PTAB disagreed, determining that Wi-Fi One did not establish that Broadcom had sufficient control over district court litigation to support a privity finding.  On appeal, the Federal Circuit held that it does not have jurisdiction to review the PTAB’s determination that Broadcom was not time-barred, holding that the Supreme Court’s decision in Cuozzo Speed Technologies, LLC v. Lee, 136 S. Ct. 2131 (2016), did not implicitly overrule prior Federal Circuit precedent on the issue (decision available here).  To date, two amicus briefs have been filed in support of Wi-Fi One (WesternGeco LLC and 3DS Innovations, LLC), eight amicus briefs have been filed in support of neither party (Jeremy Cooper Doerre, New York Intellectual Property Law Association, Federal Circuit Bar Association, Intellectual Property Owners Association, Boston Patent Law Association, Professors of Patent and Administrative Law, American Intellectual Property Law Association, and Biotechnology Innovation Organization), and three amicus briefs have been filed in support of Broadcom (Oracle, Intel, and Apple).  Oral argument was heard on May 4, 2017. Question presented: Should this court overrule Achates Reference Publishing, Inc. v. Apple Inc., 803 F.3d 652 (Fed. Cir. 2015) and hold that judicial review is available for a patent owner to challenge the PTO’s determination that the petitioner satisfied the timeliness requirement of 35 U.S.C. § 315(b) governing the filing of petitions for inter partes review? Nantkwest, Inc. v. Matal, No. 16-1794 (Fed. Cir.):  Whether the PTO can recover attorneys’ fees in litigation under 35 U.S.C. § 145. After the PTAB affirmed the examiner’s rejection of Nantkwest’s patent application, Nantkwest appealed to the United States District Court for the Eastern District of Virginia under 35 U.S.C. § 145.  The PTO prevailed on the merits of the appeal and moved to recover both attorneys’ fees and expert fees.  Section 145 provides that “[a]ll the expenses of the proceedings shall be paid by the applicant.”  Applying this provision, the district court granted the PTO’s request for expert fees, but rejected the PTO’s request for attorneys’ fees.  A panel of the Federal Circuit reversed the district court’s holding as to attorneys’ fees, holding that “[a]ll expenses of the proceedings,” under § 145, authorizes an award of attorneys’ fees.  (Decision available here.)  Following the entry of judgment, however, the Federal Circuit sua sponte ordered that the panel decision be vacated and that the case be reheard en banc.  To date, no amicus briefs have been filed, and oral argument has not yet been scheduled. Question presented: Did the panel in NantKwest, Inc. v. Matal, 860 F.3d 1352 (Fed. Cir. 2017) correctly determine that 35 U.S.C. § 145’s “[a]ll the expenses of the proceedings” provision authorizes an award of the United States Patent and Trademark Office’s attorneys’ fees? Federal Circuit Practice Update The Federal Circuit’s Internal Operating Procedure No. 14 governs which judges may vote on whether to take a case en banc, and which judges may participate in the en banc.  Consistent with 28 U.S.C. § 46(c), the composition of the en banc court generally consists of all active judges who are not recused and not disqualified, as well as any senior judge who participated in the panel decision that is now being reviewed by the en banc court.  IOP #14.7.  The decision of whether to rehear a case en banc is made by the active judges and panel judges.  IOP #14.2.  As such, judges sitting by designation on a panel may vote on whether to take a case en banc, but may not participate in the en banc itself.  Decisions for hearings en banc are only made by active judges.  IOP #14.1.  Therefore, it is possible that a highly contentious issue in an en banc case might turn on the composition of the original panel. By way of illustration, the en banc court issued its decision in Aqua Products, Inc. v. Matal (PTO), 2015-1177, on October 4, 2017 (summary of the decisions below).  The decision consisted of five written opinions (Judge Stoll did not participate): An opinion by Judge O’Malley, in which Judges Newman, Lourie, Moore, and Wallach joined, and Judges Dyk and Reyna concurred in the result; An opinion by Judge Moore, in which Judges Newman and O’Malley joined; An opinion by Judge Reyna, in which Judge Dyk joined, and Chief Judge Prost and Judges Taranto, Chen, and Hughes joined in part; An opinion by Judge Taranto, in which Chief Judge Prost and Judges Chen and Hughes joined, and Judges Dyk and Reyna joined in certain respects; and An opinion by Judge Hughes, in which Judge Chen joined. The original panel consisted of Chief Judge Prost, Judge Reyna, and Chief District Judge Stark, sitting by designation.  Judge Stark did not participate in the en banc proceedings because he was sitting by designation.  But if a senior judge had been on the panel instead of Judge Stark, he or she would have been permitted to participate in the en banc proceedings.  And if that judge had joined only Judge O’Malley’s opinion, then no part of Judge Reyna’s opinion or Judge Taranto’s opinion would have commanded a majority of the court’s vote. Key Case Summaries (October – November 2017) In re Aqua Prods., Inc., No. 15-1177 (Fed. Cir. Oct. 4, 2017) (en banc):  Allocation of the burdens of persuasion and production when a patent owner moves to amend in an inter partes review proceeding.  The PTAB instituted an inter partes review proceeding against Aqua’s patent, which relates to automated swimming pool cleaners.  Aqua moved to amend the challenged claims to distinguish the cited prior art.  The PTAB, however, denied Aqua’s motion, determining that Aqua failed to carry its burden of showing patentability of the proposed substitute claims over the prior art of record.  On appeal, the PTO intervened to defend the PTAB’s decision.  A panel of the Federal Circuit affirmed, but the court subsequently granted Aqua’s petition for rehearing en banc. Sitting en banc, the Federal Circuit issued five separate opinions: a lead opinion written by Judge O’Malley, concurring opinions by Judges Moore and Reyna, and dissenting opinions by Judges Taranto and Hughes.  A majority of the Federal Circuit held that the PTO has not set forth an interpretation of 35 U.S.C. § 316(e)—titled “Evidentiary Standards”—that is entitled to deference under Chevron.  The court further held that § 316(e) is ambiguous as to the allocation of the burden of persuasion of establishing the unpatentability of substitute claims, but that the most reasonable interpretation is that the petitioner bears the burden of persuasion.  A majority also held that 35 U.S.C. § 316(d) and 37 C.F.R. § 42.121 place a default burden of production on the patentee.  As to whether the PTAB can sua sponte raise patentability challenges to a substitute claim, a majority concluded that the record before the court did not present the “precise question,” and thus opted not to answer it.  The Federal Circuit thus vacated the PTAB’s denial of Aqua’s motion to amend and remanded for the PTAB to reconsider the motion without placing the burden of persuasion on the patent owner. Two-Way Media Ltd. v. Comcast Cable Commc’ns, LLC, Nos. 16-2531, 16-2532 (Fed. Cir. Nov. 1, 2017): Importance of claim scope in 101 eligibility determinations. Two-Way Media sued Comcast alleging infringement of four patents.  The patents all involved IP multicasting, which provided a way to transmit a packet of information to multiple recipients.  Comcast moved for judgment on the pleadings, arguing that the claims were ineligible under 35 U.S.C. § 101.  Two-Way Media argued that the motion was premature because claim construction was necessary to evaluate the claims, but Two-Way Media also provided proposed claim constructions for certain terms.  Two-Way Media also asked the district court to take judicial notice of expert reports and testimony from other cases addressing the novelty and nonobviousness of the claimed inventions.  The district court adopted Two-Way Media’s proposed claim constructions for its analysis of the motion but denied Two-Way Media’s request to take judicial notice of the expert materials because the evidence was irrelevant to an eligibility analysis under § 101.  The district court then found the claims patent ineligible under § 101, and Two-Way Media appealed. The Federal Circuit (Reyna, J.) affirmed.  The court separated its analysis of the four patents into two groups.  In analyzing step 1 for the first set, the court explained that the representative claim required the functional results of converting, routing, controlling, monitoring, and accumulating records, but the claim did not describe how to achieve those results “in a non-abstract way.”  The court concluded that the claim constructions proposed by Two-Way Media did not change the analysis because the constructions “recite only conventional components” and were not directed to a scalable network architecture—as argued by Two-Way Media—that improved the functioning of the system. Turning to step two, the court held that the claimed elements did not provide an inventive concept to render the claims patent eligible.  The court concluded that, although the specification described the system architecture as a technological innovation, the representative claim failed to recite the purportedly innovative system architecture.  The court explained: “[t]he main problem that Two-Way Media cannot overcome is that the claim—as opposed to something purportedly described in the specification—is missing an inventive concept.”  The court therefore found the representative claim ineligible, even though the specification purportedly described an innovative system architecture, because the claim did not cover the same scope as described in the specification.  The court also rejected Two-Way Media’s argument regarding its evidence of novelty and nonobviousness because such evidence was not material to the eligibility analysis. The court similarly found the second set of patents ineligible under § 101.  According to the court, the district court did not err in citing to the preamble of the patents to determine the “focus” of the claims.  The court noted that the claims were broader than the claims in the first set of patents and were similarly directed to abstract ideas.  The claims also suffered from the same problem as the representative claim of the first set of patents: the claims did not cover an inventive concept, such as the purportedly innovative system architecture, despite the specification’s discussion of that architecture. In re Micron Techs., Inc., No. 2017-138 (Fed. Cir. Nov 15, 2017): The venue defense in TC Heartland was not previously “available” to defendants and thus not waived under Rule 12. In 2016, the President and Fellows of Harvard College filed a patent infringement case in the District of Massachusetts against Micron Technologies, which is incorporated in Delaware.  Under the then-prevailing view of venue articulated in V.E. Holding Corp. v. Johnson Gas Appliance Co., 917 F.2d 1574, 1575 (Fed. Cir. 1990), venue would have been proper.  As such, Micron, like many defendants, did not object to venue with a motion under Rule 12(b)(3). After the Supreme Court’s TC Heartland decision earlier this year, venue under 28 U.S.C. § 1400(b) on the basis of where Micron resides became improper, as the Court determined that “a domestic corporation ‘resides’ only in its State of incorporation for purposes of the patent venue statue” (here, Delaware, not Massachusetts).  The Supreme Court, however, stated that this determination was not a “change” of law, but rather an articulation of what the law always had been (notwithstanding the Federal Circuit’s view in V.E. Holding). Accordingly, when Micron brought a post-TC Heartland motion objecting to venue, the district court held that Micron had waived its venue objection by not raising it in its initial Rule 12 motion, there being no change of law to make waiver inapplicable.  See Rule 12(g)(2), (h)(1)(A).  Other district courts, however, have reached different conclusions, holding that the venue defense stated in TC Heartland was not previously available, and thus waiver does not apply. In Micron, the Federal Circuit resolved the split, holding that, as a matter of “common sense” the venue objection was not “available” until after TC Heartland.  Writing for the panel, Judge Taranto explained:  “[B]efore then, it would have been improper, given controlling precedent, for the district court to dismiss or to transfer for lack of venue.”  Given that the Federal Circuit’s controlling V.E Holding decision precluded district courts from adopting a venue defense or objection of this type, “the defense or objection was not ‘available’ to the movant.” Nevertheless, the panel held that waiver by operation of Rule 12 “is not the sole basis” on which a district court might rule that a defendant had forfeited an otherwise valid venue defense.  Citing a district court’s inherent authority, the panel noted that a court could find forfeiture of a venue objection if not timely raised, barring defendants from taking a “tactical wait-and-see” approach and foregoing earlier opportunities to raise the defense. Upcoming Oral Argument Calendar For a list of upcoming arguments at the Federal Circuit, please click here. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Federal Circuit.  Please contact the Gibson Dunn lawyer with whom you usually work or the authors of this alert: Blaine H. Evanson – Los Angeles (213-229-7228, bevanson@gibsondunn.com) Blair A. Silver – Washington, D.C. (202-955-8690, bsilver@gibsondunn.com) Please also feel free to contact any of the following practice group co-chairs or any member of the firm’s Appellate and Constitutional Law or Intellectual Property practice groups: Appellate and Constitutional Law Group: Mark A. Perry – Washington, D.C. (202-887-3667, mperry@gibsondunn.com) James C. Ho – Dallas (214-698-3264, jho@gibsondunn.com) Caitlin J. Halligan – New York (212-351-4000, challigan@gibsondunn.com) Nicole A. Saharsky – Washington, D.C. (202-887-3669, nsaharsky@gibsondunn.com) Intellectual Property Group: Josh Krevitt – New York (212-351-4000, jkrevitt@gibsondunn.com) Wayne Barsky – Los Angeles (310-552-8500, wbarsky@gibsondunn.com)Mark Reiter – Dallas (214-698-3100, mreiter@gibsondunn.com) © 2017 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

September 26, 2017 |
Federal Circuit Update (September 2017)

This September 2017 edition of Gibson Dunn’s Federal Circuit Update discusses the court’s upcoming sitting in New York, the two pending Federal Circuit cases before the Supreme Court that consider issues regarding inter partes review proceedings, and the Federal Circuit’s changes to two local rules involving certificates of interest and statements of related cases.  This update also provides summaries of the three pending en banc cases involving motions to amend claims during inter partes review proceedings, judicial review of timeliness determinations in inter partes review proceedings, and attorneys’ fees for litigation involving the PTO.  Also included are summaries of three recent decisions relating to the applicability of the Seventh Amendment to requests for attorneys’ fees, patent eligibility, and evidentiary issues in inter partes review proceedings. Federal Circuit News Federal Circuit Sitting in New York.  In October, the Federal Circuit will hold oral arguments in New York, NY, at the U.S. Court of International Trade.  Below is a brief description of some interesting cases on the schedule: October 3: Janssen Biotech, Inc. v. Celltrion Healthcare Co., Ltd. (17-1120) and In re Janssen Biotech, Inc. (17-1257) – These appeals involve the application of 35 U.S.C. § 121, which provides safe harbor protection against obviousness-type double patenting rejections for divisional applications filed as the result of a restriction requirement in another application.  The parties dispute whether the application at issue is entitled to safe harbor because it was not formally designated a "divisional application" at filing, but was prosecuted as a divisional and later formally amended to be a divisional during reexamination.  The district court in Janssen v. Celltrion and the PTAB in In re Janssen held that Section 121 did not apply.  Bill Rooklidge, a partner in Gibson Dunn’s Orange County office, will argue on behalf of Janssen in the PTAB appeal. October 4:  Classen Immunotherapies, Inc. v. Elan Pharmaceuticals, Inc. (17-1033) – This appeal presents the question whether, after submitting clinical data to the Food and Drug Administration, a company’s alleged analysis, disclosure, and use of that data for potential patenting and labeling activities are protected by the safe harbor provision of 35 U.S.C. § 271(e)(1).  The appellant, Classen, argues that such activities are commercial and therefore fall outside the Section 271(e)(1) safe harbor. October 5: Travel Sentry, Inc. v. Tropp (16-2386) – This appeal involves the issue of divided infringement and application of the "condition and manner" test of attribution established in Akamai Technologies, Inc. v. Limelight Networks, Inc., 797 F.3d 1020 (Fed. Cir. 2015).  The patents-in-suit cover a luggage screening method, and the question on appeal is whether sufficient direction and control is exercised over the Travel and Security Administration in carrying out the method to fall within the realm of attribution. Supreme Court.  The Supreme Court has granted certiorari on two cases from the Federal Circuit for the upcoming October Term 2017: Case Status Issue Oil States Energy Services, LLC v. Greene’s Energy Group, LLC, No. 16-712 Cert. granted, Resp. Br. due Oct. 23, 2017 Constitutionality of inter partes review under Article III and the Seventh Amendment SAS Institute Inc. v. Matal, No. 16-969 Cert. granted, Pet’r Reply Br. due Oct. 5, 2017 The number of claims that must be addressed by the Patent Trial and Appeal Board in a final written decision during inter partes review Upcoming En Banc Federal Circuit Cases In re Aqua Prods., Inc., No. 15-1177 (Fed. Cir.):  Allocations of the burdens of persuasion and production when a patent owner moves to amend in an inter partes review proceeding. The PTAB instituted an inter partes review proceeding against Aqua’s patent, which relates to automated swimming pool cleaners.  Aqua moved to amend the challenged claims to distinguish the cited prior art.  The PTAB, however, denied Aqua’s motion, determining that Aqua failed to carry its burden of showing patentability of the proposed substitute claims over the prior art of record.  On appeal, the PTO intervened to defend the PTAB’s decision.  The Federal Circuit affirmed (decision available here).  Eight amicus briefs have been filed: three in favor of neither party (American Intellectual Property Law Association, Intellectual Property Owners Association, and Houston Intellectual Property Law Association), three in favor of Aqua Products (Case Western Reserve University School of Law Intellectual Property Venture Clinic and Ohio Venture Association, Pharmaceutical Research and Manufacturers of America, and Biotechnology Innovation Organization), and two in favor of the PTO (Askeladden, L.L.C. and Internet Association et al.).  Oral argument was heard on December 9, 2016. Questions Presented: (a)  When the patent owner moves to amend its claims under 35 U.S.C. § 316(d), may the PTO require the patent owner to bear the burden of persuasion, or a burden of production, regarding patentability of the amended claims as a condition of allowing them?  Which burdens are permitted under 35 U.S.C. § 316(e)? (b)  When the petitioner does not challenge the patentability of a proposed amended claim, or the PTAB thinks the challenge is inadequate, may the PTAB sua sponte raise patentability challenges to such a claim?  If so, where would the burden of persuasion, or a burden of production, lie? Wi-Fi One, LLC v. Broadcom Corp., No. 15-1944 (Fed. Cir.):  The Federal Circuit’s jurisdiction to review the PTAB’s determination that a petitioner is not time-barred under 35 U.S.C. § 315(b).  The PTAB instituted an inter partes review proceeding against Wi-Fi One’s patent.  Wi-Fi One argued that Broadcom was time-barred under 35 U.S.C. § 315(b) from seeking review because Broadcom was in privity with time-barred district court litigants.  The PTAB disagreed, determining that Wi-Fi One did not establish that Broadcom had sufficient control over district court litigation to support a privity finding.  On appeal, the Federal Circuit held that it does not have jurisdiction to review the PTAB’s determination that Broadcom was not time-barred, holding that the Supreme Court’s decision in Cuozzo Speed Technologies, LLC v. Lee, 136 S. Ct. 2131 (2016), did not implicitly overrule prior Federal Circuit precedent on the issue (decision available here).  To date, two amicus briefs have been filed in support of Wi-Fi One (WesternGeco LLC and 3DS Innovations, LLC), eight amicus briefs have been filed in support of neither party (Jeremy Cooper Doerre, New York Intellectual Property Law Association, Federal Circuit Bar Association, Intellectual Property Owners Association, Boston Patent Law Association, Professors of Patent and Administrative Law, American Intellectual Property Law Association, and Biotechnology Innovation Organization), and three amicus briefs have been filed in support of Broadcom (Oracle, Intel, and Apple).  Oral argument was heard on May 4, 2017.  Question presented: Should this court overrule Achates Reference Publishing, Inc. v. Apple Inc., 803 F.3d 652 (Fed. Cir. 2015) and hold that judicial review is available for a patent owner to challenge the PTO’s determination that the petitioner satisfied the timeliness requirement of 35 U.S.C. § 315(b) governing the filing of petitions for inter partes review? Nantkwest, Inc. v. Matal, No. 16-1794 (Fed. Cir.):  Whether the PTO can recover attorneys’ fees in litigation under 35 U.S.C. § 145. After the PTAB affirmed the examiner’s rejection of Nantkwest’s patent application, Nantkwest appealed to the United States District Court for the Eastern District of Virginia under 35 U.S.C. § 145.  The PTO prevailed on the merits of the appeal and moved to recover both attorneys’ fees and expert fees.  Section 145 provides that "[a]ll the expenses of the proceedings shall be paid by the applicant."  Applying this provision, the district court granted the PTO’s request for expert fees, but rejected the PTO’s request for attorneys’ fees.  A panel of the Federal Circuit reversed the district court’s holding as to attorneys’ fees, holding that "[a]ll expenses of the proceedings," under § 145, authorizes an award of attorneys’ fees.  (Decision available here.)  Following the entry of judgment, however, the Federal Circuit sua sponte ordered the panel decision be vacated and that the case be reheard en banc.  To date, no amicus briefs have been filed.  Amicus briefs in support of the PTO or in support of neither party must be filed by November 22, 2017; amicus briefs in support of Nantkwest must be filed by December 22, 2017.  Oral argument has not yet been scheduled. Question presented: Did the panel in NantKwest, Inc. v. Matal, 860 F.3d 1352 (Fed. Cir. 2017) correctly determine that 35 U.S.C. § 145’s "[a]ll the expenses of the proceedings" provision authorizes an award of the United States Patent and Trademark Office’s attorneys’ fees? Federal Circuit Practice Update On September 18, 2017, the Federal Circuit posted a notice of final amendments to two local rules, Fed. Cir. L.R. 47.4 and 47.5, which relate to certificates of interest and statements of related cases.  The rules are scheduled to take effect on October 2, 2017.  This followed a formal notice and comment period pursuant to 28 U.S.C. § 2071(b).  The Federal Circuit also posted a revised Form 9, the Certificate of Interest form, which also will become effective on October 2, 2017. Rule 47.4 sets forth the requirements for the certificate of interest.  The October 2 revision adds a requirement that the party set forth the following information, in addition to the information previously required: "The title and number of any case known to counsel to be pending in this or any other court or agency that will directly affect or be directly affected by this court’s decision in the pending appeal." Rule 47.5 sets forth the requirements for the statement of related cases.  The October 2 revision makes four changes: It adds the requirement that certificates of interest include a statement of related cases (previously, only principal briefs required a statement of related cases). It clarifies that the certificate of interest must include cases pending before agencies, not just cases pending before courts. It eliminates the exception which had allowed parties to describe numerous related cases in a general fashion, rather than specifically listing each related case. It clarifies that cases merely involving the "same general legal issue," such as the correct construction of a statue, are not "related" within the meaning of the rule. The new Form 9 is updated to reflect these changes. Key Case Summaries (August – September 2017) AIA Am., Inc. v. Avid Radiopharms., No. 16-2647 (Fed. Cir. Aug. 10, 2017):  Seventh Amendment right to a jury trial does not apply to requests for attorneys’ fees under § 285. AIA sued Avid for infringement of two patents.  Avid argued that AIA lacked standing because AIA’s founder and the alleged sole inventor of the patents conspired to cut out the university where the research was performed.  The district court ordered targeted discovery and held a jury trial on AIA’s standing.  Based on the jury’s verdict, the district court found that AIA lacked standing and entered judgment in favor of Avid.  The Federal Circuit summarily affirmed.  Avid subsequently moved for attorneys’ fees in the district court.  The court allowed the parties to submit extensive briefing, evidence, and declarations on the issue of fees and eventually awarded nearly $4 million in fees to Avid.  AIA appealed the award of fees, but not the amount. The Federal Circuit (Hughes, J.) affirmed.  On appeal, AIA argued that the district court’s award of attorneys’ fees was improper because, when an award of attorneys’ fees is based in part or in whole on a party’s state of mind, intent, or culpability, and only a jury may decide those issues.  The court rejected AIA’s argument, explaining that attorneys’ fees were traditionally decided in courts of both law and equity.  Because this was an award of fees pursuant to a statutory provision, as opposed to a contractual indemnification provision, the attorneys’ fees are properly characterized as an equitable remedy.  The Federal Circuit also held that the district court was not foreclosed from making additional factual findings about AIA’s state of mind, intent, and culpability in deciding the fees motion. Visual Memory LLC v. NVIDIA Corp., No. 2016-2254 (Fed. Cir. Aug. 15, 2017):  Improvement to computer memory systems is not abstract under Alice. Visual Memory accused NVIDIA of infringing a patent related to a programmable memory system.  Believing that the claims were directed to patent-ineligible subject matter, NVIDIA filed a motion to dismiss for failure to state a claim under Fed. R. Civ. P. 12(b)(6).  The district court granted the motion, finding that the claims were directed to the abstract idea of "categorical data storage," which humans have practiced for many years, and that the claims did not contain an inventive concept because they recited components—main memory, cache, bus, and processor—that were generic and conventional. The Federal Circuit (Stoll, J.) reversed the district court decision.  The majority determined that the claims were patent-eligible because they were directed to an improved computer memory system, not just the abstract idea of categorical data storage.  The majority focused on the alleged improvements provided by the claimed memory system as explained in the specification.  The specification explained that prior art memory systems had to be designed specifically for different types of processors, which was costly, inefficient, and caused performance issued.  In the improved memory system, by contrast, the memory could be easily programmed to be used with any type of processor, thus avoiding the drawbacks of the prior art.  Because the claims were directed to an improvement in computer functionality, the majority found the claims were not abstract under Alice. Judge Hughes dissented, arguing that the claims did not provide any specificity on how to program memory to interoperate with different processors, and thus were not directed to a specific improvement in computer functionality. Ultratec, Inc. v. CaptionCall, LLC, Nos. 2016-1706, -1707, -1708, -1709, -1710, -1712, -1713, -1715, -2366 (Fed. Cir. Aug. 28, 2017):  The PTAB must sufficiently explain its reasons for decisions on evidentiary issues to allow meaningful appellate review. Ultratec sued CaptionCall for infringement of several patents and CaptionCall initiated inter partes review ("IPR") proceedings on all of the asserted patents.  CaptionCall retained the same invalidity expert in both the district court litigation and the IPRs, and the expert testified about the same issues in both proceedings.  Within a week of the expert’s trial testimony before the district court, Ultratec requested permission to supplement the IPR record with what it believed to be testimony inconsistent with the expert’s IPR declarations.  The PTAB held a conference call to discuss Ultratec’s request and denied the request during the call without ever reviewing the testimony.  The PTAB never issued a written order.  The PTAB subsequently issued final written decisions finding all challenged claims invalid.  The PTAB’s decisions relied heavily on the credibility of the expert whose alleged inconsistent testimony was not allowed.  Ultratec appealed the final written decisions, challenging the PTAB’s decision not to supplement the evidentiary record with the allegedly inconsistent testimony. The Federal Circuit (Moore, J.) vacated and remanded the PTAB’s decisions because the PTAB abused its discretion in refusing to admit and consider the expert’s trial testimony and did not explain its decision to do so.  Under PTAB rules, a request to submit new evidence must show (1) why the information reasonably could not have been obtained earlier, and (2) that consideration of the information would be in the interests of justice.  The Federal Circuit found that Ultratec’s request satisfied both prongs.  Ultratec submitted its request within a week of the trial, and thus could not have proffered the testimony sooner.  The PTAB offered no reasons why it would not be in the interests of justice to consider allegedly inconsistent testimony from the district court litigation on the identical issues it was considering.  According to the Federal Circuit, "[a] reasonable adjudicator would have wanted to review this evidence." The Federal Circuit also criticized the PTAB’s procedures impedeing meaningful appellate review. The PTAB required Ultratec to file a request to supplement the record that "must not include a discussion of the contents or types of the particular documents to be entered."  Having never reviewed the testimony at issue, the PTAB lacked the information necessary to make a reasoned decision on the admissibility of the evidence.  The Federal Circuit also criticized the fact that the PTAB made a significant evidentiary decision without providing a written explanation or a record of the conference call where the PTAB denied Ultratec’s request. Upcoming Oral Argument Calendar For a list of upcoming arguments at the Federal Circuit, please click here. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Federal Circuit.  Please contact the Gibson Dunn lawyer with whom you usually work or the authors of this alert: Blaine H. Evanson – Los Angeles (213-229-7228, bevanson@gibsondunn.com)Blair A. Silver – Washington, D.C. (202-955-8690, bsilver@gibsondunn.com) Please also feel free to contact any of the following practice group co-chairs or any member of the firm’s Appellate and Constitutional Law or Intellectual Property practice groups:  Appellate and Constitutional Law Group:Mark A. Perry – Washington, D.C. (202-887-3667, mperry@gibsondunn.com)James C. Ho – Dallas (214-698-3264, jho@gibsondunn.com) Caitlin J. Halligan – New York (212-351-4000, challigan@gibsondunn.com) Intellectual Property Group:Josh Krevitt – New York (212-351-4000, jkrevitt@gibsondunn.com)Wayne Barsky - Los Angeles (310-552-8500, wbarsky@gibsondunn.com)Mark Reiter – Dallas (214-698-3100, mreiter@gibsondunn.com) © 2017 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

September 4, 2017 |
2017 Mid-Year FDA and Health Care Compliance and Enforcement Update – Providers

There is no doubt that with the new year in 2017 came a great deal of uncertainty for health care providers.  But even with the change in administration, new leadership in the key health care oversight positions at the Department of Health and Human Services (HHS), Centers for Medicare & Medicaid Services (CMS), and U.S. Department of Justice (DOJ), and the whirlwind of failed (for now) efforts to repeal and replace the Affordable Care Act, the first half of the year has seen some familiar government activity on the enforcement and compliance fronts.  DOJ and the HHS Office of Inspector General (HHS OIG) continue to be extremely active pursuing, and courts continue to mold the contours of, enforcement actions against health care providers of all types under the False Claims (FCA), the Anti-Kickback Statute (AKS), and a variety of other theories based on the health care laws. As we have done in our previous semiannual updates, below we discuss enforcement and compliance efforts of particular note for health care providers in the following areas:  DOJ enforcement, including FCA enforcement and notable criminal prosecutions; HHS enforcement of various administrative sanctions, including HHS OIG actions and HIPAA enforcement; and case law developments and regulatory guidance on the AKS and Stark Law.  In addition to this Update, a collection of Gibson Dunn’s recent publications on health care issues impacting providers may be found on our website. I.     DOJ Enforcement Activity A.     False Claims Act Enforcement Activity Between January 1 and June 30, 2017, the DOJ announced $817 million in FCA recoveries from health care providers, putting it on pace to exceed the approximately $1.1 billion recovered from FCA settlements with providers in all of 2016.  The total of 54 health care provider settlements announced during that time is comparable to the 49 settlements announced in the first half of 2016, and the 57 settlements announced in the first half of 2015, showing early signs that the DOJ is not slowing down with the change in administration. As usual, the FCA settlements announced so far this year have been predicated on a variety of legal theories and have involved a wide variety of different types of providers, including home health providers, pharmacies, physicians, hospitals, billing services, and skilled nursing providers.  Number of FCA Settlements with Providers, by Provider Type   In terms of the number of settlements so far in 2017, clinics and single-providers cases have easily led the pack, with the majority of these cases resting, in primary part, on allegations of upcoding, lack of medical necessity, and unqualified personnel providing care.  Hospital settlements made up the second-largest group, but featured more cases based on alleged violations of the AKS and Stark Law.  Number of FCA Settlements with Providers, by Allegation Type   Overall, medical necessity was by far the most prevalent legal theory among the provider settlements, consistent with prior years, while AKS allegations and claims that services were not provided were also particularly prevalent in the first half of 2017.  One of the largest FCA recoveries in 2017 came from a settlement with electronic health records (EHR) software vendor eClinicalWorks (ECW), which agreed in May to pay $155 million to resolve allegations that ECW misrepresented its software’s capabilities in the process of obtaining certification that would make the company eligible for incentive payments under the government’s Electronic Health Records Incentive Program.[1]  Notably, the DOJ announced that under the terms of the settlement agreement, the company’s three founders agreed to be jointly and severally liable for the full amount of the payment by ECW, and three other individuals—a software developer and two project managers—were required separately to pay a total of $80,000.  Additionally, as part of the settlement, ECW entered into a five-year Corporate Integrity Agreement that, in addition to other requirements, calls for the retention of an Independent Software Quality Oversight Organization.  ECW’s settlement may have been the first in a wave of enforcement efforts involving EHR incentive payments.  In June, HHS OIG issued a report finding that CMS overpaid $729 million under the incentive payments program to providers that did not comply with program requirements between May 2011 and June 2014.[2]  Soon thereafter, HHS OIG announced that it would review hospitals’ incentive payments between 2011 and 2016 "to identify potential overpayments that the hospitals would have received as a result of [incentive payment calculation] inaccuracies."[3]  In light of the ECW settlement and recent attention to the issue in Congress,[4] it is likely that we have not seen the last of DOJ and HHS OIG enforcement actions, under the FCA and otherwise, involving this program.  One of the most significant FCA developments this year is not reflected in the summary data above:  a jury verdict of $347 million in a declined case, pursued by the relator to trial, against skilled nursing facility operator Consulate Health Care in the Middle District of Florida.[5]  In United States ex rel. Ruckh v. CMC II LLC et al., the relator, a former nurse at two of the defendant’s facilities, alleged the defendant artificially increased the amount of care patients required, resulting in inflated Resource Utilization Group reimbursements from the Medicare program in violation of the FCA.  The jury found the claims affected by that alleged conduct resulted in more than $115 million in single damages, which are subject to mandatory trebling under the statute, along with per-claim civil penalties.  Post-trial motions practice is ongoing, but if the verdict stands, it will be the second trial verdict exceeding $300 million obtained by a relator in a declined case in the past two years—a stark reminder of the massive potential sanctions under the FCA for cases litigated all the way to trial. In notable contrast, one of the largest skilled nursing facility operators in the country, Genesis Healthcare Inc., opted this year to settle a similar set of FCA claims and avoid litigating to trial.  In June, Genesis paid $53.6 million to resolve the DOJ’s investigation and six qui tam lawsuits involving allegations that the company and its subsidiaries and predecessors submitted false claims for medically unnecessary hospice services, medically unnecessary therapy services, and care that was materially substandard.[6]  Though the Genesis settlement amount was based upon the company’s ability to pay, the juxtaposition of that amount against the Ruckh verdict is a reminder of the heavy potential sanctions under the FCA for cases litigated all the way to trial. B.     FCA-Related Case Law Developments 1.     Developments in the Implied False Certification Theory Since Escobar It has now been a year since the Supreme Court recognized and defined, in Universal Health Services Inc. v. United States ex rel. Escobar, the so-called "implied certification theory" as a basis for FCA liability.  Specifically, in Escobar, the Supreme Court held that there could be FCA liability under the implied certification theory of liability "at least where two conditions are satisfied:  first, the claim does not merely request payment, but also makes specific representations about the goods or services provided; and second, the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths."[7]  This theory of liability is of particular importance to health care providers, who, like the provider in Escobar, could be subject to liability for a potentially wide variety of regulatory violations if those violations make something about the providers’ reimbursement claims into misleading "half-truths."  In the first half of 2017, more and more courts grappled with how to analyze implied certification claims under the guidance of Escobar.  We briefly summarize some of the most notable examples of that case law below. For additional discussion of these and other recent FCA developments, please refer to our 2017 False Claims Act Mid-Year Update. In particular, courts are continuing to answer, directly or indirectly, a potentially key question left open by Escobar—must FCA plaintiffs show a "specific representation" on a defendant’s claim for payment to ground implied certification liability.  Or, in other words, must both of Escobar‘s "two conditions" be satisfied?  Circuit courts have seemingly come to different conclusions in the first half of 2017.  For example, in United States ex rel. Badr v. Triple Canopy, Inc.,[8] the Fourth Circuit found that the relator’s claims—that the defendant’s guards billed to the government did not meet marksmanship requirements—were viable under an implied certification theory even though the defendant’s claims contained no "specific representation" about marksmanship qualifications.  The Ninth Circuit, however, seemed to take a different view in two cases in which it analyzed implied certification claims under the assumption that both of Escobar‘s "two conditions" are required—United States ex rel. Kelly v. Serco, Inc.[9] and United States ex rel. Campie v. Gilead Sciences, Inc.[10]  Even in those cases, though, the court did not appear to take a particularly rigorous view of how to prove an actionable "specific representation"—in Campie, for instance, the Ninth Circuit stated that the brand name of the defendant’s drug could itself be a "representation" of the fact that the drug had received FDA approval.[11] On Escobar‘s second "condition" for implied certification liability, a number of courts in the first half of 2017 analyzed how certain alleged noncompliance with legal rules might (or might not) be material to the government’s payment decision.  Perhaps most notably for health care providers, a rapidly growing number of courts have taken the view, suggested in Escobar, that an alleged regulatory violation is not material to government payment if the government knows of the violation and continues to pay the defendant’s claims anyway.  In fact, several courts in 2017 have gone so far as to suggest that the government’s decision not to intervene in the qui tam that originated the FCA claims itself can be proof of the immateriality of the defendant’s conduct.[12]  These cases could prove to be an important firewall for providers, given the extensive federal and state government survey apparatus that frequently results in findings of regulatory noncompliance where the consequence is that the providers must undertake corrective actions, not repay claims for reimbursement. 2.     Notable Development on FCA Scienter In May 2017, the Eleventh Circuit issued an opinion regarding the application of the FCA scienter element in a case in which a defendant relied upon a reasonable interpretation of an ambiguous regulation.[13]  In United States ex rel. Phalp v. Lincare Holdings Inc., the relators alleged that defendants, suppliers of oxygen and respiratory therapy services, submitted claims without authorization from the relevant Medicare beneficiaries and after making unsolicited telemarketing calls to Medicare beneficiaries, thereby allegedly violating Medicare regulations and the FCA.  The district court determined that the relators failed to provide evidence that false claims were submitted "knowingly," stating that "a defendant’s reasonable interpretation of any ambiguity inherent in the regulations belies the scienter necessary to establish a claim of fraud under the FCA."  The Eleventh Circuit upheld the lower court’s ruling, but with a tweak to the district court’s analysis, noting that FCA scienter can exist even if a provider’s interpretation of a vague regulation was reasonable.  The court explained that it wanted to preclude allowing FCA defendants to escape liability by adopting a "reasonable interpretation" of a regulation that they did not hold at the time the claims were submitted.  The decision could have a particular impact on health care provider defendants in FCA cases, which frequently see theories based on alleged violations of vague or broadly defined reimbursement requirements that leave a great deal of discretion to the treating clinician. 3.     Update on Fourth Circuit Opinion in Michaels In our 2016 Year-End Providers Update, we noted that the Fourth Circuit, in United States ex rel. Michaels v. Agape Senior Community, Inc.,[14] would have an opportunity to hear argument on a crucial issue for health care providers in FCA cases:  whether statistical sampling can be used to prove FCA liability, particularly for cases in which the theory of liability is predicated on a claim-specific review of only a sample of the claims submitted.  However, the Michaels court declined to reach this issue.  The court unanimously decided that it had erred in granting interlocutory review of the issue, since the statistical sampling question was not a purely legal one.  Accordingly, the district court decision denying relators the use of statistical sampling stands for the time being.  The Fourth Circuit did decide, however, that the DOJ may veto a settlement in an FCA case it has not actually joined and that such a veto is not subject to review.  The court found that the language of the FCA imposed no limitation on the government in that regard.  C.     Criminal Enforcement Actions On July 13, 2017, the DOJ announced the largest-ever health care fraud enforcement action in its history.  The DOJ brought charges against 412 individuals—including many physicians and pharmacists—who were allegedly responsible for $1.3 billion in health care fraud losses by Medicaid, Medicare, and TRICARE.[15]  The action was coordinated by the Criminal Division’s Health Care Fraud Unit and its partners in the Medicare Fraud Strike Force, and involved the Drug Enforcement Administration, Defense Criminal Investigative Service, and State Medicaid Fraud Control Units.  The enforcement action was focused heavily on the distribution of medically unnecessary prescription drugs, including the unlawful distribution of opioids and other prescription narcotics.  However, the cases involved a range of other theories, including embezzlement and theft, fraudulent billing, illegal kickbacks, and money laundering.  The action currently involves cases across more than 30 states and Puerto Rico.  HHS Secretary Tom Price emphasized the current administration’s focus on addressing health care fraud, stating: "The historic results of this year’s national takedown represent significant progress toward protecting the integrity and sustainability of Medicare and Medicaid, which we will continue to build upon in the years to come."[16]  Given the breadth of this enforcement action and the current administration’s stated dedication to health care fraud enforcement generally, we anticipate seeing continued efforts on this front. The DOJ’s announcement of the nationwide "takedown" was also notable for its reference to various defendants arrested on charges related to fraudulent distribution of opioids, which has become a priority issue for the new administration.  Indeed, shortly after the "takedown" was announced, Attorney General Jeff Sessions also announced the formation of a new "Opioid Fraud and Abuse Detection Unit."[17]  The new unit will involve participation by twelve different districts around the country and will focus on using data analytics to identify those "contributing to [the] opioid epidemic." The metrics used will include the number of opioid prescriptions written or dispensed in comparison to physicians’ and pharmacies’ peers, the number of patients of each physician who have died within 60 days of an opioid prescription, and the average age of patients receiving the opioid prescriptions. II.     HHS Enforcement Activity A.     HHS OIG Activity 1.     Developments and Trends in 2017 According to its Semiannual Report to Congress, although the numbers of reported HHS OIG criminal and civil actions are up in the first half of Fiscal Year 2017, as compared to Fiscal Year 2016, HHS OIG’s expected investigative recoveries are slightly down.[18]  Through the first half of Fiscal Year 2017, HHS OIG has reported 468 criminal actions and 461 civil actions, including FCA suits, civil monetary penalty (CMP) settlements, and administrative recoveries, against individuals or entities.[19]  During the first half of Fiscal Year 2017, OIG reported expected investigative recoveries of over $2.04 billion. 2.     Final Rule on Exclusions In January 2017, HHS OIG finalized a rule that imposes a 10-year limitations period on HHS OIG exclusion actions brought on the basis of violations of the AKS.[20]  HHS OIG had originally proposed to amend the relevant regulation to clarify that there was no limitations period.  However, in response to numerous comments objecting to the proposal, HHS OIG decided to adopt a 10-year limitations period.  In doing so, HHS OIG expressed the notable concern that "any limitations period on . . . exclusions may force OIG to either initiate administrative proceedings while [a given FCA] matter is proceeding or lose the ability to protect the programs and beneficiaries through an exclusion.  Litigating FCA and exclusion actions on parallel tracks wastes Government (both administrative and judicial) and private resources."[21]  Nevertheless, HHS OIG concluded that "such situations will be less frequent with a 10-year period than with a shorter period," and that a 10-year period balances the goal of avoiding government waste against the goals of "provid[ing] certainty" and avoiding the "administrative burden" of indefinite document retention that regulated parties could incur were HHS OIG to explicitly adopt an indefinite limitations period.[22]  HHS OIG’s response to the comments it received also noted the alignment between a 10-year limitations period and the FCA’s 10-year statute of repose,[23] and stated that, while recent conduct is more relevant to exclusion decisions, HHS OIG’s experience has shown that "exclusion can be necessary to protect the Federal health care programs even when the conduct is up to 10 years old."[24] The final rule also significantly expanded the scope of HHS OIG’s permissive exclusion authority, implementing and building upon changes included in the Affordable Care Act ("ACA") by allowing the agency to exclude individuals or entities who "request or receive payment" relating to covered  items or services; who are convicted for obstruction of audits related to the "use of funds received, directly or indirectly, from any Federal health care program"; who have ownership or control interest in excluded entities; or who knowingly make or cause to be made "any false statement, omission, or misrepresentation of a material fact in any application, agreement, bid, or contract to participate or enroll as a provider of services or supplier under a Federal health care program."[25]  3.     Significant HHS OIG Enforcement Activity a)     Exclusions An important force behind many resolution of enforcement actions in which HHS OIG is involved is the potential for exclusion from government health programs, which can be a crippling (if not fatal) sanction for many providers and other companies in the health care industry.  Exclusion from government programs must be imposed upon any entity or individual engaged in a patient abuse-related crime, felony health care fraud, or the use, manufacture, distribution, or prescription of controlled substances.[26]  HHS OIG has discretion to impose the penalty in cases of fraudulent conduct, in cases involving the submission of claims for unnecessary treatments or procedures, and in connection with a license suspension or Corporate Integrity Agreement (CIA).[27]  HHS OIG excluded 2,041 individuals and entities during the first half of calendar year 2017.[28]  These exclusions include 40 entities (already almost meeting calendar year 2016’s total of 41 entities), with pharmacies accounting for 10 exclusions and mental health facilities accounting for 6 exclusions.  Among excluded individuals, 208 have been identified as business owners or executives.  Home health agencies continue to be an area of focus for HHS OIG, accounting for over 25% of the exclusions for business owners or executives in the first half of calendar year 2017.  As with entities, HHS OIG is also focused on business owners and executives of pharmacies, with over 17% of the excluded business owners and executives in the first half of calendar year 2017 having been identified as affiliated with a pharmacy. b)     Civil Monetary Penalties In the first half of the 2017 calendar year, HHS OIG announced 47 CMPs as a result of settlement agreements and self-disclosures and recovered nearly $23 million, representing a slowdown in pace from calendar year 2016.[29]  Of the top-ten largest penalties for the first half of calendar year 2017, seven of the penalties were the result of self-disclosure to HHS OIG.  False and fraudulent billing and improper claims for payment were the leading reason for the assessment of CMPs, accounting for 23 of the announced CMPs thus far in 2017 and over $12.2 million in penalties.  As in past years, HHS OIG also routinely pursued CMPs where entities employed individuals that the entities allegedly knew or should have known were excluded from federal health care programs.  These cases account for 14 of the CMPs assessed this year, amounting to over $2.9 million in penalties.  Penalties also were assessed for violations of the Emergency Medical Treatment and Labor Act (EMTALA), the AKS, and the Stark Law’s physician self-referral prohibitions. The largest CMPs assessed against providers this year are summarized below: Crittenton Hospital Medical Center (CHMC) and Crittenton Cancer Center (CCC):  After self-disclosing conduct, CHMC and CCC agreed to the year’s highest penalty thus far, paying $3.2 million to resolve allegations related to physician self-referrals and AKS violations.  HHS OIG alleged that CHMC and CCC paid more than fair market value compensation for prohibited financial arrangements with a physician and entities owned by that physician.  HHS OIG also alleged that CHMC and CCC had compensation arrangements with the physician and owned entities that were not always set in writing or did not act in accordance with written contracts.[30]  Hartford Hospital, Connecticut:  Hartford Hospital (Hartford) entered into a $2.4 million settlement with HHS OIG to resolve allegations that Hartford submitted claims for home health services within three days of patients’ release from Hartford that were improperly coded as discharged rather than as post-acute care transfer.[31]  Metro Health Corporation and Metropolitan Hospital:  After self-disclosing conduct, Metro Health and its subsidiary agreed to pay $2.3 million to resolve allegations related to physician self-referrals and AKS violations.  HHS OIG alleged that Metro Health entered into professional services agreements with two independent contractor physician groups and paid the physician groups in excess of fair market value.[32] c)     Corporate Integrity Agreements HHS OIG employs CIAs in an effort to ensure that providers comply with Medicare and Medicaid rules and regulations.  After a slight decline in calendar year 2016, the first half of 2017 saw an uptick in CIAs, with 24 new CIAs taking effect.[33]  CIAs are often linked with other enforcement penalties.  For example, as noted above, in May 2017, eClinicalWorks (ECW) entered into a five-year CIA with HHS OIG, which includes the noteworthy requirement that ECW retain an Independent Software Quality Oversight Organization to assess ECW’s software quality control systems and provide semi-annual reports to OIG documenting its reviews and recommendations.  HHS OIG continues to pursue CIAs in individual cases and cases involving much smaller payment amounts.  In May, for example, a California dentist entered into a $31,000 settlement agreement, as well as a three-year CIA, to resolve allegations that the dentist submitted claims for medically unnecessary services for a number of Medicaid dental beneficiaries.[34]  B.     CMS Activity 1.     Transparency and Data Accessibility As previously discussed, CMS has prioritized improving access to data related to the use of Medicare and Medicaid services over the past few years.  As part of this ongoing effort, CMS has released two additional data sets and one updated data tool thus far in 2017: Health Care Spending by State for 1991-2014.[35]  The data, released by CMS’s Office of the Actuary, updates previous estimates published in 2011 and "examines personal health care spending (or the health care goods and services consumed) through a resident-based view."[36]  For each state, the data "is presented both by type of goods and services (such as hospital services and retail prescription drugs) and by major payer (including Medicare, Medicaid, and private health insurance)."[37] Healthcare Disparities by Race, Ethnicity, & Gender.[38]  CMS’s Office of Minority Health released two reports detailing the quality of care received specifically by Medicare Advantage enrollees. The first report focused on disparities by gender, while the second examined "racial and ethnic differences in health care experiences and clinical care among women and men."[39]    Market Saturation and Utilization Tool.[40]  In July, CMS announced its fifth update of this important data tool, which provides interactive maps and related data sets showing provider services and utilization data.  The updated tool includes long-term care hospital and chiropractic services data in addition to the previous categories of data. 2.     Continued Implementation of Moratoria On January 29, 2017, CMS extended for six months the moratoria on nonemergency ambulance suppliers and home health care agencies in six states that are designated as "hot spots" for fraud under the ACA.[41] The moratoria blocks any new provider enrollments for nonemergency ambulance services in New Jersey, Pennsylvania, and Texas, and for home health agencies in Florida, Texas, Illinois, and Michigan.[42]  The moratoria are imposed after consultation with the DOJ and HHS OIG[43] (and, in the case of Medicaid, with State Medicaid agencies) and will be continuously reviewed every six months to assess whether they remain necessary.[44] C.     OCR and HIPAA Enforcement In June 2017, HHS’s Office of Civil Rights (OCR) reported that it had reviewed and resolved 156,467 Health Information Portability and Accountability Act (HIPAA) complaints since HIPAA privacy rules went into effect in April 2003.[45]  Nearly 28,000 of these complaints have been resolved in just the past year.[46]  Since January, OCR has reported nine new settlements amounting to $17 million in fines.[47]  At this pace, fines imposed in 2017 are likely to far exceed the $23.5 million in fines imposed during the 2016 calendar year.  Protection of patients’ confidential information remains a priority for HHS, and providers should expect HIPAA scrutiny to increase as OCR focuses on providers’ role in minimizing the impacts of data breaches. 1.     Trends to Date OCR has continued to ramp up its scrutiny of cybersecurity and providers’ responses to data breaches in 2017.  In June, OCR issued its cyber-attack "quick-response" guidance, which explains the four steps HIPAA-covered entities and their business associates should take in response to cyber-related security incidents.[48]  In the event of a cyber-attack or a similar emergency, an entity:  (1) must execute its response and mitigation procedures and contingency plans; (2) should report the crime to other law enforcement agencies; (3) should report all cyber threat indicators to the appropriate federal agencies and information-sharing and analysis organizations; and (4) must report the breach to OCR as soon as possible, but no later than 60 days after the discovery of a breach affecting 500 or more individuals.  The "quick-response" guidance provides additional detail and references for each of these steps, and is accompanied by an "infographic" that helps to make the guidance more accessible for providers.[49] OCR also continued to issue its "Cyber Awareness Newsletters" that provide guidance on what specific security measures providers can take to decrease the possibility of being exposed by the various security threats and vulnerabilities that exist in the healthcare sector, and how to reduce breaches of electronic personal health information (ePHI).[50]  For example, OCR’s January newsletter provided guidance on how HIPAA-covered entities should comply with, and the importance of, the Security Rule’s Audit Controls standard, 45 C.F.R. § 164.312(b).[51]  OCR’s February newsletter urged relevant entities to report any suspicious activity, including cybersecurity incidents, cyber threat indicators and defensive measures, phishing incidents, malware, and software vulnerabilities to the U.S. Computer Emergency Readiness Team (US-CERT) within DHS, which is responsible for analyzing data, developing timely and actionable information on threats to governments and private industry, and responding to cybersecurity incidents.[52]  OCR’s June newsletter stressed that entities must account for the security concerns that accompany the implementation of file sharing and collaboration tools in their risk analyses, risk management policies, and business associate agreements.[53] 2.     HIPAA Enforcement Actions OCR has announced nine resolutions of HIPAA matters since the start of the calendar year, with the resolutions far exceeding the fines imposed at this time last year.  Five of these resolution agreements have resulted in seven-figure fines.  Significantly, this year brought the first HIPAA enforcement action for the lack of a timely breach notification.[54]  Illinois health care network, Presence Health, agreed to pay $475,000 to settle allegations that it violated HIPAA’s Breach Notification Rule by failing to notify patients of a breach within the 60-day period.  In October 2013,  Presence discovered that paper-based operating room schedules, containing the PHI of 836 individuals, went missing.   Presence did not file a breach notification report with OCR until January 31, 2014, and also did not notify the individuals affected by the breach or prominent media outlets within the 60-day period. In this year’s largest settlement, which OCR announced in February and stated was meant to "shine[] [a] light on the importance of audit controls," South Florida-based Memorial Healthcare System (MHS) agreed to pay $5.5 million to settle allegations that it violated HIPAA Privacy and Security Rules.[55]  MHS reported to OCR that the ePHI of more than 115,000 individuals had been impermissibly accessed by its employees and improperly disclosed to affiliated-physician office staff when the login credentials of a former employee had been used to access the ePHI on a daily basis without detection for a year.  According to OCR, MHS "failed to implement procedures with respect to reviewing, modifying, [or] terminating users’ right of access," despite having identified a risk over a period of several years.[56]  In January, Children’s Medical Center of Dallas agreed to pay a $3.2 million penalty for impermissible disclosure of unsecured ePHI and alleged noncompliance with the HIPAA Security Rule over a period of many years.[57]  The penalty followed several separate incidents resulting in the loss of ePHI, including the loss of an unencrypted, non-password protected Blackberry with the ePHI of 3,800 individuals and the theft of an unencrypted laptop with the ePHI of 2,462 individuals.  OCR’s investigation revealed that Children’s did not deploy encryption or other security measures on its laptops, work stations, mobile devices, and removable storage media for several years after the incidents, despite being aware of the risks. In April, wireless health services provider CardioNet agreed to pay $2.5 million to settle allegations that it violated the HIPAA Privacy and Security Rules after an employee’s laptop containing the ePHI of over 1,300 individuals was stolen from a parked vehicle.[58]  OCR’s investigation revealed that CardioNet had insufficient risk analysis and risk management processes in place at the time of the theft and that its HIPAA policies and procedures were in draft form and had not yet been implemented. In May, Texas-based Memorial Hermann Health System MHHS agreed to pay $2.4 million to settle allegations that it violated the HIPAA Privacy Rule by including a patient’s name in the title of a press release, which was approved by the company’s senior management, and by failing to timely sanction its employees.[59]  The press release described a 2015 incident in which a patient at one of the company’s clinics presented an allegedly fraudulent identification card to office staff and was subsequently arrested. III.     AKS Developments A.     AKS-Related Case Law Developments Federal courts handed down a number of interesting decisions applying a variety of important principles related to the AKS, with respect to the "one purpose test" and intent to induce; the scope of the AKS’s scienter requirement; the meaning of "remuneration"; the relationship between remuneration and referrals; and the contours of relevant evidence in AKS cases. 1.     The "One Purpose Test" Broadly speaking, the AKS prohibits offering or receiving remuneration intended to induce referrals of goods or services reimbursed by federal health programs.[60]  Some courts have taken a rather broad view of how to apply the intent-to-induce element, holding that AKS liability can attach to remuneration if only one purpose among multiple, other legitimate purposes was to induce referrals.  In recent years, the theory has been questioned by some commenters and courts, but recently, in United States v. Nagelvoort,[61] the United States Court of Appeals for the Seventh Circuit declined to strike down the "one purpose test" as unconstitutionally vague.[62]  Nagelvoort, a former hospital administrator, was convicted of violating the AKS by providing physicians various forms of remuneration in exchange for referrals of patients to the hospital at which he worked.[63]  On appeal, he argued that the "one purpose test" threatens to render illegal "every contractual relationship a [h]ospital has with a doctor," and that the proper test for intent under the AKS should be whether inducing referrals is the "primary or substantial purpose" of the remuneration in question.[64]  Relying on a 2011 decision in which it rejected a similar challenge to the "one purpose" test, the Seventh Circuit declined to revisit its approach to the AKS’s intent requirement and upheld the "one purpose" test amid Nagelvoort’s constitutional challenge.[65] 2.     Scienter under the AKS Liability under the AKS also requires that the defendant has acted "knowingly and willfully,"[66] which the Supreme Court has generally said means with "knowledge the conduct [is] unlawful."[67]  In a criminal case decided in June, United States v. Waller,[68] the defendant challenged the court’s failure to define "willfully" as requiring a showing of specific intent to defraud.[69]  The jury instruction the court gave stated that Waller need not have known of the AKS or have had specific intent to violate it, and used the word "willfully" only by way of stating that "[t]he government must prove that the defendant willfully committed an act that violated the [AKS]."[70]  The court, Waller argued, should have required a showing of specific intent to defraud, because a mere "knowing violation" is insufficient to establish AKS liability.[71]  The court rejected Waller’s argument as inconsistent with Fifth Circuit precedent which held—on the basis of the AKS’s text—that the AKS does not require a showing of specific intent to violate the statute.[72]  As such, the court indicated a reluctance to introduce any sort of specific intent requirement into the AKS analysis, even in the modified form ("specific intent to defraud") proposed by Waller.[73]  The court similarly rejected Waller’s argument that the AKS implicitly incorporates a requirement of materiality due to its close relationship to the FCA.[74]  No materiality element could be inferred in the AKS context, the court held, where Congress itself did not explicitly use the word "fraud" or "defraud" in the statute.[75] 3.     The Meaning of "Remuneration" As noted above, AKS liability attaches to "remuneration," which some courts have defined very broadly to include (with some exceptions) virtually anything of value.  It is well known that the AKS applies where such remuneration is given in exchange for referrals or recommendations of federally reimbursed goods or services.  But a separate provision of the AKS, which has received much less attention in the case law, attaches liability where the remuneration is provided in return for "arranging for" the furnishing of a federally reimbursed item.  In United States v. Addus HomeCare Corp.,[76] a federal District Court recently had the opportunity to weigh in on the scope of the "arranging for" provision.  In Addus, the relator alleged a False Claims Act scheme whereby a defendant home health provider would "arrange for" physicians from the co-defendant provider to visit patient homes to certify those patients for home health care, even if the patient was not eligible for such care.[77]  In exchange  for those certifications, the home health provider allegedly would refer to its co-defendant any of its patients that needed physician services.[78]  The court held that the false certifications of patients’ eligibility for home health services themselves constituted remuneration under the AKS, even though no "payment or compensation" was made.  The court explained that the false certifications made it possible for the provider who received the certifications to bill Medicare for home health services provided to the patients in question, which was enough to constitute actionable remuneration as "any thing[] of value [provided] to the alleged recipient[]."[79] 4.     The Relationship Between Remuneration and Referrals In United States ex rel. Graziosi v. Accretive Health, Inc., another district court reinforced the idea that a kickback need not actually result in a referral, purchase, or other act to violate the AKS.[80]  In Graziosi, an FCA case, the relator alleged that the defendant, a hospital operations consultant, received payments from hospitals in exchange for written recommendations that certain patients be designated as eligible for inpatient admission.[81]  In moving to dismiss the case, one of the defendant hospital systems argued that the consulting defendant’s alleged conduct had no "impact on patient care," and that the alleged kickback scheme did not result in the patients receiving any treatment they would not otherwise have received.[82]  The court held that this was irrelevant and that the consulting defendant need only have recommended the services in return for the kickbacks—regardless of whether the services were ever provided.  The court reasoned that requiring a showing that services were actually provided "would create a loophole for services that were recommended and billed, but not actually provided, which cannot have been the intent of the statute’s drafters."[83]  It is difficult to see how this analysis squares with the elements of a False Claims Act violation—especially causation—as opposed to a stand-alone AKS violation. 5.     Evidentiary Developments:  Medical Necessity and Fair Market Value In a unique FCA opinion issued in April, United States ex rel. Cairns v. D.S. Medical L.L.C., a federal judge ruled that the government could support kickback claims by introducing evidence regarding the medical necessity of the allegedly related services performed and devices used by the physician.[84]  To support its allegations that a defendant physician’s selections of a co-defendant distributor’s medical devices were the product of illegal kickback payments, the government proffered evidence that the devices and certain services by the physician were not medically necessary.  The government’s theory was that such evidence would distinguish the physician’s use of the devices in question from other physicians’ use, and so help show the physician’s state of mind regarding the financial implications of his use of the distributor’s devices.[85]  In ruling on what it called a "somewhat close question," the court held that the evidence was "probative of [the physician’s] intent," and that the potential prejudicial effect of the evidence did not substantially outweigh its probative value.[86] In another recent and instructive evidentiary ruling bearing on proof in AKS cases, United States v. Moshiri, the Seventh Circuit upheld a trial judge’s decision to permit expert testimony relevant to the fair market value of a teaching contract that the defendant allegedly received as a kickback.[87]  The expert in question did not actually render an opinion regarding the transaction’s fair market value; rather, he merely testified as to how the value of the contract at issue compared to contracts with which he was familiar based on "industry norms."[88]  The court held that the expert’s "specialized experience and knowledge within the field" was sufficient to qualify the expert as such, and that the lack of a nationwide "empirical analysis" of contracts similar to the defendant’s was not fatal to the admissibility of the expert’s testimony.[89]  Although the lack of empirical analysis was relevant to the weight of the expert’s testimony, the court reasoned, it did not affect the admissibility of the testimony in the first instance.[90] B.     Guidance and Regulations 1.     Free and Low-Cost Lodging and Meals to Low-Income Patients In an advisory opinion issued in March, HHS OIG approved a proposed arrangement involving the provision of free and low-cost meals and lodging to low-income patients.[91]  Under the arrangement set forth in the advisory opinion, the requestor—the owner and operator of a hospital whose patient population includes individuals "who reside in rural and medically underserved areas"—would provide free or low-cost meals and hotel rooms to patients at certain income thresholds to facilitate their access to "services they may not be able to obtain locally."[92]  Any given patient would have to meet specific geographic and income requirements to be eligible for the benefits, and patients would only be evaluated for participation in the program after their treatment appointments had been scheduled.[93]  Moreover, the requestor would not engage in advertising or marketing of the meal and lodging benefits to patients, would not seek federal reimbursement for the costs of the program, and would not provide any remuneration to physicians to induce referrals of eligible patients to the hospital.[94] HHS OIG analyzed the proposed program under Section 1128A(a)(5) of the Social Security Act, which imposes civil monetary penalties on those who induce federal healthcare program beneficiaries to choose particular providers.[95]  HHS OIG found that, given the parameters and limitations of the program, the benefits provided to patients would both "promote access to care" for, and "pose a low risk of harm" to, federal health care program beneficiaries—thereby satisfying the "Promotes Access to Care" exception to Section 1128A(a)(5).[96]  The opinion did not analyze the AKS extensively and noted that the Promotes Access to Care exception does not apply to the AKS.  However, the opinion did conclude that while the proposed program "would constitute remuneration" under the AKS, HHS OIG would not impose administrative sanctions on the requestor, provided that it lacked the "intent to induce or reward referrals."[97]  In reaching this conclusion, HHS OIG cited the same factors that it found persuasive in concluding that the proposed program would not violate Section 1128A(a)(5).[98] 2.     Reduction or Waiver of Cost Sharing Amounts Owed by Patients in a Clinical Study In an advisory opinion issued in June, HHS OIG considered a proposal to "reduce or waive, on a non-routine, unadvertised basis, cost-sharing amounts owed by financially needy Medicare beneficiaries for items and services furnished in connection with a clinical research study."[99]  The study involved a biomedical system indicated for treating ulcers and other chronic wounds.[100]  In the proposal advanced by the parties seeking the advisory opinion, a particular hospital participating in the study would "reduce or waive applicable cost-sharing amounts owed by financially needy beneficiaries for all Study-related items and services."[101]  The manufacturer of the system under study would not cover any of these reductions or waivers.  The hospital would only inform a given patient of the possibility of reduction or waiver if that patient, upon receiving notice that he or she "may owe cost-sharing amounts in connection with the Study," informed the hospital that he or she could not afford these payments.[102]  The hospital would then evaluate the patient’s financial need according to a set of uniform criteria.[103]  Neither the hospital nor the manufacturer would advertise the possibility of waiver or reduction of patients’ cost-sharing obligations.[104] Analyzing the proposal under the Beneficiary Inducement CMP,[105] HHS OIG found that the proposal fit within an exception to the definition of remuneration for any waiver of coinsurance or deductible amounts that are "not offered as part of any advertisement or solicitation"; that are not "routinely" provided; and that are only granted either after a "good faith" determination of financial need, or after "reasonable collection efforts" have failed.[106]  Given the non-advertised and "case-by-case" nature of the proposed reductions and waivers in this particular case, along with the "objective criteria" used to determine financial need, HHS OIG found that the proposal fit within this exception.[107]  For the same reasons, HHS OIG determined that it would not seek administrative sanctions under the AKS, provided that "the requisite intent to induce or reward referrals of Federal health care program business" remained absent.[108] IV.     Stark Law Developments The first half of 2017 saw several notable developments related to the physician self-referral law, or Stark Law.[109]  On the legislative and regulatory front, these developments included a new self-disclosure protocol from CMS and a Congressional report that touched on the intersection of cybersecurity and Stark Law enforcement.  On the case law and enforcement fronts, meanwhile, there were notable cases and settlements that explored and illuminated the broad scope of potential liability under the Stark Law. A.     Regulatory and Legislative Updates On March 28, 2017, CMS released the final version of its Voluntary Self-Referral Disclosure Protocol (SRDP), which establishes a standardized format for reporting overpayments caused by actual or potential violations of the Stark Law.[110]  As we previously reported in these pages, CMS’s revised protocol replaces the protocol CMS released after passage of the Patient Protection and Affordable Care Act (PPACA) in 2010 and streamlines the reporting process to conform it to the final overpayment regulations issued in February 2016.  Under the streamlined reporting format for self-disclosures, the new SRDP now includes Disclosure, Physician Information, and Financial Analysis Worksheet forms that providers must submit for each disclosure as of June 1, 2017.  In 2016, self-disclosures under the SRDP resulted in settlements between CMS and health care providers of more than $6.9 million.[111] Elsewhere, the Health Care Industry Cybersecurity Task Force, a federal task force established by the Cybersecurity Act of 2015, called for changes to the Stark Law in its final Report on Improving Cybersecurity in the Health Care Industry.[112]  To speed the sharing and adoption of improved cybersecurity tools and practices, the Task Force recommended that large health care organizations be able "to share cybersecurity resources and information with their partners."  But even though organizations "[o]ften . . . want to provide technology to ensure smaller business partners do not become a liability in the supply chain," the report noted that the Stark Law (and the AKS) can serve as impediments to such sharing agreements.  Therefore, the report recommended a "regulatory exception" to the Stark Law to permit such cooperation.  Such an exception would surely be welcomed by health care providers that increasingly face cybersecurity threats, but it remains to be seen whether CMS, or Congress, will act on the report’s recommendation, and if so, what such an exception would look like. Finally, in our 2016 Year-End Update, we noted several legislative initiatives to reexamine the Stark Law and its sweeping scope.  With Congress consumed by broader issues of health care reform and potential repeal of PPACA, those initiatives have not moved forward.  But we will continue to monitor any health care reform proposals for significant changes to the Stark Law. B.     Case Law Developments In United States ex rel. Emanuele v. Medicor Associates—a case with potentially broad implications for Stark Law enforcement—a federal district court ruled that the Stark Law’s requirement that financial arrangements with physicians be memorialized in a written agreement can be "material" to the government’s decision to pay claims.[113] The case involved financial arrangements between a Pennsylvania medical center and a cardiology group, under which a group of cardiologists provided oversight and supervision of the medical center’s cardiology services.  Although there were several written agreements memorializing these arrangements, those agreements lapsed at various points (before being renewed) and were sometimes unexecuted, among other minor deficiencies in the paperwork.[114]  On summary judgment, the relator relied on the incomplete documentation and contracts to show that the cardiologists could not satisfy relevant Stark Law exceptions, which require a written agreement.[115]  Defendants argued, meanwhile, that "even if [the arrangements] violated the Stark Act’s writing requirements, those violations do not rise to the level of materiality required to support an FCA claim."[116] Despite purporting to apply the "demanding" and "rigorous" materiality standard espoused in Universal Health Services, Inc. v. United States ex rel. Escobar, the district court sided with the relator to hold that "it is clear" that violations of the written agreement requirement are material, because the Stark Law "expressly prohibits Medicare from paying claims that do not satisfy each of its requirements, including every element of any applicable exception."[117]  The court noted that the Stark Law’s requirement of a "signature as a manifestation of the parties’ assent to the arrangement . . . plays a role in preventing fraud and abuse."[118] In so holding, the court essentially mandated perfect adherence to every requirement of Stark Law exceptions.  Although the court acknowledged that materiality was a fact issue, by denying summary judgment on these grounds, the court’s decision opens the door for whistleblowers to survive motions to dismiss and summary judgment even where there are only minor, administrative deficiencies in the required paperwork under the Stark Law.  This case serves as another reminder, therefore, that Stark Law compliance is a bedeviling exercise and warrants close attention.  This is, of course, one district court decision, and we will continue to monitor case law developments in this area. C.     Enforcement Two settlements also counted among the notable Stark Law developments during the first half of the year and served as reminders of the high price of Stark Law violations. In May, two Missouri hospitals agreed to pay $34 million to settle allegations that they made impermissible payments to oncologists in violation of the Stark Law, resulting in false claims under the FCA.[119]  The settlement stemmed from allegations that the hospitals paid oncologists, in part, based on a formula that considered the value of their patient referrals, and then submitted claims to Medicare for chemotherapy services referred by those physicians.  In June, a Los Angeles hospital agreed to pay $42 million to settle allegations that it violated the Stark Law and the AKS by entering into allegedly improper financial relationships with referring physicians.[120]  The hospital allegedly paid above-market rates to rent office space in physicians’ offices and entered into marketing arrangements with physicians that allegedly provided undue benefit to those physicians’ practices. V.     Conclusion As these issues and others important to the healthcare provider community continue to develop, we will track them and report back in our 2017 Year-End Update. [1] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Electronic Health Records Vendor to Pay $155 Million to Settle False Claims Act Allegations (May 31, 2017), https://www.justice.gov/opa/pr/electronic-health-records-vendor-pay-155-million-settle-false-claims-act-allegations. [2] U.S. Dep’t of Health & Human Servs., Office of the Inspector Gen., Medicare Paid Hundreds of Millions in Electronic Health Record Incentive Payments That Did Not Comply With Federal Requirements (June 2017), https://oig.hhs.gov/oas/reports/region5/51400047.pdf.  [3] U.S. Dep’t of Health & Human Servs., Office of the Inspector Gen., Nationwide Medicare Electronic Health Record Incentive Payments to Hospital (July 2017), https://oig.hhs.gov/reports-and-publications/workplan/summary/wp-summary-0000232.asp. [4] Letter from Sens. Orrin G. Hatch and Charles E. Grassley to CMS Administrator Seema Verma (July 12, 2017), https://www.grassley.senate.gov/sites/default/files/constituents/letter%20to%20CMS%20on%20electronic%20health%20incentive%20payments%207-12-17.pdf. [5] Ruckh v. CMC II, LLC, No. 8:11-cv-01303 (M.D. Fla. June 10, 2011), ECF Nos. 1, 121, 430, 441-446. [6] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Genesis Healthcare Inc. Agrees to Pay Federal Government $53.6 Million to Resolve False Claims Act Allegations Relating to the Provision of Medically Unnecessary Rehabilitation Therapy and Hospice Services (June 16, 2017), https://www.justice.gov/opa/pr/genesis-healthcare-inc-agrees-pay-federal-government-536-million-resolve-false-claims-act. [7] 136 S. Ct. 1989, 2001 (2016). [8] 857 F.3d 174 (4th Cir. 2017). [9] 846 F.3d 325, 332 (9th Cir. 2017). [10] 862 F.3d 890, 901 (9th Cir. 2017). [11] Id. at 902-03. [12] See, e.g., United States ex rel. Petratos v. Genentech Inc., 855 F.3d 481, 485 (3d Cir. 2017); Abbott v. BP Exploration & Production, Inc., 851 F.3d 384 (5th Cir. 2017).   [13] United States ex rel. Phalp v. Lincare Holdings Inc., 857 F.3d 1148 (11th Cir. 2017). [14] United States ex rel. Michaels v. Agape Senior Community, Inc., 848 F.3d 330 (4th Cir. 2017). [15] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, National Health Care Fraud Takedown Results in Charges Against Over 412 Individuals Responsible for $1.3 Billion in Fraud Losses (July 13, 2017), https://www.justice.gov/opa/pr/national-health-care-fraud-takedown-results-charges-against-over-412-individuals-responsible. [16] Id. (internal citations omitted). [17] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Attorney General Sessions Announces Opioid Fraud and Abuse Detection Unit (Aug. 2, 2017), https://www.justice.gov/opa/pr/attorney-general-sessions-announces-opioid-fraud-and-abuse-detection-unit. [18] See U.S. Dep’t of Health & Human Servs., Office of the Inspector Gen., Semiannual Report to Congress, at iv (Apr. 1 – Sept. 30, 2016), https://oig.hhs.gov/reports-and-publications/archives/semiannual/2016/sar-fall-2016.pdf [hereinafter 2016 SA Report]; U.S. Dep’t of Health & Human Servs., Office of the Inspector Gen., Semiannual Report to Congress, at ix (Oct. 1, 2016 – March 31, 2017),  https://oig.hhs.gov/reports-and-publications/archives/semiannual/2017/sar-spring-2017.pdf [hereinafter 2017 SA Report]. [19] 2017 SA Report. [20] See U.S. Dep’t of Health & Human Servs., Office of Inspector Gen., Health Care Programs: Fraud and Abuse; Revisions to the Office of Inspector General’s Exclusion Authorities, 82 Fed. Reg. 4100, 4114 (Jan. 12, 2017), https://www.gpo.gov/fdsys/pkg/FR-2017-01-12/pdf/2016-31390.pdf. [21] Id. at 4102. [22] See id. at 4101–02. [23] See id. at 4102; 31 U.S.C. § 3731(b)(2). [24] 82 Fed. Reg. at 4102.  The final rule applies both to exclusions for conduct that violates the AKS, as well as exclusions for conduct that violates the CMP statute. See id. at 4114; 42 C.F.R. §§ 1001.901(c), 1001.951(c). [25] 82 Fed. Reg. at 4111-18. [26] See 42 U.S.C. § 1320a-7a. [27] 42 U.S.C. § 1320a-7b. [28] U.S. Dep’t of Health & Human Servs., Office of the Inspector Gen., LEIE Downloadable Databases, http://oig.hhs.gov/exclusions/exclusions_list.asp (last visited Aug. 10, 2017). [29] Data gathered through HHS OIG press releases and publicly available information.  See generally U.S. Dep’t of Health & Human Servs., Office of the Inspector Gen., Civil Monetary Penalties and Affirmative Exclusions, http://oig.hhs.gov/fraud/enforcement/cmp/index.asp (last visited Aug. 10, 2017) [hereinafter CMP Assessments]; U.S. Dep’t of Health & Human Servs., Office of the Inspector Gen., Provider Self-Disclosure Settlements, http://oig.hhs.gov/fraud/enforcement/cmp/psds.asp (last visited Aug. 10, 2017) [hereinafter Provider Self-Disclosure Settlements].  [30] See Provider Self-Disclosure Settlements, supra note 29. [31] See CMP Assessments, supra note 29. [32] See Provider Self-Disclosure Settlements, supra note 29. [33] See U.S. Dep’t of Health & Human Servs., Office of the Inspector Gen., Corporate Integrity Agreement Documents, http://oig.hhs.gov/compliance/corporate-integrity-agreements/cia-documents.asp (last visited Aug. 10, 2017). [34] See CMP Assessments, supra note 29. [35] Press Release, Ctrs. for Medicare & Medicaid Servs., CMS Releases 1991-2014 Health Care Spending by State (June 14, 2017),  https://www.cms.gov/Newsroom/MediaReleaseDatabase/Press-releases/2017-Press-releases-items/2017-06-14.html. [36] Id. [37] Id. [38] Press Release, Ctrs. for Medicare & Medicaid Servs., CMS releases quality data showing racial, ethnic and gender differences in Medicare Advantage health care during National Minority Health Month (Apr. 13, 2017), https://www.cms.gov/Newsroom/MediaReleaseDatabase/Press-releases/2017-Press-releases-items/2017-04-13.html?DLPage=1&DLEntries=50&DLFilter=data&DLSort=0&DLSortDir=descending. [39] Id. [40] Press Release, Ctrs. for Medicare & Medicaid Servs., Market Saturation and Utilization Data Tool (July 24, 2017), https://www.cms.gov/Newsroom/MediaReleaseDatabase/Fact-sheets/2017-Fact-Sheet-items/2017-07-24.html?DLPage=1&DLEntries=10&DLSort=0&DLSortDir=descending. [41] 82 Fed. Reg. 2363 (Jan. 9, 2017), https://www.federalregister.gov/documents/2017/01/09/2016-32007/medicare-medicaid-and-childrens-health-insurance-programs-announcement-of-the-extension-of-temporary; see also The Patient Protection and Affordable Care Act of 2010, Pub. L. No. 111-148, § 6401(a). [42] See Press Release, Ctrs. for Medicare & Medicaid Servs., CMS extends, expands fraud-fighting enrollment moratoria efforts in six states (July 29, 2016), https://www.cms.gov/Newsroom/MediaReleaseDatabase/Press-releases/2016-Press-releases-items/2016-07-29-2.html. [43] 42 C.F.R. § 424.570(a)(2)(iv) (2017) (setting forth these procedures for Medicare moratoria). [44] Id. § 424.570(b) (2017); id. § 455.470(a)(1) (requiring that Medicaid moratoria be imposed "in accordance with" regulations governing Medicare moratoria); id. § 455.470(c) (requiring that Medicaid moratoria be imposed and extended, as necessary, in six-month increments). [45] U.S. Dep’t of Health & Human Servs., Health Information Privacy, Enforcement Highlights (June 30, 2017), https://www.hhs.gov/hipaa/for-professionals/compliance-enforcement/data/enforcement-highlights/index.html. [46] U.S. Dep’t of Health & Human Servs., Health Information Privacy, Enforcement Highlights (May 31, 2016), https://www.hhs.gov/hipaa/for-professionals/compliance-enforcement/data/enforcement-highlights/2017-may/index.html. [47] Data gathered through HHS press releases and other publicly available information. See generally U.S. Dep’t of Health & Human Servs., HIPAA News Releases & Bulletins, https://www.hhs.gov/hipaa/newsroom (last visited Aug. 10, 2017). [48] U.S. Dep’t of Health & Human Servs., Office of Civil Rights, My entity just experienced a cyber-attack! What do we do now? (June 2017), https://www.hhs.gov/sites/default/files/cyber-attack-checklist-06-2017.pdf. [49] U.S. Dep’t of Health & Human Servs., Office of Civil Rights, Cyber-Attack Quick Response Infographic (June 2017), https://www.hhs.gov/sites/default/files/cyber-attack-quick-response-infographic.gif. [50] U.S. Dep’t of Health & Human Servs., Security Rule Guidance Material, https://www.hhs.gov/hipaa/for-professionals/security/guidance/index.html (last visited Aug. 10, 2017). [51] U.S. Dep’t of Health & Human Servs., Office of Civil Rights, Understanding the Importance of Audit Controls (Jan. 2017), https://www.hhs.gov/sites/default/files/january-2017-cyber-newsletter.pdf. [52] U.S. Dep’t of Health & Human Servs., Office of Civil Rights, Reporting and Monitoring Cyber Threats (Feb. 2017), https://www.hhs.gov/sites/default/files/february-2017-ocr-cyber-awareness-newsletter.pdf. [53] U.S. Dep’t of Health & Human Servs., Office of Civil Rights, File Sharing and Cloud Computing:  What to Consider? (June 2017), https://www.hhs.gov/sites/default/files/june-2017-ocr-cyber-newsletter.pdf. [54] See Press Release, U.S. Dep’t of Health & Human Servs., First HIPAA enforcement action for lack of timely breach notification settles for $475,000 (Jan. 9, 2017),  http://wayback.archive-it.org/3926/20170127111957/https://www.hhs.gov/about/news/2017/01/09/first-hipaa-enforcement-action-lack-timely-breach-notification-settles-475000.html. [55] See Press Release, U.S. Dep’t of Health & Human Servs., $5.5 million HIPAA shines light on the importance of audit controls, Feb. 16, 2017), https://www.hhs.gov/about/news/2017/02/16/hipaa-settlement-shines-light-on-the-importance-of-audit-controls.html. [56] Id. [57] See Press Release, U.S. Dep’t of Health & Human Servs., Lack of timely action risks security and costs money (Feb. 1, 2017), https://www.hhs.gov/about/news/2017/02/01/lack-timely-action-risks-security-and-costs-money.html?language=es. [58] See Press Release, U.S. Dep’t of Health & Human Servs., $2.5 million settlement shows that not understanding HIPAA requirements creates risk (Apr. 24, 2017), https://www.hhs.gov/about/news/2017/04/24/2-5-million-settlement-shows-not-understanding-hipaa-requirements-creates-risk.html?language=es.  [59] See Press Release, U.S. Dep’t of Health & Human Servs., Texas health system settles potential HIPAA disclosure violations (May 10, 2017), https://www.hhs.gov/about/news/2017/05/10/texas-health-system-settles-potential-hipaa-disclosure-violations.html?language=es. [60] 42 U.S.C. § 1320a-7b(b). [61] 856 F.3d 1117 (7th Cir. 2017). [62] Id. at 1129–30. [63] See id. at 1119–24. [64]  Id. at 1130 (internal quotation marks removed). [65] See id. [66] 42 U.S.C. § 1320a-7b(b)(1), (b)(2). [67] See Bryan v. United States, 524 U.S. 184 (1998). [68] No. 14-171-11, 2017 WL 2559092, at *1 (S.D. Tex. June 13, 2017). [69] Id. at *5. [70] See id. at *4. [71] Id. at *5. [72] See id. (discussing United States v. St. Junius, 739 F.3d 193, 210 (5th Cir. 2013)). [73] See id. at *5. [74] See id. at *6–7. [75] Id. at *7. [76] United States v. Addus HomeCare Corp., No. 13 CV 9059, 2017 WL 467673 (N.D. Ill. Feb. 3, 2017). [77] Id. at *5. [78] Id. [79] Id. at *9-10. [80] See United States ex rel. Graziosi v. Accretive Health, Inc., No. 13-CV-1194, 2017 WL 1079190, at *8 (N.D. Ill. Mar. 22, 2017). [81] See id. at *2. [82] See id. at *8. [83] Id. [84] See United States ex rel. Cairns v. D.S. Medical, L.L.C., No. 1:12CV00004 AGF, 2017 WL 1304947, at *3 (E.D. Mo. Apr. 7, 2017). [85] Id. at *2. [86] Id. at *3. [87] United States v. Moshiri, 858 F.3d 1077, 1084 (7th Cir. June 5, 2017). [88] Id. [89] See id. [90] Id. [91] See U.S. Dep’t of Health & Human Servs., Office of Inspector Gen., OIG Advisory Op. 17-01 (Mar. 3, 2017), https://oig.hhs.gov/fraud/docs/advisoryopinions/2017/AdvOpn17-01.pdf. [92] Id. at 2. [93] See id. at 3–4. [94] Id. at 4. [95] See id. at 5. [96] Id. at 5–9 [97] Id. at 9. [98] Id. [99] U.S. Dep’t of Health & Human Servs., Office of Inspector Gen., OIG Advisory Op. 17-02 at 1 (June 29, 2017), https://oig.hhs.gov/fraud/docs/advisoryopinions/2017/AdvOpn17-02.pdf [hereinafter OIG Advisory Op. 17-02]. [100] Id. at 3. [101] Id. [102] Id. at 3–4. [103] See id. at 4, 7. [104] Id. at 4. [105] 42 U.S.C. § 1320a-7a(a)(5). [106] See 42 U.S.C. § 1320a-7a(i)(6)(A).  As HHS OIG noted in the advisory opinion, the same exception to the definition of "remuneration" is found in the CMP statute’s implementing regulations.  See OIG Advisory Op. 17-02, supra note 114, at 6 n.6; 42 C.F.R. § 1003.110. [107] See OIG Advisory Op. 17-02, supra note 114, at 6–7. [108] Id. at 7. [109] 42 U.S.C. § 1395nn. [110] Ctrs. for Medicare & Medicaid Servs., Self-Referral Disclosure Protocol, https://www.cms.gov/Medicare/Fraud-and-Abuse/PhysicianSelfReferral/Self_Referral_Disclosure_Protocol.html (last visited Aug. 10, 2017). [111] Ctrs. for Medicare & Medicaid Servs., Self-Referral Disclosure Protocol Settlements, https://www.cms.gov/Medicare/Fraud-and-Abuse/PhysicianSelfReferral/Self-Referral-Disclosure-Protocol-Settlements.html (last visited Aug. 10, 2017). [112] Health Care Industry Cybersecurity Task Force, Report on Improving Cybersecurity in the Health Care Industry (June 2017), https://www.phe.gov/Preparedness/planning/CyberTF/Documents/report2017.pdf. [113] United States ex rel. Emanuele v. Medicor Assocs., 2017 WL 1001581, at *17 (W.D. Pa. Mar. 15, 2017). [114] Id. at *4-5. [115] Id. at *6. [116] Id. at *17. [117] Id. at *18. [118] Id. [119] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Missouri Hospitals Agree to Pay United States $34 Million to Settle Alleged False Claims Act Violations Arising from Improper Payments to Oncologists (May 18, 2017), https://www.justice.gov/opa/pr/missouri-hospitals-agree-pay-united-states-34-million-settle-alleged-false-claims-act. [120] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Los Angeles Hospital Agrees to Pay $42 Million to Settle Alleged False Claims Act Violations Arising from Improper Payments to Physicians (June 28, 2017), https://www.justice.gov/opa/pr/los-angeles-hospital-agrees-pay-42-million-settle-alleged-false-claims-act-violations-arising. The following Gibson Dunn lawyers assisted in the preparation of this client update:  Steve Payne, John Partridge, Jonathan Phillips, Coreen Mao, Laura Musselman, Reid Rector, Julie Schenker, Yamini Grema, Michael Dziuban and Stevie Pearl.  Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work or any of the following:  Washington, D.C.Stephen C. Payne, Co-Chair, FDA and Health Care Practice Group (202-887-3693, spayne@gibsondunn.com)F. Joseph Warin (202-887-3609, fwarin@gibsondunn.com)Marian J. Lee (202-887-3732, mjlee@gibsondunn.com)Daniel P. Chung (202-887-3729, dchung@gibsondunn.com)Jonathan M. Phillips (202-887-3546, jphillips@gibsondunn.com) Los AngelesDebra Wong Yang (213-229-7472, dwongyang@gibsondunn.com) San FranciscoCharles J. Stevens (415-393-8391, cstevens@gibsondunn.com)Winston Y. Chan (415-393-8362, wchan@gibsondunn.com) Orange CountyNicola T. Hanna (949-451-4270, nhanna@gibsondunn.com) New YorkAlexander H. Southwell (212-351-3981, asouthwell@gibsondunn.com) DenverRobert C. Blume (303-298-5758, rblume@gibsondunn.com)John D.W. Partridge (303-298-5931, jpartridge@gibsondunn.com)        © 2017 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

August 30, 2017 |
Webcast: 2017 Mid-Year Update: The False Claims Act and Health Care Providers

​The False Claims Act (FCA) is well-known as one of the most powerful tools in the government’s arsenal to combat fraud, waste and abuse anywhere government funds are implicated. The U.S. Department of Justice has made clear that vigorous FCA enforcement is here to stay,  with newly filed cases remaining at historical peak levels and the DOJ  on pace to recover more than $3 billion from FCA cases for the seventh straight year.  More than ever, any company that deals in government funds—including companies in the education, health care and life sciences, government contracting and financial services sectors—needs to stay abreast of how the government and private whistleblowers alike are wielding this tool, and how they can prepare and defend themselves. Please join Gibson Dunn for a 90-minute discussion of the latest developments in FCA, including: The latest trends in FCA enforcement actions and associated litigation involving Health Care Providers; Updates on the Trump Administration’s approach to FCA enforcement; Notable legislative and administrative developments affecting the FCA’s statutory framework and application; and The latest developments in FCA case law following the Supreme Court’s Escobar decision. View Slides [PDF] PANELISTS: Stephen Payne is a partner in the Washington, D.C. office. He is Chair of the firm’s FDA and Health Care practice group, and is a member of the Life Sciences practice group.  His practice focuses on FDA and health care compliance, enforcement, and litigation for pharmaceutical and medical device clients.  He has significant experience in the areas of fraud and abuse, product diversion and counterfeiting, good manufacturing practice regulations, product recalls and product promotion. Winston Chan is a partner in the San Francisco office.  He has particular experience leading matters involving government enforcement defense, internal investigations, compliance counseling, and civil trial litigation. Previously, he served as an Assistant U.S. Attorney in the Eastern District of NY, where he investigated a wide range of matters as part of that office’s Business and Securities Fraud Section, including FCA violations and health care fraud. Jonathan Phillips is a senior associate in the Washington, D.C. office, where his practice focuses on FDA and health care compliance, enforcement, and litigation, as well as other government enforcement matters and related litigation. He has substantial experience representing pharmaceutical, medical device, and health care provider clients in investigations by the DOJ, FDA, and Department of Health and Human Services Office of Inspector General. Previously, he served as a Trial Attorney in the Civil Division, Fraud Section of the DOJ, where he investigated and prosecuted allegations of fraud against the U.S. under the FCA and related statutes. Julie Schenker is a litigation associate in the Washington, D.C. office, where she focuses on governmentenforcement matters, health care compliance, and related litigation. She has represented health care providerclients in investigations by the DOJ and the Department of Health and Human Services Office of InspectorGeneral. MCLE CREDIT INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.80 credit hours, of which 1.80 credit hours may be applied toward the areas of professional practice requirement.  This course is approved for transitional/non-transitional credit only. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast.  Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondun.com  to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.50 hours. California attorneys may claim “self-study” credit for viewing the archived version of this webcast.  No certificate of attendance is required for California “self-study” credit.

August 25, 2017 |
2017 Mid-Year FDA and Health Care Compliance and Enforcement Update – Drugs and Devices

At the midpoint of 2017, much has changed, and yet much has stayed the same for U.S. manufacturers of pharmaceuticals and medical devices.  Although the new administration arrived in January, Dr. Scott Gottlieb, the new U.S. Food and Drug Administration ("FDA") Commissioner, was not confirmed until May.  Not surprisingly, then, much of the regulatory activity for the year is still on the horizon. In the meantime, various federal and state government enforcement agencies continue to keep drug and device manufacturers in their sights.  As in recent years, the first half of 2017 saw a steady cadence of enforcement actions against drug and device companies under the standard set of enforcement statutes: the False Claims Act ("FCA"), Anti-Kickback Statute ("AKS"), Federal Food, Drug, and Cosmetic Act ("FDCA"), and Foreign Corrupt Practices Act ("FCPA").  This included, most notably, the largest-ever FCA recovery in a kickback case involving a device company, a $350 million settlement that served as a continuing reminder of the high stakes for companies facing investigations under these statutes.  Other notable enforcement developments included increasing scrutiny of companies that manufacture and market opioids.  In the courts, FCA jurisprudence continued to evolve in the wake of the Supreme Court’s decision in Universal Health Services v. United States ex rel. Escobar in June of 2016. On the regulatory and legislative fronts, the headline has been the lack of any real headlines.  With the exception of a few pieces of guidance from FDA hurried out during the last days of the Obama Administration—including several notable guidance documents related to promotional issues—the regulatory landscape has, perhaps unsurprisingly, remained largely unchanged since President Trump’s inauguration in January.  On the Hill, several key pieces of potential legislation percolated in Congress, which battled over the state of the Affordable Care Act and possible replacements, passed the FDA Reauthorization Act in July and continued to debate drug pricing and promotional issues. Below, we discuss the most notable enforcement and regulatory developments from the first half of 2017 affecting drug and device manufacturers.  As in past updates, we begin with an overview of government enforcement efforts against drug and device companies under the FCA, the FDCA, and other laws.  We then address evolving regulatory guidance and enforcement actions on topics of note to drug and device companies: promotional activities, manufacturing practices, medical device regulation, and the AKS. I.     Department of Justice Enforcement in the Pharmaceutical and Medical Device Industries The first half of 2017 saw yet another string of headline-worthy developments in the enforcement arena.      A.     False Claims Act We begin this update, as always, with an overview of FCA recoveries from the pharmaceutical, medical device, and durable medical equipment ("DME") sectors in the first half of 2017.  The U.S. Department of Justice ("DOJ") pulled in more than $419 million from settlements with seven companies.  That number was driven by two settlements involving allegations that were predicated on purported AKS violations, including Shire Pharmaceuticals LLC’s record-setting $350 million resolution.  Filling out the government’s civil recoveries in the first six months of the year were $54 million from cases involving alleged violations of government health program or contractual requirements, and a $2 million settlement involving alleged violations of the FDCA.  Notably, none of the settlements announced by DOJ thus far in 2017 have focused primarily on alleged off-label promotion. 1.     Settlements in AKS-Related FCA Matters The lion’s share of government recoveries in FCA matters from the first half of 2017 resulted from the settlement among DOJ, Shire Pharmaceuticals LLC, and other Shire subsidiaries on January 11, 2017.[1]  Shire, a global pharmaceutical and medical device company, agreed to pay $350 million to resolve allegations that it offered kickbacks to induce clinics and physicians to use its bioengineered human skin substitute, an FDA-approved medical device.  Sales personnel allegedly offered expensive dinners and entertainment, medical equipment and supplies, sham speaking engagements and case studies, and rebates to encourage the use of the device.  The settlement also resolved allegations that Shire marketed the product for uses not approved by FDA, made false statements to inflate the price of the device, and caused improper coding of claims for reimbursement.  According to DOJ, the settlement with Shire is the largest-ever FCA recovery in a kickback case involving a medical device.[2] 2.     Government Program and Contractual Requirements Most of the balance of settlement recoveries so far in 2017 has come from alleged violations of government health program requirements.  In April, DOJ announced that Sanofi-Pasteur agreed to pay $19.8 million to resolve allegations that it miscalculated the prices it reported to the U.S. Department of Veterans Affairs ("VA") and thereby overcharged the VA for vaccine products.[3]  Under the Veterans Health Care Act, pharmaceutical manufacturers must list their covered drugs on the Federal Supply Schedule and charge no more than a fixed ceiling price, which is determined as a percentage of the drug’s average manufacturer price.[4]  In April and June 2017, several durable medical equipment suppliers also resolved claims of alleged violations of government health program rules related to product utilization.  Two companies, Lincare and Pacific Pulmonary Services, paid $20 million and $11.4 million, respectively, to resolve allegations that they submitted claims for oxygen equipment and other services that were not supported by medical necessity.[5]  Another company, Innovative Therapies, paid $2.7 million to resolve allegations that its negative pressure wound treatment devices were billed to government programs as DME, but did not meet program requirements to qualify as DME for billing purposes.[6] 3.     Manufacturing Requirements In January 2017, Baxter Healthcare Corporation agreed to pay more than $18 million to resolve claims related to its alleged failure to abide by current Good Manufacturing Practices ("cGMPs") in producing drug products it sold to the VA.[7]  Baxter agreed to pay approximately $2.158 million to settle the civil FCA claims, which stood on the theory that Baxter submitted "false claims" to the VA as a result of the company’s purported violation of contractual requirements mandating compliance with the FDCA.  As outlined in more detail in the FDCA section below, the company allegedly failed to follow cGMPs by manufacturing its large-volume sterile intravenous solutions in a "clean room" that was ventilated by moldy air filters.[8]  Notably, the Statement of Facts included in Baxter’s deferred prosecution agreement acknowledges that there was no indication that any product was affected by the alleged cGMP violations.[9]  That is significant; historically, where DOJ has pursued FCA enforcement actions involving manufacturing issues, it has focused on whether the issues impacted product quality such that DOJ could assert FCA liability under a "worthless products" theory. 4.     Developments in the Implied Certification Theory The first half of the year also saw continued developments in the application of the Supreme Court’s 2016 Escobar decision, in which the Court recognized the viability of the "implied false certification theory" of FCA liability.[10]  Under the implied certification theory, FCA liability can be predicated on violations of material statutory, regulatory, or contractual requirements.[11]  In the first half of 2017, we continued to see the courts diverge in their interpretations of key aspects of Escobar, including what specific representations (if any) are needed to support an FCA claim, how a company’s track record of interacting with the government or regulatory agencies may or may not impact the courts’ materiality analyses, and whether fraud-on-the-FDA claims under the FCA are viable after Escobar. a.     Framework for Assessing "Implied Certification" Claims As outlined in more detail in our 2016 Year-End Update, the Supreme Court explained in Escobar that "the implied certification theory can be a basis for [FCA] liability, at least where two conditions" are met, including (1) "the claim does not merely request payment, but also makes specific representations about the goods or services provided," and (2) "the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths."[12] Since Escobar, courts have taken differing approaches regarding whether an FCA plaintiff must satisfy both of Escobar‘s "two conditions" to state a viable implied certification claim.  The question of whether there must be a "specific representation" made in the claim submission process is particularly significant for drug and device companies.  Indeed, these companies typically do not submit claims for reimbursement themselves, and prescribing physicians’ and pharmacists’ claims typically are true statements about patients’ diagnoses and the drugs being prescribed and dispensed to the patients.  In United States v. Sanford-Brown Ltd., which we discussed in our 2016 Year-End Update, the Seventh Circuit suggested that it would enforce a strict reading of Escobar‘s two conditions.  Explaining that "bare speculation that [a defendant] made misleading representations is insufficient," the Sanford-Brown court affirmed summary judgment in favor of the defendant where the relator offered no evidence that the defendant made "any representations at all."[13]  The Ninth Circuit also has adopted a strict interpretation of the Escobar conditions, stating in United States ex rel. Campie v. Gilead Sciences, Inc., that a defendant "must not merely request payment, but also make specific representations about the goods or services provided" to succeed on an implied certification theory.[14]  District courts in other circuits have followed this line of reasoning.  For example, the Eastern District of Pennsylvania held in March that the "Escobar standard," which requires proof of specific representations made to the government payer, is "the only [standard] available for proving FCA liability" under the implied certification theory.  Accordingly, the court dismissed the plaintiffs’ FCA claims, which were based on alleged violations of the Poison Prevention Packaging Act.[15]  But some other courts, such as the Fourth Circuit, have recently said that Escobar does not necessarily require "specific representations" for implied certification liability.[16] Even among the courts that require FCA plaintiffs to satisfy both of Escobar‘s conditions, some have not made the "specific representations" condition a very high bar to cross.  In Campie, for example, the relators alleged that the defendant, a biotechnology company, caused the submission of claims for reimbursement for drugs manufactured in a manner inconsistent with representations that the company made to FDA in securing approval.  The Ninth Circuit indicated that the drugs’ proprietary names alone could constitute a false representation, because the names "necessarily refer to specific drugs under the FDA’s regulatory regime" and thus themselves represent FDA approval.[17]  Given that the defendant allegedly "requested payment for drugs that fell outside of that approval," the court reasoned that relators adequately alleged that the defendant "omitted critical information regarding compliance with FDA standards."[18]  If other courts follow Campie‘s lead and loosen the "specific representations" standard, Escobar may provide far less protection to future FCA defendants than some anticipated. b.     Government Knowledge and Materiality The Supreme Court emphasized in Escobar that the FCA’s materiality element, which requires an FCA plaintiff to show that the alleged violation of a legal requirement was material to the government’s decision to pay the claims in question, is "demanding" and "rigorous."   Accordingly, the Court clarified that the government’s mere option to refuse payment is not sufficient to establish materiality.[19]  The Court explained further that the government’s refusal to pay claims based on the alleged noncompliance may serve as evidence of materiality and that the government’s payment of claims "in full despite its actual knowledge that certain requirements were violated" is "very strong evidence" that the requirements are not material.[20]  In light of this guidance, several courts have recently grappled with what credence (if any) to attribute to the inaction of government officials with responsibility for payment and of agencies investigating the alleged compliance issues. In United States ex rel. Petratos v. Genentech Inc., the Third Circuit affirmed the district court’s decision to dismiss claims that the defendant pharmaceutical company had "suppressed data that caused doctors to certify incorrectly that [a drug] was ‘reasonable and necessary’ for certain at-risk Medicare patients."[21]  The relator alleged that the defendant was liable under the FCA because disclosures of certain data showing more common and severe side effects of its cancer drug "would have required the company to file adverse-event reports with FDA, and could have resulted in changes" to the drug’s FDA-approved labeling.[22]  The relator also alleged that, had the defendant disclosed the side-effect information, physicians would have prescribed different doses of the drug or decided not to prescribe it at all.[23] In affirming, the Third Circuit held that the alleged suppression of data was not material to payment under Escobar, noting that the relator’s claims must fail, in large part, because he "not only fail[ed] to plead that CMS ‘consistently refuses to pay’ claims like those alleged . . . but essentially concede[d] that CMS would consistently reimburse these claims with full knowledge of the purported noncompliance."[24]  As to the government’s knowledge of alleged wrongdoing, the court observed that neither FDA nor DOJ took any adverse action against the defendant after the relator disclosed the allegations, FDA added more approved indications for the drug, and DOJ declined to intervene in the qui tam suit.[25]  The court concluded that because the relator "concede[d] that the expert agencies and government regulators have deemed these violations insubstantial (or at least would do so if made aware) . . . it [is not] appropriate for a private citizen to enforce these regulations through the [FCA]."[26] c.     The Ninth Circuit Recognizes "Fraud on the FDA" Theory under Escobar In our 2016 Year-End Update, we addressed the First Circuit’s decision in United States ex rel. D’Agostino v. ev3, Inc., which rejected the relator’s theory that an alleged fraud perpetuated on FDA could serve as a basis for FCA liability.[27]  Cautioning against "turn[ing] the FCA into a tool with which a jury . . . could retroactively eliminate the value of FDA approval . . . when the FDA itself sees no reason to do so,"[28] the First Circuit reasoned that allegations that the "fraudulent representations ‘could have’ influenced the FDA to approve [the drug]" fell short of pleading the necessary "causal link" between representations made to FDA and payments made from CMS.[29]  The court also emphasized that FDA did not withdraw its approval of the device or take any other action despite being aware of the alleged fraudulent statements.[30]  More recently, however, the Ninth Circuit reached a different result from the First Circuit’s.  As noted above, in Campie, the relators alleged that the defendant biotechnology company fraudulently obtained approval for certain of its drugs by making false statements to FDA about the manufacturing source of the drugs’ active ingredient and negative results of internal quality testing of the products.[31]  According to the relators, FDA would not have approved the drugs if it had been aware of the alleged quality issues at the manufacturing site; the relators also alleged that the defendant took various steps to fraudulently conceal that it was obtaining the active ingredient from an unapproved manufacturing site before FDA’s approval.[32]  The government declined to intervene, and the district court granted the defendant’s pre-Escobar motion to dismiss, concluding that the relators did not plead that the FDA regulations allegedly violated by the defendant were a material condition of payment and thus failed to state a claim for relief under an implied certification theory.[33] The Ninth Circuit reversed.  After deciding that the defendant’s proprietary drug names themselves could constitute actionable "specific representations," the court rejected the distinction, advanced by the defendant and adopted by the district court, that any misrepresentations were made to FDA, not the government agency that paid for the drugs.[34]  The Campie court—quite incredibly—observed that the purported fraud was "committed against the Department of Health and Human Services," which oversees FDA, and concluded that a fraud on one component agency amounts to a fraud on a separate component agency, as long as they are "overseen" by the same cabinet secretary.[35]  In any event, the court continued, "[i]t is not the distinction between the agencies that matters, but rather the connection between the regulatory omissions and the claim for payment."[36]  According to the Campie court, the crux of the inquiry is whether the false statement is "integral to [the] causal chain leading to payment[.]"[37] Turning to materiality, the court concluded that the relators adequately pleaded that element because "FDA approval is ‘the sine qua non‘ of federal funding here."[38]  The court then rejected the defendant’s argument that FDA’s choice not to withdraw approval, even after it became aware of the unsanctioned manufacturing site and the alleged quality issues, showed that the alleged conduct was not material.[39]  The court noted that "there are many reasons the FDA may choose not to withdraw a drug approval," and stated that FDA’s continued approval of the drugs was unremarkable because the company had stopped using the manufacturing site in question.[40] The Campie court’s analysis of materiality appears, at best, incomplete.  The court emphasized that FDA approval was material to payment, but it never analyzed how the alleged statements or regulatory violations were material to the FDA approval or whether relators pleaded those seemingly required facts.  Nevertheless, the court concluded that the "issues raised by the parties here are matters of proof, not legal grounds to dismiss relators’ complaint."[41]  In doing so, the Campie court appears not to have given much regard to Escobar’s admonition that questions about materiality in the implied certification context are "[not] too fact intensive for courts to dismiss [FCA] cases on a motion to dismiss . . . ."[42] 5.     Rule 9(b) Particularity Federal Rule of Civil Procedure 9(b), which requires allegations of fraud to be pleaded with particularity, applies to FCA cases.  But federal circuit and district courts have diverged widely over the years as to how much detail FCA plaintiffs—and especially relators in cases after the government has declined to intervene—must plead about actual false claims to survive a Rule 9(b) challenge on a motion to dismiss.  That is a particularly salient issue in claims against pharmaceutical and medical device companies.  Because those companies typically do not submit false claims themselves, FCA plaintiffs must plead some level of factual information about the claims for reimbursement submitted by the physicians who prescribe or use the defendants’ drugs or devices, or by retail pharmacies that fill subscriptions.  In United States ex rel. Booker v. Pfizer,[43] the First Circuit added another entry to the growing body of case law on this question and reaffirmed a prior ruling that pleading aggregate government expenditure data for the drugs at issue does not, without more, pass muster under Rule 9(b).[44] In Booker, the relators brought FCA claims against the defendant pharmaceutical company alleging that the defendant continued to induce third parties to submit false claims for off-label pediatric use of its psychotropic drug despite settling prior claims with the government based on those off-label uses (and that the defendant failed to report those purported violations as required by its prior corporate integrity agreement).[45]  After allowing limited discovery on some of the claims, the district court granted summary judgment in favor of the defendant on the relators’ off-label and kickback claims.[46]  The First Circuit affirmed the dismissal of relators’ reverse FCA claim, which was based on the defendant’s alleged failure to comply with the corporate integrity agreement’s reporting requirements, on the ground that the relators did not assert that the defendant acted unreasonably in determining that the complaint was not a "Reportable Event" for purposes of the agreement.[47]  The court then affirmed the grant of summary judgment on the off-label FCA claims, as the only evidence proffered by the relators "[a]fter six years of litigation" was aggregate Medicaid reimbursement data for the alleged off-label use.[48]  Applying Rule 9(b)’s particularity requirements, the court echoed prior precedent, holding that "where relators offer only ‘aggregate expenditure data by the government for’ the drug at issue, ‘with[out] identify[ing] specific entities who submitted claims[,] much less times, amounts, and circumstances,’ their claims ‘fall short.’"[49]  The court further clarified that the First Circuit had not held that "aggregate data together with strong circumstantial evidence" could be used "to demonstrate the existence of false claims in an FCA case."[50]  Because the relators’ data was "woefully inadequate to support their FCA claim[,]" the court affirmed the district court’s grant of summary judgment for the defendant on the claims.[51]  It is somewhat unusual that the First Circuit would apply Rule 9(b), a pleading requirement, at the summary judgment stage, but the takeaway from Booker is clear that FCA plaintiffs alleging off-label theories in the First Circuit risk early dismissal if their claims are based solely on aggregate reimbursement data without at least some detail regarding individual claims. 6.     Public Disclosure The first half of 2017 saw two decisions applying the FCA’s public disclosure bar, 31 U.S.C. § 3130(e)(4), that may prove useful to drug and device companies.  Both addressed the level of specificity with which previous public disclosures must discuss the allegations at issue for the bar to apply. In the first decision, the Eighth Circuit affirmed the dismissal of the relator’s claims in United States ex rel. Lager v. CSL Behring, L.L.C., because various public sources disclosed "enough information" to identify the defendant and its products.[52]  There, the relator alleged that the defendant manufacturer conspired with specialty pharmacies to submit false claims to the United States for reimbursement for prescription drugs.  In particular, the relator asserted that CSL falsely reported inflated wholesale prices of two durable medical equipment infusion drugs, allowing the pharmacies to charge Medicare higher prices for the drugs and resulting in $280 million in Medicare overpayments.  Rejecting the relator’s argument that he added value by identifying the specific defendant in question in this case, the court held that a public disclosure must either "explicitly identify" the defendant or "provide enough information about the participants in the scheme such that the defendant is identifiable."[53]  The court agreed that, collectively, the various sources outlining issues with the average wholesale price ("AWP"), including CMS data showing the defendant’s prices and a government report identifying the same class of products, "provide[d] enough information" to "directly identify" the defendant and its products.[54]  Because the same sources disclosed the concept of fraudulently marketing the "spread" between the actual costs and the AWP at which Medicare reimburses the products, the "elements critical to [relator’s] complaint theory were already in the public domain before [he] brought suit"; as such, the FCA’s statutory bar applied to relator’s suit.[55] In the second decision, the Ninth Circuit joined a number of other courts that have concluded that the FCA’s enumerated sources of public disclosures encompass pleadings and other public filings in civil litigation.  In Amphastar Pharmaceuticals Inc. v. Aventis Pharma SA, the court held that the public disclosure bar can apply if the relator developed the bases for the allegations and transactions in question during discovery in a prior suit.[56]  There, the relator, a generic pharmaceutical manufacturer, alleged that the defendant innovator manufacturer violated the FCA by submitting false information to the U.S. Patent and Trademark Office in obtaining a patent for one of its drugs; the relator further contended that this purportedly false submission facilitated the defendant’s monopoly for the drug and led to overcharging of the government.[57]  In an earlier patent infringement suit brought by the defendant, the relator asserted similar claims of inequitable conduct as an affirmative defense and counterclaim.[58]  Observing that "pleadings or other public filings" can provide the basis for public disclosures that trigger the statutory bar,[59] the Ninth Circuit held that the relator’s amended answer and counterclaim for inequitable conduct in the prior suit "made nearly identical allegations to those made" in the FCA case.[60]  The court rejected the argument that the relator had not previously raised FCA claims, explaining that an allegation "need not include an express reference to the [FCA,]" nor must it contain "every specific detail" for the bar to apply.[61]  Notably, although the relator had not previously alleged that the government was buying the drug in question while the defendant asserted its patent, the court reasoned that it was "an obvious inference based on the publicly disclosed allegations."[62]  And because the underlying information was developed during earlier litigation, the court also found that the relator lacked the "direct and independent knowledge" necessary to qualify as an original source under the public disclosure bar as it existed prior to the 2010 amendments in the Patient Protection and Affordable Care Act.[63]      B.     Developments in Enforcement Actions Against Opioid Manufacturers In its first six months, the Trump Administration has stated that it will focus on responding to public health crises involving opioid abuse around the country and that its enforcement agencies will scrutinize companies that manufacture and market opioid drugs. In a first-of-its-kind settlement announced on July 11, 2017, Mallinckrodt, one of the largest manufacturers of generic oxycodone, agreed to pay $35 million to settle allegations that it violated certain civil penalty provisions of the Controlled Substances Act.[64]  The government alleged that Mallinckrodt failed to meet its obligations to detect and notify the Drug Enforcement Agency ("DEA") of suspicious orders of oxycodone, which is a controlled substance and is subject to certain order monitoring requirements.  From 2008 to 2011, Mallinckrodt purportedly supplied distributors with "excessive" quantities of oxycodone without notifying the DEA of the allegedly suspicious orders.  The settlement also resolved recordkeeping allegations related to purported issues with the batch records at one of the company’s manufacturing plants.  According to DOJ, the Mallinckrodt settlement is the first of its size to resolve claims premised on violations of suspicious order monitoring and reporting requirements with a drug maker.[65] Of particular note, the settlement includes a parallel agreement with the DEA under which the company must conduct certain data analyses to identify suspicious orders in the future.  The settlement requires Mallinckrodt to use downstream customer purchase information (provided by the company’s distributors to inform the amount of discounts, or "chargebacks," that Mallinckrodt may offer based on sales to certain downstream customers) to monitor and then report suspicious sales of oxycodone by distributors to pharmacy and pain clinic customers.[66]       C.     Notable Developments in FDCA Enforcement As noted above, Baxter Healthcare Corporation agreed to pay more than $18 million to resolve allegations that it failed to comply with cGMPs when manufacturing sterile intravenous ("IV") solutions.  Of that settlement sum, Baxter will pay $16 million in connection with its criminal deferred prosecution agreement and related penalties and forfeiture.[67]  According to the criminal information, the drugs were adulterated as a result of the presence of mold on some of the high-efficiency particulate absorption filters installed in the clean rooms in which the IV solutions were manufactured.  A Baxter employee allegedly reported the presence of mold on the filters to the management of the manufacturing plant, but, according to the government, Baxter did not remove the moldy filters until after an unannounced FDA inspection identified the issue.  Although there was no evidence that mold had any impact on the IV solutions, Baxter admitted to distribution of adulterated drugs in violation of the FDCA in its deferred prosecution agreement and agreed to implement enhanced compliance provisions, including periodic certifications to the government.[68] On April 18, 2017, DOJ announced that SCM True Air Technologies, Inc. and the company’s former president pleaded guilty to a criminal information involving one count of operating an establishment that manufactured medical devices without proper registration.[69]  According to the government, between 2010 and 2012, the president delivered to the VA misbranded bariatric hospital beds (Class II medical devices) manufactured in Ohio and Kentucky establishments that were not registered properly with FDA, even though the president and SCM had been advised that such registration was required.  The former president also pleaded guilty to one count of obstruction of an FDA investigation and one count of introducing misbranded medical devices into commerce.[70] Turning to case law developments, the Supreme Court refused to hear a case challenging the contours of the Park doctrine.  The Park doctrine (also known as the "responsible corporate officer" doctrine) derives from United States v. Park,[71] in which the Supreme Court held corporate officers could be criminally liable under the FDCA for failing to prevent or correct an FDCA violation without the usual criminal state of mind.[72]  As we reported in our 2016 Year-End FDA Update, a divided panel of the Eighth Circuit in United States v. DeCoster upheld the misdemeanor convictions of two owners and operators of an egg-production company for introducing eggs into interstate commerce that had been adulterated with salmonella enteritidis.[73]  The panel refused to undercut the Park doctrine (and distinguished officer liability from vicarious liability).  Instead, the panel focused on the fact that the defendants knew or should have known of the risks posed by unsanitary conditions at their egg barns, and held that the "elimination of a mens rea requirement does not violate the Due Process Clause for a public welfare offense where the penalty is ‘relatively small[.]’"[74]    In petitioning for certiorari, the defendants argued that their convictions were based on vicarious liability and thus violated due process because the defendants did not have knowledge that the distribution company sold adulterated eggs.[75]  But the Supreme Court ultimately denied the defendants’ petition (without any written order),[76] leaving the Park doctrine undisturbed.      D.     FCPA Investigations Two FCPA settlements from early in the year illustrate the potential consequences companies may face after failing to correct (from the government’s perspective) issues identified in previous investigations. In the first, Zimmer Biomet Holdings ("Biomet") entered a joint FCPA resolution with DOJ and the Securities and Exchange Commission ("SEC") in January 2017, stemming from Biomet’s alleged failure to sever ties with an unauthorized third-party distributor in Brazil and its purportedly improper payments to customs officials in Mexico.[77]  To settle the allegations, Biomet agreed to pay more than $30 million and retain a compliance monitor for three years.  By way of background, Biomet previously settled FCPA charges in 2012 involving allegedly improper payments to doctors employed by public institutions in Argentina, Brazil, and China by entering into a deferred prosecution agreement signed prior to Zimmer’s acquisition of Biomet.  As part of that settlement, Biomet agreed to a three-year independent compliance monitor; the company had to extend that monitorship for one year in light of the new allegations in Brazil and Mexico, which arose in the midst of its previously established compliance program.[78] According to the 2017 charging documents, Biomet continued its relationship with one of the distributors in Brazil that allegedly made some of the corrupt payments underlying the 2012 settlement, despite representations to the contrary made even after an internal audit allegedly identified a related company through which Biomet interacted with the distributor.[79]  The government took issue with Biomet’s books and records, claiming that they inaccurately recorded transactions with the pass-through company instead of the unauthorized distributor that actually performed the work.[80]  As to Mexico, the government alleged that a subsidiary used improper payments to customs officials through customs brokers and sub-agents to move unlicensed dental implants across the border.[81] In its resolution with the SEC, Biomet consented to an administrative cease-and-desist order alleging FCPA bribery and accounting violations.[82]  And to resolve the DOJ investigation, Biomet entered into a deferred prosecution agreement charging willful failure to implement internal controls, and a subsidiary pleaded guilty to a single count of causing the parent company’s books and records to be inaccurate.[83]  With the implementation of Biomet’s new settlement terms, by the end of its obligations the company will have operated under the supervision of a monitor for a total of eight years. On January 18, 2017, the SEC announced a settled cease-and-desist action against Texas-based medical device company Orthofix International; the action involved alleged FCPA accounting violations related to purportedly improper payments to doctors at state-run hospitals in Brazil.[84]  From 2011 to 2013, the company’s Brazilian subsidiary allegedly used inaccurately recorded discounts and improper payments through third-party commercial representatives and distributors to persuade doctors to use the company’s products.[85]  The SEC contended that Orthofix lacked policies or mechanisms to centrally approve and monitor discounts and commissions provided by the subsidiary.[86]  In the action, the SEC specifically referenced Orthofix’s previous FCPA resolution in 2012, which focused on allegedly improper payments by its subsidiary in Mexico.[87]  Like the Biomet case discussed above, Orthofix disclosed the facts leading to this second FCPA settlement as part of the company’s reporting obligations from its settlement in 2012.[88] To settle the SEC’s FCPA allegations, Orthofix consented to an administrative cease-and-desist order and agreed to pay more than $6 million, including nearly $3.2 million in disgorgement and prejudgment interest and a $2.9 million civil penalty.[89]  Orthofix also agreed to retain an independent compliance consultant for one year[90] and, notably, was required to admit the facts forming the basis for the settlement.[91]  In a coordinated non-FCPA resolution, Orthofix and four former executives settled with the SEC revenue recognition charges relating to distributor sales.[92] Additional discussion of these and other FCPA developments can be found in Gibson Dunn’s 2017 Mid-Year FCPA Update. II.     Promotional Issues After a flurry of last-minute activity by the Obama Administration in January, the first half of the year saw relatively little regulatory activity regarding the promotion of drugs and devices.  That is unsurprising, given that Commissioner Gottlieb did not take the helm until May.[93]  Before taking his new post, Commissioner Gottlieb publicly proposed changing FDA’s culture.  For example, he decried "increasing regulatory obstacles," observed that the "practice of medicine is supposed to be regulated by state governments," and noted that physicians "are not always required to strictly follow labels or FDA directives."[94]  These remarks may signal that a shift away from strict regulation of promotional information, which many observers feel has been warranted for a long time, is near. Below, we address the limited regulatory and legislative  developments from the first six months of 2017, as well as recent developments in FDA enforcement involving promotional issues.      A.     FDA Enforcement Activity – Advertising and Promotion In our 2016 Year-End Update, we reported a flurry of year-end FDA enforcement activity related to advertising and promotion by the outgoing administration.  But so far this year, the agency’s enforcement activity has nearly ground to a halt.  FDA’s Office of Prescription Drug Promotion ("OPDP") has issued only one warning letter so far.[95]   It remains to be seen whether this is the new normal (in light of growing First Amendment concerns about enforcement in this arena), a sign of shifting agency priorities under its new leadership, or simply an anomaly. OPDP’s sole warning letter this year concerns misleading risk information in electronic advertising—an area that has been a focus of FDA enforcement efforts in the past.  As in previous OPDP letters, FDA took issue with the presentation of risk information in the advertisement as well as the substance of that information. In a May 18, 2017 untitled letter, OPDP asserted that Orexigen Therapeutics, Inc.’s television advertisement promoting a chronic weight management drug made false or misleading representations about the associated risks of the drug.[96]  According to OPDP, the advertisement contained numerous effectiveness claims, but omitted relevant risk information.  Further, OPDP contended that the advertisement misled consumers because it presented certain risk information in the visual portion of the advertisement while simultaneously communicating unrelated risk information in the audio portion.[97]      B.     FDA’s Promotional Guidance FDA has issued two draft guidance documents relating to promotional practices this year, both as part of the Obama Administration’s last-minute efforts to shape FDA promotional policies. In January, FDA issued a draft "Questions and Answers" guidance entitled "Medical Product Communications That Are Consistent With the FDA-Required Labeling."[98]  The draft guidance document is intended to illuminate "how FDA evaluates firms’ medical product communications, including promotional materials, that present information that is not contained in the FDA-required labeling for the product but that may be consistent with the FDA-required labeling for the product."  FDA issued this draft guidance in response to manufacturers’ expressed interest in communicating "the approved/cleared uses of their products that are not contained in their products’ FDA-required labeling."[99] According to the draft guidance, a manufacturer would not be subject to FDA enforcement action if its promotional communication is consistent with the FDA-required labeling, and is otherwise truthful and non-misleading—even if such information is not clearly contained in the labeling.  In determining whether promotional communication is "consistent" with the labeling, FDA would evaluate three factors: First, FDA would consider whether any representations regarding the product in the communication conflict with particular conditions of use in the FDA-required labeling.  If there is a conflict, FDA would treat the communication as inconsistent under the draft guidance. Second, FDA would look to whether the representations negatively alter the benefit-risk profile of a product in a way that may result in increased harm to health.  If so, the communication would be deemed inconsistent with FDA-required labeling. Third, the agency would consider whether the product can be used safely and effectively under the conditions represented in the communication.  If so, the communication would be deemed consistent with FDA-required labeling.[100] Also in January, FDA issued a draft guidance document regarding communication of health care economic information ("HCEI") to payors about both approved and investigational drugs and devices.[101]  This draft guidance emphasized FDA’s belief that "information provided by firms to payors about their drugs [should] be truthful and non-misleading."[102] In regard to approved drugs, FDA first clarified that HCEI can be communicated to "a payor, formulary committee, or other similar entity with knowledge and expertise in the area of health care economic analysis, carrying out its responsibilities for the selection of drugs for coverage or reimbursement."  FDA then clarified that HCEI would be considered truthful and non-misleading if it relates to an approved indication.  According to FDA, illustrative examples of HCEI that is related to an approved indication include:  duration of treatment in clinical trials, use in additional practice settings, variations in dosing regimens, alternative patient subgroups, and clinical outcome assessments.[103] In regard to investigational drugs and devices, the draft guidance would permit manufacturers to provide certain information prior to FDA approval, so long as it is done in an "unbiased, factual, accurate, and non-misleading" manner.  Approved topics include, for example, indications for which approval is sought, clinical results, pricing, and related product information.[104] Halfway through 2017, the drug and device industry is still awaiting the long-ago promised guidance from FDA regarding its comprehensive review of policies relating to promotion of drugs and devices for off-label uses.  Although we continue to await that final guidance, we can report on a few notable regulatory developments in this area from the first half of 2017. As we noted in our 2016 Year-End Update, FDA held a public meeting last November to solicit commentary on the issue of off-label promotion.  Following up on the meeting, FDA issued a January 2017 memorandum in which it identified 12 alternative approaches to off-label promotion under the First Amendment.[105]  FDA rejected every potential approach as inadequate in its memorandum.  But, the agency nevertheless extended the commentary period on its review (which had closed on January 9, 2017) to solicit further input on the First Amendment implications because some commenters had "expressed the view that FDA had not sufficiently discussed the First Amendment in the notification of public hearing."  The extended review period, which closed in April, resulted in nearly 100 additional comments.[106] On January 9, 2017, FDA issued a final rule that partially amended the agency’s definition of "intended use" for drugs and devices.[107]  Departing from the prior definition of "intended use," which focused on whether a manufacturer had "knowledge of facts that would give him notice" that a drug or device would be used for off-label purposes, the new rule adopts a "totality of the evidence" standard.  The rule provides that "where the totality of evidence is sufficient to establish a new intended use for a medical product, relevant provisions of the [FDCA] and its implementing regulations will be triggered." On March 20, 2017 (after the change in administrations), FDA delayed the rule’s effective date until March 19, 2018 to allow for additional public comment.[108]  Opponents of the rule have criticized its definition of intended use as overbroad, and various industry organizations submitted a petition requesting that FDA reconsider and permanently stay the rule on that basis.[109]      C.     Notable Litigation Relating to Promotional Issues Although the first half of 2017 produced little relevant jurisprudence, one opinion provides an important reminder about the practical limits to the First Amendment’s protection of promotional speech. In United States ex rel. Gohil v. Aventis, Inc., the Eastern District of Pennsylvania declined to dismiss, on First Amendment grounds, allegations that the defendant "misrepresent[ed] the safety and effectiveness of the off-label use" of an FDA-approved drug for the treatment of cancer, reasoning that "[t]hat sort of speech is not necessarily protected by the First Amendment."[110]  The court recognized that "[l]iability for truthful, non-misleading speech related to off-label marketing may be protected by the First Amendment."[111]  But because the issue arose at the pleadings stage, the court declined to resolve the factual issue of whether "the off-label promotion [was] actually false and/or misleading."[112]  Although the Gohil court allowed the case to proceed, it is noteworthy that the court recognized the viability of a potential First Amendment defense in an FCA case based on off-label theories.      D.     Legislative Developments Reflecting the momentum for broader recognition of more permissive promotion communications about FDA-approved drugs and devices, the first half of 2017 featured notable legislative activity relating to off-label promotion at both the state and federal levels. At the state level, one state took matters into its own hands in the absence of FDA policy reform regarding the exchange of truthful off-label information between industry participants and physicians.  On March 21, 2017, Arizona became the first state to enact a law permitting drug and device manufacturers to communicate with health care providers about off-label treatments by eliminating state penalties for such conduct.[113]  Arizona’s "Free Speech in Medicine Act" allows manufacturers to "engage in truthful promotion of an off-label use of a drug, biological product or device" with licensed health care professionals, but not directly to the public.  Of course, because FDA retains the authority to police off-label promotion at the federal level, Arizona’s effort to relax restrictions is largely a symbolic gesture.  Nevertheless, the bill received widespread media attention and may help to encourage similar activity by other states and may even influence FDA’s policy development. Congress also shuffled forward this year, with House lawmakers introducing a pair of draft bills that would loosen restrictions on off-label drug and device communications. The first bill, entitled the Pharmaceutical Information Exchange Act, is aimed at loosening restrictions on what information manufacturers are permitted to communicate prior to FDA approval of a product.[114]  Introduced by Rep. Brett Guthrie (R-KY), the bill would amend the FDCA to permit the provision of "health care economic information or scientific information . . . to a payor, formulary committee, or other similar entity . . . if it is based on competent and reliable scientific evidence and relates to an investigational new drug or an investigational use of an approved drug." The second bill, entitled the Medical Product Communications Act of 2017, would enable manufacturers to proactively discuss certain off-label information with health care providers.[115]  The bill, introduced by Rep. Morgan Griffith (R-VA), provides that "the scientific exchange of information about a drug, biological product, or device . . . shall not constitute labeling, advertising, or evidence of a new intended use."  Thus, the bill would permit drug manufacturers to communicate information related to unapproved uses with health care professionals, provided that the communication is supported by appropriate data and the manufacturer makes no claim that the unapproved product or use has been demonstrated to be safe or effective. Although some lawmakers and industry groups expressed support for the draft bills during recent committee hearings—praising the proposed clarification of off-label communications and provision of more information to payers and health-care decision makers aimed at improving patient access to new treatments—other lawmakers and consumer groups expressed concern that the bills could undermine existing regulatory processes intended to protect patient health and safety.[116]  To date, neither bill has been advanced out of committee in the House.  III.     Developments in cGMP Regulations and Other Manufacturing Issues The biggest headline in the cGMP and manufacturing arena during the first six months of 2017 was the criminal conviction and sentencing of Barry Cadden, who was responsible for a deadly meningitis outbreak that arguably is the largest public health crisis caused by the defective manufacturing of a pharmaceutical product.  The first half of the year saw robust enforcement efforts on the part of DOJ and FDA.  For its part, FDA continues to crack down on manufacturing issues with warning letters and is on pace to exceed last year’s total number of warning letters by year’s end.  These developments, as well as recently issued final and draft guidance documents, are discussed below.      A.     Notable cGMP Compliance and Enforcement Activity 1.     Owner of New England Compounding Center Is Convicted and Sentenced In late 2014, an indictment was unsealed charging Barry Cadden, owner and head pharmacist of New England Compounding Center ("NECC"), with a host of crimes in connection with a nationwide meningitis outbreak.  According to DOJ, Cadden authorized the shipment of contaminated methylprednisolone acetate ("MPA") to NECC customers nationwide and, as a result, 753 patients in twenty states were diagnosed with a fungal infection after receiving injections of MPA.  The outbreak led to the deaths of 64 patients in nine states.  Cadden allegedly authorized the shipment of drugs without waiting for the return of sterility tests, failed to notify customers of nonsterile results, and compounded drugs with expired ingredients.  According to DOJ, this series of cGMP failures led to an outbreak that was the "largest public health crisis ever caused by a pharmaceutical product," with hundreds suffering from debilitating and life-changing injuries and a tragic number of wholly preventable fatalities.  In May 2017, after a nine-week trial, a federal jury convicted Cadden of racketeering, racketeering conspiracy, mail fraud, and introduction of misbranded drugs into interstate commerce with the intent to defraud and mislead.  The jury acquitted Cadden of murder charges.  In late June 2017, Cadden was sentenced to nine years in prison, three years of supervised release, and forfeiture and restitution in amounts to be determined.[117] In the wake of sentencing, FDA Commissioner Gottlieb commented, "[p]atients should not have to worry about the safety and sterility of the drugs they are prescribed. . . . [W]e will continue to hold accountable those who violate the law and put patients at risk."  According to Commissioner Gottlieb, this outcome serves as a cautionary tale against corner cutting and putting "profits over patients."[118] 2.     Consent Decrees Involving Two Drug Makers During the last six months, DOJ announced two notable consent decrees of permanent injunction entered by federal district courts against drug manufacturers to stop the distribution of unapproved, misbranded, and adulterated drugs.  On March 15, 2017, the U.S. District Court for the District of Colorado enjoined EonNutra LLC, two related companies (CDSM LLC and HABW LLC), and their owner from selling or distributing adulterated and misbranded dietary supplements and unapproved and misbranded drugs.[119]  The cGMP-based claims underlying the injunction alleged that the defendants’ products were not manufactured in compliance with federal regulations; a 2016 FDA inspection cited the defendants’ failure to establish specifications for the identity, purity, strength, and composition of their products or prepare and follow manufacturing plans. More recently, on June 15, 2017, the U.S. District Court for the Southern District of Florida entered a consent decree including a permanent injunction against Florida-based Stratus Pharmaceuticals Inc. and New Jersey-based Sonar Products Inc., as well as two of their officers, Alberto Hoyo and Juan Carlos Billoch.[120]  FDA accused Stratus and Sonar of regularly shipping unapproved dermatological products, such as washes, creams, and ointments promoted to treat skin conditions like acne and rosacea.  Sonar made the drugs for Stratus, which distributed prescription and nonprescription drugs and also owned 80% of Sonar.  The agency asserted that the companies had been violating cGMP requirements since 2014.  The consent decree requires Sonar to stop all operations until it hires a cGMP expert and receives written permission from FDA to resume operations.  Stratus is barred from distributing unapproved drugs until it gets clearance from FDA on those products. 3.     cGMP-Based Warning Letters FDA’s Office of Manufacturing Quality in the Center for Drug Evaluation and Research ("CDER") issued 26 warning letters in the first half of 2017, putting it on pace to exceed the 44 warning letters issued in 2016.[121]  As in 2016, FDA continued to focus on issues identified during foreign inspections, with warning letters issued to companies in China and India, as well as Japan, Singapore, Italy and the United Kingdom.  Also consistent with FDA’s activity in 2016, the warning letters thus far this year underscore FDA’s focus on data integrity.  Data integrity citations and recommendations for "Data Integrity Remediation" cropped up in 11 of the 26 warning letters issued by CDER in 2017.  CDER often found these violations in manufacturing facilities in China and India.   A few of the most notable warning letters from the first half of the year are summarized below: Jinan Jinda Pharmaceutical Chemistry Co.[122]  In February 2017, a Chinese manufacturer received a warning letter that cited, among other things, the lack of controls in place to prevent staff from altering or deleting electronic data.  FDA noted that "[a]nalysts manipulated and deleted audit trails" and that full administrative rights were given to the quality control manager and deputy manager, allowing them to manipulate data and turn off audit trails.  FDA also cited the company for failures of its quality unit to meet specifications for quality and purity and failure to adequately investigate out-of-specification results. Badrivishal Chemicals & Pharmaceuticals.[123]  In March 2017, FDA cited Badrivishal in India for multiple violations including quality and data integrity deficiencies.  In detailing the many asserted violations, FDA noted that original laboratory and production records were found in trash bags behind the facility, data on the discarded documents did not match official records, and the quality unit did not investigate the discrepancies.  Investigators discovered later that the trash bags had been removed, preventing further examination of the documents.  FDA recommended that the company hire a cGMP consultant to correct deviations. USV Private Limited.[124]  After a 2016 inspection of the company’s facility in India, FDA issued a March 2017 warning letter to USV listing cGMP violations.  The alleged violations included data integrity deficiencies, e.g., computer systems that were not appropriately controlled, data in laboratory records that were not complete, a computer system that allowed for deletion of files, the failure to maintain a backup file, and unrestricted access to microbial identification instrument and external hard drives.  To address these issues, FDA recommended a comprehensive data integrity remediation.  In the warning letter, FDA also asserted that USV failed to establish proper laboratory controls and procedures to prevent microbiological contamination on sterile products and to correctly and routinely perform environmental monitoring tests.  Notably, FDA pointed out that it found similar violations at another of the company’s facilities in 2014, which also resulted in a warning letter.  FDA admonished USV that "[t]hese repeated problems at multiple sites demonstrate that your company’s oversight and control over the manufacture of drugs is inadequate" and called for an immediate and comprehensive assessment of the company’s global manufacturing operations.      B.     cGMP Rulemaking and Guidance Activity Since January, FDA has issued four draft and final guidance documents related to cGMP compliance.  Like the guidance activity relating to promotional issues discussed above, FDA released three of the guidance documents in a last-minute effort to advance guidelines that had long been in the works before the change in administration. Combination Products.  In January 2017, FDA published final guidance entitled Current Good Manufacturing Practice Requirements for Combination Products, which describes and explains the final rule on cGMP requirements for combination products that FDA issued on January 22, 2013, as codified in 21 CFR part 4.[125]  The guidance defines what a combination product is, provides an overview of the final rule, and discusses the purpose and content of specific cGMP requirements addressed in the final rule.  In separate sections, the guidance also addresses certain general considerations for cGMP compliance for combination products and presents hypothetical scenarios to illustrate how to comply with requirements for particular types of combination products—specifically, a prefilled syringe, drug-eluting stent, and drug-coated mesh. Repackaging.  In January 2017, FDA also issued final guidance on the topic of Repackaging of Certain Human Drug Products by Pharmacies and Outsourcing Facilities.[126]  Repackaged drugs, which are prepared to meet the specific needs of particular patients, are generally subject to the adulteration, misbranding, and approval provisions of the FDCA.  The agency stated in the guidance, however, that it does not intend to enforce those provisions against state-licensed pharmacies, federal facilities or outsourcing facilities so long as they meet the criteria outlined in the guidance (e.g., that a licensed pharmacist repackage or directly supervise the repackaging of the drug product). Mixing, Diluting or Repackaging.  FDA issued draft guidance in January 2017 called Mixing, Diluting, or Repackaging Biological Products Outside the Scope of an Approved Biologics License Application.  The draft guidance details the conditions under which state-licensed pharmacies, federal facilities or outsourcing facilities can mix, dilute, and repackage biologics.[127]  According to FDA, "diluting or mixing a biological product with other components, or repackaging a biological product by removing it from its approved container-closure system and transferring it to another container-closure system, is, in the absence of manufacturing controls, highly likely to affect the safety and/or effectiveness of the biological product."[128]  FDA recognized, however, that in certain circumstances, it is appropriate to mix, dilute, or repackage a biological product to meet the needs of a specific patient (e.g., in the pediatric care context).  Although any biological product that is mixed, diluted, or repackaged such that it falls outside the scope of an approved BLA as an "unlicensed biological product," this draft guidance details the appropriate conditions under which these steps can be taken without risk of FDA action.  Notably, this document appears to provide more flexibility for outsourcing facilities to repackage biologics than the 2015 draft guidance.[129] Medical Gases.  Finally, FDA issued draft guidance in June 2017 addressing Current Good Manufacturing Practice for Medical Gases.  This draft guidance superseded the far lengthier May 2003 draft guidance regarding the same topic.[130]  In its most recent version, FDA explained that in an effort to reduce the regulatory compliance burden on the industry, it tailored the draft guidance to provide "clear, up-to-date, detailed recommendations regarding CGMP issues that have been the subject of industry questions."[131]  Among other issues, the draft guidance addresses requirements with respect to organization and personnel; facility and equipment; production and process controls; packaging and labeling, distribution, and laboratory controls; and records and reports. IV.     Medical Devices The first half of 2017 saw some late Obama Administration guidance with respect to medical devices followed by relative silence as FDA’s leadership turned over with the new administration.  We summarize below recent regulatory and enforcement developments relating to medical device manufacturers.      A.     FDA Guidance Since the Trump Administration took the reins, there has been little new guidance from FDA directed at medical devices.  In the waning days of the Obama Administration, however, CDRH released significant guidance regarding investigational device exemptions ("IDE"). On January 13, 2017, CDRH released guidance intended to clarify the "principal factors that FDA considers when assessing the benefits and risks of IDE applications for human clinical studies."[132]  The guidance sets forth a flexible review process that takes into account the "total product lifecycle" and the inherent "uncertainty (i.e., lower level of evidence)" available at the early stages of device development and investigational clinical study.  By recognizing the inherent uncertainty in early-stage device development, the guidance gives IDE sponsors and investigators leeway to pursue investigational devices without perfect knowledge of the ultimate benefit-risk balance.  The guidance also "characterize[s] benefits in the context of investigational research" to include both "direct benefits to the subject" and "benefits to others (to the extent there are indirect benefits to subjects such as knowledge to be gained from the study or information that may contribute to developing a treatment)."      B.     Update on Regulation of Laboratory Developed Tests We have previously reported on FDA’s controversial efforts to regulate Laboratory Developed Tests ("LDTs")—diagnostic tests designed, manufactured, and performed in clinical laboratories—including FDA’s indication that it would finalize its 2014 draft guidance regarding regulation of LDTs as medical devices.[133]  The change of administrations, paired with intense feedback from industry stakeholders, delayed efforts to finalize that guidance.  Indeed, FDA announced at the end of 2016 that it would not issue final guidance  on the oversight of LDTs. In January 2017, FDA went back to the drawing board and released a "Discussion Paper on Laboratory Developed Tests" that sets out a "possible approach to LDT oversight" based on the "extensive, and often conflicting, feedback [FDA] received from a broad range of stakeholders" on the aborted draft guidance.[134]  According to FDA, the approach outlined in the paper seeks to strike a balance between encouraging innovation, on the one hand, and ensuring that patients and health care providers have access to "accurate, reliable, and clinically valid tests," on the other.  To this end, the paper floats the possibility of requiring approval for "new and significantly modified high and moderate risk LDTs," while exempting "previously marketed LDTs" from "most or all FDA regulatory requirements" unless "necessary to protect the public health."[135]  Although the paper is non-binding and "does not represent the formal position of FDA," it previews an approach that could be more palatable to many stakeholders in continuing development of LDTs.[136]  There is no timeline for implementing or finalizing this framework, but FDA said it will continue to "work with all stakeholders in future conversations around the right path forward on LDT oversight."[137]      C.     Enforcement Letters FDA issued 11 device-related warning letters during the first six months of 2017, with only one of those coming from CDRH.[138]  Of those letters, all but one were related to manufacturing and Quality System Regulation issues.  Two letters warrant mention here. In January, Rapid Release Technologies received a warning letter concerning its "RPT PRO2" vibration pain therapy device; the Letter alleged that the company did not have an approved application for premarket approval or an approved application for an IDE.[139] In April, CDRH issued a warning letter to Abbott (St. Jude Medical Inc.) in connection with alleged battery defects in its defibrillators and alleged cybersecurity vulnerabilities in its home monitoring devices.[140]  CDRH’s focus on cybersecurity represents FDA’s first enforcement foray on that topic.  V.     Anti-Kickback Statute      A.     AKS-Related Case Law Developments Federal courts issued several notable decisions interpreting the AKS in the first half of 2017, including some that further expand the conduct reached by the AKS.  Continuing a trend we have noted in past updates, these courts broadly interpreted key language in the statute’s prohibition on drug and device manufacturers providing or receiving "remuneration" to induce, "arrange for," or reward referrals or business involving goods or services for which payment "may be made" by a federal health care program. Two notable opinions involved issues tied to the promotion of prescription drugs.  First, in United States ex rel. Brown v. Pfizer, Inc.,[141] the Eastern District of Pennsylvania declined to dismiss a case involving alleged speaker fees and other payments the defendant made to physicians to encourage prescriptions of an anti-infection drug.[142]  Although the defendant argued that imposing AKS liability on such allegations "would effectively criminalize the promotion of prescription drugs," the court disagreed.  The court recognized that the personal services and management contracts "safe harbor" to the AKS permits paid contractual  arrangements between pharmaceutical companies and physicians provided that they meet certain requirements (e.g., that the payments were set at "fair market value").  But the court concluded that relators had sufficiently alleged that the defendant’s payments were not made at fair market value, and, as a result, the defendant could not—at least at the pleadings stage—establish that it met the personal services and management contracts safe harbor.[143] In a second case, United States ex rel. Wood v. Allergan Inc.,[144] the Southern District of New York considered whether prescription drug sampling—a practice expressly permitted by the Prescription Drug Marketing Act ("PDMA")—could constitute "remuneration" under the AKS.  Specifically, the court declined to dismiss an FCA claim predicated on the defendant’s alleged payment of kickbacks to physicians in the form of prescription drug samples to encourage drug prescriptions.  The defendant argued that the PDMA permits pharmaceutical companies to provide drug samples to encourage physicians to prescribe the drugs and that HHS OIG guidance expressly acknowledges that prescription drug samples have no value to physicians unless resold or billed to government health care programs.  The court sidestepped the apparent conflict between the AKS and PDMA, however, and instead relied on the relator’s allegations that absent the provision of free samples, physicians may have had to purchase some amount of those drugs to use in their practices, rather than having prescriptions filled at retail pharmacies.  As a result, the court concluded that the samples could be "remuneration" insofar as they had value to physicians by allegedly "subsidiz[ing] . . . [their] costs."[145] Another federal court also adopted an expansive interpretation of the AKS in analyzing what it means to "arrange for" the provision of federally reimbursable goods or services, which the AKS penalizes if done in exchange for remuneration.[146]  In MedPricer.com, Inc. v. Becton, Dixon & Co.,[147] the court declared unenforceable a contract between a device manufacturer and the operator of an auction website under which the website operator would post device listings because performing the contract would violate the AKS’s "arrange for" provision.[148]  The court held that the website operator "arranged" for sales of devices within the meaning of the AKS despite the fact that the operator neither participated as a buyer or a seller, nor "cho[se] which particular suppliers participate[d] in the sales [or] which products [were] sold."[149]  In reaching this conclusion, the court relied largely on the website operator’s description of its business model as "facilitat[ing] sales" of medical devices.[150]  Notably, the MedPricer.com opinion has potentially broader applicability in that the court determined that AKS liability "requires only a minimal showing" that the goods or services in question are provided to a government program beneficiary and "may be" federally reimbursable—rejecting the argument that AKS liability only attaches when the goods or services are, in fact, actually reimbursed by the federal government.[151]  In reaching the latter conclusion, the court relied on the HHS OIG’s view in past advisory opinions that whether a product or service is in fact reimbursed by federal health care programs bears only on HHS OIG enforcement decisions, not on the scope of conduct covered by the AKS.[152]      B.     HHS OIG Final Rule Regarding AKS Statute of Limitations In January 2017, HHS OIG finalized a rule that imposes a 10-year limitations period on HHS OIG exclusion actions brought on the basis of violations of the AKS.[153]  HHS OIG had originally proposed to amend the relevant regulation to clarify that there was no limitations period.[154]  However, in response to numerous comments objecting to the proposal, HHS OIG decided to adopt a 10-year limitations period.[155]  In doing so, HHS OIG expressed concern that "any limitations period on . . . exclusions may force OIG to either initiate administrative proceedings while [a given FCA] matter is proceeding or lose the ability to protect the programs and beneficiaries through an exclusion.  Litigating FCA and exclusion actions on parallel tracks wastes Government (both administrative and judicial) and private resources."[156]  Nonetheless, HHS OIG concluded that "such situations will be less frequent with a 10-year period than with a shorter period," and that a 10-year period balances the goal of avoiding government waste against the goals of "provid[ing] certainty" and avoiding the "administrative burden" of indefinite document retention that regulated parties could incur were HHS OIG to explicitly adopt an indefinite limitations period.[157]  HHS OIG’s response to the comments it received also noted the alignment between a 10-year limitations period and the FCA’s 10-year statute of repose,[158] and stated that, while recent conduct is more relevant to exclusion decisions, HHS OIG’s experience has shown that "exclusion can be necessary to protect the Federal health care programs even when the conduct is up to 10 years old."[159]      C.     Notable HHS OIG Guidance Among a number of advisory opinions issued by HHS OIG so far in 2017, one opinion had particular relevance for drug and device companies in the context of clinical studies and patient assistance programs. In an advisory opinion issued on June 29, 2017, HHS OIG considered a proposal to "reduce or waive, on a non-routine, unadvertised basis, cost-sharing amounts owed by financially needy Medicare beneficiaries for items and services furnished in connection with a clinical research study."[160]  The study involved a biomedical system indicated for treating ulcers and other chronic wounds.[161]  In the proposal advanced by the parties seeking the advisory opinion, a particular hospital participating in the study would "reduce or waive applicable cost-sharing amounts owed by financially needy beneficiaries for all Study-related items and services."[162]  The manufacturer of the system under study would not cover any of these reductions or waivers.  The hospital would only inform a given patient of the possibility of reduction or waiver if that patient, upon receiving notice that he or she "may owe cost-sharing amounts in connection with the Study," informed the hospital that he or she could not afford these payments.[163]  The hospital would then evaluate the patient’s financial need according to a set of uniform criteria.  Neither the hospital nor the manufacturer would advertise the possibility of waiver or reduction of patients’ cost-sharing obligations.[164] Analyzing the proposal under the Beneficiary Inducement CMP,[165] HHS OIG found that the proposal fits within an exception from the definition of remuneration for any waiver of coinsurance or deductible amounts that "is not offered as part of any advertisement or solicitation"; that is not "routinely" provided; and that is only granted either after a "good faith" determination of financial need, or after "reasonable collection efforts" have failed.[166]  Given the non-advertised and "case-by-case" nature of the proposed reductions and waivers in this particular case, along with the "objective criteria" used to determine financial need, HHS OIG found that the proposal fit within this exception.[167]  For the same reasons, HHS OIG determined that it would not seek administrative sanctions under the AKS, provided that "the requisite intent to induce or reward referrals of Federal health care program business" remained absent.[168] VI.     Conclusion As these issues, and others, in the drug device industries continue to develop, we will track them and report back in our 2017 Year-End Update. [1]      Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Shire PLC Subsidiaries to Pay $350 Million to Settle False Claims Act Allegations (Jan. 11, 2017), https://www.justice.gov/opa/pr/ shire-plc-subsidiaries-pay-350-million-settle-false-claims-act-allegations. [2]      Id. [3]      Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Sanofi Pasteur Agrees to Pay $19.8 Million to Resolve Drug Overcharges to the Department of Veterans Affairs (Apr. 3, 2017), https://www.justice.gov/ opa/pr/sanofi-pasteur-agrees-pay-198-million-resolve-drug-overcharges-department-veterans-affairs. [4]      See 38 U.S.C. § 8126. [5]      Nate Raymond, Linde’s Lincare settles U.S. whistleblower case for $20 million, Reuters, June 27, 2017, http://www.reuters.com/article/us-linde-lawsuit-idUSKBN19I2GX; Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Oxygen Equipment Provider Pays $11.4 Million to Resolve False Claims Act Allegations (Apr. 25, 2017), https://www.justice.gov/opa/pr/oxygen-equipment-provider-pays-114-million-resolve-false-claims-act-allegations. [6]      Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Durable Medical Equipment Manufacturer Agrees To Pay $2.715 Million To Resolve False Claims Allegations (June 29, 2017), https://www.justice.gov/usao-mdtn/pr/ durable-medical-equipment-manufacturer-agrees-pay-2715-million-resolve-false-claims. [7]      Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Baxter Healthcare Corporation to Pay More Than $18 Million to Resolve Criminal and Civil Liability Relating to Sterile Products (Jan. 12, 2017), https://www.justice.gov/opa/pr/baxter-healthcare-corporation-pay-more-18-million-resolve-criminal-and-civil-liability. [8]      Id. [9]      See Statement of Facts ¶¶ 37–40, United States v. Baxter Healthcare Corp., No. 1:17-mj-00010-DLH (W.D.N.C. Jan. 12, 2017), ECF No. 1-1. [10]     See generally Universal Health Servs., Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016). [11]     See id. at 1995. [12]     Id. at 2001 (emphasis added). [13]     840 F.3d 445, 447 (7th Cir. 2016). [14]     862 F.3d 890, 902 (9th Cir. 2017). [15]     United States ex rel. Schiemelpfenig v. Dr. Reddy’s Labs. Ltd., No. 11-4607, 2017 WL 1133956, at *6 (E.D. Pa. Mar. 27, 2017) (interpreting language from the Third Circuit’s decision in United States ex rel. Whatley v. Eastwick College, 657 F. App’x 89 (3d Cir. 2016)) [16]     See United States ex rel. Badr v. Triple Canopy, Inc., 857 F.3d 174, 178 (4th Cir. 2017); see also United States ex rel. Landis v. Tailwind Sports Corp., 2017 WL 573470, at *11 (D.D.C. Feb. 13, 2017). [17]     Campie, 862 F.3d at 902–03. [18]     Id. at 903. [19]     136 S. Ct. at 2002–04. [20]     Id. at 2003. [21]     855 F.3d 481, 485 (3d Cir. 2017). [22]     Id. [23]     Id. at 486. [24]     Id. at 490 (quoting Escobar, 136 S. Ct. at 2003). [25]     Petratos, 855 F.3d at 490. [26]     Id. [27]     845 F.3d 1 (1st Cir. 2016). [28]     Id. at 8. [29]     Id. at 7. [30]     Id. at 8. [31]     862 F.3d at 895–96. [32]     Id. at 896–97. [33]     See id. at 898; see also United States ex rel. Campie v. Gilead Sci., Inc., No. C-11-0941 EMC, 2015 WL 3659765, at *6–8 (N.D. Cal. June 12, 2015). [34]     862 F.3d at 902–03. [35]     Id. at 903. [36]     Id. [37]     Id. (citation and internal quotation marks omitted). [38]     Id. at 905 (citation omitted). [39]     Id. at 906. [40]     Id. [41]     Id. at 907. [42]     136 S. Ct. at 2004 n.6. [43]     847 F.3d 52 (1st Cir. 2017). [44]     See id. at 58 (upholding United States ex rel. Ge v. Takeda Pharm. Co. Ltd., 737 F.3d 116, 121, 124 (1st Cir. 2013)). [45]     847 F.3d at 54–55. [46]     See id. at 55. [47]     Id. at 57. [48]     Id. at 58. [49]     Id. (quoting United States ex rel. Ge v. Takeda Pharm. Co., 737 F.3d 116, 121, 124 (1st Cir. 2013) (alterations in original)). [50]     847 F.3d at 58. [51]     Id. at 58–59. [52]     855 F.3d 935, 945–46 (8th Cir. 2017) (citation and internal quotation marks omitted). [53]     Id. at 944 (citation and internal quotation marks omitted). [54]     Id. at 945–46 (citation and internal quotation marks omitted). [55]     Id. at 948–49. [56]     856 F.3d 696 (9th Cir. 2017).  Gibson, Dunn & Crutcher LLP represented the defendants-appellants in the district court and in their successful appeal of this matter in the Ninth Circuit. [57]     Id. at 702. [58]     Id. at 701. [59]     Id. at 703. [60]     Id. at 704. [61]     Id. (citation and internal quotation marks omitted). [62]     Id. [63]     Id. at 706–08. [64]     Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Mallinckrodt Agrees to Pay Record $35 Million Settlement for Failure to Report Suspicious Orders of Pharmaceutical Drugs and for Recordkeeping Violations (July 11, 2017), https://www.justice.gov/opa/pr/mallinckrodt-agrees-pay-record-35-million-settlement-failure-report-suspicious-orders. [65]     Id. [66]     Id. [67]     See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Baxter Healthcare Corporation to Pay More Than $18 Million to Resolve Criminal and Civil Liability Relating to Sterile Products (Jan. 12, 2017), https://www.justice.gov/opa/pr/baxter-healthcare-corporation-pay-more-18-million-resolve-criminal-and-civil-liability. [68]     See id. [69]     Press Release, U.S. Dep’t of Justice, U.S. Attorney’s Office, W.D. of Ky., SCM True Air Technologies, Of Ohio And Kentucky, And Its Former Company President – Guilty Of Delivering Misbranded Medical Devices From Unregistered Facilities To A Georgia V.A. Medical Center And Obstructing An FDA Investigation Into Their Conduct (Apr. 18, 2017), https://www.justice.gov/usao-wdky/pr/scm-true-air-technologies-ohio-and-kentucky-and-its-former-company-president-guilty. [70]     Id. [71]     421 U.S. 658 (1975). [72]     Id. at 670–76. [73]     United States v. DeCoster, 828 F.3d 626, 629–33 (8th Cir. 2016). [74]     Id. at 633. [75]     See Petition for Writ of Certiorari at 2–4, DeCoster v. United States (No. 16-877). [76]     137 S. Ct. 2160 (2017). [77]     Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Zimmer Biomet Holdings Inc. Agrees to Pay $17.4 Million to Resolve Foreign Corrupt Practices Act Charges (Jan. 12, 2017), https://www.justice.gov/opa/pr/ zimmer-biomet-holdings-inc-agrees-pay-174-million-resolve-foreign-corrupt-practices-act. [78]     See id. [79]     See Superseding Information ¶¶ 20, 22–44, United States v. Zimmer Biomet Holdings, Inc., No. 12-CR-00080 RBW (D.D.C. Jan. 12, 2017). [80]     See id. at ¶¶ 72–75. [81]     See id. at ¶ 45. [82]     Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Zimmer Biomet Holdings Inc. Agrees to Pay $17.4 Million to Resolve Foreign Corrupt Practices Act Charges (Jan. 12, 2017), https://www.justice.gov/opa/ pr/zimmer-biomet-holdings-inc-agrees-pay-174-million-resolve-foreign-corrupt-practices-act; Press Release, U.S. Sec. & Exch. Comm’n, Biomet Charged With Repeating FCPA Violations (Jan. 12, 2017), https://www.sec.gov/news/pressrelease/2017-8.html. [83]     Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Zimmer Biomet Holdings Inc. Agrees to Pay $17.4 Million to Resolve Foreign Corrupt Practices Act Charges (Jan. 12, 2017), https://www.justice.gov/opa/pr/zimmer-biomet-holdings-inc-agrees-pay-174-million-resolve-foreign-corrupt-practices-act. [84]     Press Release, U.S. Sec. & Exch. Comm’n, Medical Device Company Charged With Accounting Failures and FCPA Violations (Jan. 18, 2017), https://www.sec.gov/news/pressrelease/2017-18.html. [85]     Id. [86]     See Order Instituting Cease-and-Desist Proceedings 2, In the Matter of Orthofix Int’l N.V., Admin. Proc. File No. 3-17800 (Jan. 18, 2017), https://www.sec.gov/litigation/admin/2017/34-79828.pdf. [87]     See id. at 2, 3.18, 2017), https://www.sec.gov/litigation/admin/2017/34-79828.pdf. [88]     See id. at 6. [89]     See Press Release, U.S. Sec. & Exch. Comm’n, Medical Device Company Charged With Accounting Failures and FCPA Violations (Jan. 18, 2017), https://www.sec.gov/news/pressrelease/2017-18.html. [90]     See Order Instituting Cease-and-Desist Proceedings 9, In the Matter of Orthofix Int’l N.V., Admin. Proc. File No. 3-17800 (Jan. 18, 2017), https://www.sec.gov/litigation/admin/2017/34-79828.pdf. [91]     See id. at 1. [92]     See Press Release, U.S. Sec. & Exch. Comm’n, Medical Device Company Charged With Accounting Failures and FCPA Violations (Jan. 18, 2017), https://www.sec.gov/news/pressrelease/2017-18.html. [93]     Meet Scott Gottlieb, M.D., Commissioner of Food and Drugs, U.S. Food & Drug Admin., https://www.fda.gov/AboutFDA/CentersOffices/ucm557569.htm (last updated May 18, 2017). [94]     Scott Gottlieb, Changing the FDA’s Culture, Nat’l Affairs (2012), https://www.nationalaffairs.com/publications/detail/changing-the-fdas-culture. [95]     Warning Letters 2017: Office of Prescription Drug Promotion, U.S. Food & Drug Admin., https://www.fda.gov/Drugs/GuidanceComplianceRegulatoryInformation/default.htm (follow "Enforcement Activities by FDA" hyperlink; then follow "Warning Letters and Notice of Violation Letters to Pharmaceutical Companies" hyperlink; then follow "Warning Letters 2017" hyperlink) (last updated Aug. 3, 2017). [96]     Untitled Letter from Meena Ramachandra, Regulatory Review Officer, Office of Prescription Drug Promotion, U.S. Food & Drug Admin. to Stacy Hennings, Senior Director, Regulatory Affairs Advertising & Promotions, Orexigen Therapeutics, Inc. (May 18, 2017), https://www.fda.gov/Drugs/GuidanceComplianceRegulatoryInformation/default.htm (follow "Enforcement Activities by FDA" hyperlink; then follow "Warning Letters and Notice of Violation Letters to Pharmaceutical Companies" hyperlink; then follow "Warning Letters 2017" hyperlink; then follow "Untitled Letter" hyperlink under "Office of Prescription Drug Promotion"). [97]     Id. [98]     U.S. Food & Drug Admin., Draft Guidance for Industry: Medical Product Communications That Are Consistent With the FDA-Required Labeling—Questions and Answers (Jan. 2017), https://www.fda.gov/downloads/Drugs/GuidanceComplianceRegulatoryInformation/Guidances/UCM537130.pdf. [99]     Id. at 1–2. [100]   Id. at 3–5. [101]   U.S. Food & Drug Admin., Draft Guidance for Industry and Review Staff:  Drug and Device Manufacturer Communications With Payors, Formulary Committees, and Similar Entities—Questions and Answers (Jan. 2017), https://www.fda.gov/downloads/Drugs/GuidanceComplianceRegulatoryInformation/Guidances/UCM537347.pdf. [102]   Id. at 3. [103]   Id. at 4–8. [104]   Id. at 16. [105]   U.S. Food & Drug Admin., Public Health Interests and First Amendment Considerations Related to Manufacturer Communications Regarding Unapproved Uses of Approved or Cleared Medical Products 1, 26–34 (Jan. 2017), https://www.federalregister.gov/documents/2017/01/19/2017-01013/manufacturer-communications-regarding-unapproved-uses-of-approved-or-cleared-medical-products. [106]   U.S. Food & Drug Admin., Manufacturer Communications Regarding Unapproved Uses of Approved or Cleared Medical Products; Availability of Memorandum; Reopening of the Comment Period, 82 Fed. Reg. 6367, 6368 (Jan. 19, 2017). [107]   U.S. Food & Drug Admin., Clarification of When Products Made or Derived From Tobacco Are Regulated as Drugs, Devices, or Combination Products; Amendments to Regulations Regarding "Intended Uses," 82 Fed. Reg. 2193 (Jan. 9, 2017). [108]   U.S. Food & Drug Admin., Clarification of When Products Made or Derived From Tobacco Are Regulated as Drugs, Devices, or Combination Products; Amendments to Regulations Regarding "Intended Uses"; Further Delayed Effective Date; Request for Comments, 82 Fed. Reg. 14319 (Mar. 20, 2017), https://www.federalregister.gov/documents/2017/03/20/2017-05526/ clarification-of-when-products-made-or-derived-from-tobacco-are-regulated-as-drugs-devices-or. [109]   Id. [110]   United States ex rel. Gohil v. Aventis, Inc., No. 02-2964, 2017 WL 85375, at *1, 8 (E.D. Pa. Jan. 10, 2017). [111]   Id. at *8 (citation omitted). [112]   Id. [113]   Free Speech in Medicine Act, HB 2382 (2017), http://www.azleg.gov/legtext/53leg/1r/bills/hb2382p.pdf. [114]   Pharmaceutical Information Exchange Act, H.R. 2026, 115th Cong. (2017), https://www.congress.gov/bill/115th-congress/house-bill/2026. [115]   Medical Product Communications Act of 2017, H.R. 1703, 115th Cong. (2017), https://www.congress.gov/bill/115th-congress/house-bill/1703/text. [116]   Jeff Overley, Off-Label Drug Bills Get Little Traction On Capitol Hill, Law360, https://www.law360.com/health/articles/943303/off-label-drug-bills-get-little-traction-on-capitol-hill. [117]   Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Owner of New England Compounding Center Sentenced for Racketeering Leading to Nationwide Fungal Meningitis Outbreak (June. 26, 2017), https://www.justice.gov/opa/pr/ owner-new-england-compounding-center-sentenced-racketeering-leading-nationwide-fungal; see also Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Owner of New England Compounding Center Convicted of Racketeering Leading to Nationwide Fungal Meningitis Outbreak (Mar. 22, 2017), https://www.justice.gov/opa/pr/ owner-new-england-compounding-center-convicted-racketeering-leading-nationwide-fungal. [118]   Id. [119]   Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, District Court Enters Permanent Injunction Against Colorado Companies to Stop Distribution of Adulterated And Misbranded Dietary Supplements and Unapproved and Misbranded Drugs (Mar. 15, 2017), https://www.justice.gov/opa/pr/district-court-enters-permanent-injunction-against-colorado-companies-stop-distribution. [120]   Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, District Court Enters Permanent Injunction Against Florida and New Jersey Companies and Senior Managers to Stop the Distribution of Unapproved, Misbranded, and Adulterated Drugs (June 15, 2017), https://www.justice.gov/opa/pr/district-court-enters-permanent-injunction-against-florida-and-new-jersey-companies-and. [121]   See U.S. Food & Drug Admin., Warning Letters 2017 (Aug. 8, 2017), https://www.fda.gov/Drugs/GuidanceComplianceRegulatoryInformation/default.htm (follow "Enforcement Activities by FDA" hyperlink; then follow "Warning Letters and Notice of Violation Letters to Pharmaceutical Companies" hyperlink; then follow "Warning Letters 2017" hyperlink). [122]   Warning Letter from Thomas J. Cosgrove, Dir., Office of Mfg. Quality, U.S. Food & Drug Admin. to Mr. Yu Shui Cheng, General Manager, Jinan Jinda Pharmaceutical Chemistry Co., Ltd (Feb. 24, 2017), https://www.fda.gov/ICECI/EnforcementActions/WarningLetters/2017/ucm546319.htm. [123]   Warning Letter from Thomas J. Cosgrove, Dir., Office of Mfg. Quality, U.S. Food & Drug Admin. to Mr. Deepak Rawat, CEO, Badrivishal Chemicals & Pharmaceuticals (Mar. 2, 2017), https://www.fda.gov/ICECI/EnforcementActions/WarningLetters/2017/ucm545454.htm. [124]   Warning Letter from Thomas J. Cosgrove, Dir., Office of Mfg. Quality, U.S. Food & Drug Admin. to Mr. Prashant K. Tewari, Managing Dir., USV Private Limited (Mar. 10, 2017), https://www.fda.gov/ICECI/EnforcementActions/ WarningLetters/2017/ucm546483.htm. [125]   U.S. Food & Drug Admin., Guidance for Industry and FDA Staff: Current Good Manufacturing Practice Requirements for Combination Products (Jan. 10, 2017), https://www.fda.gov/downloads/ RegulatoryInformation/Guidances/UCM429304.pdf. [126]   U.S. Food & Drug Admin., Guidance for Industry: Repackaging of Certain Human Drug Products by Pharmacies and Outsourcing Facilities (Jan. 12, 2017), https://www.fda.gov/downloads/Drugs/ GuidanceComplianceRegulatoryInformation/Guidances/UCM434174.pdf. [127]   U.S. Food & Drug Admin., Draft Guidance for Industry: Mixing, Diluting, or Repackaging Biological Products Outside the Scope of an Approved Biologics License Application (Jan. 12, 2017), https://www.fda.gov/downloads/Drugs/GuidanceComplianceRegulatoryInformation/Guidances/UCM434176.pdf. [128]   Id. at 3. [129]   U.S. Food & Drug Admin., Draft Guidance for Industry: Mixing, Diluting, or Repackaging Biological Products Outside the Scope of an Approved Biologics License Application (Feb. 2015), https://www.regulations.gov/document?D=FDA-2014-D-1525-0356. [130]   U.S. Food & Drug Admin., Draft Guidance for Industry: Current Good Manufacturing Practice for Medical Gases (June 28, 2017), https://www.fda.gov/downloads/Drugs/GuidanceComplianceRegulatoryInformation/Guidances/UCM070270.pdf.    [131]   Id. at 2. [132]   U.S. Food & Drug Admin., Factors to Consider When Making Benefit-Risk Determinations for Medical Device Investigational Device Exemptions 5–6 (Jan. 13, 2017), https://www.fda.gov/downloads/MedicalDevices/‌DeviceRegulationandGuidance/GuidanceDocuments/UCM451440.pdf. [133]   See U.S. Food & Drug Admin., Draft Guidance for Industry, Food and Drug Administration Staff, and Clinical Laboratories: FDA Notification and Medical Device Reporting for Laboratory Developed Tests (LDTs) (Oct. 3, 2014), http://www.fda.gov/downloads/%20MedicalDevices/‌ DeviceRegulationandGuidance/GuidanceDocuments/UCM416684.pdf; U.S. Food & Drug Admin., Draft Guidance for Industry, Food and Drug Administration Staff, and Clinical Laboratories: Framework for Regulatory Oversight of Laboratory Developed Tests (LDTs) (Oct. 3, 2014), https://www.fda.gov/downloads/medicaldevices/deviceregulationandguidance/guidancedocuments/ucm416685.pdf. [134]   U.S. Food & Drug Admin., Discussion Paper on Laboratory Developed Tests (LDTs) (Jan. 13, 2017), https://www.fda.gov/downloads/medicaldevices/productsandmedicalprocedures/ invitrodiagnostics/laboratorydevelopedtests/ucm536965.pdf. [135]   Id. at 4. [136]   Id. at 1. [137]   Id. at 10. [138]   Warning Letters 2017, U.S. Food & Drug Admin., https://www.fda.gov/ICECI/EnforcementActions/WarningLetters/2017/default.htm (last updated Aug. 24, 2017). [139]   Warning Letter from Steven E. Porter, L.A. District Dir., U.S. Food & Drug Admin. to Dr. Stanley R. Stanbridge, Vice President of R&D, Rapid Release Technologies (Jan. 17, 2017), https://www.fda.gov/ICECI/EnforcementActions/WarningLetters/2017/ucm538234.htm. [140]   Warning Letter from Sean M. Boyd, Deputy Dir. for Regulatory Affairs, Office of Compliance, Ctr. for Devices & Radiological Health, U.S. Food & Drug Admin. to Mike Rousseau, President, Abbott (Apr. 12, 2017), https://www.fda.gov/ICECI/EnforcementActions/WarningLetters/2017/ucm552687.htm. [141]   No. 05-6795, 2017 WL 1344365, at *1 (E.D. Pa. Apr. 12, 2017). [142]   Id. at *6. [143]   Id. at *8. [144]   No. 10-CV-5645, 2017 WL 1233991, at *1 (S.D.N.Y. Mar. 31, 2017). [145]   Id. at *21. [146]   The AKS prohibits remuneration solicited or received "in return for purchasing, leasing, ordering, or arranging for . . . any good, facility, service, 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) (emphasis added).  A similar prohibition exists for remuneration offered or given as an inducement for the recipient to "arrange for" a covered item or service.  See 42 U.S.C. § 1320a-7b(b)(2)(B). [147]   No. 3:13-cv-1545 (MPS), 2017 WL 888479 (D. Conn. Mar. 6, 2017). [148]   Id. at *1. [149]   Id. at *5. [150]   Id. The court also found that the AKS’s scienter requirement does not need to be fulfilled in order for a contract to be illegal under the AKS and thus unenforceable.  See id. at *9. [151]   See id. at *8. [152]   See id.. [153]   See U.S. Dep’t of Health & Human Servs., Office of Inspector Gen., Health Care Programs: Fraud and Abuse; Revisions to the Office of Inspector General’s Exclusion Authorities, 82 Fed. Reg. 4100, 4114 (Jan. 12, 2017), https://www.gpo.gov/fdsys/pkg/FR-2017-01-12/pdf/2016-31390.pdf. [154]   See id. at 4101. [155]   See id. at 4101–02. [156]   Id. at 4102. [157]   See id. at 4101–02. [158]   See id. at 4102; 31 U.S.C. § 3731(b)(2). [159]   82 Fed. Reg. at 4102.  The final rule applies both to exclusions for conduct that violates the AKS, as well as exclusions for conduct that violates the CMP statute. See id. at 4114; 42 C.F.R. §§ 1001.901(c), 1001.951(c). [160]   U.S. Dep’t of Health & Human Servs., Office of Inspector Gen., OIG Advisory Op. 17-02 at 1 (June 29, 2017), https://oig.hhs.gov/fraud/docs/advisoryopinions/2017/AdvOpn17-02.pdf. [161]   Id. at 3. [162]   Id. [163]   Id. at 3–4. [164]   Id. at 4, 7. [165]   42 U.S.C. § 1320a-7a(a)(5). [166]   See 42 U.S.C. § 1320a-7a(i)(6)(A).  As HHS OIG noted in the advisory opinion, the same exception to the definition of "remuneration" is found in the CMP statute’s implementing regulations.  See OIG Advisory Op. 17-02 at 6 n.6; 42 C.F.R. § 1003.110. [167]   See OIG Advisory Op. 17-02 at 6–7. [168]   See id. at 7.   The following Gibson Dunn lawyers assisted in the preparation of this client update:  Stephen Payne, Marian Lee, John Partridge, Jonathan Phillips, Sean Twomey, Reid Rector, Naomi Takagi, Allison Chapin, Coreen Mao, and Michael Dziuban.    Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work or any of the following:  Washington, D.C.Stephen C. Payne, Chair, FDA and Health Care Practice Group (202-887-3693, spayne@gibsondunn.com)F. Joseph Warin (202-887-3609, fwarin@gibsondunn.com)Marian J. Lee (202-887-3732, mjlee@gibsondunn.com)Daniel P. Chung (202-887-3729, dchung@gibsondunn.com)Jonathan M. Phillips (202-887-3546, jphillips@gibsondunn.com) Los AngelesDebra Wong Yang (213-229-7472, dwongyang@gibsondunn.com) San FranciscoCharles J. Stevens (415-393-8391, cstevens@gibsondunn.com)Winston Y. Chan (415-393-8362, wchan@gibsondunn.com) Orange CountyNicola T. Hanna (949-451-4270, nhanna@gibsondunn.com) New YorkAlexander H. Southwell (212-351-3981, asouthwell@gibsondunn.com) DenverRobert C. Blume (303-298-5758, rblume@gibsondunn.com)John D. W. Partridge (303-298-5931, jpartridge@gibsondunn.com) © 2017 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.