United States District Court, S.D. New York
UNITED STATES OF AMERICA ex rel. DAVID M. KESTER, STATE OF CALIFORNIA ex rel. DAVID M. KESTER, STATE OF COLORADO ex rel. DAVID M. KESTER, STATE OF CONNECTICUT ex rel. DAVID M. KESTER, STATE OF DELAWARE ex rel. DAVID M. KESTER, DISTRICT OF COLUMBIA ex rel. DAVID M. KESTER, STATE OF FLORIDA ex rel. DAVID M. KESTER, STATE OF GEORGIA ex rel. DAVID M. KESTER, STATE OF HAWAII ex rel. DAVID M. KESTER, STATE OF ILLINOIS ex rel. DAVID M. KESTER, STATE OF INDIANA ex rel. DAVID M. KESTER, STATE OF LOUISIANA ex rel. DAVID M. KESTER, STATE OF MARYLAND ex rel. DAVID M. KESTER, STATE OF MASSACHUSETTS ex rel. DAVID M. KESTER, STATE OF MICHIGAN ex rel. DAVID M. KESTER, STATE OF MINNESOTA ex rel. DAVID M. KESTER, STATE OF MONTANA ex rel. DAVID M. KESTER, STATE OF NEVADA ex rel. DAVID M. KESTER, STATE OF NEW JERSEY ex rel. DAVID M. KESTER, STATE OF NEW MEXICO ex rel. DAVID M. KESTER, STATE OF NEW YORK ex rel. DAVID M. KESTER, STATE OF NORTH CAROLINA ex rel. DAVID M. KESTER, STATE OF OKLAHOMA ex rel. DAVID M. KESTER, STATE OF RHODE ISLAND ex rel. DAVID M. KESTER, STATE OF TENNESSEE ex rel. DAVID M. KESTER, STATE OF TEXAS ex rel. DAVID M. KESTER, STATE OF VIRGINIA ex rel. DAVID M. KESTER, and STATE OF WISCONSIN ex rel. DAVID M. KESTER, Plaintiffs and Relator,
NOVARTIS PHARMACEUTICALS CORPORATION, ACCREDO HEALTH GROUP, INC., BIOSCRIP CORPORATION, CURASCRIPT, INC., CVS CAREMARK CORPORATION, Defendants
[Copyrighted Material Omitted]
For United States Of America, ex rel. DAVID M. KESTER, Plaintiff: Tara Marie La Morte, LEAD ATTORNEY, Li Yu, U.S. Attorney's Office, SDNY (Chambers Street), New York, NY; Ellen Melissa London, U.S. Attorney Office SDNY, New York, NY; Rebecca C. Martin, U.S. Attorney's Office, SDNY (86 Chambers St.), New York, NY.
For State of California, ex rel. DAVID M. KESTER, Plaintiff: David B. Zlotnick, Nicholas N. Paul, Steven U Ross, California Attorney General's Office, Bureau of Medi-Ca, San Diego, ca; Rachel Coles, Office of The Attorney General, Sacramento, CA.
For State of Georgia, ex rel. DAVID M. KESTER, Plaintiff: Elizabeth White, PRO HAC VICE, Georgia Attorney General's Office, Atlanta, GA.
For State of Illinois, ex rel. DAVID M. KESTER, Plaintiff: Clemon D Ashley, PRO HAC VICE, Assistant Attorney General, Illinois Attorney General Office, Medicaid Fraud Control Unit, Chicago, IL.
For State of Indiana, ex rel. DAVID M. KESTER, Plaintiff: Lawrence Joseph Carcare, II, Office of IN Attorney General, Indianapolis, IN.
For State of Maryland, ex rel. DAVID M. KESTER, Plaintiff: Jeremy Dykes, PRO HAC VICE, Maryland Attorney General, Baltimore, MD.
For State of Michigan, ex rel. DAVID M. KESTER, Plaintiff: Deborah J Harper, PRO HAC VICE, Assistant Attorney General, Health Care Fraud Division, East Lansing, MI; Deborah J. Harper, State of Michigan/Attorney General/Health Care Fraud Divisio, East Lansing, MI.
State of Minnesota, ex rel. DAVID M. KESTER, Plaintiff, Pro se.
For State of Oklahoma, ex rel. DAVID M. KESTER, Plaintiff: Niki Suzanne Batt, LEAD ATTORNEY, Oklahoma Office of The Attorney General, Oklahoma City, OK; Christopher P Robinson, Niki S Batt, PRO HAC VICE, Assistant Attorney General, Medicaid Fraud Control Unit, Oklahoma Office of Attorney General, Oklahoma City, OK.
For State of Wisconsin, ex rel. DAVID M. KESTER, Plaintiff: Katie M Wilson, PRO HAC VICE, Assistant Attorney General, Wisconsin Department of Justice, Madison, WI.
For State of New York, Plaintiff: Diana Elkind, LEAD ATTORNEY, Office of the New York State Attorney General, New York, NY; Christopher Yates Miller, New York State Office of the Attorney General (NYC), New York, NY.
For David M. Kester, ex rel, Relator, Plaintiff: Robert Lawrence Vogel, LEAD ATTORNEY, Vogel, Slade & Goldsteinm LLP, Washington, DC; Arun Srinivas Subramanian, William Christopher Carmody, Susman Godfrey LLP (NYC), New York, NY; Janet Lyn Goldstein, Shelley R. Slade, PRO HAC VICE, Vogel, Slade & Goldstein, Washington, DC; Jonathan Bridges, PRO HAC VICE, Susman Godfrey LLP, Dallas, TX; Kristin Malone, Susman Godfrey LLP, Seattle, WA; Shawn Raymond, PRO HAC VICE, Susman Godfrey LLP, Houston, TX; Steven M. Shepard, PRO HAC VICE, Susman Godfrey LLP (NYC), New York, NY.
For Novartis Pharmaceuticals Corporation, Defendant: Evan R Chesler, LEAD ATTORNEY, Benjamin Gruenstein, Rachel G Skaistis, Cravath, Swaine & Moore LLP, New York, NY; Manvin Singh Mayell, Michael A. Rogoff, LEAD ATTORNEYS, United States Attorney's Office, Southern District of New York, New York, NY; Faith E. Gay, Quinn Emanuel, New York, NY; Manisha M. Sheth, Quinn Emanuel Urquhart & Sullivan LLP, New York, NY; Nina M. Dillon, Cravath, Swaine & Moore LLP, U.S. District Court E.D.N.Y., Brooklyn, NY.
For State of Washington, Intervenor Plaintiff: Carrie L. Bashaw, PRO HAC VICE, Washington State Attorney General's Offic, Medicaid Fra, Olympia, WA; Douglas D. Walsh, Michelle M. Teed, PRO HAC VICE, Washington State Attorney General's Office, Medicaid Fr, Olympia, WA.
For State of Washington, Interpleader Plaintiff: Carrie L. Bashaw, Washington State Attorney General's Offic, Medicaid Fra, Olympia, WA; Douglas D. Walsh, Michelle M. Teed, PRO HAC VICE, Washington State Attorney General's Office, Medicaid Fr, Olympia, WA.
MEMORANDUM DECISION AND ORDER DENYING DEFENDANT'S MOTION TO DISMISS
COLLEEN MCMAHON, U.S.D.J.
Plaintiff-relator David M. Kester (" Relator" ) filed a sealed qui tam action asserting claims arising under the False Claims Act (" FCA" ), 31 U.S.C. § 3729 et seq., and related state laws. The Defendants named in the Relator's original complaint included Novartis Pharmaceuticals Corporation (" Novartis" ) and certain specialty pharmacies, including BioScrip Corporation (" BioScrip" ). The United States government (" the Government" ) subsequently chose to intervene as a plaintiff in this case, but only against Novartis and BioScrip. The Government alleges that Novartis violated the FCA and the Anti-Kickback Statute (" AKS" ), 42 U.S.C. § 1320a-7b(b), in connection with a kickback scheme.
Pending before the Court is Defendant Novartis's motion to dismiss the Government's Amended Complaint-in-Intervention pursuant to Rule 9(b) of the Federal Rules of Civil Procedure for failure to plead fraud with particularity. For the reasons discussed below, that motion is denied without prejudice.
A. Procedural History
Pursuant to the False Claims Act (" FCA" ), private persons known as " relators" may file qui tam actions and recover damages on behalf of the United States. See 31 U.S.C. § 3730(b). Plaintiff Kester (" Relator" ) originally filed this FCA action in November 2011 on behalf of the United States, 27 states, and the District of Columbia. The original named defendants in the Relator's complaint included Novartis and several pharmacy companies--BioScrip, Accredo Health Group, Inc., AmeriSource Bergen Corporation, Curascript, Inc., CVS Caremark Corporation, Express Scripts, Medco Health Solutions, Inc., Walgreens Company (" Walgreens" ), and other pharmacies. The Relator alleged that Novartis and the defendant pharmacies violated the FCA and the Anti-Kickback Statute by engaging in a kickback scheme and then submitting " false claims" for reimbursement to federal and state government programs.
The United States government (" the Government" ) began investigating the alleged
kickback scheme. In April 2013, the Government elected to intervene as a plaintiff in this case, but only against Novartis and BioScrip. In January 2014, Defendant BioScrip settled out of the case. See Docket No. 41. Eleven states have since intervened as co-plaintiffs against Novartis.
On January 8, 2014, the Government filed an Amended Complaint-in-Intervention (" the Complaint" ). It brings claims against Novartis arising under three subsections of the FCA--31 U.S.C. § § 3729(a)(1)(A), (a)(1)(B), and (a)(1)(C). These subsections are discussed in detail below. See infra at § I. The Government also asserts state law claims for unjust enrichment and payment by mistake of fact.
Generally, the FCA outlaws the submission of a false or fraudulent " claim" for payment ( i.e., a request for reimbursement) to the government. See id. at § 3729(a)(1). Such claims may be rendered " false" in a variety of ways. In this case, the Government's FCA claims are predicated on an underlying violation of the Anti-Kickback Statute (" AKS" ). Under the AKS, it is illegal to offer a person a kickback in order to " induce" that person to " recommend" the purchase of a drug covered by a federal health care program. 42 U.S.C. § 1320a-7b(b)(2). It is likewise illegal to receive a kickback in exchange for " recommending" the purchase of such drugs. See id. at § 1320a-7b(b)(1). The Government alleges that Novartis conducted two kickback schemes involving drugs covered by Medicare and Medicaid.
B. The Alleged Kickback Schemes
Defendant Novartis is a pharmaceutical company that develops, manufactures, and markets prescription drugs. It sells these drugs through various avenues, one of which is pharmacies. See Compl. at ¶ 14.
According to the Government, Novartis realized that certain pharmacies had influence over doctors or patients. So it decided to offer these pharmacies kickbacks to induce them to recommend its drugs to doctors or patients. The first scheme involved an immunosuppressant drug named Myfortic, which is given to patients who receive organ transplants in order to prevent organ rejection. The second kickback scheme involved an iron chelation drug named Exjade, which is given to patients who receive blood transfusions in order to prevent iron overload in the blood.
The pharmacies involved in this case are primarily " specialty pharmacies." Myfortic is distributed by various specialty pharmacies across the United States. Novartis coordinates the dispensing of Exjade through its exclusive distribution network--Exjade Patient Assistance & Support Services (" EPASS" ). Through EPASS, Novartis controls which specialty pharmacies receive patient referrals for new Exjade prescriptions. The pharmacies dispense Exjade to patients, contact them about refills, and provide patient " counseling." Id. at ¶ 7.
1. Myfortic Scheme
The Government alleges that the Myfortic " switching" kickback scheme lasted from 2005 to 2013. In this scheme, Novartis offered contractual rebates or discounts to " twenty or more" pharmacies on the condition that they use their influence to recommend that doctors switch (or " convert" ) transplant patients from other medications to Myfortic. Id. at ¶ 4. The pharmacies also agreed to argue against the use of Myfortic's competitors, including a drug named CellCept. The Complaint specifically names five pharmacies engaged in the Myfortic scheme: Baylor Hospital (" Baylor" ), Bryant's Pharmacy
(" Bryant" ), Kilgore's Medical Pharmacy (" Kilgore" ), Transcript Pharmacy (" Transcript" ), and Twenty-Ten Pharmacy (" Twenty-Ten" ). See id. at ¶ ¶ 71-121. The Government also alleges that Novartis had discussions with Walgreens regarding the Myfortic scheme, but it does not assert that Walgreens agreed to the kickback arrangement. See id. at ¶ ¶ 130-40.
The Complaint describes in great detail the mechanics of the Myfortic switching scheme involving Baylor, Bryant, Kilgore, Transcript, and Twenty-Ten. For example, the Complaint states that Novartis targeted Bryant because it recognized that the pharmacy's owner was " very influential" in the Arkansas transplant community due to his relationships with the State Board of Pharmacy, the State Kidney commission, and the largest managed care organization in the state. Id. at ¶ 72. Novartis chose to offer Bryant the opportunity to earn significant rebates--up to 15% of its Myfortic sales--in exchange for recommending to both doctors and patients that patients convert from Myfortic's main competitor drug (CellCept) to Myfortic. The more Myfortic that Bryant sold, the higher the rebates it received from Novartis.
Once the scheme began, Novartis closely tracked Bryant's Myfortic and CellCept sales to see how many Bryant patients switched from CellCept to Myfortic. Novartis saw that, " in 3 months," Bryant's owner was able " to convert all [of his transplant] patients from CellCept to Myfortic." Id. at ¶ 74. He used his influence with local doctors to " control [Myfortic] market share" and " to increase Myfortic utilization." Id. Once a generic (and less costly) form of CellCept was introduced in 2009, Bryant's owner had discussions with physicians in which he argued against the idea of switching patients from Myfortic to generic CellCept. See id. at ¶ ¶ 77-78.
The Government alleges that Novartis's kickback relationship with Bryant was highly lucrative for both companies. From 2005 to 2009, Novartis saw a tenfold increase in Bryant's annual Myfortic sales, rising from $100,000 to over $1 million. Novartis, in turn, gave Bryant over $650,000 in rebates between 2005 and March 2013 as rewards and as further inducements ( i.e., kickbacks) to promote Myfortic. See id. at ¶ ¶ 70, 75.
The Complaint contains similarly detailed allegations regarding Novartis's quid pro quo kickback arrangements with Baylor, Kilgore, Transcript, and Twenty-Ten. Each of the pharmacies promised to recommend Myfortic and to attempt to use its influence over doctors or patients to " convert" patients to Myfortic and to prevent patients from switching to CellCept. In exchange, Novartis paid the pharmacies kickbacks in the form of rebates or discounts on all Myfortic sales, whether generated by this influence-peddling campaign or not. See id. at ¶ ¶ 83-121.
2. Exjade Scheme
The Government alleges that the Exjade " refill" kickback scheme lasted from 2007 to 2012. For this scheme, Novartis used its control over patient referrals to induce one pharmacy--BioScrip--to promote Exjade. The Complaint alleges that this scheme began in 2007 when Novartis realized that Exjade's side effects and changing patient population were causing refill orders to decline, leading to a big " performance gap" between Novartis's sales targets and actual Exjade sales. Id. at ¶ 173.
Because BioScrip's Exjade sales were lower than those of other pharmacies, Novartis placed the pharmacy under a " performance improvement plan" in February 2007; it imposed new conditions on BioScrip's continued access to its exclusive patient
distribution network (EPASS) and its ability to earn rebates, which were $13 per Exjade shipment. See id. at ¶ 165. Under this plan, Novartis required BioScrip to commit to increasing the refill rates among its Exjade patients, and to convincing patients who had stopped ordering refills to resume doing so. BioScrip complied with Novartis's demands. Its poorly-trained pharmacy staff called patients to offer purported " counseling" about Exjade therapy. The Government alleges that these calls were actually designed to get patients to order refills, and that Novartis's marketing team was directly involved in formulating BioScrip's " counseling" strategy. See id. at ¶ ¶ 173-84.
By late 2007, Novartis recognized that BioScrip had become very effective in generating refills. Novartis's internal studies stated that " an Exjade patient [at] BioScrip is worth $800-$2,800 more than a patient serviced by another pharmacy." Id. ¶ 185. To ensure that BioScrip would continue promoting Exjade refills to patients, Novartis gave the pharmacy benefits including more patient referrals and higher rebates on each sale ( i.e., kickbacks). See id. ¶ ¶ 186-92. In exchange, BioScrip committed to " mirror and support Novartis priorities," and it continued to recommend Exjade refills to patients. Id. ¶ 193.
The Exjade refill scheme allegedly lasted until 2012, when BioScrip sold its specialty pharmacy division.
C. The Anti-Kickback Statute Compliance Certifications
The Government alleges that, while the two kickback schemes were operating, Novartis and the pharmacies repeatedly " certified" ( i.e., represented) that they were complying with the AKS.
The Complaint alleges that the pharmacies had to enter into Medicare provider agreements (CMS Form 855S), which require all participating pharmacies (the " providers" or " suppliers" ) to certify:
I agree to abide by the Social Security Act and all applicable Medicare laws, regulations and program instructions that apply to this supplier. The Medicare laws, regulations, and program instructions are available through the Medicare contractor. I understand that payment of a claim by Medicare is conditioned upon the claim and the underlying transaction complying with such laws, regulations, and program instructions (including, but not limited to, the Federal anti-kickback statute and the Stark law), and on the supplier's compliance with all applicable conditions of participation in Medicare.
Id. at ¶ 23 (emphasis added). These provider agreements " establish [the pharmacies'] eligibility to participate in the program." Id.
The Complaint alleges that state Medicaid enrollment agreements likewise required the pharmacies to certify compliance with " all state and federal laws and Medicaid regulations," including the AKS, " in billing the state Medicaid program for services or supplies furnished." Id. at ¶ 36. Additionally, many states required Medicaid providers (like the pharmacies) to " affirmatively certify, as a condition of payment of the claims submitted for reimbursement by Medicaid, compliance with applicable federal and state laws and regulations." Id. at ¶ 37.
The pharmacies also certified AKS compliance as part of their involvement in the Medicare Part D prescription drug program. For this program, the Department of Health and Human Services (" HHS" ), through its component agency the Centers for Medicare and Medicaid Services (" CMS" ), contracts with private companies
(" Part D plan sponsors" ) to administer prescription drug plans. Part D plan sponsors, in turn, enter into subcontracts with pharmacies to provide drugs to Medicare Part D beneficiaries. The Complaint alleges that, per CMS regulations, these subcontracts must contain language " obligating the pharmacies to comply with all applicable federal laws, regulations, and CMS instructions," including specifically the AKS. Id. at ¶ ¶ 28-29. The Part D pharmacies must also certify to the " accuracy, completeness, and truthfulness of the [claims] data" they generate. Id. at ¶ 32.
Pursuant to CMS regulations, the Part D plan sponsors must certify that they are in compliance with a number of identified federal laws (including specifically the AKS), as well as certify the accuracy of their claims data. See id. at ¶ ¶ 28-31.
As to Novartis, in September 2010 it entered into a settlement agreement with the Government and several states. The settlement arose in response to the filing of civil actions alleging that Novartis committed AKS violations and health care fraud. The settlement agreement states that Novartis had violated the AKS by giving " illegal remuneration . . . to health care professionals to induce them to promote and prescribe" Novartis drugs. Id. at ¶ 55.
In conjunction with this settlement, Novartis entered into a Corporate Integrity Agreement (" CIA" ) with the Office of Inspector General of HHS (" HHS-OIG" ), which requires Novartis to comply with all federal laws, including specifically the AKS. The CIA mandates that executives at Novartis must submit annual certifications to HHS-OIG to attest to their compliance with federal law. It also requires Novartis to notify HHS-OIG in writing " of all probable violations of criminal, civil, or administrative laws applicable to any federal health care program, including violations of the AKS." Id. at ¶ 59.
The Government contends that the AKS compliance certifications made by Novartis and the pharmacies during the course of the kickback schemes were false.
D. The Claims for Payment
The Government asserts that, through these two schemes, Novartis knowingly caused the pharmacies to submit thousands of false claims to government programs. The claims were allegedly false, not because the drugs were not provided to patients, but rather because they were " tainted" by the undisclosed kickbacks the pharmacies were receiving from Novartis drug sales. The pharmacies were certifying compliance with the AKS, yet they continued to submit claims for Novartis drugs while receiving kickbacks in violation of that statute.
The Complaint contains detailed data on the claims that BioScrip, Baylor, Bryant, Kilgore, Transcript, and Twenty-Ten submitted to government programs. For example, it alleges the following regarding claims submitted by Transcript:
Any Medicare or Medicaid claim submitted by Transcript for Myfortic dispensed in connection with its illegal arrangement with Novartis was false and ineligible for reimbursement because such a claim was tainted by kickbacks. In that regard, Medicare data shows that, between August 1, 2011, and February 28, 2013, Transcript submitted 614 Myfortic claims to Medicare Part B and obtained more than $354,000 in reimbursement based on such false claims.
Id. at ¶ 109. The Complaint contains virtually identical allegations for the other
five pharmacies. No particular claim that a pharmacy submitted for reimbursement is attached as an exhibit or identified in the pleading; rather, the Government's theory is that all claims for Myfortic and Exjade submitted by Novartis's co-conspirators during the life of the kickback scheme were " false." The falsity lay in the fact that the pharmacies were receiving kickbacks from Novartis for promoting these drugs, in violation of the AKS, yet ...