Recently, a Florida federal judge dismissed the Department of Justice’s (DOJ) False Claims Act (FCA) allegations against a compounding drug pharmacy and the pharmacy’s private equity (PE) owner. For two reasons, the case may be illustrative of the DOJ’s increasingly aggressive pursuit of what it perceives as fraud within the healthcare industry.
First, it is noteworthy that DOJ suffered a dismissal of its FCA claims. This case began as yet another qui tam/relator claim. Thereafter, DOJ intervened after as many as five extensions allowing for its review of the matter. DOJ does not intervene in cases lightly, and when it does, it typically means DOJ believes the claims and proof are strong and of significant value. In this case, DOJ had previously obtained a criminal conviction against at least one fairly noteworthy alleged kickback recipient in a scheme involving the same pharmacy, signaling that the proof of a fraud scheme in this case may indeed be strong. But a dismissal (albeit without prejudice) of FCA claims against company defendants after DOJ intervention may show that the DOJ is increasingly willing to push the envelope in its theories and claims as it seeks to go after the money in such cases. According to the judge’s ruling, DOJ brought forward allegations of real, provable false claims, but failed to allege the company defendants had falsely certified those claims as legitimate under the law (a prerequisite to liability in cases like this). The true test of DOJ’s aggression in this case will now be whether it revamps its claims and refiles them.
Second, this may well be the first time DOJ has brought an FCA claim against not only the company that allegedly engaged directly in the fraud in its own name, but also against the private equity firm that owned the company. This case highlights the delicate balance such firms face as they seek to protect and manage their investments, while maintaining sufficient distance and managerial detachment to avoid liability for things like FCA claims. In this case, the PE firm had allegedly scrambled to protect its investment in the pharmacy company after a primary line of products dwindled. The PE firm put two of its partners on the pharmacy’s board, and had selected a new CEO against the advice of an independent management consultant, according to the government. Through its board and CEO selection and oversight, the government alleged the PE firm maintained a high level of control over the pharmacy. Even more striking, according to the government the PE firm had been advised by counsel that the claims at issue violated the FCA, yet continued to allow the pharmacy to submit them.
It remains to be seen whether DOJ will increasingly bring FCA claims against PE firms who own companies that allegedly engage in misconduct. While this case may well be a first of its kind, it is possible (if not likely) that the unique facts of the case led the government to include the PE firm. The standard of proof in FCA cases is knowing or intentional fraud. The government clearly felt it could meet that standard in this case based on the level of control the PE firm exercised. Other PE firms should take care to evaluate the level of control exercised over portfolio companies in this light.