Overview

Devices and Diagnostics Letter

by Paul D.Scott
Vol. 22, No. 26
July 7, 1995

A new and ominous peril confronts manufacturers submitting applications to the FDA for approval of devices. The False Claims Act, a statute dating back more than a century, has recently become a significant weapon in the federal government’s arsenal against fraud on the FDA. Companies caught making false statements in applications to the FDA can now expect to pay enormous sums in damages and penalties to compensate the government for federal funds expended on the devices. Meanwhile, whistle-blowers who report such conduct can look forward to collecting generous bounties.

False representations to the FDA once produced certain predictable consequences. The government has long sought criminal sanctions against companies that submit “false or misleading” reports to the FDA in violation of the Food Drug and Cosmetic Act or related criminal statutes. Recently, however, the government has begun to focus on its own harm resulting from such false statements and thus has introduced the False Claims Act to the fight.

Passed in 1863 during the height of the Civil War, the False Claims Act permits the Justice Department, or whistle-blowers acting on its behalf, to file suit against any person or entity that knowingly submits false statements or claims to the government for payment.

Virtually any claim is covered, including claims for reimbursement for medical devices, whether submitted directly to the government or indirectly through a third party like a hospital, distributor or intermediary. If the claim is paid in whole or in part under a federal government program like Medicare or Medicaid, it is covered.

The Act requires proof that the statement or claim was made “knowingly”, but this standard is easily met. The term “knowingly” is defined in the Act to include “actual knowledge,” “reckless disregard” or “deliberate ignorance” of the truth.

Treble Damages and $10,000 penalties

A firm found liable for submitting false claims can pay up to three times the government’s damages plus penalties of between $5,000 and $10,000 for each false statement or claim. Of course, in the medical device industry, where sometimes hundreds and thousands of claims are submitted for reimbursement, even if the damages per claim are small, penalties can quickly mount into the millions of dollars.

Indeed, the government’s leverage is confirmed by the size of some of the settlements it has obtained recently from device manufacturers. In 1994, Shiley paid $10.75 million to settle claims it had made false representations in its application for pre-market approval of the company’s convexo-concave prosthetic heart valve.

C.R. Bard last year paid $30.5 million in damages and penalties to settle claims that it made false statements to the FDA about its heart catheters. Cordis paid $5 million a few years ago to settle claims that it made false statements to gain approval of a defective pacemaker.

With these recent successes, the government is sure to bring more False Claims Act cases in the future. More important, though, whistle-blowers acting on the government’s behalf will be even more likely to bring such cases.

The False Claims Act permits people possessing information about fraud against the government to file suit on its behalf, and collect a substantial chunk of the government’s winnings for their effort. In the past several years, the number of these cases has exploded.

Whistle-blower suits are filed in federal court under the “qui tam” provisions of the False Claims Act. [qui tam, from Latin, “who as well,” prosecuting the case for the government as well as oneself.] Individuals who file suit on the government’s behalf are called “relators.” Almost anyone can file suit as a relator, including wrongdoers, unless they have been convicted of or initiated the fraud. When the Act was first passed in 1863, Congress expressed no compunction about “setting a rogue to catch a rogue.”

The key limitation on relators concerns whether the information they provide has been publicly disclosed previously in a public hearing, report or investigation, or in the news media. If so, then the relator can only be assured of a share of the government’s recovery if the relator was the “original source” of the information, meaning the relator supplied the information to the government or the media before it became public.

Complaints are filed under seal and are initially served only on the Government, giving the Justice Department a chance to investigate the allegations in the complaint and determine whether or not to intervene. If Justice decides to intervene, the relator is generally entitled to 15 to 25 percent of the recovery, depending on, among other things, how much he or she helped the government’s prosecution of the case.

If the government does not intervene, the relator may still pursue the case on the government’s behalf. If this effort is successful, the relator’s share jumps to between 25 and 30 percent of the recovery.

Only One Device Case — So Far

Because of these strong incentives, and the passage of liberalizing amendments to the False Claims Act in 1986, qui tam cases have multiplied exponentially over the past decade. In 1987, only 32 qui tams were filed. Last year, the number was well over 220. Recoveries by the government in qui tam actions have correspondingly grown from none in 1987 to $378 million last year. Over the same period, relators have collected over $90 million for themselves.

While only one qui tam case — Cordis — has been reported against a device maker, firms can expect more of such suits in the future. The Shiley and Bard cases, for example, could well have been qui tam actions had knowledgeable parties stepped forward and filed suit against the defendants before the government resolved the cases.

The simple fact is that the amended qui tam provisions of the False Claims Act were designed to encourage whistle-blowing and they are working, with dramatic consequences for all firms doing business with the government. The challenge for industry in this dangerous climate will be to avoid questionable representations that might lead to a fraud case. The temptation, of course, for individuals aware of such practices will be to file suit on the government’s behalf and collect their statutory reward.