Is Off-Label Marketing Here to Stay?

Since 2004, there have been dozens of settlements in qui tam cases alleging off-label marketing by pharmaceutical and medical device manufacturers. These include some of the largest qui tam settlements in history, including $1.4 billion paid by Eli Lilly in January 2009 and $2.3 billion paid by Pfizer in September 2009. One might reasonably ask whether the drug and device industries have learned their lesson from these cases and will be deterred from future off-label marketing. The writer thinks not, simply because off-label sales are an important part of the business model for drug and devices companies.

To understand this point, one must understand two simple facts about these industries: 

1. getting FDA approval for a new “indication” for a drug or device is very expensive; and
2. once a drug or device has been approved for a single use, no matter how narrow or specific, doctors are free to prescribe it for any other use they see fit.

If you are in charge of rolling out a new drug or device for a manufacturer, your job is to maximize sales of that drug or device and your compensation is likely tied to your success in doing so. Therefore, you don’t have to be a marketing genius to figure out that the market for your product can be increased greatly, and the company’s sales of the new drug or device will soar, if only doctors will make up their minds to use it for an off-label condition that affects large numbers of people.

Yet you are not supposed to actively “promote” a use of a drug or device that is not described in its FDA-approved labeling. If you do so, you may be guilty of misbranding, 21 U.S. C. §352, for which there are criminal penalties including imprisonment for not more than one year and fines of up to twice the gross gain realized by your company. 21 U.S. C. §§331 & 333. Moreover, the False Claims Act may subject you to treble damages and civil penalties on sales to government healthcare programs. 32 U.S.C. §3729. This creates a real conundrum for the drug or device marketer, one in which he weighs the benefits of violating the law (potentially billions of dollars in annual sales for a blockbuster drug) against the likelihood and consequences of getting caught (not too great and not to bad).

As a practical matter, even when drug and device companies are caught, no one goes to jail and the fines imposed are significantly less than the profits realized, especially profits pocketed by executives and sales personnel who have moved on and left others to clean up the mess. It often takes four to five years for the government to act upon a qui tam complaint and the complaint itself may not be filed until several years after the illegal activity occurs. Several of the off-label cases settled within the last year involved conduct occurring between 1998-2000, for a starting point, and 2004-2006, for an end point. The company and many in its sales force often realize years of profit before they are asked to pay anything back. So, doing a simple cost/benefit analysis, many people in the industry decide to break the law. It’s as simple as that.

Once the decision is made to break the law by engaging in off-label promotion of drugs or devices, it takes only a small additional failure of conscience to use money to influence medical education, to distort medical research and to influence the prescribing behavior of physicians, especially if you are losing market share to cut-throat competitors who are already doing so. Depending upon the circumstances, these acts may constitute violations of the Anti-Kickback Statute, 42 U.S.C. §1320a-7b(b)(2) and the False Claims Act, 31 U.S. C. §3729 et seq.

I'm convinced that people in the drug and device industries are no worse morally than people in any other. But these are tough, competitive industries where people are expected to produce outsized profits on their compainies' best products to make up for all the drugs and devices that never pay for their costs of development. The pressure to produce and compete can be overwhelming. many executives and sales representatives eventually reach a day when they can no longer look themselves in the mirror. If you have reached that point, the lawyers at Waters & Kraus are here to help you do the right thing without sacrificing the financial well-being of your family. The government provides you a significant bounty of 10% to 30% of its recovery in any qui tam case you file in order that you will not have to make the Hobson's choice of either breaking the law or having no livelihood.

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WM. Paul Lawrence, II serves as of counsel to Waters & Kraus, LLP. His practice focuses on appellate, class action, and qui tam (whistleblower) litigation under the False Claims Act.

Two Significant Types of False Claims Act Cases Get Second Wind

Some of the biggest qui tam cases settled by the Department of Justice have alleged that pharmaceutical and device manufacturers illegally paid kickbacks to physicians in order to have them prescribe drugs or use certain medical devices. For example, as part of its $328,000,000 settlement with Bristol-Myers Squibb in 2007, the U.S. settled claims that the company paid kickbacks to increase prescriptions of its products. Part of the $2.3 billion settlement with Pfizer in 2009 was also to resolve kickback claims. But some recent district court decisions of the U.S. District Court in Boston—the district with the U.S. Attorney’s office that has been among the most aggressive in pursuing these types of cases—had dealt near fatal blows to these types of cases. For example, in the long-standing case brought by whistleblower Peter Rost, a U.S. District court judge in Boston ruled that Mr. Rost’s allegations against Pfizer ought to be dismissed because the pharmacist that made the “false claim”—the claim for payment for the prescription—did not know that the prescription itself had been influenced by a kickback. In another qui tam case called U.S. ex rel. Hutcheson v. Blackstone Medical, Inc., a different judge from the same court similarly ruled that relators’ kickback allegations should be dismissed, in part, because the party that submitted the claim was not the party that engaged in the illegal, fraudulent behavior.

Now, in a decision overruling the district court’s opinion in Hutcheson, the U.S. Court of Appeals for the First Circuit has ruled that a drug or device maker remains liable under the False Claims Act for paying kickbacks to physicians to prescribe a drug or use a device even when the claim for payment for that drug or device is made by an innocent third-party, such as a pharmacist or hospital. Specifically, the Court found that
“[t]he Supreme Court has long held that a non-submitting entity may be liable under the FCA for knowingly causing a submitting entity to submit a false or fraudulent claim, and it has not conditioned this liability on whether the submitting entity knew or should have known about a non-submitting entity’s lawful conduct.” It ruled, “unlawful acts by non-submitting entities may give rise to a false or fraudulent claim even if the claim is submitted by an innocent party.”

The First Circuit’s Hutcheson opinion is also notable for several other reasons. First, the Court found that a claim could be considered false or fraudulent if the underlying behavior that influenced the claim violated the terms of a contract—in this case, the physicians’ provider agreements and the hospitals’ cost reports. Those agreements certified compliance with anti-kickback provisions. Despite this language, the district court had ruled that a claim could not be false merely because the behavior that influenced it violated certain contractual provisions. Rather, the court found that the relator had to show that the regulation or statute that was violated explicitly prevented the government from paying a claim based on the illegal behavior. The First Circuit rejected this reasoning, holding that because the claims were made due to schemes that violated the language of provider and hospital agreements, they could be considered false.

Finally, and equally significantly, the First Circuit found that even though the claims were paid pursuant to a DRG—a diagnostic-related group code—the fact that they had been made due to kickbacks could be material, meaning knowledge about the fraudulent activity could have influenced Medicare’s decision to pay the claim. When a hospital submits a claim for a procedure, it assigns the procedure a DRG code, and Medicare pays the claim based on what it has determined is the appropriate amount for such procedures. The separate aspects of the procedure are not line-itemed or paid for separately. Defendants have successfully argued in the past, as in the decision from the U.S. District Court for Illinois in U.S. ex rel. Kennedy v. Aventis Pharmaceuticals, that because Medicare just pays for the entire in-patient procedure pursuant to the code, it does not matter that certain aspects of the procedure (for example, the decision to use a particular device or to use a particular drug as part of the procedure in an off-label manner) were caused by illegal or fraudulent conduct. As stated, the First Circuit rejected this reasoning, stating, “We cannot say that, as a matter of law, the alleged misrepresentations in the hospital and the physician claims were not capable of influencing Medicare’s decision to pay the claims.”

In one swoop, then, Hutcheson breathes new life back into at least two significant types of FCA cases: those based on kickbacks and those alleging fraudulent conduct that leads to the off-label use of drugs or the use of devices in in-patient hospital procedures. It also broadens the notion of “conditions of payment” to validate FCA cases that are based on violations of contracts, including, in the health care context, provider agreements and hospital cost reports.

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Loren Jacobson is a partner at Waters & Kraus, LLP, in the firm’s Dallas office. Her practice focuses on qui tam (whistleblower) cases and appellate matters.

SEC Publishes its Final Rules Implementing the New SEC Whistleblower Award Program

On March 25, 2011, the SEC published its final rules implementing the new SEC whistleblower award program. The SEC received over 240 comments regarding its proposed rules. One of the biggest and most contentious debates was whether to prohibit whistleblowers from being rewarded if they did not utilize their company's internal compliance programs. Many companies stated that their internal compliance programs would be undermined if whistleblowers could report directly to the SEC without informing the company first. Ultimately, in the final rules, the SEC created particular incentives for whistleblowers who use their company's internal compliance programs, such as making internal compliance one of the positive factors that the SEC considers in determining the percentage award. However, the SEC ultimately concluded that it was not in the best interests of the public to make use of the company's internal compliance program mandatory in order for whistleblowers to receive an award.

The new rules also have provisions that say that sanctions may be aggregated for actions with the same nucleus of facts for the purpose of determining whether total sanctions add up to $1,000,0000. Under Dodd-Frank (the name of the law which created the SEC whistleblower award program), the SEC must successfully recover more than $1,000,000 in order for the whistleblower to receive a reward. Under the proposed rules, a whistleblower could only recover an award if the SEC obtained sanctions of over $1,000,000 in a single action. This final rule allowing aggregation is helpful to whistleblowers in many situations. For example, if the SEC recovered sanctions against a company, and then brought an action against individuals for the same actions, then the SEC will aggregate the total amount of sanctions from the two actions to determine whether the total amount of sanctions recovered is over $1,000,000.

Another significant provision of the rules is that it includes the Tip, Complaint, or Referral Form (Form TCR) that whistleblowers will be required to fill out in order to obtain a reward. A whistleblower has the choice whether to submit the information electronically, by mail or delivery, or by fax. The SEC's original proposed rule had two required forms for whistleblowers tips, but after receiving many comments, the SEC decided to consolidate the forms into one form. An important provision of Form TCR to be aware of is that whistleblowers have the option to report anonymously, but if they decide to use this option, they must be represented by an attorney. Whistleblowers must disclose their identity once the SEC has brought a successful action and the whistleblower requests an award. In addition, Whistleblowers must sign a copy of Form TCR and give it to their attorney, and must present their attorney with a valid form of government I.D. Although they are allowed to report anonymously, whistleblowers must agree that their attorney can release their signed form (which would reveal their identity) if the SEC requests it due to concerns that the whistleblower has been untruthful.

The SEC also published its procedures for determining who receives an award once a successful action has been taken. The whistleblower must fill out the application for award form (Form WB-APP) that is included in the final rules in order to receive an award. There are deadlines for submitting the form once the SEC has successfully recovered sanctions and published a notice, so it is essential for whistleblowers and their attorneys to pay close attention to these deadlines. The new SEC rules plus the SEC's explanations of the rules and the comments received are available at: http://www.sec.gov/rules/final/2011/34-64545.pdf.

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Jennifer L. McIntosh is an attorney at Waters & Kraus, LLP, in the firm’s West Coast practice — Waters, Kraus & Paul. Her practice focuses on class action cases, qui tam (whistleblower), and commercial litigation.