Third Circuit Says Public Disclosure Bar Does Not Stop FCA Suit Where Claim Was Dependent on Combination of Public and Non-Public Information
On September 4, 2018, the Third Circuit revived a False Claims Act (FCA) suit against PharMerica Corporation that the District Court had dismissed based on the FCA’s public disclosure bar. The public disclosure bar provides that a “court shall dismiss an action or claim under this section …. if substantially the same allegations or transactions as alleged in the action or claim were publicly disclosed… unless… the person bringing the action is an original source of the information.” 31 U.S.C. § 3730(e)(4)(A) (2010). Where the fraud has been publicly disclosed (either because the public documents set out the actual allegation of fraud or its essential elements), a relator’s claim is barred if it is “supported by” or “substantially similar to” the public information.
In United States ex rel. Silver v. Omnicare, Inc., No. 16-4418, at 10 (3d Cir. 2018), the Third Circuit held that the public disclosure bar did not apply because, although the relator relied on publicly available information to bring his suit, he could not have done so but for the additional non-public information on which he also relied.
PharMerica owns and operates institutional pharmacies that service nursing homes. In Omnicare, the relator, Marc Silver, alleged that PharMerica unlawfully discounted prices for Medicare Part A patients in order to secure contracts to supply services to patients in the same nursing homes covered by Medicare Part D and Medicaid. This quid pro quo practice is known as “swapping.”
Swapping is a violation of the Anti-Kickback Statute, and also violates the FCA when a pharmacy certifies falsely that it has complied with the Anti-Kickback Statute. The government pays nursing homes a fixed per-diem rate for each Medicare Part A patient, and nursing homes are responsible for paying for the care of such patients, including for their prescription drugs. Nursing homes therefore have an incentive to seek cheaper drug prices for Part A patients. In contrast, the government pays pharmacies directly for drugs provided to Part D and Medicaid patients, so nursing homes need not worry about the price of medications dispensed to such patients. This reimbursement structure potentially incentivizes nursing homes to bargain with pharmacies to “swap” lower drug prices for Part A patients in exchange for allowing pharmacies to sell drugs to a larger number of Part D patients.
In his qui tam suit, Silver alleged that PharMerica engaged in swapping by agreeing with various nursing homes to provide drugs to Part A patients at per-diem rates that were below cost in exchange for the right to service Part D and Medicaid patients at the market rate. The United States District Court for the District of New Jersey held that Silver’s claims were barred by the FCA’s public disclosure bar because Silver admitted that he relied on public documents in concluding that fraud had occurred.
Third Circuit Decision
On appeal, the Third Circuit reversed the District Court’s dismissal and held that the public disclosure bar did not apply because the public documents on which Silver relied to bring his FCA claim – namely (1) public reports that described the general risk of swapping in the nursing home industry; and (2) PharMerica’s financial information in its public 10-K filings – were insufficient to create a viable FCA claim. Specifically, the Court concluded that the publicly available documents did not, on their own, disclose the fraudulent transactions that Silver alleged, nor did they point to any specific fraudulent transactions directly attributable to PharMerica. Rather, although Silver admitted he relied on public documents, his claims also depended on information he acquired through non-public contracts indicating that PharMerica was offering below-price per-diem rates for Part A patients. Without those non-public documents, Silver could not have pled fraud with particularity sufficient to state a viable claim under Fed. R. Civ. P. 9(b). Although it had never explicitly said so in the past, the Third Circuit clarified that “the FCA’s public disclosure bar is not triggered when a relator relies upon non-public information to make sense of publicly available information, where the public information – standing alone – could not have reasonably or plausibly supported an inference that the fraud was in fact occurring.” Omnicare, No. 16-4418, at 21.
Additionally, the Third Circuit held that the District Court erred because it had relied on Silver’s admission that he deduced fraud from public documents in order to conclude that those public documents actually disclosed the fraud. The Third Circuit explained that courts are tasked with determining independently where the fraud was disclosed, and may not take the relator’s word for it, without more. In cases in which the relator admits that the fraud was disclosed fully through public documents, the court must nonetheless confirm that those documents disclosed the fraud. Conversely, in cases in which the relator claims reliance upon non-public documents to ascertain the fraud, the court must still review the public documents to determine if alone, they disclosed information sufficient to raise the inference of fraud. If “the public documents disclose substantially the same fraud that the relator – even through non-public information – alleges, the allegation is deemed publicly disclosed,” and the public disclosure bar would apply. Omnicare, No. 16-4418, at 29.
In sum, even if a relator relies on publicly available information in bringing an FCA claim, the public disclosure bar does not apply unless the fraud was sufficiently disclosed through the public information standing alone, without the aid of non-public information. Of course, this is not to say that the public disclosure bar could never apply to a relator’s reliance upon both public and non-public information. Rather, the test is whether the non-public information was necessary to support the fraud claim. And if a fraud claim was already disclosed through public information, the relator’s application of his own experience or deductive skills to the publicly available information would not be necessary to state the fraud, and so the bar would still apply.
Finally, even if a relator concedes reliance upon public information to bring a claim, courts must still exercise their independent duty to review publicly disclosed information to determine whether the fraud was sufficiently disclosed.