iStock_000035162090LargeThis week, the Supreme Court denied the qui tam plaintiff’s petition for certiorari in United States ex. Rel. Rostholder v. Omnicare, Inc., a False Claims Act (FCA) case from the Fourth Circuit. In Omnicare, the relator alleged that the defendants violated the FCA because certain of its practices violated Food and Drug Administration (FDA) safety regulations and Medicare and Medicaid beneficiaries subsequently presented claims for reimbursement for its products. The district court dismissed the relator’s complaint for failure to state a claim upon which relief can be granted, and the Fourth Circuit affirmed. The Supreme Court’s denial of a writ of certiorari sends a signal that there are limits on FCA claims rooted in regulatory violations. Namely, an FCA claim cannot be based on a violation of a regulation that is wholly unrelated to any condition or requirement for payment.

The relator in Omnicare was a licensed pharmacist at a  facility owned by Omnicare. He became concerned that the company was handling certain drugs in violation of an FDA regulation. In 2006, the relator resigned and reported the company’s practices to the FDA. The FDA investigated  and issued a warning letter to Omnicare.

The relator then filed an FCA action, alleging that because the defendants allegedly failed to comply with certain FDA regulations, the defendants’ products were ineligible for coverage under Government programs. The district court dismissed the complaint, finding that the relator failed to allege that Omnicare made a false statement to the Government or engaged in fraudulent conduct. The district court further denied the relator’s motion for leave to amend the complaint.

The Fourth Circuit affirmed the dismissal and denial of leave to amend. The appeals court analyzed the FDA regulations underlying the qui tam plaintiff’s claim and determined that although the drugs may have been deemed “adulterated” under food and drug law, the Medicare and Medicaid statutes do not prohibit reimbursement for such drugs or require compliance with FDA regulations as a precondition for reimbursement. The relator argued that he sufficiently pled false claims because compliance with the FDA regulations is material to the Government’s decision to reimburse beneficiaries for drugs, but the Fourth Circuit rejected this argument, explaining that a relator must allege “both materiality and a ‘false statement or fraudulent course of conduct.’” Because compliance with the regulations was not a condition for payment, the relator failed to allege a false statement. Finally, because the Medicare and Medicaid statutes do not require compliance with the regulations for reimbursement, the qui tam plaintiff failed to satisfy the FCA’s scienter requirement.

This decision has important implications for government contractors. As the number of whistleblower FCA claims has increased in recent years, contractors have been faced with FCA claims based on alleged failures to comply with an array of complex and ever-changing regulatory requirements that are not a condition of payment. Government contractors will likely agree with the Fourth Circuit’s statement rejecting FCA liability based on a regulatory violation:

Were we to accept relator’s theory of liability based merely on a regulatory violation, we would sanction use of the FCA as a sweeping mechanism to promote regulatory compliance, rather than a set of statutes aimed at protecting the financial resources of the government from the consequences of fraudulent conduct. When an agency has broad powers to enforce its own regulations, as the FDA does in this case, allowing FCA liability based on regulatory non-compliance could “short-circuit the very remedial process the Government has established to address non-compliance with those regulations.”

The Supreme Court’s denial of cert in Omnicare should be a signal to other courts that the FCA is not the mechanism to enforce regulatory compliance.