PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 12-2431
UNITED STATES ex rel. BARRY ROSTHOLDER; BARRY ROSTHOLDER,
individually,
Plaintiffs - Appellants,
and
STATE OF CALIFORNIA; STATE OF DELAWARE; STATE OF FLORIDA;
STATE OF HAWAII; STATE OF ILLINOIS; STATE OF INDIANA; STATE
OF LOUISIANA; STATE OF MASSACHUSETTS; STATE OF MICHIGAN;
STATE OF MONTANA; STATE OF NEW HAMPSHIRE; STATE OF NEW
MEXICO; STATE OF NEW YORK; STATE OF NEVADA; STATE OF
TENNESSEE; STATE OF TEXAS; STATE OF VIRGINIA; COOK COUNTY,
ILLINOIS; DISTRICT OF COLUMBIA; CITIES OF CHICAGO AND NEW
YORK; STATE OF GEORGIA; STATE OF NEW JERSEY; STATE OF
OKLAHOMA; STATE OF RHODE ISLAND; STATE OF WISCONSIN,
Plaintiffs,
v.
OMNICARE, INCORPORATED, a Delaware Corporation; OMNICARE
DISTRIBUTION CENTER, LLC, f/k/a Heartland Repack Services,
LLC, a Delaware Limited Liability Company, jointly and
severally,
Defendants – Appellees.
Appeal from the United States District Court for the District of
Maryland, at Baltimore. Catherine C. Blake, District Judge.
(1:07-cv-01283-CCB)
Argued: December 10, 2013 Decided: February 21, 2014
Before NIEMEYER, SHEDD, and KEENAN, Circuit Judges.
Affirmed by published opinion. Judge Keenan wrote the opinion,
in which Judge Niemeyer and Judge Shedd joined.
ARGUED: Gerald C. Robinson, GERALD ROBINSON LAW FIRM PLLC,
Minneapolis, Minnesota, for Appellants. James Christopher
Martin, REED SMITH LLP, Pittsburgh, Pennsylvania, for Appellees.
ON BRIEF: Jay P. Holland, JOSEPH, GREENWALD & LAAKE, PA,
Greenbelt, Maryland, for Appellants. Colin E. Wrabley,
Pittsburgh, Pennsylvania, Eric A. Dubelier, Lawrence S. Sher,
Katherine J. Seikaly, REED SMITH LLP, Washington, D.C., for
Appellees.
2
BARBARA MILANO KEENAN, Circuit Judge:
Relator Barry Rostholder (relator) filed this qui tam
action under the False Claims Act (FCA), 31 U.S.C. §§ 3729
through 3733, against his former employer, Omnicare, Inc., and
its affiliated companies. Relator alleged that the defendants
violated a series of Food and Drug Administration (FDA) safety
regulations requiring that penicillin and non-penicillin drugs
be packaged in complete isolation from one another, which
violations resulted in a legal presumption of penicillin cross-
contamination. According to relator, these contaminated drugs
were not eligible for reimbursement by Medicare and Medicaid
and, therefore, any claims presented to the government for
reimbursement for these drugs were false under the FCA.
The district court granted Omnicare’s motion to dismiss the
complaint under Federal Rule of Civil Procedure 12(b)(6).
Because relator already had filed two amended complaints, the
court denied any further leave to amend. Upon our review, we
hold that relator’s complaint failed to allege that the
defendants made a false statement or that they acted with the
necessary scienter. We also conclude that the district court
did not abuse its discretion in denying relator’s request to
file a third amended complaint. We therefore affirm the
district court’s judgment.
3
I.
Omnicare provides certain pharmaceutical services to senior
citizens through its drug repackaging and pharmacy facilities.
As alleged in relator’s second amended complaint, Omnicare owned
Heartland Repack Services, LLC (Heartland), the drug repackaging
operation at issue in this case located in Toledo, Ohio (the
Toledo building). Heartland repackaged drugs into convenient
units for patient use. Omnicare also operated hundreds of
pharmacies nationwide, including a pharmacy that shared the
Toledo building with Heartland. Such pharmacies “primarily”
served nursing homes owned by Omnicare’s partner, Health Care
Resources.
Although Heartland repackaged non-penicillin drugs for
distribution, the Omnicare pharmacy that shared the Toledo
building processed penicillin products. The pharmacy and the
repackaging operations were located in the Toledo building, and
were separated by “rolling” garage-type doors. Within the
building, employees of both the repackaging and pharmacy units
shared “break” areas, entrances, and exits. The Toledo building
also had a single ventilation and heating/cooling system.
From 1997 until 2006, relator, a licensed pharmacist, was
employed at Heartland. Relator’s job responsibilities included
“overseeing repackaging, quality assurance, regulatory affairs,
and wholesale and distribution.” In 2004, Omnicare executive
4
and relator’s supervisor, Denis Holmes, suggested that Heartland
begin repackaging penicillin products. Relator informed Holmes
that any repackaging of penicillin drugs would constitute a
violation of FDA regulations requiring the separate processing
of penicillin and non-penicillin products.
Relator conducted further research regarding the FDA’s
penicillin isolation requirements and stated his conclusions in
a memorandum that he provided to Holmes. Relator also contacted
the pharmacy manager in the Toledo building, who informed
relator for the first time that the pharmacy frequently
repackaged penicillin, despite sharing the building with
Heartland’s non-penicillin drug packaging operation (the
Heartland facility). At Holmes’ request, relator researched and
recommended ways in which Heartland could repackage penicillin
in compliance with FDA regulations.
In February 2006, relator resigned from Heartland due to
his concerns about the facility’s quality control efforts.
Several months after his resignation, relator notified the FDA
of Heartland’s “improper repackaging practices.” Based on this
information, FDA investigators visited the Heartland facility
and were advised by employees that “no penicillin was being
repackaged in the Repackaging Division.” Based on these
representations, the investigators left the Heartland facility.
5
Relator later participated in an interview with FDA
officials, during which “[h]e described the specific details of
the penicillin exposure” at the Heartland facility. In the
summer of 2006, the FDA conducted another inspection of the
Heartland facility and discovered that penicillin was being
repackaged in the Toledo building. Testing “revealed the
presence of penicillin throughout the building,” including in
the Heartland facility. As a result, the FDA issued a warning
letter to Omnicare (the warning letter), outlining numerous
violations of FDA regulations, both related and unrelated to
Omnicare’s practices of handling penicillin. The warning letter
explained that Omnicare’s failure to adhere to the FDA’s Current
Good Manufacturing Practice regulations (the CGMPs) caused the
drugs to be “adulterated.”
Rather than quarantining and conducting tests on its
products, Omnicare disposed of nearly $19 million worth of
inventory. According to the complaint, Omnicare at that time
had not recalled any of its drugs due to suspected penicillin
contamination, nor had Omnicare reimbursed the government for
amounts already paid for the contaminated drugs.
6
In May 2007, relator filed this action under the FCA, 31
U.S.C. § 3729(a)(1), (a)(2), and (a)(7) (2006), 1 and similar
state statutes, against Omnicare and its affiliated companies
(collectively, Omnicare). 2 Relator alleged that Omnicare
“knowingly and/or recklessly repackaged drugs at [the Toledo
building] in violation of applicable laws, including [the
CGMPs], which rendered [the drugs] presumptively unsafe under
[the CGMPs], and therefore adulterated and misbranded, and
therefore not in their FDA-approved form, and thus ineligible
for coverage under government programs.” The government
declined to intervene in the action.
The district court granted Omnicare’s motion to dismiss,
holding that relator had failed to allege that Omnicare made a
false statement to the government or engaged in fraudulent
conduct. The court also held that relator had not adequately
alleged the details of any false claims that had been submitted
to the government for reimbursement. After the court denied
relator’s motion for leave to amend his complaint, relator
timely appealed.
1
The 2009 amendments to the FCA resulted in a renumbering
of these sections. See Fraud Enforcement and Recovery Act of
2009, Pub. L. No. 111-21, 123 Stat. 1617. We refer to the pre-
amendment numbering system as cited in the complaint.
2
The second amended complaint was filed in October 2010.
7
II.
A.
Before addressing the merits of relator’s arguments on
appeal, we first consider Omnicare’s assertion that the district
court lacked subject matter jurisdiction over this action due to
the “public disclosure bar” in the FCA. We review this
jurisdictional question de novo, and examine the district
court’s jurisdictional findings of fact for clear error. U.S.
ex rel. Vuyyuru v. Jadhav, 555 F.3d 337, 350 (4th Cir. 2009);
U.S. ex rel. Grayson v. Advanced Mgmt. Tech., Inc., 221 F.3d
580, 582 (4th Cir. 2000); see also Gaines Motor Lines, Inc. v.
Klaussner Furniture Indus., 734 F.3d 296, 301 (4th Cir. 2013)
(noting our “obligation to assure ourselves of our
jurisdiction”).
The version of the public disclosure bar in place at the
time of the relevant events 3 provided:
3
The public disclosure bar provision was amended in 2010.
See Patient Protection and Affordable Care Act, Pub. L. No. 111-
148, 124 Stat. 119 (2010). The disclosures at issue in this
case occurred in 2006, and relator filed the original complaint
in 2007. The amendments to the public disclosure bar are not
retroactive, and neither party argues that the amended statute
should apply. See Graham Cnty. Soil & Water Conservation Dist.
v. U.S. ex rel. Wilson, 559 U.S. 280, 283 n.1 (2010).
Accordingly, like the district court, we apply the pre-amendment
version of the statute and our precedent interpreting that
version.
8
(A) No court shall have jurisdiction over an action
under this section based upon the public disclosure of
allegations or transactions in a criminal, civil, or
administrative hearing, in a congressional,
administrative, or Government [General] Accounting
Office report, hearing, audit, or investigation, or
from the news media, unless the action is brought by
the Attorney General or the person bringing the action
is an original source of the information.
(B) For purposes of this paragraph, ‘original source’
means an individual who has direct and independent
knowledge of the information on which the allegations
are based and has voluntarily provided the information
to the Government before filing an action under this
section which is based on the information.
31 U.S.C. § 3730(e)(4) (2006) (emphasis added). Omnicare argues
that the public disclosure bar divested the district court of
jurisdiction because relator’s complaint is “based upon” the
warning letter and Omnicare’s “Form 10-Ks” filed with the
Securities and Exchange Commission (SEC). 4 Omnicare also asserts
that relator is not an “original source” of the information in
the complaint. We disagree with Omnicare’s arguments.
Under this Court’s precedent, “a qui tam action is based
upon publicly disclosed allegations only if the qui tam
plaintiff’s allegations were actually derived from the public
4
Publicly traded companies must submit to the SEC a “Form
10-K” annually. The form “provides a comprehensive overview of
the company’s business and financial condition and includes
audited financial statements.” U.S. Securities and Exchange
Commission, Form 10-K, available at
http://www.sec.gov/answers/form10k.htm (last accessed Feb. 20,
2014).
9
disclosure itself.” U.S. ex rel. Wilson v. Graham Cnty. Soil &
Water Conservation Dist., 528 F.3d 292, 308 (4th Cir. 2008),
rev’d on other grounds by 559 U.S. 280 (2010) (emphasis in
original). A qui tam action will “not be barred if the
plaintiff’s claims are similar or even identical to the publicly
disclosed allegations, so long as the plaintiff had independent
knowledge of the facts and did not derive his allegations from
the public disclosure itself.” 5 Id.
We conclude that relator’s FCA complaint was not “based
upon” the warning letter or SEC filings, despite Omnicare’s
objection to the “substantial similarities” between the
allegations in the complaint and the public disclosures. The
complaint makes clear that relator discovered the penicillin-
related violations of the CGMPs during his employment at
Heartland. Relator’s knowledge was based on his conversations
with other employees in the Toledo building, his personal
familiarity with the repackaging operations, and his own
independent research. Relator also alleged that he twice
informed the FDA of the penicillin exposure issues at Heartland,
5
We note that under the amended version of the statute, the
public disclosure bar applies “if substantially the same
allegations or transactions as alleged in the action or claim
were publicly disclosed,” unless the plaintiff was an original
source. 31 U.S.C. § 3730(e)(4).
10
which precipitated the FDA investigations and resulted in the
FDA’s issuance of the warning letter.
Also in his complaint, relator alleged that Omnicare
supplied drugs to patients residing in nursing care facilities
who primarily were insured by government health care programs.
These allegations illustrate relator’s independent knowledge,
apart from the SEC filings regarding Omnicare’s revenue, that
Omnicare caused claims to be submitted to the government for
payment. See Vuyyuru, 555 F.3d at 353.
For the same reasons, we conclude that relator has
sufficiently alleged that he had “direct and independent
knowledge of the information on which the allegations are
based,” thereby entitling him to original source status. See 31
U.S.C. § 3730(e)(4)(B) (2006). Accordingly, we hold that the
public disclosure bar did not divest the district court of
jurisdiction over relator’s FCA claims.
B.
We next consider relator’s primary argument on appeal,
namely, that the district court erred in dismissing relator’s
complaint on the ground that he did not adequately allege a
false statement or a fraudulent course of conduct as required
for an FCA claim. We review de novo the district court’s
dismissal of relator’s complaint under Rule 12(b)(6). U.S. ex
11
rel. Nathan v. Takeda Pharms. N. Am., Inc., 707 F.3d 451, 455
(4th Cir. 2013).
The FCA is designed to prevent fraud and reflects Congress’
broad goal “to protect the funds and property of the
government.” U.S. ex rel. Owens v. First Kuwaiti Gen. Trading &
Contracting Co., 612 F.3d 724, 728 (4th Cir. 2010) (citation and
quotation marks omitted). Under 31 U.S.C. § 3729(a)(1), a
person is liable to the United States government if he
“knowingly presents, or causes to be presented, a false or
fraudulent claim for payment or approval.” To plead an FCA
claim, a relator must plausibly allege four distinct elements:
“(1) [] there was a false statement or fraudulent course of
conduct; (2) made or carried out with the requisite scienter
[knowledge]; (3) that was material; and (4) that caused the
government to pay out money or to forfeit moneys due (i.e., that
involved a ‘claim’).” 6 Harrison v. Westinghouse Savannah River
Co., 176 F.3d 776, 788 (4th Cir. 1999).
Relator contends that he adequately alleged the elements of
an FCA claim in this case. He asserts that by failing to comply
with the CGMPs, Omnicare’s repackaged drugs were “adulterated”
6
These elements similarly apply to FCA claims brought under
§ 3729(a)(2) and (a)(7). See Harrison v. Westinghouse Savannah
River Co., 176 F.3d 776, 784-88 (4th Cir. 1999); U.S. ex rel.
Sanders v. N. Am. Bus Indus. Inc., 546 F.3d 288, 297, 299 (4th
Cir. 2008).
12
and prohibited from interstate commerce and, therefore,
ineligible for reimbursement by Medicare and Medicaid. Relator
thus maintains that any claim for reimbursement for these drugs
under government programs was false or fraudulent within the
meaning of the FCA.
To determine whether relator’s allegations in his second
amended complaint were sufficient to withstand Omnicare’s motion
to dismiss under Rule 12(b)(6), we first consider the general
regulations and the statutory provisions on which relator’s FCA
claim is based. FDA regulations set forth the “Current Good
Manufacturing Practices” related to the handling of penicillin.
The CGMPs require that “[o]perations relating to the
manufacture, processing, and packing of penicillin” be
“performed in facilities separate from those used for other drug
products for human use,” and additionally mandate “completely
separate” “air-handling systems” for such operations involving
penicillin and other types of drugs. 21 C.F.R. §§ 211.42,
211.46(d).
The regulations require that non-penicillin drugs be tested
for the presence of penicillin “[i]f a reasonable possibility
exists” that the non-penicillin drug has been exposed to
penicillin cross-contamination. 21 C.F.R. § 211.176. The non-
penicillin drug may not be marketed “if detectable levels [of
penicillin] are found when tested.” Id. Drugs that do not
13
comply with the CGMPs are considered “adulterated” within the
meaning of the Food, Drug, and Cosmetic Act (FDCA), and are not
permitted in interstate commerce. 21 U.S.C. §§ 331,
351(a)(2)(B); see also 21 C.F.R. 210.1 (failure to comply with
the CGMPs renders a drug “adulterated”).
Relator’s assertion that Omnicare fraudulently made claims
for payment for “adulterated” drugs is based on the statutes
governing reimbursement under Medicare and Medicaid. Those
statutes define “covered outpatient drugs” as those “approved
for safety and effectiveness” under the FDCA, 21 U.S.C. § 355.
See 42 U.S.C. § 1396r-8(k)(2)(A)(i) (Medicaid); 42 U.S.C. §
1395w-102(e) (Medicare Part D); see also 42 C.F.R. § 423.100
(defining Medicare “Part D” drug). The FDA’s approval process
for new drugs under 21 U.S.C. § 355 requires that an application
for approval describe “the methods used in, and the facilities
and controls used for, the manufacture, processing, and packing”
of the drug. 21 U.S.C. § 355(b). The FDA may refuse an
application or withdraw a previously approved application if
these methods or facilities “are inadequate to preserve [the
drug’s] identity, strength, quality, and purity.” Id. § 355(d),
(e). A new drug may not be introduced into interstate commerce
unless an approved application is in effect. 21 U.S.C. §
355(a).
14
According to relator, because the Medicare and Medicaid
statutes refer to the FDCA’s requirements for new drug approval
and marketing set forth in Section 355, Medicare and Medicaid do
not authorize reimbursement for any drugs that are “adulterated”
due to non-compliance with the CGMPs. Relator acknowledges,
however, that the Medicare and Medicaid statutes do not
expressly prohibit reimbursement for drugs that have been
adulterated. Moreover, those statutes do not require compliance
with the CGMPs or any other FDA safety regulations as a
precondition to reimbursement.
To qualify as a “covered outpatient drug” as defined in the
Medicare and Medicaid statutes, a drug merely must be approved
by the FDA. The relevant statutes do not provide that when an
already-approved drug has been produced or packaged in violation
of FDA safety regulations, that particular drug may not be the
proper subject of a reimbursement request under Medicare and
Medicaid. Therefore, we conclude that once a new drug has been
approved by the FDA and thus qualifies for reimbursement under
the Medicare and Medicaid statutes, the submission of a
reimbursement request for that drug cannot constitute a “false”
claim under the FCA on the sole basis that the drug has been
adulterated as a result of having been processed in violation of
FDA safety regulations.
15
Relator maintains, nevertheless, that he adequately has
pleaded a false claim because compliance with the CGMPs is
material to the government’s decision to provide reimbursement
for regulated drugs. However, relator must allege both
materiality and a “false statement or fraudulent course of
conduct” as distinct elements of an FCA claim. See Harrison,
176 F.3d at 788; Owens, 612 F.3d at 729. Here, because
compliance with the CGMPs is not required for payment by
Medicare and Medicaid, Omnicare has not falsely stated such
compliance to the government, as contemplated by the FCA. 7 Thus,
relator’s allegations of regulatory violations fail to support
FCA liability. See Harrison, 176 F.3d at 786-87 (discussing
U.S. ex. rel. Thompson v. Columbia/HCA Healthcare Corp., 125
F.3d 899, 902 (5th Cir. 1997), and stating that FCA liability
based on a false certification to the government “will lie only
if compliance with the statutes or regulations was a
prerequisite to gaining a benefit, and the defendant
affirmatively certified such compliance”). As we previously
7
Because adulterated drugs are subject to reimbursement by
Medicare and Medicaid and therefore any claim for payment cannot
be “false,” we do not separately address relator’s arguments for
FCA liability under “implied certification” or “worthless
services” theories. See generally United States v. Sci.
Applications Int'l Corp., 626 F.3d 1257, 1266-71 (D.C. Cir.
2010) (discussing various versions of the implied certification
theory); U.S. ex. rel. Mikes v. Straus, 274 F.3d 687, 702-03 (2d
Cir. 2001) (describing worthless services theory).
16
have explained, the correction of regulatory problems is a
worthy goal, but is “not actionable under the FCA in the absence
of actual fraudulent conduct.” Mann v. Heckler & Koch Def.,
Inc., 630 F.3d 338, 346 (4th Cir. 2010) (emphasis added and
citation omitted). In the present case, relator has not
identified any false statement or other fraudulent
misrepresentation that Omnicare made to the government.
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.” U.S. ex rel.
Wilkins v. United Health Grp., Inc., 659 F.3d 295, 310 (3d Cir.
2011).
Under the provisions of the FDCA, the Secretary of Health
and Human Services may suspend or withdraw FDA approval of a
drug if the packaging process is “inadequate to assure and
preserve [the drug’s] identity, strength, quality, and purity.”
21 U.S.C. § 355(e). In the present case, the FDA pursued
17
numerous regulatory actions against Omnicare, including
conducting multiple inspections of the Toledo building and
issuing the warning letter. The FDA also threatened seizure of
Heartland products, use of injunctive remedies, and action
recommending “disapproval of any new applications listing
[Heartland] as a manufacturer of drugs.” The existence of these
significant remedial powers of the FDA buttresses our conclusion
that Congress did not intend that the FCA be used as a
regulatory-compliance mechanism in the absence of a false
statement or fraudulent conduct directed at the federal
government.
For the same reasons that relator has failed to plead the
existence of a false statement or fraudulent conduct, he cannot
plausibly allege that Omnicare acted with the requisite scienter
when submitting claims to the government for drugs not in
compliance with the CGMPs. Liability under the FCA requires
that the defendant acted “knowingly,” which by definition
requires actual knowledge, deliberate ignorance, or reckless
disregard of the truth or falsity of the information. 31 U.S.C.
§ 3729(a), (b)(1). Because the Medicare and Medicaid statutes
do not prohibit reimbursement for drugs packaged in violation of
18
the CGMPs, Omnicare could not have knowingly submitted a false
claim for such drugs. 8
We also conclude that the district court did not abuse its
discretion in denying relator’s request to file a third amended
complaint. In seeking leave to amend, relator did not comply
with the District of Maryland’s local rules, which require that
a plaintiff attach to a motion to amend “the proposed amended
pleading.” D. Md. Local Rule 103(6)(a). Relator’s failure to
comply with this rule justified the district court’s denial of
leave to amend. See Francis v. Giacomelli, 588 F.3d 186, 197
(4th Cir. 2009). Moreover, any amendment would have been futile
in light of our holding that adulterated drugs are not barred
from reimbursement by Medicare and Medicaid and, therefore,
claims for reimbursement for these drugs cannot be “false” under
the FCA.
Finally, we emphasize that we do not condone Omnicare’s
disregard of FDA safety regulations that apparently occurred in
this case. Nevertheless, we remain convinced that the
submission of claims for payment for drugs packaged at the
8
Because we conclude that relator failed to plead the
existence of a false statement and the scienter required for an
FCA claim, we do not address Omnicare’s alternative argument
that relator did not allege the presentment of a false claim
with particularity under Federal Rule of Civil Procedure 9(b)
and our decision in Nathan, 707 F.3d 451.
19
Heartland facility did not constitute fraud on the government,
and we are confident that the FDA’s use of its regulatory
enforcement powers may be exercised fully to ensure further
compliance with applicable safety standards.
III.
In sum, we conclude that the district court properly
exercised jurisdiction over this action, but that relator failed
to plead the existence of a false statement and scienter as
required by the FCA. Accordingly, we affirm the district
court’s judgment.
AFFIRMED
20