In 2013, the U.S. Department of Justice (DOJ) announced that it would be stepping up enforcement of pharmaceutical manufacturers, examining violations of current good manufacturing practices (cGMPs) that create an unacceptable risk of harm to consumers and the public.¹ Traditionally, cGMP violations have been enforced by the Food and Drug Administration (“FDA”) under the Federal Food, Drug, and Cosmetic Act (FDCA)² and its implementing regulations. However, the DOJ’s pronouncement indicated that the agency intended to pave new ground by enforcing cGMP violations under the Federal False Claims Act (FCA).³ At the time, no court had fully considered whether an FCA case might be based on cGMP violations.  Since then, all that has changed.

Enforcement Under the FDCA
Under FDCA and its implementing regulations, FDA has the authority to oversee the safety of all drugs, biologics, and medical devices that are introduced into interstate commerce in the United States.  Among other things, cGMP requirements allow the Agency to assess adulteration, and help assure consumer safety.

Under the FDCA, a drug is considered to be adulterated if “the methods used in, or the facilities or controls used for, its manufacture, processing, packing or holding do not conform to or are not operated or administered in conformity with [cGMPs] to assure that such drug meets the [statutory] requirements as to safety and has the identity and strength, and meets the quality and purity characteristics, which it purports or is represented to possess.”⁴

A device is adulterated under the FDCA if “the methods used in, or the facilities or controls used for, its manufacture, packing, or the facilities or controls used for, its manufacture, packing, storage, or installation are not in conformity” with applicable laws, including the Quality System Regulation (“QSR”).⁵

The FDCA grants FDA the authority to pursue enforcement actions against companies, individuals, and their products.  FDA’s enforcement of the FDCA can take many forms, including the issuance of Warning Letters, seizures, injunctions, recalls, and criminal and civil penalties.

Enforcement Under the FCA
The FCA provides DOJ with authority to penalize companies for acts of fraud committed against the federal government. Specifically, the FCA prohibits any individual or business from knowingly submitting, or causing someone else to submit, to the government a false or fraudulent claim for payment.  The law includes a qui tam provision that allows individuals who are not affiliated with the government (known as “relators”) to file actions on behalf of the government (informally called “whistleblowing”). Individuals who seek to enforce the FCA stand to receive a portion of any recovered damages (in the range of 15-30 percent, depending on whether the government decides to intervene or allow the relator to proceed alone).  In fact, the vast majority of FCA actions for pharmaceutical and medical device cases are initiated by whistleblowers.

Although the FCA has been used with much success to prosecute pharmaceutical and medical device manufacturers, most alleged violations have tended to fall within the categories of improper kickbacks and off-label promotion. The DOJ’s announcement that it intends to use the FCA to address violations related to pharmaceutical manufacturing marked a change in enforcement strategy that took many in the industry by surprise.

FCA Cases Premised on cGMP Violations
When the DOJ indicated in early 2013 that it would be taking “an especially hard look”⁶ at violations of  cGMP’s, many wondered what violation would warrant such a charge under the FCA.  At that time there was no court precedent for such a case, and only a limited number of settlements had been reached.

GlaxoSmithKline
The first instance in which the FCA was used to enforce cGMP violations dates back to 2010.  In that case, a GlaxoSmithKline (“GSK”) subsidiary was accused of committing a myriad of cGMP violations.  In particular, GSK was charged with selling certain batches or lots of drugs whose strength, purity, or quality differed materially from the strength, purity, or quality specified in the drugs’ applications for FDA approval.⁷ The crux of the FCA allegations was that GSK was alleged to have knowingly caused false or fraudulent claims for reimbursement of such products to be submitted to federal health care programs, including Medicaid.⁸ GSK entered into a settlement agreement totaling $750 million in fines and penalties, an amount that included a criminal fine of $150 million for cGMP violations under the FDCA, and $600 million to resolve the FCA violations.⁹

Ranbaxy
In May 2013, on the heels of DOJ’s announcement of its intention to target cGMP violators, the department entered into a record-breaking settlement agreement with Ranbaxy USA, Inc. (“Ranbaxy”).  Ranbaxy, recognized as one of the world’s largest manufacturers of generic drugs, came under scrutiny when cGMP and other violations were discovered at two manufacturing plants in India. Facility inspections over the course of two years revealed significant cGMP deficiencies, including incomplete testing records, inadequate drug stability assessment programs and failure to establish appropriate manufacturing controls to prevent cross-contamination. Following these inspections, FDA issued warning letters to both facilities, and issued an import alert that covered 30 pharmaceutical products manufactured at those locations.  The government claimed that, by placing adulterated drugs into interstate commerce, Ranbaxy caused false claims to be submitted to federal health care programs in violation of the FCA.¹⁰

The subsequent civil and criminal settlement totaled $500 million—to date, the largest penalty ever imposed on a generic drug company for cGMP violations.  Of that amount, $350 million was allocated to settle civil claims arising under the FCA and related state laws.¹¹

Omnicare
Both GSK and Ranbaxy elected to settle their cases with the government instead of proceeding to trial.  To date, courts have considered the merits of an FCA case premised on cGMP violations only once.  On February 21, 2014, the Fourth Circuit affirmed a lower court’s ruling dismissing a case against Omnicare, Inc. (“Omnicare”) for alleged FCA violations predicated on cGMP compliance.

In United States ex rel. Rostholder, et al. v. Omnicare, Inc., et al.,¹² Omnicare’s subsidiary, Heartland Repack Services, LLC (“Heartland”) repackaged drugs for patient use.  Heartland shared its Toledo, Ohio facility with one of over one hundred pharmacies operated by Omnicare nationwide.  Although the Heartland facility repackaged only non-penicillin drugs for distribution, the neighboring Omnicare pharmacy processed penicillin products.  Barry Rostholder, a licensed pharmacist and employee at the Heartland facility, became aware that Omnicare was manufacturing products in direct violation of the FDA’s penicillin isolation requirements.  Rostholder notified FDA of Heartland’s “improper repackaging practices,” which prompted an investigation into the facility’s manufacturing practices.¹³

The cGMP violations at the Heartland facility were well documented. Facility inspections revealed that penicillin was being repackaged in the building, as demonstrated by testing that confirmed “the presence of penicillin throughout the building,” including inside the Heartland facility.¹⁴ In Guidance for Industry, Non-Penicillin Beta-Lactam Drugs:  A CGMP Framework for Preventing Cross-Contamination, FDA explained that “penicillin can be a sensitizing agent that triggers a hypersensitive exaggerated allergic immune response in some people. Accordingly, implementing methods for preventing cross-contamination of other drugs with penicillin is a key element of manufacturing penicillin and [cGMP] regulations require the use of such methods.”¹⁵
As a result of the conditions documented during these facility inspections, FDA issued a Warning Letter to Omnicare that outlined numerous violations of FDA regulations, only some of which were related to the facility’s handling of penicillin.¹⁶ Omnicare did not immediately recall any of the products that were suspected of being contaminated by penicillin, nor did the company return funds to the government for any amounts that had been reimbursed by federal health care programs.¹⁷

In May 2007, Rostholder filed suit on behalf of the government, alleging 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.”¹⁸ The government declined to intervene in the action.

Rostholder alleged that, by failing to comply with cGMP requirements, Omnicare’s drug products were adulterated and prohibited from interstate commerce, which rendered them ineligible for reimbursement by Medicare and Medicaid.  The district court granted Omnicare’s motion to dismiss the case, holding that Rostholder had “failed to allege that Omnicare made a false statement to the government or engaged in fraudulent conduct,” and that Rostholder “had not adequately alleged the details of any false claims that had been submitted to the government for reimbursement.” ¹⁹

On appeal, the Fourth Circuit affirmed the district court’s dismissal of the case, concluding 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.”²⁰ In a broad statement, the court reasoned: “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.”²¹ In essence, the court ruled that the claims alleged could not be sustained because “compliance with the cGMPs is not required for payment by Medicare or Medicaid.”²²

Lessons from Omnicare
The broad holding of the Fourth Circuit might lead one to conclude that an FCA action cannot and will not be sustained for cGMP violations; however, with only one opinion on the record, it would be premature to make such a prediction. Omnicare presented a unique set of facts that, while demonstrating noncompliance with cGMP requirements, did not appear to result in any affected products presenting an actual and significant safety risk or injury.  Thus, for technical violations—even those that could theoretically result in significant risks—it is true that mere regulatory violations alone are “not actionable under the FCA in the absence of actual fraudulent conduct.”²³ Indeed, if they were, every drug and device manufacturer would be a new target, as nearly every FDA inspection of such facilities results in findings of cGMP violations.

On the other hand, under different facts—facts that demonstrate materiality—a different result may be warranted.  cGMP violations may be relevant to FCA cases where, as in the GSK and Ranbaxy examples, there are significant and substantial differences in the composition or efficacy or the product (e.g., lack of an active ingredient).  Where an unsafe or less effective drug creates an “an unacceptably high risk of harm” to consumers and patients, cGMP violations may indeed be material to the government’s decision whether to pay for the product—and therefore, may suffice for FCA enforcement purposes.²⁴ 

References

1. Justice News, Deputy Assistant General Maame Ewusi-Mensah Frimpong Speaks at the 2013 CBI Pharmaceutical Compliance Congress (Jan. 29, 2013), available at http://www.justice.gov/iso/opa/civil/speeches/2013/civ-speech-130129.html.
2. 21 U.S.C. §§ 301 et seq.
3. 31 U.S.C. §§ 3729 et seq.
4. 21 U.S.C. § 331(a)(2)(B).
5. Id. § 351(h).
6. Justice News, supra note 1.
7. Justice News, GlaxoSmithKline to Plead Guilty & Pay $750 Million to Resolve Criminal and Civil Liability Regarding Manufacturing Deficiencies at Puerto Rico Plant (Oct. 26, 2010), available at http://www.justice.gov/opa/pr/2010/October/10-civ-1205.html.
8. Id.
9. Id.
10. Justice News, Generic Drug Manufacturer Ranbaxy Pleads Guilty and Agrees to Pay $500 Million to Resolve False Claims Allegations, cGMP Violations and False Statements to the FDA (May 13, 2013), available at http://www.justice.gov/opa/pr/2013/May/13-civ-542.html.
11. Id.
12. United States ex rel. Rostholder, et al. v. Omnicare, Inc., et al. (No. 12-2431).
13. Id.
14. Id.
15. FDA Guidance for Industry, Non-Penicillin Beta-Lactam Drugs:  A CGMP Framework for Preventing Cross-Contamination (April 2013), available at http://www.fda.gov/downloads/Drugs/Guidances/UCM246958.pdf. 
16. United States ex rel. Rostholder, et al. v. Omnicare, Inc., et al. (No. 12-2431).
17. Id.
18. Id.
19. Id.
20. Id.
21. Id.
22. Id.
23. Id.
24. Justice News, supra note 1.