Rigid, Severe Penalties of FCAs On Full Display
News of the $1.2 billion verdict against Johnson & Johnson and its subsidiary Janssen Pharmaceuticals Inc. for their roles in marketing Risperdal during the middle of last decade sent reverberations through the industry earlier this week. The award resolved Arkansas’ claims that the companies fraudulently marketed the “second generation” antipsychotic, misleading doctors and deceiving the state’s Medicaid program into paying for 239,000 prescriptions of the drug. Specifically, the state claimed the companies minimized Risperdal’s dangerous side effects by not disclosing the risks on its label, marketed the drug for unapproved uses, and characterized it as more effective than competitors’ drugs.
After the jury found that the companies had misled doctors about the risks associated with Risperdal, Judge Tim Fox awarded $11 million for the violation of the state deceptive trade practices act. Further, Judge Fox turned to the Arkansas’ False Claims Act (FCA) – which carries a minimum $5,000 civil penalty for each violation of the Act (the federal FCA requires a minimum civil penalty of $5,500) – and applied Arkansas’ statutory penalty to the 239,000 prescriptions of Risperdal paid for by Arkansas Medicaid between 2002 and 2006, totaling $1.195 billion in damages. According to Janssen, the state paid only $8.1 million for Risperdal during the 3½ year time period, which amounts to less than 1% of the damages amount. The companies plan to appeal.
Arkansas adds itself to a growing list of states taking legal action relating to Risperdal’s marketing – trials in Louisiana and South Carolina have already resulted in damage awards of $258 million and $327 million, respectively. Earlier this year, the state of Texas settled its allegations for $158 million. And the federal government is also pursuing the companies, reportedly seeking between $1.3 and $1.8 billion to resolve its claims.
The Arkansas award provides an opportunity to engage in serious “Monday morning quarterbacking” as to why the companies did not settle the case, with a settlement estimate perhaps as low as $30 million. In addition to providing an opportunity to second-guess the trial strategy, the court’s award also places the mandatory and stark penalties of state and the federal FCAs – blunt, severe governmental tools – into public discussion. Due to the statutes’ structures, the damages amounts often far exceed the amounts of monetary damages the government initially suffers. Further, as in federal fraud recoveries, the award amount does not go to those who may have been personally harmed by the Risperdal marketing tactics (notably, however, at trial, the state failed to show any patient harm, according to Janssen). Instead, the recovery goes into the Arkansas Medicaid program (which, as pointed out by the Associated Press, is facing a $400 million shortfall for 2013).
The huge damage amount required by the federal FCA prompted one court in a widely publicized non-health-related fraud case in February to refuse rewarding any damages after finding FCA liability. See U.S. ex rel. Bunk v. Birkart Globistics GMBH & Co., 2012 WL 488256 (E.D. Va. Feb. 14, 2012). In Bunk, qui tam relators had brought a lawsuit (in which the government eventually partially intervened) alleging that bidders to a contract with the U.S. military had engaged in price collusion. After the bidder had certified to the government they had independently arrived at their prices and denied collusion, the parties entered into a contract relating to transporting goods belonging to U.S. military members and their families. Once relators found that the bidders had in fact colluded in setting the price, they brought suit. The court found the defendants liable under the federal FCA, and proceeded to determine damages.
The defendants had filed 9,136 invoices under the contract, mandating damages under the FCA of at least $50 million (at least $5,500 per violation). However, the court concluded that the prices under the contract – even if not independently reached – were fair and reasonable. Further, the court found that the government was not financially harmed, and as such, the statutory penalty constituted an excessive penalty under the Eighth Amendment. After finding that it lacked discretion to reduce the statutory penalty, the court refused to award any damages to the relators.
Both cases demonstrate the seriousness and rigidity mandated by both the federal and Arkansas FCAs. Where the Risperdal settlement is staggering in its amount, the Bunk court’s failure to impose any damages is equally stunning. As the government continues to rely on big FCA penalties to combat and deter healthcare fraud, defendants are incentivized to settle before trial, and more courts may be forced into a Bunk-like analysis.