Third Circuit Hears Oral Arguments in $1.6 Billion Johnson & Johnson Appeal

Third Circuit Hears Oral Arguments in $1.6 Billion Johnson & Johnson Appeal

A three-judge panel heard oral argument in U.S. ex rel. Penelow et al. v. Janssen Products LP, challenging the record $1.6 billion False Claims Act (FCA) jury verdict against Johnson & Johnson (J&J) and the constitutionality of the FCA’s qui tam provisions. The case reached the Third Circuit after a New Jersey federal jury returned the verdict based on allegations of off-label marketing and fraud related to conduct from 2006 to 2014. 

On materiality, J&J argued there was no evidence that any false representation was material to the government’s payment decision. Judges Paul Matey and Cindy K. Chung noted materiality is an issue for a jury and questioned whether J&J was seeking to convert the continued government reimbursement factor at the center of the Supreme Court’s 2016 decision in United States v. Escobar into a legal standard. Relator’s counsel argued the government lacked actual knowledge during the relevant period; thus, Escobar’s continued-reimbursement analysis is inapplicable. 

The panel also heard arguments regarding the constitutionality of the FCA’s qui tam provision. There has been a resurgence of constitutional challenges to FCA qui tam actions following the US Supreme Court’s 2023 decision in United States ex rel. Polansky v. Executive Health Resources. Read more about that decision in our prior alert here.

The Investigations Blog has been following J&J’s appeal closely. Read our prior alerts analyzing the appeal here, and the US Department of Justice’s (DOJ) arguments here.

The case is United States ex rel. Penelow v. Janssen Products, LP, No. 25-1818 (3d Cir.).

Listen to the oral argument here.

Ninth Circuit Reverses Dismissal of 340B Drug Pricing FCA Case Against Four Major Pharmaceutical Manufacturers

In a win for FCA relators, the Ninth Circuit reversed the district court’s dismissal of qui tam claims brought by Adventist Health System of West (Adventist) against four major drug manufacturers — AbbVie, AstraZeneca, Novartis, and Sanofi — for allegedly overcharging covered entities under the Section 340B Drug Pricing Program (340B Program).

Adventist, a nonprofit corporation operating medical clinics under the 340B Program, alleged that defendants engaged in a fraudulent scheme by knowingly charging inflated prices for covered drugs that did not comply with statutory ceiling prices. According to Adventist, the defendants’ fraud caused the federal and state governments to wrongly pay hundreds of millions of dollars through Medicaid, Medicare, and government-funded clinics. 

The defendants argued the relator’s claims were barred under the Supreme Court’s decision in Astra USA, Inc. v. Santa Clara County, which held that covered entities have no private right of action under the 340B Program and must instead use the program’s administrative dispute resolution process. The district court agreed and dismissed the relator’s complaint with prejudice.

The Ninth Circuit reversed, holding that the absence of a private right of action under the 340B Program does not foreclose FCA claims. Writing for the panel, Judge Roopali H. Desai explained that Adventist’s FCA claims are “free-standing and independent of Section 340B,” and the relator “does not ‘in essence’ seek to enforce Section 340B—it seeks to enforce the FCA.” The court emphasized that Adventist brought “a prototypical FCA action to remedy allegedly false or fraudulent claims resulting in financial loss to the government.”

The court further reasoned that barring such claims would undermine the FCA, which is to be “interpreted broadly” to “reach all types of fraud, without qualification, that might result in financial loss to the government.” The panel noted that US Congress enacted specific exceptions to the FCA where it intended to limit qui tam actions, and the absence of any exception for Section 340B-related claims was notable.

The decision reinforces qui tam relators’ ability to pursue FCA claims based on underlying statutory violations even where the underlying statute provides no private cause of action, so long as the relator seeks redress for false claims rather than direct statutory enforcement.

The case is United States ex rel. Adventist Health System of West v. AbbVie Inc., et al., No. 24-2180 (9th Cir.).

Fourth Circuit Revives FCA Claims Against Allergan Subsidiary Over Medicaid Best Price Reporting

The Fourth Circuit reversed the dismissal of a qui tam action alleging that Forest Laboratories (Forest) (now Allergan Sales, LLC) falsely reported its “Best Price” to the Centers for Medicare and Medicaid Services (CMS), thereby underpaying Medicaid rebates by an estimated $686 million over nearly a decade.

Troy Sheldon, a former Forest employee with knowledge of the company’s drug rebate practices, brought this action in 2014. Sheldon alleged Forest paid rebates and discounts to multiple entities in the distribution chain — for example, both a wholesaler and a pharmacy provider — but when reporting its “Best Price” to CMS, Forest reported only the highest single discount rather than aggregating (or “stacking”) all discounts on the same drug. According to Sheldon, this resulted in Forest paying lower rebates to state Medicaid programs than required.

The case’s procedural history spans more than a decade. The district court initially dismissed for failure to plead scienter and falsity, applying an objective reasonableness standard. A Fourth Circuit panel affirmed, but the Supreme Court’s 2023 decision in United States ex rel. Schutte v. SuperValu Inc. — holding that FCA scienter is a subjective standard focused on the defendant’s knowledge and beliefs — prompted the Supreme Court to vacate and remand for reconsideration.

On remand, the district court again dismissed, finding that even under the subjective standard, Sheldon failed to plausibly allege scienter. The Fourth Circuit disagreed and reversed.

Writing for the majority, Judge Berner emphasized that Sheldon’s allegations were sufficient to survive a motion to dismiss. Key among these were: (1) Forest’s letter to CMS during the 2006-2007 rulemaking expressing concern that the proposed rule required aggregation of stacked discounts; (2) CMS’s decision not to change the language Forest objected to; (3) Forest’s subsequent internal audit to eliminate double rebates for most customers while continuing the practice for preferred clients; and (4) Forest’s continued reporting of “Best Price” without aggregation despite awareness of CMS’s interpretation.

The court noted that under the subjective standard articulated in Schutte, “a company cannot exploit such ambiguities by relying on an objectively reasonable interpretation if the company is subjectively aware of the risk that such an interpretation is incorrect.”

The Fourth Circuit’s decision provides critical guidance on how courts will apply the subjective scienter standard articulated by the Supreme Court in Schutte. Evidence of a defendant’s awareness of regulatory interpretations differing from its own practices can support an inference of reckless disregard sufficient to survive a motion to dismiss. 

The case is United States ex rel. Sheldon v. Allergan Sales, LLC, No. 24-1793 (4th Cir.).

Tri-City Cardiology to Pay $4.75 Million to Settle Claims of Medically Unnecessary Vascular Procedures

Tri-City Cardiology, P.C., an Arizona-based physician group, along with three of its shareholder physicians — Dr. Jaskamal Kahlon, Dr. Joshua D. Cohen, and Dr. Marc J. Berkowitz — has agreed to pay $4.75 million to resolve allegations that they submitted false claims to federal health care programs for medically unnecessary vascular procedures. 

The government alleged that between January 1, 2017, and April 27, 2022, the defendants submitted or caused to be submitted claims seeking reimbursement for medically unnecessary perforator vein ablations to Medicare, Medicaid, TRICARE, and the US Department of Veterans Affairs. According to the government, the three physicians knowingly performed ablations on perforator veins that did not qualify for treatment under accepted standards of medical practice. The government further alleged the physicians incorrectly measured or documented in medical records the duration of outward blood flow, vein diameter, patient symptoms, and conservative therapy measures — giving the false appearance that the ablations met accepted medical standards and were justified. 

Read the DOJ’s press release here.

The claims resolved by the settlements are allegations only, and there has been no determination of liability.