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Original Source and The Third Circuit

Yesterday, the 3rd Circuit issued an opinion regarding direct and independent knowledge requirement of the original source exception to the public disclosure bar.  It found that, among other things, “knowledge of a scheme is not direct when it is gained by reviewing files and discussing the documents therein with individuals who actually participated in the memorialized events.”

The relator, Karl Schumann, was the VP of contracting for Medco.  He alleged that Bristol-Myers Squibb (BMS) paid Medco sham data fees and rebates relating to the drug Coumadin, and that the BMS failed to include those amounts when calculating the price thereby inaccurately reporting an incorrect best price to the government.  He made the same allegations regarding AstraZeneca and its Prilosec and Nexium drugs.  The trial court dismissed the case on public disclosure grounds as he was not an original source.  In the lower court, he argued that “he had learned of BMS’s conduct by reviewing existing agreements and internal documents in Medco files, discussing them with Medco colleagues, negotiating rebate and data fee agreements with BMS, and comparing the terms of those agreements with others he had seen in his years in the pharmacy-benefits industry.”

Upon appeal, the third circuit addressed the standard for having direct and independent knowledge under the FCA.  Citing and quoting from prior cases it said that:

  1. Direct and independent are separate requirements that have to be met;
  2. “Direct knowledge” is “knowledge obtained without any intervening agency, instrumentality, or influence: immediate” and is “first-hand, seen with the relator’s own eyes, unmediated by anything but [the relator’s] own labor, and by the relator’s own efforts, and not by the labors of others, and . . . not derivative of the information of others.”  (Slip opinion at 16, citations omitted); and
  3. Independent knowledge means that “knowledge of the fraud cannot be merely dependent on a public disclosure”, it means the relator “must possess substantive information about the particular fraud, rather than merely background information which enables a putative relator to understand the significance of a publicly disclosed transaction or allegation.” (Slip opinion at 16-17, citations omitted).

In applying the law to the case before it, the Court agreed with the lower court that Relator’s knowledge was not direct and independent.  The key section states:

First, knowledge of a scheme is not direct when it is gained by reviewing files and discussing the documents therein with individuals who actually participated in the memorialized events. See Paranich, 396 F.3d at 335-36; Stinson, 944 F.2d at 1160-61. Second, Schumann’s description of his involvement in Medco’s business with BMS, including negotiating rebate and data fee agreements and recognizing that BMS was aware of its best-price reporting obligations, does not evince direct and independent knowledge of any improper kickback or inaccurate best-price report. See Paranich, 396 F.3d at 336 & n.11 (noting such knowledge gained when relator’s involvement constituted filing false claims on defendant’s behalf); Houck on behalf of the United States v. Folding Admin. Comm., 881 F.2d 494, 505 (7th Cir. 1989) (finding relator’s knowledge direct when he was involved by helping others file false claims); see also In re Pharmacy Benefit Mgrs. Antitrust Litig., 582 F.3d at 434 (explaining PBMs negotiate discounts and rebates from drug makers). Finally, Schumann’s conclusions that BMS intended to pay kickbacks to Medco and to submit false claims to the government, based on his experience in and understanding of the PBM industry, do not qualify as independent knowledge under the FCA.

Here is a copy of the opinion: Schumann v BMS.

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