Eighth Circuit Widens FCA “Fraud-in-the-Inducement” Theory

 

Merle M. DeLancey and Justin A. Chiarodo

Merle DelanceyJustin A. ChiarodoIn a significant decision regarding the “fraud-in-the-inducement” theory under the False Claims Act (FCA), the Eighth Circuit recently reversed a District Court’s dismissal of an FCA claim brought by a former employee against a major pharmaceutical company. United States ex rel. Simpson v. Bayer Healthcare, No. 12-2979, 2013 WL 5614268 (8th Cir. Oct. 15, 2013), aff’g in part, rev’g in part, Order, No. 08-5758, 2012 WL 5358333 (D. Minn. July 19, 2012). The Simpson decision demonstrates courts’ willingness to accept a “fraud-in-the-inducement” theory of liability even when the relationship between the alleged fraud and the claim for payment is attenuated, at best. The proliferation of the “fraud-in-the-inducement” theory-and the significant damages exposure it presents-raises a number of challenges for companies in the defense, healthcare, and other sectors that are paid with federal funds.

In Simpson, the relator alleged that the company, Bayer, knew that its cholesterol lowering drug Baycol increased the risk of developing rhabdomyolysis, a rare but serious muscle disorder. Despite knowing that rhabdomyolysis and Baycol were linked, Bayer allegedly instructed its sales representatives to push the product to customers, including the Department of Defense (DoD), which purchased the drug under several contracts. According to the relator, Bayer representatives told the DoD that no such causal link had been proven.

The Eighth Circuit affirmed the dismissal of one claim, but reversed the dismissal of another claim, which relied on the “fraud-in-the-inducement” theory. Under the “fraud-in-the-inducement” theory, FCA liability attaches to a contractor’s false statements if those statements induce the government to make improper payments it otherwise would not have made. In Simpson, the relator identified the individuals involved in the exchange between Bayer and the DoD: she identified the specific misrepresentations regarding the relationship between Baycol and rhabdomyolysis; she specified the dates when the misrepresentations were made; and she stated the reasons why the representations were fraudulent (i.e., that Bayer allegedly possessed evidence indicating that its representations were false). Simpson, 2013 WL 5614268 at *6. According to the court, this was sufficient for the relator to survive Bayer’s motion to dismiss.

 

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