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The Eighth Circuit Gives False Claims Act Fraud in the Inducement Claims a Shot in the Arm

On October 15, 2013, the United States Court of Appeals for the Eighth Circuit issued a False Claims Act (“FCA”) judgment allowing the case to continue against Bayer Healthcare Pharmaceuticals (“Bayer”), based on the relator’s allegations that the company fraudulently induced the Department of Defense (“DoD”) to enter contracts under which a drug known as Baycol was purchased for the use of armed service men and women.

United States ex rel. Simpson v. Bayer Healthcare, No. 12-2979 (8th Cir. Oct. 15, 2013).

In the complaint, the relator alleged that the company fraudulently caused the government to make reimbursements for Baycol prescriptions and also that, by making false representations about the drug’s safety, Bayer fraudulently induced DoD into the contract for payment under federally financed health care programs. Although the District Court rejected both claims, the Eighth Circuit overturned only one claim, holding that fraudulent inducement was actionable even if there is no provable economic loss to the government.

The FCA, at its core, allows whistleblower to bring claims in the name of the United States seeking to hold persons or entities liable for defrauding the government through the presentation of false claims for payment. Because FCA actions seek to remedy fraud, which is controlled by Fed. R. Civ. P. 9(b), a valid claim must state with heightened particularity that a false claim for payment led directly to the government suffering economic damages.

Sometimes, where a good or service is delivered to the government, the loss is calculated by subtracting the value of what was received from what was charged. But not in Bayer. There the majority endorsed an argument long made by the government and endorsed by the Supreme Court that actionable false claims were sufficiently pleaded as the result of the government being induced to enter supply contracts that it would not have entered into if it had been fully informed of certain risks that the company withheld – in this case, the allegedly dangerous side effects of the drug Baycol.

This decision is a significant win for government and whistleblower attorneys alike because the majority reached this conclusion despite the fact that no individual claim for reimbursement was false in the sense that the drug was not delivered as specified or that the government paid too much for it. In essence, where there normally must be specific false claims for reimbursement identifying with particularity the falsity of the claim, the Eighth Circuit is saying that all claims related to Baycol were false because DoD would not have agreed to the contract had it known of the risks associated with the drug.

Now, Bayer is at risk for treble damages based on the contracted value of each and every reimbursement claim made to the government for Baycol even though the government has not suffered any tangible economic loss. This case is one to watch because there is now a split in the circuits on the issue of whether fraud in the inducement, absent economic injury, is actionable, something the Supreme Court may seek to clarify.

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