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From Health Law Daily, April 1, 2013

Sears and Kmart fail to obtain dismissal of qui tam action alleging illegal pharmacy incentives

By Harold M. Bishop, JD

A motion to dismiss by Sears Holdings Corporation (Sears) and Kmart Corporation (Kmart) was granted in part and denied in part as to certain False Claims Act (FCA) and Anti-kickback Act (AKA) violations brought by qui tam relator Michael Yarberry (Yarberry) and 16 states that joined with him in the action (U.S. ex rel. Yarberry v Sears Holding Corp., March 28, 2013, Reagan, M). In their multi-count complaint, Yarberry and the states alleged that from approximately 2006 to the present, Sears and Kmart violated the FCA and AKA by offering and paying unreported monetary inducements (cash gift cards and coupon promotions) to the beneficiaries of government health programs (GHPs), including Medicare, Medicaid, TRICARE (serving active service military members), and the Civilian Health and Medical Program for the Uniformed Services (CHAMPUS—serving former military personnel) in exchange for beneficiaries filling their prescriptions at Sears and Kmart pharmacies.

FCA and AKA liability. Civil liability under the FCA (31 U.S.C. sec. 3729) requires that the relator prove (1) that the defendant made a statement in order to receive money from the government; (2) that the statement was false; and (3) that the defendant knew the statement was false. The AKA (42 U.S.C. sec. 1320a–7b(b)(2)(B)) prohibits knowingly and willfully offering or paying any remuneration (including kickbacks, bribes and rebates, in cash or in kind) to any person to induce that person to purchase or order any good for which payment may be made, in whole or in part, under a federal healthcare program.

Identification of false statements. In their motion to dismiss, Sears and Kmart assert that the complaint does not identify any false statements they made. The court noted, however, that several paragraphs in the complaint contained specific examples of apparent AKA violations and detailed the who, what, when, where, and how of the alleged kickbacks. While none of the kickback allegations were linked to a particular claim submitted to the government, the court found that the complaint did contain a broad allegation that compliance with federal and state statutes prohibiting kickbacks is a material condition to payment to federal and state healthcare programs. The court found this inference to be sufficient to sustain the FCA and AKA claims at this stage in the proceedings.

Certification of compliance. Sears and Kmart also argued for dismissal because the complaint did not allege that they submitted a facially false claim, a false statement, or a false record to the government. The premise of this argument is that the complaint must allege that Sears and Kmart not only submitted claims to the government but in doing so certify that they complied with all statutory and regulatory requirements. In denying this argument, the court found that this alleged certification requirement is not mentioned in that applicable sections of the FCA and is unnecessary as long the alleged statement made to the government is knowingly false when made.

AKA violation. The court also was not persuaded that the multiple kickback allegations in the complaint, untethered to specific transactions with the government, lacked the specificity or were too de minimis to support AKA-based FCA claims. The court, however, was persuaded that no claim related to the On Time Guarantee (OTG) cards given to GHP customers was properly pleaded. Yarberry, the court noted, did not dispute that no specific claim was linked to the OTG card program. In addition, the court found that one paragraph in the complaint did not properly plead an AKA violation because it did not specify that a government program was implicated.

Claims against Sears. Sears further argues that it should be dismissed from the lawsuit because the complaint failed to plead any claims against it. Sears does acknowledge that a paragraph in the complaint referenced a Kmart pharmacy that is located in a Sears Essential Store, but asserts that the pharmacy was owned, operated and licensed by Kmart, not Sears. The court’s review of the complaint revealed that there is a single Sears Essential pharmacy, Store 4180. Although Sears asserts that pharmacy is not actually associated with Sears, the court found this to be a bald assertion and, at this stage in the proceedings, the court refused to look beyond the four-corners of the complaint.

Public disclosure. Finally, Sears and Kmart contend that due to the nationwide announcement of the incentive program, the public disclosure bar was triggered, and as such, Yarberry could not be an original source of the allegations. A public disclosure bar requires the critical elements exposing the transaction as fraudulent to be placed in the public domain. Here, the court noted that the fraudulent conduct was never in the public domain (i.e., the fraud could not be inferred from the information that was made public). Therefore, whether Yarberry qualifies as an original source is irrelevant.

The motion to dismiss was denied, except for the claims regarding the OTG cards and the single AKA violation that failed to allege the involvement of a government healthcare program.

The case number is 09-cv-00588-MJR-PMF.

Attorneys: Timothy Keller (Aschemann Keller, LLC) for the State of California, State of Illinois, State of Florida, State of Indiana, State of Louisiana, State of Michigan, State of Nevada, State of New Hampshire, State of New Jersey, State of New Mexico, State of New York, State of Texas, State of Virginia, and State of Wisconsin. Abigail A. Clapp (Greenberg Traurig) for Sears Holdings Corporation and Kmart Corporation.

Companies: State of California; State of Illinois; State of Florida; State of Indiana; State of Louisiana; State of Michigan; State of Nevada; State of New Hampshire; State of New Jersey; State of New Mexico; State of New York; State of Texas; State of Virginia; State of Wisconsin; Sears Holdings Corporation; Kmart Corporation

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