SCT: False Claims Act Actions Based Upon Fraudulently Obtained Patent Rights

by Dennis Crouch

This post walks through a new petition for writ of certiorari involving claims that Valeant Pharma defrauded the U.S. government by using fraudulently obtained patent rights prop up its drug prices. [Read the Petition]

The False Claims Act (FCA), originally enacted in 1863 to combat contractor fraud during the Civil War, imposes civil liability on anyone who “knowingly presents” a “fraudulent claim for payment” to the federal government. 31 U.S.C. § 3729(a)(1)(A). The Act allows private citizens, known as “relators,” to bring qui tam actions on the government’s behalf against those who have defrauded the government. If successful, relators can recover up to 30 percent of the damages. 31 U.S.C. §§ 3730(b)(4), (d)(2).

To prevent opportunistic lawsuits, however, Congress has sought to strike a “balance between encouraging private persons to root out fraud and stifling parasitic lawsuits” through the FCA’s public disclosure bar. Graham Cnty. Soil & Water Conservation Dist. v. United States ex rel. Wilson, 559 U.S. 280 (2010). As amended in 2010, the public disclosure bar requires courts to dismiss a qui tam action “if substantially the same allegations or transactions as alleged in the action or claim were [already] publicly disclosed” in certain federal proceedings or the news media, unless the relator is an “original source” of the information. 31 U.S.C. § 3730(e)(4)(A). The basic idea here is that we don’t need qui tam actions for publicly disclosed fraud since for serious cases the information should have also made its way into the hands of prosecutors, and we can put down failures to prosecute as a system design element that we call prosecutorial discretion.

Over the past several years, patent attorney Zachary Silbersher has been pursuing FCA qui tam lawsuits against pharmaceutical companies who allegedly fraudulently obtain patent rights and then use those exclusive rights to charge the Federal Government high prices for the resulting drugs.  In these cases, Silbersher is relying on public documents (file histories) which the pharmaceutical companies argue bar the qui tam proceedings under the public disclosure bar.  But, so far, Silbersher’s cases have been proceeding.

In a case now pending before the Supreme Court, Silbersher argues that Valeant fraudulently obtained patents for its drug Apriso, allowing it to delay generic competition and charge inflated prices to the government. United States ex rel. Silbersher v. Valeant Pharms. Int’l, Inc., 89 F.4th 1154 (9th Cir. 2024). Specifically, Silbersher alleged that Valeant:

1. Failed to disclose to the Patent Office material prior art (the Brunner and Marakhouski studies) rendering its patent on administering Apriso without food obvious.
2. Made contradictory statements in two patent applications about whether it was obvious that Apriso could be effectively administered without food.
3. Knew that its earlier Otterbeck patents on Apriso’s delayed-release formula were invalidly obtained over prior art.

The district court dismissed the action, finding the claims barred because the underlying facts were publicly disclosed in inter partes review (IPR) proceedings before the Patent Trial and Appeal Board (PTAB).

On appeal, the Ninth Circuit reversed — siding with Silbersher that the disclosures were insufficient to bar his action.

IPR Proceedings Not a Public Proceeding Under the Statute: First, with regard to the IPR proceedings, the 9th Circuit held that the IPR proceeding that invalidated Valeant’s patent was not a qualifying public disclosure under the False Claims Act’s (FCA) public disclosure bar.  The first step for understanding this conclusion requires an understanding that the public disclosure bar statute includes a list of qualifying disclosures – much like 35 U.S.C. 102’s definition of prior art.  And, the bar only applies for the listed disclosures.

In this case, the appellate panel analyzed whether the IPR fit within the channels specified in 31 U.S.C. § 3730(e)(4)(A)(i) or (ii).  Subsection (i) covers disclosures made in a “federal criminal, civil, or administrative hearing in which the Government or its agent is a party.” Subsection (ii) encompasses disclosures made “in a congressional, Government Accountability Office, or other Federal report, hearing, audit, or investigation.”

The appellate court concluded that the IPR proceeding was not a disclosure under subsection (i) because, although it had many characteristics of a “Federal administrative hearing,” the government was not a “party” to the IPR proceeding as required by that provision. The mere fact that the Patent and Trademark Office (PTO) Director has certain adjudicatory and institution authorities did not transform the PTO into a “party.” The court also found the IPR was not an “other Federal … hearing” under subsection (ii) because its primary purpose was not “investigative” but rather adjudicatory.  In a statutory application of a surplusage canon, the appellate panel concluded that treating an adversarial, adjudicatory hearing as an “other Federal hearing” under (ii) when the government was not a party would nullify the government-party requirement of subsection (i). Therefore, the IPR proceeding did not qualify as a public disclosure through either channel.

Other Documents Were Not Enough to Infer the False Claim: Still, there were several other documents that did qualify as a public disclosures, including two medical studies in the prior art, news report on about the IPR decision, and the prosecution history of of the patents.  In its appeal decision, the ninth circuit concluded that these documents “when viewed together possibly reveal some of these true and misrepresented facts, but nothing in combination from which fraud can reasonably be inferred.”

In its revised opinion, the panel explained that “the scattered qualifying public disclosures may each contain a piece of the puzzle, but when pieced together, they failed to present the full picture of fraud.”  Departing from other circuits, the ninth circuit held that the public disclosure bar applies only when the disclosures reveal both the “misrepresented state of facts” and the “true state of facts” together, such that fraud can be inferred without “stitching together” separate disclosures. Here, the “scattered disclosures” each revealed part of the puzzle, but it was Silbersher who put the pieces together to infer fraud.

Valeant’s Cert Petition

In its cert petition, Valeant raises two questions:

The False Claims Act’s public disclosure bar plays the critical role of preventing “parasitic” qui tam lawsuits filed by plaintiffs who “learn of the fraud through public channels.” Graham Cnty. Soil & Water Conservation Dist. v. United States ex rel. Wilson, 559 U.S. 280, 294, 296 n.16 (2010). These public channels include “a Federal . . . administrative hearing in which the Government . . . is a party” and a “Federal report, hearing, audit, or investigation.” 31 U.S.C. § 3730(e)(4)(A)(i)–(ii).

The questions presented are:

1. Whether a relator can avoid the public disclosure bar by “stitching together” public disclosures.

2. Whether inter partes review (IPR)—which this Court and the Federal Circuit have described as a hearing between the federal government and the patent owner—constitutes a channel for public disclosure, either because: (i) the government is a “party” to IPRs, or (ii) an IPR is a “Federal . . . hearing.”

Valeant contends the Ninth Circuit erred in holding that IPRs do not qualify as public disclosures under either subsection (i) or (ii). Its holding that the government is not a “party” to IPRs “conflicts directly with Federal Circuit precedent and the holding of this Court” that IPRs are “proceeding[s] between the government and patent owner.” Regents of the Univ. of Minn. v. LSI Corp., 926 F.3d 1327 (Fed. Cir. 2019) (following Oil States Energy Servs., LLC v. Greene’s Energy Grp., LLC, 584 U.S. 325, 343 (2018)).

Additionally, by holding that IPRs are not “other Federal . . . hearing[s]” because they are not “investigative,” the Ninth Circuit deviated from other circuits that have rejected such a “narrow[]” reading of the amended provision. Instead, those circuits read “other Federal . . . hearing” according to its “broad, plain language.” See Moore & Co., P.A. v. Majestic Blue Fisheries, LLC, 812 F.3d 294, 302 (3d Cir. 2016)) (FOIA).

Valeant argues that the 9th Circuit decision “opens the floodgates to qui tams based on publicly disclosed information” and undermine the bar’s purpose of “prevent[ing] ‘parasitic’ and ‘opportunistic’ suits.”  Of course, Silbersher might respond here that the way for Valeant to avoid lawsuits was to not commit (alleged) fraud on the United States.

What do you think: Is the Ninth Circuit’s use of FCA liability in this area proper as a policy matter to deter and punish fraudulent behavior that results in the government overpaying for patented products.