In late July, a federal district court in Pennsylvania denied a motion to dismiss brought by pharmaceutical company Cephalon, Inc., concluding that violations of a corporate integrity agreement (“CIA”) entered into by Cephalon and the federal government could give rise to “reverse false claim” liability.  United States ex rel. Boise v. Cephalon, Inc., No. 2:08-cv-00287-TON (E.D. Pa. July 21, 2015).

Conduct prohibited under section 3729(a)(1)(G) of the False Claims Act (“FCA”) is known as a “reverse false claim” because it involves false records or statements by which a defendant avoids or decreases its obligation to pay the government, rather than a defendant obtaining an improper payment from the government.  Cephalon was accused of falsely certifying compliance with reporting requirements under the governing CIA in order to avoid its obligation to pay stipulated penalties to the government.  In its motion to dismiss for failure to state a claim, Cephalon argued that no obligation to pay arises under the CIA unless and until the Office of the Inspector General decides to demand payment of the stipulated penalties, as a matter of discretion.

The court rejected Cephalon’s position, noting that “[t]he existence of a contractual obligation to pay does not typically depend upon the timing of the demand for payment.”  The court reasoned the obligation to pay contractual penalties was not contingent upon the government’s decision whether to enforce the contract because, if that were the case, a breach of contract could never be an “obligation” until the government made a formal demand or initiated a lawsuit.  This, the court explained, would be contrary to the language and purpose of the FCA, which expressly references obligations arising from contractual relationships.

In reaching its decision, the Pennsylvania court noted that two federal district courts expressly considered this question last year and came to opposite conclusions—namely, United States ex rel. Booker v. Pfizer, Inc., No. 10-11166 (D. Mass. Mar. 26, 2014), and Ruscher v. Omnicare Inc., No. 08-3396 (S.D. Tex. Sept. 5, 2014).  The Pennsylvania court rejected the District of Massachusetts’ reasoning that, when penalties for violation a CIA are only potential fines that depending on intervening discretionary acts by the government, they do not give rise to reverse false claim liability.  Instead, the court expressed agreement with the district court’s conclusion in Ruscher and concluded that “Cephalon’s contractual obligation to pay the government is an ‘established duty’ as contemplated by § 3729(b)(3) upon breach of the CIA’s relevant requirements and that therefore relators have stated a claim under § 3729(a)(1)(G).”