Michael D. Lam is Pharmaceutical Executive's Associate Editor.

Pfizer is embroiled in a whistleblower lawsuit based on an unproven legal theory with the potential "to scare the hell out of a lot of drug companies," says attorney Alan Minsk of Arnall Golden Gregory. If upheld, even those compliant with FDA regulations for off-label promotion might still be liable for Medicaid fraud under the federal False Claims Act (FCA).

The cost of losing the case, known as Franklin v. Parke-Davis (a unit of Warner-Lambert, acquired by Pfizer, liabilities and all, four years ago), could be enormous. Violators of FCA are excluded from government business and pay triple damages and civil penalties between $5,000 and $11,000 for each false claim-all of which likely motivated Pfizer to set aside more than $400 million recently, presumably to settle the matter.

Who's right? What's at stake? And what can pharma do?

Not as Directed

Like the flu, off-label promotion problems seem to afflict the industry in a new form every year. The Parke-Davis bug is not only the latest strain, but in certain respects the most unlikely. The plaintiff, David Franklin, PhD, a microbiologist employed by Parke-Davis as a medical liaison for five months in 1996, filed a lawsuit that year alleging that the company had engaged in unlawful activities, including kickbacks and sham research, to promote off-label use of Neurontin (gabapentin), an anti-convulsant approved for the treatment of epilepsy.

Much of the misbehavior alleged in Franklin echoes previous actions against pharma firms. (See "Whistleblower Fraud Cases.") But Franklin's suit contains a troubling new legal theory that to date has withstood the court's scrutiny. It has two parts. The first, Minsk says, is the contention that, although Parke-Davis never directly submitted a Medicaid claim the company "in effect caused the false claim to be made."

In a motion to dismiss the suit, the company argued, as Minsk put it, "Wait a second, we don't submit the paperwork. That's the doctors and the pharmacies. Throw the claim out." But the court didn't.

Why not? Because the allegation is not so outlandish after all. First, there's the basic legal principle, articulated by William Vodra, senior partner with Arnold & Porter, "that a company remains responsible for the foreseeable consequences of its activities." In particular, the FCA statute imposes liability on any person who "knowingly presents, or causes to be presented ... a false or fraudulent claim," with "knowingly" defined as actual knowledge, reckless disregard, or deliberate ignorance. It's easy to see that a company that promotes off-label use, however circumspectly, might reasonably foresee that a Medicaid claim would be submitted for that use.

The second part concerns why the claims are fraudulent. Medicaid programs in most states cover the cost of off-label drug use (for which they are reimbursed by the federal government) as long as the unapproved indications are listed in any of three standard reference works (Drugdex, AHFS Drug Information, and US Pharmacopeia). However, eight states do not cover any off-label use under any circumstance. Because Medicaid reimbursement was sought for off-label use of Neurontin in these states, the claims were materially false.

"Franklin was a surprise for the industry," says a consultant who advises pharma on compliance issues. The connection between drug maker and the person who actually bills Medicaid is so attenuated, he says, "that this issue probably was not on the compliance radar screen of any pharmaceutical company." He likens it to "waking up one morning ... and wearing pants is suddenly viewed as inappropriate. If you're asked, 'Did you ever wear pants?' you have to say yes. But you never thought you were violating the law."

Minsk says, "The majority of drug companies promote off-label. If the court determines that a company can be held responsible for causing a false claim to be made, the US Attorney could shoot fish in a barrel if he or she wishes to go after almost any of them."

Then there are qui tam incentives to consider. "If Franklin walks out of this thing with $100 million," says Vodra, "I can certainly see people saying, 'This is something to get into.' Every single person in a marketing organization, from the bottommost sales rep up to the top levels of the company, might blow the whistle," he says. "Even the secretaries at headquarters can walk out, taking all the documents with them."

So far, the claims in Franklin are just theoretical. And they are likely to stay that way. Every pharmaceutical company in a similar position has settled. So, the consultant says, "there's never been any proof that these theories really stand up."

If Franklin is settled, as seems likely, the trial court's rulings won't be reviewed by an appellate court, and will be "interesting opinions from one district court judge with no binding effect on any other," Vodra says. "That doesn't mean the court says it's a silly claim," says Minsk. "It doesn't mean the court says it's a victorious claim. It just simply means that somebody else is probably going to bring the issue up at another time."

Why do companies uniformly settle FCA lawsuits? David Hyman, a professor at the University of Maryland school of law, says, "[Healthcare] providers who believe they are blameless are under tremendous pressure to settle, because of the legal expenses associated with mounting a defense and the high probability of bankruptcy and professional disgrace if the jury does not see things the same way."

It is interesting to note that the costliest penalty is the seemingly paltry civil fine of $5,000–$11,000 per false claim. But, as Hyman points out, "because most healthcare providers typically submit a large number of modest claims, this structure means that statutory penalties generally dwarf actual damages, and quickly rise to staggering levels—as much as $1.1 million for every 100 false claims."