On August 20, the Fifth Circuit Court of Appeals rejected a whistleblower claim by a former employee of Cardinal Health, Inc., affirming dismissal of the former employee’s complaint, which alleged that Cardinal Health sold hospitals run by the U.S. Department of Veterans Affairs defective medical equipment, in violation of the False Claims Act (FCA).
Before her termination from Cardinal Health, the plaintiff marketed Cardinal Health’s “Signature pump”—an electronic device that regulates the rate at which intravenous fluids flow into patients—to various hospitals, including hospitals run by the VA. The plaintiff alleged that the Signature pump had a dangerous defect, causing air bubbles to accumulate and be released into a patient’s intravenous fluids flow, potentially resulting in serious injury or death.
The plaintiff claimed that she became aware of the defect in late 2000 and discussed it with a Cardinal Health area manager in early 2001. In mid-2001, Cardinal Health suspended shipment of the Signature pump for three months and undertook a review of the possible defect. Cardinal Health terminated the plaintiff at the end of the three-month review period. Cardinal Health suspended production and sale of the Signature pump for independent reasons in 2006.
“Implied False Certification” Theory of FCA Product Liability
The crux of the plaintiff’s FCA claim was that Cardinal Health falsely certified to the VA that the Signature pump was in compliance with the warranty of merchantability in the parties’ contract each time it requested payment from the VA for the pumps—a so-called “implied false certification” theory.
The Fifth Circuit has not expressly recognized an implied false certification theory under the FCA; rather, the Fifth Circuit adheres to the view that an underlying claim for payment is not “false” within the meaning of the FCA, if the government contractor (here, Cardinal Health) is not required to certify compliance in order to receive payment. The Fifth Circuit concluded that the warranty of merchantability in the parties’ contract was not a precondition of payment, rejecting the plaintiff’s theory as “an implied certification of an implied contract provision that is an implied prerequisite to payment.”
Further, even if there were such a payment precondition in the parties’ contract, the Fifth Circuit found that the FCA required the plaintiff to plead with particularity how the Signature pump deviated from the government’s product specifications. The court found that she failed to do so.
“Worthless Goods” Theory of FCA Product Liability
As an additional line of attack, the plaintiff asserted that Cardinal Health violated the FCA under a “worthless goods” theory. Here, the plaintiff alleged that the Signature pumps were worthless because the expected cost due to tort liability from using the pumps exceeded the expected benefit of using them. Without reaching the question of whether an FCA claim may be viable under a worthless goods theory, the Fifth Circuit concluded that the plaintiff’s complaint failed to articulate such a claim with the necessary particularity. Specifically, the Fifth Circuit explained that the plaintiff’s complaint “fails to allege that any patient was harmed due to the use of the Signature pump at a VA hospital [and] fails to allege that the VA was ever sued due to injury caused by a malfunctioning Signature pump.” In other words, the plaintiff’s complaint was devoid of facts sufficient to suggest that tort liability costs, with respect to the Signature pump, in fact outweighed the benefits of their use.
Our Insight. Your Advantage. While the Fifth Circuit did not accept the plaintiff’s false certification theory, another circuit may have found it credible. Companies contracting with governmental entities should be mindful of any certification that is required as a precondition of payment. Internal compliance officers, with the assistance of outside counsel if necessary, must work to assure that any such certifications are true and accurate.
The case is U.S. ex rel. Steury v. Cardinal Health, Inc., No. 12-20314 (5th Cir. Aug. 20, 2013).