Opinion
Civ. No. 98-2031 (DRD).
June 27, 2000
Richard P. Hedeman, Esq., Law Offices of Richard P. Hedeman, Morristown, New Jersey.
Harvey S. Mars, Esq., Leibowitz Mars, LLP, New York, NY, Attorneys for Plaintiff.
James A. Robertson, Esq., Kalison, McBride Jackson, Esq., Liberty Corner, New Jersey.
Harry Silver, Esq., Ober, Kaler, Grimes Shriver, Washington, DC, Attorneys for Defendants Omnicare, Inc. and Pompton Nursing Home Suppliers, Inc.
OPINION
On March 12, 2002, Magistrate Judge Hedges granted leave to plaintiff-relator, Thomas G. Quinn ("Quinn") to file a Second Amended Complaint. United States ex rel. Quinn v. Omnicare, Inc., 98-Civ-2031, Order at 6 (D.N.J. Mar. 12, 2002). Defendants Omnicare, Inc. ("Omnicare") and Pompton Nursing Home Suppliers, Inc. ("Pompton") now move, pursuant to 28 U.S.C. § 636(b)(1)(A) and Fed.R.Civ.P 72(a) to reverse Magistrate Judge Hedges's Order on the ground that it was clearly erroneous or contrary to the law or both. For the reasons set forth below, Judge Hedges's Order is affirmed.
Background and Analysis
The underlying facts of this case have been set forth in Magistrate Judge Hedges's March 12, 2002, opinion and will not be repeated here.
A district court reviewing a magistrate judge's order on a non-dispositive motion may modify or vacate the order only if the ruling was "clearly erroneous or contrary to law." 28 U.S.C. § 636(b)(1); Fed.R.Civ.P. 72(a); Loc. R. 72.1(c)(1); see Cipollone v. Liggett Group, Inc., 785 F.2d 1108, 1113 n. 5 (3d Cir. 1986). "A finding is clearly erroneous `when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.'" Dome Petroleum Ltd. v. Employers Mut. Liab. Ins. Co., 131 F.R.D. 63, 65 (D.N.J. 1990) (quoting United States v. U.S. Gypsum Co., 333 U.S. 364, 395 (1948)). A ruling is contrary to law if the magistrate judge has misinterpreted or misapplied applicable law. Gunter v. Ridgewood Energy Corp., 32 F.Supp.2d 162, 164 (D.N.J. 1998).
Federal Rule of Civil Procedure 15(a) provides that after an answer is filed, a party may amend its pleadings only "by leave of court or by written consent of the adverse party" and that leave to amend a pleading "shall be freely given when justice so requires." The federal rules reflect the "principle that the purpose of pleading is to facilitate a proper decision on the merits," and that if the underlying facts relied upon by a party may be a proper subject of relief, that party should have the opportunity to test its claims on the merits. Foman v. Davis, 317 U.S. 178, 182 (1962). Reasons for denying leave to amend include: (1) undue delay; (2) bad faith; (3) dilatory motive; (4) prejudice; and (5) futility. See In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1434 (3d Cir. 1997).
A. Futility
Defendants contend that leave to amend the Amended Complaint would be futile because there is no subject matter jurisdiction over the new allegations in Quinn's proposed Second Amended Complaint. Magistrate Judge Hedges ruled that amendment of the complaint is not futile. In support of their contention, Defendants assert that Quinn is not an "original source" of the new allegations and that the new allegations are "public disclosures."
A determination as to futility does not require a conclusive determination on the merits of a claim or defense. Instead, the futility of an amendment may only serve as a basis for denial of leave to amend when the proposed amendment is frivolous or advances a claim that is legally insufficient on its face. See Pharmaceutical Sales Consulting Corp. v. J.W.S. Delavau Co., Inc., 106 F. Supp.2d 761, 764 (D.N.J. 2000) (citing Miller v. Beneficial Management Corp., 855 F. Supp. 990, 1001 (D.N.J. 1993)).
Although futility of amendment is generally analyzed using the motion to dismiss standard under Fed.R.Civ.P. 12(b)(6), see Massarky v. General Motors Corp., 706 F.2d 11, 12 (3d Cir. 1983), In re Burlington Coat Factory, 114 F.3d at 1434, in the instant case, the motion to dismiss standard under Fed.R.Civ.P. 12(b)(1) should be applied because Defendants challenge the court's subject matter jurisdiction over the proposed amended allegations rather than their facial legal viability. See Mortensen v. First Fed. Sav. Loan Ass'n, 549 F.2d 884, 891 (3d Cir. 1977). Although Magistrate Judge Hedges applied what appears to be the Rule 12(b)(6) standard in evaluating Quinn's proposed amendments, his conclusions remain sound.
In evaluating a motion to dismiss under Rule 12(b)(1) for lack of subject matter jurisdiction, a court must first determine whether defendant's motion attacks the complaint as deficient on its face, or whether defendant's motion attacks the existence of subject matter jurisdiction in fact. Mortensen, 549 F.2d at 891. Where defendant's 12(b)(1) motion facially attacks the complaint, the Court must take all allegations in the complaint as true. Id. Under those circumstances, the court may dismiss the complaint only if it appears to a certainty that the plaintiff will not be able to assert a colorable claim of subject matter jurisdiction. Id.; Iwanowa v. Ford Motor Co., 67 F. Supp.2d 424, 438 (D.N.J. 1999). Where however, defendant attacks the Court's subject matter jurisdiction in fact, no presumptive truthfulness attaches to plaintiff's allegations and the Court may weigh the evidence to satisfy itself that subject matter jurisdiction exists in fact. Mortensen, 549 F.2d at 891. Plaintiff bears the burden of proof that subject matter jurisdiction does in fact exist. Id. When the defendant makes a factual challenge to plaintiff's jurisdictional allegations, affidavits, depositions and testimony may be considered in resolving the factual issues bearing on jurisdiction. See Gotha v. United States, 115 F.3d 176, 179 (3d Cir. 1997). Here, Defendants challenge both the legal and the factual validity of Quinn's proposed allegations.
The False Claims Act ("FCA") removes jurisdiction from the courts over any
action under this section based upon the public disclosure of allegations or transactions in a criminal, civil, or administrative hearing, in a congressional administrative, or Government Account Office report, hearing audit, or investigation, or from the news media, unless the action is brought by the Attorney General or the person bringing the action is an original source of the information.31 U.S.C. § 3730(e)(4)(A). The FCA defines an "original source" as "an individual who has direct and independent knowledge of the information on which the allegations are based and has voluntarily provided the information to the Government before filing an action under this section which is based on the information." Id. § 37370(e)(4)(B). Thus, jurisdiction over an FCA claim may exist even when a complaint's allegations are based upon publicly disclosed documents if the relator is "an original source" of the information.
Defendants contend that under § 3730(e)(4)(A), subject matter jurisdiction over Quinn's new claims does not exist because the allegations to be appended are derived from material that he obtained in discovery and are therefore "public disclosures."See United States ex rel. Stinson v. Prudential Insurance Co., 944 F.2d 1149, 1159-60 (3d Cir. 1990) ("[I]nformation received as a result of [civil] discovery should be deemed based on a `public disclosure' for purposes of the FCA jurisdictional bar"). Jurisdiction may nonetheless exist if Quinn were an "original source" of the allegations described in the Complaint; here, Defendants assert that Quinn is not an original source because he admits to relying upon documents disclosed during discovery of this case. Therefore, because subject matter jurisdiction would not exist over the amended claims, Defendants urge reversal of Judge Hedges's order granting leave to amend the complaint.
Quinn claims that the new allegations to be added to the complaint merely clarify and detail factual matters and are based on his personal knowledge of the facts underlying the allegations. Because he had personal knowledge, Quinn claims that he is an "original source" as defined in the FCA.
Defendants contend that Magistrate Judge Hedges's interpretation and application of Stinson is clearly erroneous and contrary to law. Magistrate Judge Hedges's ruled that:
[w]hile plaintiff admits that some information received during the discovery process forms the basis of the new substandard medication allegations, he argues that such information was subject to a Protective Order entered in this matter. Plaintiff claims that since the information was subject to a Protective Order, the information should not be considered "publicly disclosed" and therefore these claims should not be subject to the FCA jurisdictional bar. See Stinson v. Prudential Insurance Co., 944 F.2d 1149, 1158 (3d Cir. 1991). I agree.
Magistrate Judge Hedges accepted all of Quinn's statements as true and appears to have considered the arguments presented by both parties. Because there exists doubts as to whether subject matter jurisdiction exists over these claims, Magistrate Judge Hedges did not have to accept Plaintiff's allegations as true and could have considered affidavits, depositions and other testimony. See Mortensen, 549 F.2d at 891.
1. Whether Quinn Has Relied on Documents that Have Been Publicly Disclosed
Assuming that everything that Plaintiff has asserted is true, Magistrate Judge Hedges did not err in his ruling regardingStinson's interpretation of what constitutes "public disclosure." In Stinson, the Third Circuit Court of Appeals carefully distinguished between disclosures made in the course of discovery to parties who are not under any court imposed limitation as to its use and similar disclosures to parties who are subject to protective orders. See Stinson, 944 F.2d at 1158. The holding in Stinson clearly does not include materials disclosed in the discovery process, but subject to a protective order, within the definition of documents received through "public disclosure." See id. ("In this case, we need not consider whether information subject to a protective order which is either advertently or inadvertently disclosed could be considered to be received pursuant to a `public disclosure.'"). Therefore, Magistrate Judge Hedges was correct in ruling that documents subject to a protective order are not "publicly disclosed."
Defendants cite to Seal 1 v. Seal A, 255 F.3d 1154 (9th Cir. 2001) in support of the proposition that even sealed documents disclosed to relators are public disclosures. However, the facts of Seal 1 are distinguishable from the facts in the instant case. In Seal 1, the Ninth Circuit Court of Appeals ruled that when a relator bases his complaint upon confidential documents obtained from a government investigation, the confidential documents are public disclosures and the relator is not an "original source." See id. at 1161-63. Here, the confidential documents upon which Quinn relies were obtained through his efforts in the instant litigation rather than through the efforts of government investigators in an unrelated case. As discussed below in Part A.1., the facts in the present case do not pose the same free-riding problems that prompted Congress to bar FCA lawsuits based upon publicly disclosed information derived from non-original sources. Consequently, the holding ofSeal 1 is inapplicable to documents that Quinn relies upon in this case.
Furthermore, even if, arguendo, the sole basis of Quinn's new factual allegations rested on facts learned through discovery not subject to a protective order, the Third Circuit Court of Appeals's holding in Stinson regarding "public disclosure" of documents is inapplicable because the facts in the instant case are distinguishable. In Stinson, the relator learned of the defendant's alleged fraudulent activity during the relator's representation of T. Armlon Leonard in connection with injuries sustained by Leonard in an automobile accident.Stinson, 944 F.2d at 1151. Leonard was covered by an insurance plan provided by his employer and carried by Provident Life and Accident Insurance Company ("Provident"). See id. In the course of processing Leonard's claim against Provident, Stinson formed a suspicion that Provident's claim processing practice was in violation of federal law. See id. Provident filed suit against Leonard in Florida state court seeking a declaratory judgment establishing the legality of its claims procedure. See id. Through discovery in that suit, Stinson obtained two internal Provident memoranda suggesting that other insurance companies had similar claim processing practices. See id. A year and a half later, Stinson brought an action under the FCA against Prudential Insurance Company ("Prudential"). See id.
Prudential moved for dismissal pursuant to Fed.R.Civ.P. 12(b)(1), contending that Stinson's evidence of fraud was based solely upon documents obtained in the lawsuit between Leonard and Provident, which, because they were produced through discovery, should be considered "public disclosures" in the context of a civil hearing. See id. at 1152. The District Court granted Prudential's motion, see id., and the Court of Appeals for the Third Circuit affirmed the decision. See id. at 1161. The Court of Appeals based its decision on the assumption that in the absence of a protective order, all information disclosed in discovery is potentially accessible to the public. See id. at 1158. Underlying the Court of Appeals decision was its understanding that Congress created the FCA's public disclosure bar to preclude the initiation of parasitic lawsuits. See id. at 1154.
Unlike the information used by the relator in Stinson, in the present case, the information that Quinn has allegedly used as the basis of his proposed amendments to the complaint was produced in connection with the instant litigation. This information was not, as in Stinson, publicly disclosed through the discovery process in a separate lawsuit.
It is irrational to bar a plaintiff-relator like Quinn from amending a complaint to add allegations that are based upon information that he discovers in the course of his qui tam suit. Adopting such a rule would not thwart Congress's goal of preventing parasitic lawsuits. See Stinson, 944 F.2d at 1154 (citing to False Claims Act Implementation: Hearing Before the Subcomm. on Admin. Law and Gov. Relations of the House Comm. on the Judiciary, 101st Cong., 2d Sess. 3 (1990)). In fact, applying Stinson's holding to the instant case would create ade facto requirement that a relator have his or her case against an alleged defrauder prepared and proven from the start of the lawsuit and deprive a relator as well as the government (on whose behalf the relator acts) from the benefits of the discovery process in unraveling a fraud against the government. Such a result would frustrate Congress's clear intention to encourage persons with first-hand knowledge of fraudulent misconduct, albeit incomplete, to report and prosecute fraud against the government. Consequently, in light of clear congressional intent, information obtained through discovery in an FCA action is not considered "publicly disclosed" when the plaintiff-relator uses such information to amend a complaint in the same action — i.e., a plaintiff-relator is not barred from amending a complaint by the jurisdiction bar created by 29 U.S.C. § 3730(e)(4) when the proposed allegations to be appended are based from facts developed through discovery in the same action.
Defendants' concerns about "fishing expeditions" by plaintiff-relators are obviated by the heightened pleading requirements of Fed.R.Civ.P. 9 that the plaintiff-relators must satisfy, see United States ex rel. Palladino v. VNA of Southern New Jersey, Inc., 68 F.Supp.2d 455, 462 (D.N.J. 1999) (citing to Rule in support of the proposition that "[b]ecause claims under the FCA are claims of fraud, the pleading rules are somewhat more specific: plaintiffs must allege those claims with particularity"), and by careful supervision of the discovery process.
2. Whether Quinn Is an "Original Source"
When the various depositions and affidavits that Defendants and Quinn have provided are examined, it is not apparent why Quinn's affidavit should be discounted as Defendants urge. Defendants contend that the facts contained in the segments of the deposition transcripts attached to the January 28, 2002, Mars Affidavit actually revealed the particular acts of adulteration of unit dose medication now set forth in ¶ 64 of the proposed second amended complaint. However, a review of these deposition transcripts reveals nothing that supports Defendants' contention. Joffre Molina testified as to the Defendants' recycling practice during the time period after Quinn was employed by Pompton. The Brickman, Vaccaro and Fusco deposition testimonies only concern their understanding of the application of New Jersey Pharmacy` regulations. Furthermore, Brickman testified that one could not see pills being pushed out through the cardboard (Brickman dep. at 130-31, Ex. D to Affidavit of Harvey S. Mars), but Quinn states in the proposed second amended complaint that he personally saw employees "manually removing medications from the sealed packaging in which they were contained." (Proposed Second Am. Compl. ¶ 64, Ex. K to Defendants' Br. Appealing Leave to Amend; Quinn Aff. ¶ 3.)
Thus, Quinn claims that he witnessed individuals working within the returns department removing pills from their original packages but did not understand the import of what he saw until he had an opportunity to review various state and federal regulations. (Quinn Aff. ¶¶ 3-5.) It is perfectly understandable why an accountant might not understand the import of what he sees on the operational side of a business, and he should not be penalized for not developing sooner an understanding of how the federal food and drug laws regulate the recycling of medication.
Therefore, even if the information underlying the proposed amendments of the complaint were based upon information produced in the course of discovery, Quinn remains an original source of the information. In his affidavit, Quinn states that he witnessed individuals removing pills from their original packages using various means and saw others creating new sealed packages with loose pills using a hot iron press. (Quinn Aff. ¶ 3.) Quinn also states that he had several conversations with Loretta Brickman regarding the recycling of lotions and gels, which revealed a larger, industry-wide conspiracy to defraud the federal and state governments. (Quinn Aff. ¶ 4.) Because Quinn witnessed these events, he is an original source.
B. Timeliness
The defendants contend that Quinn's motion to amend is untimely and therefore prejudicial. The mere passage of time, without more, does not require the denial of a motion to amend a complaint, although the delay at some point will become "undue," placing an unwarranted burden on the court, or will become "prejudicial," placing an unfair burden on the opposing party.See Adams v. Gould, Inc., 739 F.2d 858, 868 (3d Cir. 1984). As the Third Circuit Court of Appeals held in Adams, an inquiry regarding the timeliness of a motion to amend must focus on the plaintiff's motives for not amending to assert his claims earlier. See id.
Magistrate Judge Hedges ruled that Quinn did not unduly delay filing his motion to amend. Instead, Judge Hedges attributed the delay in bringing the motion to the four months that the United States Department of Justice took to review the Second Amended Complaint. This ruling was neither clearly erroneous or contrary to law.
The Defendants contend that the FCA does not require that a relator file his or her amended complaint under seal. Section 3730(b)(2) of the False Claims Act mandates that "[a] copy of the complaint and written disclosure of substantially all material evidence and information the person possesses shall be served on the Government. . . . The complaint shall be filed in camera, shall remain under seal for 60 days, and shall not be served on the defendant until the Court so orders." Although courts have interpreted § 3730(b)(2)'s sealing requirement to apply only to the initial complaint, see United States ex rel. Milam v. Regents of University of California, 912 F. Supp. 868, 889-90 (D. Md. 1995), there is no prohibition against filing an amended complaint under seal. See generally S. Rep. No. 345, 99th Cong., 2d Sess., 24, reprinted in 1986 U.S.C.C.A.N. 5266, 5289 (explaining the purpose of the requirement that all complaints should be sealed). In fact, the issue of whether the FCA requires that an amended complaint must be filed under seal is clearly ambiguous, which is why the issue has been litigated repeatedly. See, e.g., Wisz ex rel United States v. C/HCA Development, Inc., 31 F. Supp.2d 1068 (N.D. Ill. 1998); Milam, 912 F. Supp. at 889-90. Thus, the mere fact that Quinn filed his Second Amended Complaint under seal has no causal connection with the fact that the government took an inordinate amount of time reviewing the Second Amended Complaint.
Moreover, Magistrate Judge Hedges noted that the new claims asserted in the Second Amended Complaint arise out of the same set of facts alleged in the original Complaint and that no significant discovery is required. A comparison of the original Complaint indicates that Quinn's amended complaint only supplements and clarifies what he has alleged earlier. For example, Paragraph 21 of the original Complaint states that "[w]hen the [blister pack] cards are returned to PNHS with pills remaining on them, the pills can be removed and repackaged onto new blister pack cards. This may be done by heating the card. . . ." Paragraph 64 of the Second Amended Complaint is entirely new and details the manual removal of medication from their blister packs. Not only did Judge Hedges find that the new allegations were related to the original allegations, Ed Vaccaro, a disinterested third party, also interpreted Paragraph 21 of the original complaint to mean the separation of unit doses from a blister pack. See Mars Aff., Ex. B. Because Judge Hedges's conclusion regarding the timeliness of Quinn's motion to amend was neither clearly erroneous or contrary to law, it cannot be overturned.
C. The Addition of New Defendants
The Defendants contend that there is no subject matter jurisdiction over the claims against the new defendants because the information used as the basis of these claims was obtained through discovery in the instant case. Plaintiff, however, alleged from the beginning that other companies colluded with Omnicare's efforts to defraud the federal government. Thus, the substitution of parties and additional allegations, merely supplement and detail Quinn's allegations in paragraphs 36 and 61 of his original complaint. Moreover, as discussed above, information that a relator obtains through discovery proceedings can be used to amend a complaint in that proceeding; the Third Circuit Court of Appeals's holding in Stinson does not apply. Consequently, Defendants' contention that subject matter jurisdiction over the amended allegations with respect to allegations involving the new defendants is rejected.
Paragraph 36 of the Complaint stated in part:
Traster replied that this practice was of long standing and that he was a member of a long-term care pharmacy providers consortium . . . whose policy was to credit Medicaid only 50% on returned medications. Upon information and belief, it is the practice and policy of the various John Doe Company members of the long term care pharmaceutical providers consortium, and of the defendant Omnicare, corporate-wide, to falsely or fraudulently understand the value of returned reusable pharmaceuticals to Medicaid.
Paragraph 61 stated in part:
As a result of this false or fraudulent activity, the Medicaid program has been and possibly continues to be fraudulently induced to pay many times for the same medications. By the corporate and industry practices of understating to Medicaid the value of pharmaceuticals returned by patients at long term care facilities the various John Doe Company defendants (members of the long term care pharmaceutical providers consortium) . . . have engaged in a systematic pattern of Medicaid fraud.
The Defendants assert that Quinn has based his Second Amended Complaint on information that was classified as "Counsel Only Confidential." There is, however, no reference by Quinn to the documents that Defendants describe in Exhibit L of their brief. Instead, Quinn has stated that he derived the information from records provided to him by the state of New Jersey. See Quinn Aff. ¶ 9.
D. Whether New Parties Will Be Prejudiced
Bach's Pharmacy East; Cherry Hill Pharmacy, LTC; and Winslow's Pharmacy are all wholly-owned subsidiaries of Omnicare (collectively, the "Subsidiaries"). Quinn's Second Amended Complaint alleges that the Subsidiaries engaged in Medicaid fraud by understating the value of pharmaceuticals returned by patients at long term care facilities. (Sec. Am. Compl. ¶ 63.) The Defendants contend that because Omnicare acquired the Subsidiaries without acquiring all of the pre-acquisition liabilities of the Subsidiaries, the former owners may want to be represented by their own counsel. Defendants suggest that to avoid being prejudiced, new counsel might want to conduct discovery, which may necessitate redeposing all prior witnesses and delay the disposition of this litigation. Defendants also contends that the prior owners of these three newly named defendants had no prior notice of this litigation.
With respect to the amended allegations against Defendants, Magistrate Judge Hedges ruled that only limited additional discovery would be required because the new claims that Quinn seeks to assert arise out of the same set of facts alleged in the original Complaint. Because the Subsidiaries are wholly-owned by Omnicare, a named defendant here, it can be presumed that they have had notice of this on-going lawsuit. Moreover, because the Second Amended Complaint only seeks to recover from the Subsidiaries for fraud against Medicaid allegedly perpetrated after Omnicare's acquisition of them, it is unlikely that the Subsidiaries will require significant additional discovery or additional counsel; virtually all of the relevant issues have already been thoroughly and exhaustively explored by counsel for Defendants. Furthermore, although discovery has ended, a pretrial order has yet to be prepared and summary judgment motions have yet to be filed. In addition, Judge Hedges has indicated that he is willing to allow any additional discovery which may be necessary. Thus, a brief period of additional discovery would not prejudice Defendants, and the Subsidiaries will not be prejudiced by the new allegations set forth in the Second Amended Complaint.
Paragraph 10 of Quinn's Second Amended Complaint does not explicitly limit the liability of the Subsidiaries to frauds allegedly perpetrated since Omnicare's purchase of the Subsidiaries. However, Quinn's counsel has explained in his brief that ¶ 10 should be read to limit the Subsidiaries' liabilities in this manner.
Conclusion
For the reasons set forth above, the Defendants' motion to reverse Judge Hedges's order will be denied, and the order will be affirmed.