Supreme Court to Weigh in on Fraud Standard under False Claims Act
In a move that may substantially increase healthtech companies’ exposure to monetary damages, the U.S. Supreme Court agreed to weigh in on the key standard for fraud lawsuits under the False Claims Act (“FCA”). On January 13, 2023, the Supreme Court granted petitions for writs of certiorari in two now-combined 7th Circuit Court whistleblower fraud lawsuits that address the fraud standard– Schutte v. Supervalu Inc. and Proctor v. Safeway.
The FCA imposes monetary damages on persons and companies that defraud the government by “knowingly” submitting to the government false claims for payment, or “knowingly” making false statements in support of such claims. Lawsuits under the FCA may be filed by the government or by a private party, such as a whistleblower.
In the underlying cases, the 7th Circuit held that a company can shield itself from fraud lawsuits if the company’s lawyers can show that the company’s conduct was consistent with an erroneous but “objectively reasonable” interpretation of the law, regardless of the company’s subjective beliefs. However, some judges and commentators have opined that “subjective bad faith” can establish the necessary intent.
The Supreme Court will now hopefully resolve this issue of whether and when a defendant’s contemporaneous subjective understanding or beliefs about the lawfulness of its conduct are relevant to whether it “knowingly” violated the FCA.
The total annual amount of recovery under the FCA is substantial and may likely to continue to increase, especially if the Supreme Court removes the “objectively reasonable” shield. According to the Department of Justice (“DOJ”) website, the DOJ obtained more than $5.6 billion in settlements and judgments from civil cases involving fraud and false claims against the government in the fiscal year ending Sept. 30, 2021, which was the second largest annual total in history. Numbers for the 2022 fiscal year should be released shortly.
Of the $5.6 billion in recovery in the 2021 fiscal year, over $5 billion relates to matters that involved the health care industry. For example, as recently reported in a prior Knobbe Medical blog post, a medical device developer Advanced Bionics LLC stated that it will pay about $12 million to resolve allegations that it misled federal health care programs.
Medical Device Patentee Petitions Supreme Court Regarding On-Sale Bar and Price Quotes
A medical device patentee has asked the U.S. Supreme Court to save his design patent, related to an introducer sheath handle, from invalidity based on application of the “on-sale” bar, which prohibits patenting an invention if it has been for sale for over one year prior to the patent filing.
On July 6, 2022, in Junker v. Medical Components Inc., inventor Larry Junker filed a petition for certiorari asking the Supreme Court to review the Federal Circuit’s finding of invalidity of his design patent under the on-sale bar. Mr. Junker alleged that Medical Components, Inc. and Martech Medical Products, Inc. (collectively “MedComp”) infringed U.S. Design Patent No. D450,839 (the “D’839 patent”), entitled “Handle for Introducer Sheath.” An introducer sheath is a device used to place catheters. The D’839 patent covered the design of the introducer sheath’s handle with rounded “Mickey-Mouse-shaped ears” that made the device easier to grasp when inserting the catheter and when peeling apart and removing the sheath. Figure 1 from the D’389 patent is reproduced below:
Mr. Junker and MedComp filed cross-motions for summary judgment debating whether the D’839 patent was invalid under the “on-sale bar” of 35 U.S.C. § 102(b) (pre-AIA). Under 35 U.S.C. § 102(b) (pre-AIA), a patent claim is invalid if “the invention was . . . on sale in this country, more than one year prior to the date of the application for patent in the United States.” The parties disputed whether a 1999 letter regarding a price quotation, sent more than one year before the D’839 patent was filed, constituted a commercial offer for sale. The letter was sent by a third party manufacturer to Boston Scientific.
The district court concluded that the letter was not a commercial offer for sale and accordingly granted Mr. Junker’s motion for summary judgment of no invalidity. After a bench trial, the court awarded Mr. Junker $1.25 million in damages. On appeal, the U.S. Court of Appeals for the Federal Circuit disagreed, finding that the letter contained sufficient terms to constitute a commercial offer for sale rather than a mere quotation.
In his petition for certiorari, Mr. Junker urges the Supreme Court to review the Federal Circuit’s ruling, arguing that the Federal Circuit misapplied contract law because the 1999 letter was sent by a third party who had no right to sell the invention, and the letter expressly stated it was a quotation rather than a price list.
Mr. Junker’s petition for certiorari is available here.
Supreme Court Makes it Easier for Medical Device Companies to Recover Enhanced Damages for Patent Infringement
The Patent Act provides that, in a case of infringement, courts “may increase the damages up to three times the amount found or assessed.” Previously, in order to recover enhanced damages under the Patent Act, a patent owner had to show two things: (1) the infringer acted with objective recklessness and (2) the risk of infringement was either known or should have been known to the accused infringer. Both of these elements had to be shown by the relatively high standard of “clear and convincing” evidence.
The Supreme Court’s recent decision in Halo Electronics, Inc v. Pulse Electronics, Inc. drastically changed the standard for enhanced damages and made it easier for patent owners to obtain an enhanced damages award. The Court eliminated the objective recklessness prong and lowered the standard of proof from “clear and convincing evidence” to “preponderance of the evidence.” The Court also adopted an abuse of discretion standard for appellate courts reviewing a district court’s decision to grant enhanced damages.
Previously, patent owners struggled to obtain enhanced damages even when they could establish that the infringer acted with bad faith. Infringers were able to avoid enhanced damages by making a reasonable defense at trial. Thus, the ability of a patent owner to obtain enhanced damages sometimes depended more on the ingenuity of the defendant’s attorney than the defendant’s culpability at the time of the challenged conduct. By eliminating the objective recklessness prong, the Supreme Court refocused the analysis on the defendant’s knowledge at the time of the infringing conduct.
The Court’s new contemporaneous focus will likely influence the prelitigation conduct of patent owners and accused infringers. Demand letters informing accused infringers of their infringement and relevant patents will likely become more common place. Opinion letters will also likely take on an increased significance for accused infringers. Not all instances will warrant a full-blown infringement and validity analysis but, under the new standard, accusations of patent infringement should be given prompt, thorough, and carefully documented consideration.
United States Supreme Court Reverses Federal Circuit Decision in Medtronic, Inc. v. Mirowski Family Ventures, LLC
(January 22, 2014) A unanimous Supreme Court reversed the Federal Circuit and held that, when a licensee seeks a declaratory judgment against a patentee to establish that there is no infringement, the burden of proving infringement remains with the patentee.
According to the opinion, Mirowski Family Ventures, LLC (“Mirowski”) owns patents (U.S. Reissue Patents Nos. RE38,119 and RE39,897) relating to implantable heart stimulators. Figure 1 of U.S. Reissue Patent No. RE38,119 is illustrated below:
By way of background, Mirowski entered into a licensing agreement that permitted Medtronic, Inc. (“Medtronic”) to practice certain Mirowski patents in exchange for royalty payments. Mirowski notified Medtronic of its belief that several of Medtronic’s new products infringed the licensed patents, and thus royalty payments relating to those product were owed. Medtronic then brought a declaratory judgment action asserting that their products did not noninfringe the Mirowski patents. The district court concluded that Mirowski, as the party asserting infringement, had the burden of proving infringement and that Mirowski had not met that burden. The Federal Circuit disagreed. It acknowledged that a patentee normally bears the burden of proof, but concluded that where the patentee is a declaratory judgment defendant and, like Mirowski, is foreclosed from asserting an infringement counterclaim by the continued existence of a licensing agreement, the party seeking the declaratory judgment, namely Medtronic, bears the burden of persuasion.
The Supreme Court reversed the decision of the Federal Circuit and held that, “when a licensee seeks a declaratory judgment against a patentee to establish that there is no infringement, the burden of proving infringement remains with the patentee.” The case was remanded for further proceedings.
Supreme Court Invalidates Claims to Naturally Occurring DNA
On June 13, 2013, the Supreme Court issued a unanimous decision finding that claims to naturally occurring DNA segments were invalid under the Patent Act because DNA is a product of nature and therefore not patent eligible. Myriad, the patentee, discovered the precise location and genetic sequence of the BRCA1 and BRCA2 genes, but did not create or alter the genetic information encoded in the BRCA1 and BRCA2 genes.
The Court also ruled that a second set of claims to complementary DNA (cDNA) sequences are patent eligible because cDNA is not naturally occurring. As a result, cDNA therefore does not present the same obstacle to patentability as naturally occurring, isolated DNA segments.
The Court expressed no opinion regarding method claims, new applications of knowledge about the BRCA1 and BRCA2 genes, or patentability of DNA in which the order of naturally occurring nucleotides has been altered, noting they are not implicated by this decision. A copy of the Supreme Court’s opinion is available here: Assoc. for Molecular Pathology v. Myriad Genetics, Inc., No. 12-398.
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