Fourth Circuit Rejects FCA Claims on Scienter Grounds Based on Ambiguous Regulations

In Short

The Situation: Manufacturers of allergenic extracts that are injected into a patient must obtain a Food and Drug Administration ("FDA") approved license in order to ensure their products are safe for consumption. Until the FDA issued regulatory guidance in 2015, most manufacturers interpreted the FDA regulation at issue as allowing a general license for the custom mixes of extracts. But the FDA's 2015 guidance clarified that a separate license was required for custom mixes. Seizing on the guidance, relators have sought False Claims Act ("FCA") liability for earlier claims that do not comport with the regulations as they stand today.

The Result: Two former employees of Greer Laboratories filed a False Claims Act lawsuit based on regulatory compliance concerns. The relators alleged that Greer Labs sold custom mixes of allergenic extracts under a general license to physicians, who then received reimbursement from the government in violation of FDA regulations. On January 7, the U.S. Court of Appeals for the Fourth Circuit affirmed summary judgment for Greer Labs, holding that the relators could not establish scienter under the FCA and also had not engaged in a protected activity under the FCA.

Looking Ahead: The conventional wisdom that the scienter requirement is not ripe for summary judgment because intent is traditionally an issue to be decided by the trier of fact is appropriately turned on its head in this case. Scienter, like materiality, remains subject to a rigorous inquiry and should be considered as the focus of any summary judgment motion in a FCA case.

In August 2013, relators filed a retaliation claim under the FCA against Greer Labs, for terminating them after they raised concerns that "custom mix" allergenic extracts violated FDA regulations. The relators also alleged a FCA claim against Greer Labs for selling the custom mixes as licensed allergenic extracts to physicians, who received reimbursement from the government for administering the custom mixes to patients. Relators contended the physicians' claims for reimbursement were false because the custom mixes were not licensed allergens and thus not eligible for Medicare or Medicaid reimbursement. But the custom mixes at issue were mixes of individual allergen extracts for general use, rather than patient-specific mixes. Greer Labs had a longstanding general license, and did not seek separate licenses for its custom mixes because it believed the mixes fell under its general license. Before being terminated in 2012, relators notified Greer Labs that the custom mixes were violating FDA regulations.

The district court granted defendants' summary judgment motion. The court held that relators could not prove that Greer Labs acted knowing that a separate license was required for the custom mixes. The district court also held that relators' complaints did not qualify as protected activity in support of their retaliation claim. The Fourth Circuit affirmed in an unpublished ruling, reasoning that the FDA did not issue formal guidance construing the applicable regulation to require separate licenses for custom mixes until 2015 (more than 40 years after the regulation was enacted)—and, moreover, that the industry practice before the guidance was to distribute custom mixes without separate licenses. Because Greer Labs acted consistent with industry practice and the understanding of regulatory requirements, the Fourth Circuit agreed that Greer Labs had negated relators' claim of scienter.

The Fourth Circuit also highlighted that the FDA had regularly inspected Greer Labs' operations, including its custom mix practice, but had not raised any concerns about that practice until 2013. Moreover, the Fourth Circuit held that the complaint relators raised about regulatory compliance was insufficient to show that relators engaged in a protected activity under the FCA, because "[a]llegations of regulatory violations are not enough 'in the absence of actual fraudulent conduct.'" Skibo v. Greer Laboratories, Inc., 2021 WL 72124, at *6 (4th Cir. Jan. 8, 2021) at 16 (emphasis in original) (quoting United States ex rel Rostholder v. Omnicare, Inc., 745 F.3d 694, 702 (4th Cir. 2014)).  

Three Key Takeaways

  1. The FCA's scienter requirement remains rigorous and should not be overlooked as a basis for summary judgment, particularly with ambiguous statutes or regulations.
  2. Industry practice can be a useful avenue for compelling evidence on whether a defendant acted with requisite scienter and might be an appropriate area for expert testimony.
  3. Inspections or audits by the FDA that do not result in any adverse findings can negate any claim that a defendant knowingly misled the government about the conduct at issue.
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