The Dallas Morning News / The Texas Lawbook
By Janet Elliott

October 20, 2012

AUSTIN — Long known for its business-friendly litigation climate, Texas has quietly become the national leader in using the courthouse to punish one set of corporations: pharmaceutical companies that cheat government health programs.

Teaming up with company insiders and others who claim to know of wrongdoing by suppliers to the Texas Medicaid program, the state has recovered more than $1.2 billion over the last decade from suits accusing drug manufacturers and health care providers of overpricing and fraud.

Records from the Texas attorney general show that the recoveries resulted in Texas keeping $407 million, plus $92 million in fees for the AG’s office. The state sent $554 million to the federal government and $149 million to whistle-blowers and their lawyers.

A recent analysis of all 50 states by Public Citizen found that Texas used whistle-blower-initiated investigations more than any other state. In fact, Texas has become the role model for the rest of the country. By mid-July 2012, the federal government and the states had recovered a record $6.6 billion.

Texas’ program reflects an unlikely alliance between private trial lawyers and Attorney General Greg Abbott, a Republican who has regularly criticized lawyers who represent plaintiffs in lawsuits against businesses.

“The truth of the matter is, if Texas waited around for Uncle Sam to step up on the horse and ride up for the bad guys, they’d still be waiting,” said Patrick Burns, a spokesman for the pro-whistle-blower group Taxpayers Against Fraud.

Burns also credits another Republican, former attorney general and now U.S. Sen. John Cornyn, for taking advantage of whistle-blower provisions Texas added to its law in 1997.

“I would like to say that salvation came from Washington,” he said. “I would like to say it came from Democrats. [But] it came from a Republican attorney general, it came out of Texas, Florida, the private bar, and it came out of the West.”

Boon to attorneys

The litigation has been a boon to plaintiff lawyers at a time when medical malpractice and other traditional cases have slowed because of legislative limits.

“It’s one of the few areas that has been immune from the so-called tort reform movement,” said Tom Melsheimer, a Dallas lawyer who represented whistle-blower Allen Jones in a lawsuit that alleged that drug maker Johnson & Johnson falsely marketed its Risperdal antipsychotic. The case resulted in a $158 million midtrial settlement in January, the largest Medicaid fraud recovery in Texas history.

The state’s recoveries have taken off since 2007, when Abbott requested money to hire additional lawyers after being questioned by legislative budget writers about 140 fraud cases that were languishing for lack of manpower.

Under the leadership of Raymond Winter, the civil Medicaid fraud division has grown from nine lawyers to 33, and recoveries have leapt from $41.3 million in fiscal year 2007 to $411 million in fiscal year 2012.

Such numbers are inspiring other states. More than 28 now have whistle-blower provisions similar to those in the Texas Medicaid Fraud Prevention Act. Even Congress has nodded its approval, allowing states with strong laws like Texas to keep a greater share of money recovered.

Cases filed under seal

A case begins when a whistle-blower files a lawsuit under seal and presents information to the AG. Abbott’s lawyers can initiate an investigation of the claims, using their authority to demand documents from potential defendants. If the state joins the lawsuit, it is unsealed. Any recoveries are divided among the federal and state governments and the whistle-blower, who can collect 15 to 25 percent.

Defense lawyers criticize the law for allowing the state to keep cases under seal for years as the defendant continues doing business with the state while the potential damages mount up.

All but two of more than 200 cases have settled before trial because the threat of trebled damages and penalties for each transaction “set the stage for pretty one-sided settlement negotiations,” said Joe Knight, managing partner of Baker Botts’ Austin office. Knight represented drug maker Actavis in its appeal of the only Texas Medicaid fraud case to reach a jury verdict.

After a Travis County jury determined last year that Actavis should pay Texas and the federal government $170.3 million for fraudulent pricing of its generic drugs, the company sought a new trial, claiming that the Texas statute violates constitutional standards for fundamental fairness in civil actions.

In the three years before the case was unsealed, Actavis argued, Texas officials didn’t notify the company of its allegations and the Legislature increased the minimum penalty from $1,000 to $5,000 per violation and reduced the standard of proof for punitive damages.

“I do think there’s something wrong with a statute that would allow the state to continue doing business with somebody on terms the state has already concluded to be fraudulent without notifying the other party that the state has made that allegation,” Knight said.

The Actavis co-defendants dropped their appeal last December and settled for $84 million. AG spokesman Tom Kelley said the settlement was based on the ability of the defendants to pay.

Key West to Austin

Texas’ effort actually began in 1999 when Austin lawyer Pat O’Connell went to work for Cornyn to head the new fraud unit. He reviewed several cases filed by the owners of a small pharmacy in Key West, Fla., alleging widespread overpricing of drugs sold to government programs.

O’Connell says the cases, which also were filed in federal court, had been languishing. He decided to intervene in 2000, making Texas the first state to intervene in whistle-blower-initiated litigation targeting fraudulent drug price reporting.

The cases, known as the Ven-A-Care line, have generated $153 million for Texas out of an overall $498 million the AG and whistle-blowers collected. Texas has recovered one-fourth of the $2 billion pharmaceutical companies have paid to all states combined and the federal government since the cases began.

In June 2005 testimony to U.S. Senate Finance Committee, O’Connell said that he didn’t initially plan to concentrate so heavily on drug manufacturers.

“The fact is that whistle-blowers brought us cases which showed significant fraud in amounts which dwarfed the cases against other providers. Because of the limited number of staff and resources we can bring to any one case, we chose to pursue those cases which provided the greatest return to the Medicaid program,” he testified.

O’Connell left the AG’s office in 2007 and now represents whistle-blowers.

Litigation continues

Although the Ven-A-Care cases are winding down, Abbott’s office says the upward trend of Medicaid fraud recoveries is expected to continue as more cases than ever are being filed for review. During the review process, it is critical for whistle-blowers and their counsel to gain the attention of government lawyers.

“You’ve got to sell them on the merits of your case, which requires you to understand the facts and the law in a very detailed way,” said Melsheimer, who brought the Johnson & Johnson suit to the state.

The AG’s office or Justice Department also wants to know what kind of resources the private lawyers bring to the table. The Fish & Richardson team led by Melsheimer in the Risperdal case, for example, helped manage 10 million pages of documents and 150 depositions.

“They told me flat out that one of the reasons they were willing to take this massive case was because I told them that we were going to put our best lawyers and our financial support behind the case,” Melsheimer said.