In the

United States Court of Appeals

For the Seventh Circuit ____________

No. 06-4419

UNITED STATES ex rel. MICHAEL FOWLER,

PEPPI FOWLER, VICTOR CORTES,

and DANNY NEVAREZ,

Plaintiffs-Appellants,

v.

CAREMARK RX, L.L.C., and CAREMARK INC.,

Defendants-Appellees.

____________

Appeal from the United States District Court

for the Northern District of Illinois, Eastern Division.

No. 03 C 8714—Suzanne B. Conlon, Judge.

____________

ARGUED JUNE 6, 2007—DECIDED JULY 27, 2007

____________

Before RIPPLE, KANNE, and EVANS, Circuit Judges.

KANNE, Circuit Judge. The plaintiff—Relators are

employees of Caremark. They filed a qui tam action under

the False Claims Act. 31 U.S.C. § 3729 et seq. The district

court held that subject matter jurisdiction existed but

dismissed the complaint on the merits. On appeal, the

Relators argue that the district court erred in dismissing

the case while Caremark argues that the case should have

been dismissed for want of subject matter jurisdiction. We

conclude that subject matter jurisdiction exists and we

affirm the judgment of the district court on the merits.
2 No. 06-4419

I. HISTORY

The United States government, like many employers,

provides health insurance benefits to its employees. The

government contracts with various private health insurance plans. Federal employees are able to choose among

these private health insurance plans. Both the United

States and individual federal employees make premium

payments to the plans for the health coverage.

Many health plans provide prescription drug coverage

as part of their benefit package for the participating

federal employees. In turn, a number of these plans

contract with Caremark to provide the prescription drug

benefits provided under their respective plans. Caremark

ultimately receives payment from the federal government

and its employees for the prescription drugs and related

services provided under the plans.

The Relators, (we call them Relators, they call themselves Whistleblowers), were employed by Caremark at

two of its prescription drug processing facilities. The

Relators brought a False Claims Act suit on behalf of

the United States alleging that Caremark engaged in six

fraudulent schemes: (1) failing to provide a credit for

returned prescription drugs; (2) changing prescriptions

without proper approval; (3) misrepresenting the savings

obtained from its recommendations; (4) failing to substitute a generic version of “Prilosec;” (5) failing to credit

for prescriptions lost in the mail; and (6) manipulating

the mandatory times for filing prescriptions.

The Relators filed their original complaint under seal in

December 2003. An amended complaint was also filed

under seal in March 2004. In July 2004, the United States

Attorney’s Office for the Northern District of Illinois

contacted Caremark and asked it to cooperate in an

investigation of Caremark’s business practices. From

October 2004 through January 2006, Caremark disclosed
No. 06-4419 3

in excess of 113,000 pages of documents to the U.S. Attorney’s Office. These documents included Caremark’s

contracts with the health insurance plans serving federal

employees, invoices, quarterly reports, Caremark’s internal reports, memoranda and training procedures. In

January 2006, the government declined to intervene in

this case and the case was unsealed by the district court

in February 2006. In April and May 2006, the Relators

obtained discovery materials from both Caremark and the

U.S. Attorney’s Office.

In May 2006, the district court granted Caremark’s

motion to dismiss the first amended complaint holding

that the complaint failed to meet the heightened pleading

requirements of Rule 9(b). United States ex rel. Fowler v.

Caremark RX, Inc., 03 C 8714, 2006 WL 1519567 (N.D. Ill.

May 30, 2006). The Relators were granted leave to file

a second amended complaint which they did in June 2006.

Caremark then argued that case should be dismissed

pursuant to the jurisdictional bar contained in 31 U.S.C.

§ 3730(e)(4). Caremark’s position was that the Relators’

second amended complaint was based on publicly disclosed

information and the Relators were not the original source

of this information. The district court rejected Caremark’s

jurisdictional argument and held that the Relators met

the requirements of § 3730(e)(4). United States ex rel.

Fowler v. Caremark RX, Inc., No. 03 C 8714, 2006 WL

2425331, at *4-6 (N.D. Ill. Aug. 21, 2006).

However on the merits, the district court held that

despite increasing in size, the second amended complaint

failed to meet the heightened pleading requirements of

Rule 9. The second amended complaint consisted of 514

paragraphs spanning over 178 pages and also had over

1000 pages of attached exhibits. Id. at *3. The district

court explained that despite its length, the second

amended complaint failed to “identify a single prescription
4 No. 06-4419

through which Caremark perpetrated the alleged fraud.

Nor do they tie a specific fraudulent transaction to an

invoice submitted to the government. . . . [N]otice [sufficient to satisfy Rule 9(b)] is woefully inadequate where, as

here, plaintiffs allege only generalized schemes and fail to

specify a single false claim.” Id. at *6-7.

The Relators were then given an opportunity to seek

leave to file a third amended complaint. However, the

district court warned the Relators that the case could be

dismissed in its entirety if they failed to provide a proposed third amended complaint that complied with the

federal rules. The Relators then tendered their proposed

third amended complaint and sought leave to file the

complaint. The district court rejected the proposed third

amended complaint holding that it failed to meet the

requirements of Rule 9(b). United States ex rel. Fowler v.

Caremark RX, Inc., 03 C 8714, 2006 WL 3469537 (N.D. Ill.

Nov. 30, 2006). The district court, pursuant to Rule 15(a),

denied the Relators’ request to file the new amended

complaint and entered a judgment dismissing the case

in its entirety.

II. ANALYSIS

A. The Jurisdictional Bar of 31 U.S.C. § 3730(e)(4)

Caremark argues that the district court lacked subject

matter jurisdiction, pursuant to the jurisdictional bar set

forth in § 3730(e)(4), because the Relators’ claims are

based on publicly disclosed information and the Relators

are not the original source of this information. The Supreme Court has recently determined that § 3730(e)(4) is

a jurisdictional requirement implicating subject matter

jurisdiction and therefore no cross-appeal from Caremark

is required. Rockwell Int’l Corp. v. United States, ___

U.S. ___, 127 S. Ct. 1397, 1405-07 (2007); see generally
No. 06-4419 5

Luna v. United States, 454 F.3d 631, 635 (7th Cir. 2006)

(citing Arbaugh v. Y & H Corp., 546 U.S. 500, ___, 126 S.

Ct. 1235, 1244 (2006) (noting that a cross-appeal is not

required when a party is contesting subject matter jurisdiction)); McCready v. White, 417 F.3d 700, 702 (7th Cir.

2005) (“Ensuring the existence of subject matter jurisdiction is the court’s first duty in every lawsuit.”) (citing

Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83 (1998)).

We note that the Relators’ proposed third amended

complaint is the controlling document to be considered

by this court. “[W]hen a plaintiff files a complaint in

federal court and then voluntarily amends the complaint,

courts look to the amended complaint to determine jurisdiction.” Rockwell, 127 S. Ct. at 1409 (citing Wellness

Cmty.-Nat’l v. Wellness House, 70 F.3d 46, 49 (7th Cir.

1995); Boelens v. Redman Homes, Inc., 759 F.2d 504, 508

(5th Cir. 1985)).

Title 31, United States Code, Section 3730(e)(4) states:

(A) No court shall have jurisdiction over an 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 Accounting 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.

(B) For purposes of this paragraph, “original source”

means 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.

31 U.S.C. § 3730(e)(4). “The bar is designed to deter

parasitic qui tam actions. . . . [O]nce information becomes
6 No. 06-4419

1 The record is somewhat limited as to the scope of the U.S.

Attorney’s Office’s investigation. It is clear that U.S. Attorney’s

Office contacted Caremark to investigate Caremark’s business

practices and Caremark provided information in return. This

information was then disclosed by the U.S. Attorney’s Office to

the Relators. The record does not reflect, however, whether the

U.S. Attorney’s Office was engaged in a civil or criminal investi-

(continued...)

public, only the Attorney General and a relator who is

an ‘original source’ of the information may represent the

United States.” United States ex rel. Gear v. Emergency

Med. Assoc. of Illinois, Inc., 436 F.3d 726, 728 (7th Cir.

2006).

“The inquiry into whether a court may hear a qui tam

relator’s claim has three parts: (1) Have the allegations

made by the plaintiff been ‘publicly disclosed’? (2) If so, is

the lawsuit ‘based upon’ that publicly disclosed information? (3) If so, is the plaintiff an ‘original source’ of the

information?” United States ex rel. Mathews v. Bank of

Farmington, 166 F.3d 853, 859 (7th Cir. 1999) (citing

United States ex rel. Cooper v. Blue Cross and Blue Shield

of Florida, Inc., 19 F.3d 562, 564 n.4 (11th Cir. 1994)); see

also Gear, 436 F.3d at 728; United States ex rel. Feingold

v. AdminaStar Fed., Inc., 324 F.3d 492, 495 (7th Cir.

2003).

Before we begin the analysis, it should be noted that

there are three types of information in the Relators’

possession in this case. First is the Relators’ “inside”

information that they obtained during their work at

Caremark. Second is the information disclosed by

Caremark directly to the Relators. Third is the information

disclosed by Caremark to the U.S. Attorney’s Office and

then passed from the U.S. Attorney’s Office to the

Relators.1
No. 06-4419 7

1 (...continued)

gation. Specifically, the record does not tell us whether a grand

jury was involved in the investigation. Grand juries, of course,

are governed by Rule 6 of the Federal Rules of Criminal Procedure including the secrecy requirements of Rule 6(e)(2).

Issue 1: Have the Allegations made by the Plaintiff been

“Publicly Disclosed”?

“A ‘public disclosure’ exists under § 3730(e)(4)(A) when

the critical elements exposing the transaction as fraudulent are placed in the public domain.” Feingold, 324 F.3d

at 495 (citing United States ex rel. Rabushka v. Crane Co.,

40 F.3d 1509, 1512 (8th Cir. 1994); United States ex rel.

Springfield Terminal Ry. Co. v. Quinn, 14 F.3d 645, 654

(D.C. Cir. 1994)). “The point of public disclosure of a

false claim against the government is to bring it to the

attention of the authorities, not merely to educate and

enlighten the public about the dangers of misappropriation of their tax money.” Mathews, 166 F.3d at 861.

“Disclosure of information to a competent public official

about an alleged false claim against the government [is a]

public disclosure within the meaning of § 3730(e)(4)(A)

when the disclosure is made to one who has managerial

responsibility for the very claims being made.” Id. The

more open a public disclosure, the less any specific public

official needs to be informed. Id. Conversely, “[i]f the

disclosure is made . . . to precisely the public official

responsible for the claim, it need not be disclosed to

anyone else to be [a] public disclosure within the meaning

of the Act.” Id. And, of course, “disclosure to the government by a qui tam plaintiff of the information on which the

complaint is based, as mandated in § 3730(a)(2), is not

‘public disclosure’ under § 3730(e)(4)(A).” Id. at 862.

Caremark’s disclosure of information to the U.S. Attorney’s Office during the government’s investigation of
8 No. 06-4419

Caremark’s business practices qualifies as a public

disclosure of the Relators’ allegations. The scope of the

investigation involved whether Caremark defrauded the

federal government through its participation in the federal

employee health insurance programs. The U.S. Attorney

is the primary legal representative of the United States

within his or her respective district, 28 U.S.C. § 547, and

would be the public official responsible for bringing

criminal or civil claims against Caremark on this issue.

Thus, the Relators’ allegations have been publicly disclosed.

Issue 2: Is the Lawsuit “Based Upon” that Publicly

Disclosed Information?

“[A] lawsuit is based upon public[ly] disclose[d information] when it ‘both depends essentially upon publicly

disclosed information and is actually derived from such

information.’ ” Feingold, 324 F.3d at 497 (quoting Mathews,

166 F.3d at 864). Caremark notes that our standard

conflicts with the standard adopted by the majority of

circuits and argues that we should reconsider our position in light of this conflict.

The majority of circuits apply the standard “that a qui

tam action is ‘based upon’ a public disclosure when the

supporting allegations are ‘the same as those that have

been publicly disclosed . . . regardless of where the relator

obtained his information.’ ” Mathews, 166 F.3d at 863

(quoting United States ex rel. Doe v. John Doe Corp., 960

F.2d 318, 324 (2d Cir. 1992)) (citing United States ex rel.

Kreindler & Kreindler v. United Tech. Corp., 985 F.2d

1148, 1158 (2d Cir. 1993); United States ex rel. Springfield

Terminal Ry. Co. v. Quinn, 14 F.3d 645, 652-55 (D.C. Cir.

1994); United States ex rel. McKenzie v. BellSouth

Telecomm., Inc., 123 F.3d 935, 940 (6th Cir. 1997); United

States ex rel. Wang v. FMC Corp., 975 F.2d 1412, 1417 (9th
No. 06-4419 9

Cir. 1992); United States ex rel. Precision Co. v. Koch

Indus., Inc., 971 F.2d 548, 552 (10th Cir. 1992); United

States ex rel. Cooper v. Blue Cross and Blue Shield of

Florida, Inc., 19 F.3d 562, 566-67 (11th Cir. 1994)); see

also United States ex rel. Paranich v. Sorgnard, 396 F.3d

326, 334-35 (3d Cir. 2005); Federal Recovery Servs. v.

United States, 72 F.3d 447, 451 (5th Cir. 1995); United

States ex rel. Minnesota Assoc. of Nurse Anesthetists v.

Allina Health Sys. Corp., 276 F.3d 1032, 1044-47 (8th Cir.

2002). In Mathews, we declined to adopt the majority

standard and instead adopted our current standard from

the Fourth Circuit’s decision United States ex rel. Siller v.

Becton Dickinson & Co. Mathews, 166 F.3d at 863 (citing

21 F.3d 1339, 1347-48 (4th Cir. 1994)).

In Mathews, we explained that the Fourth Circuit’s

standard of “ ‘based upon’ is . . . better on the grounds both

of plain meaning and public policy.” Id. The plain language

argument is that “ ‘based upon’ does not mean ‘similar

(even identical) to’ but ‘derived from.’ ” Id. (quoting Siller,

21 F.3d at 1347-48). The public policy justification is

that “information which happens to be similar or identical

to publicly disclosed allegations or transactions, but which

derives from some other source than the public disclosure,

is not parasitic, and should not be barred by a provision

meant to bar parasitic lawsuits.” Id. (quoting Siller, 21

F.3d at 1348).

In United States ex rel. Mistick PBT v. Housing Auth. of

the City of Pittsburgh, the Third Circuit analyzed the

circuit split and concluded that there was “merit” on both

sides of the split. 186 F.3d 376, 386 (3d Cir. 1999) (Alito,

J.). According to the Mistick court, although the minority

standard was a more faithful plain language interpretation, the interpretation would render the “original source”

exception largely superfluous. Id. Thus, the circuit split

was framed as “a clash between two textual arguments
10 No. 06-4419

concerning the meaning of 31 U.S.C. § 3730(e)(4)(A): one

based on the ordinary meaning of the phrase ‘based upon’

and one based on the precept that a statute should be

construed if possible so as not to render any of its terms

superfluous.” Id. at 387 (citations omitted). Citing various

drafting errors in the statute, the Third Circuit determined that “[t]he inescapable conclusion is that the qui

tam provision does not reflect careful drafting [and

therefore] we are hesitant to attach too much significance

to a fine parsing of the syntax.” Id. at 388. Consequently,

it rejected the plain language interpretation of the minority standard and determined the majority standard to

be superior.

Then-Chief Judge Becker dissented from the Mistick

decision. He noting that (1) traditionally courts defer to

the plain language interpretation of statutes, (2) there

were several plausible situations in which the plain

meaning interpretation would not make the “original

source” clause superfluous, (3) the plain meaning interpretation was consistent with how Congress had used “based

upon” in another statute, and (4) the plain language

interpretation was consistent with both the False Claims

Act’s underlying policy and legislative history. Id. at 395-

403 (Becker, C.J., dissenting).

We reject Caremark’s invitation to alter our position

and reaffirm our adherence to the standard that “[a]

lawsuit is based upon public[ly] disclose[d information]

when it both depends essentially upon publicly disclosed

information and is actually derived from such information.” Feingold, 324 F.3d at 497. “In a statutory construction case, the beginning point must be the language of the

statute, and when a statute speaks with clarity to an

issue judicial inquiry into the statute’s meaning, in all

but the most extraordinary circumstances, is finished.”

Estate of Cowart v. Nicklos Drilling Co., 505 U.S. 469, 475

(1992) (citing Demarest v. Manspeaker, 498 U.S. 184, 190
No. 06-4419 11

(1991)). Both the majority and minority standard have

rallied powerful arguments to their respective sides, but

the minority standard holds the trump card, the plain

language interpretation. We may be in the minority, but

we will not jettison a standard when that standard

includes an appropriate plain language interpretation of

the statute.

Returning to the jurisdictional analysis, we must

determine whether the Relators’ proposed third amended

complaint (1) depends essentially upon publicly disclosed

information and (2) is actually derived from such information. Feingold, 324 F.3d at 497. The Relators’ proposed

third amended complaint will not meet the jurisdictional

bar of § 3730(e)(4) if the Relators used materials that they

received from the U.S. Attorney’s Office. However, the

complaint will meet the jurisdictional requirement if it

is only based on other materials such as the Relators’

“inside” knowledge that they obtained while working at

Caremark and Caremark’s disclosures made directly from

Caremark to the Relators.

In its review of the second amended complaint, the

district court determined that the Relators based their

complaint on their “inside” information and information

obtained directly from Caremark’s direct disclosure to the

Relators. Thus, jurisdiction was present, according to

the district court because there was no evidence of information being used from the U.S. Attorney’s Office’s

disclosure. Of course, the proposed third amended complaint is the controlling document to be considered because

the district court has dismissed the second amended

complaint on Rule 9 grounds, and now the Relators seek

leave to file their proposed third amended complaint.

However, based on the fact that the Relators’ practice has

been to build current complaints off of prior complaints,

and Caremark has not pointed to any indication in the

proposed third complaint that the U.S. Attorney’s Office
12 No. 06-4419

material was used in any way to construct the proposed

complaint, we conclude that the proposed third amended

complaint is not actually derived from any publicly

disclosed information provided by Caremark to the U.S.

Attorney’s Office and then passed onto the Relators.

Caremark has not pointed to specific items in the

complaint that it says comes from the U.S. Attorney’s

Office’s disclosure. Instead, Caremark’s position is that

the U.S. Attorney’s Office disclosure, and the discovery

disclosure it made directly to the Relators, consist essentially of identical information. Thus, Caremark argues

that it is irrelevant whether the Relators faithfully

limited themselves to the discovery disclosures that they

received directly from Caremark and abstained from

including the U.S. Attorney’s Office material in the

complaint. Ultimately, according to Caremark, it is all the

same material, regardless of which copy was used by the

Relators in preparing their proposed third amended

complaint.

At first glance, there is logic to Caremark’s position. The

argument raises the question of what is the legal importance of whether the Relators took their information for

the complaint from Caremark’s disclosure or the U.S.

Attorney’s Office’s disclosure? It is the same material after

all. However, what this argument really does is return us

to Caremark’s prior argument that we should abandon

our current standard and instead adopt the standard

from the majority of other circuits. And as we discussed

above, we are unwilling to do this.

Congress said that, “No court shall have jurisdiction over

an action under this section based upon the public disclosure of allegations or transactions . . .” 31 U.S.C.

§ 3730(e)(4)(A) (emphasis added). Congress did not say,

“No court shall have jurisdiction under this section based

upon the public disclosure of allegations or transactions
No. 06-4419 13

or material that is the same or substantially the same as

the public disclosure . . . .”

This is more than a mere blind adherence to the plain

language of the statute. Congress is trying to balance two

policies in this statute. On one side, Congress wants

insiders to come forth with information about fraudulent

claims when this information is not otherwise publicly

available. On the other hand, Congress does not want selfserving opportunists, who do not possess their own

insider information, to get in on the action and try to

collect on parasitic claims when the allegations have

already been publicly disclosed and the opportunists have

nothing new to add. The “based upon” language in

§ 3730(e)(4)(A) is the means through which Congress

strikes the balance between these two competing policies.

If we rewrite the statute to effectively include the “same

or substantially the same” language, we are eliminating

otherwise valid insider claims that Congress currently

allows to go forth. Perhaps, this class of claims should be

eliminated, but that is a policy choice reserved for the

Congress and we must respect its current decision. As the

Relators’ proposed third amended complaint does not

appear to be based upon publicly disclosed information,

the jurisdictional bar of § 3730(e)(4) does not apply

and therefore we shall turn to the merits.

B. The Merits

The district court determined that the Relators’ proposed

third amended complaint did not meet the heightened

pleading requirements of Rule 9(b), refused the Relators

leave to file the amended complaint under Rule 15(a), and

dismissed the case. “We review a denial of a motion for

leave to amend a pleading under an abuse of discretion

standard.” Gagan v. Am. Cablevision, Inc., 77 F.3d 951,

968 (7th Cir. 1996) (citing Moore v. Indiana, 999 F.2d
14 No. 06-4419

1125, 1128 (7th Cir. 1993)). Rule 15(a) states that “leave

[to amend] shall be freely given when justice so requires.”

FED. R. CIV. P. 15(a). “Although the rule reflects a liberal

attitude towards the amendment of pleadings, courts

in their sound discretion may deny a proposed amendment if the moving party has unduly delayed in filing

the motion, if the opposing party would suffer undue

prejudice or if the pleading is futile.” Campania Mgmt.

Co., Inc. v. Rooks, Pitts & Poust, 290 F.3d 843, 848-49 (7th

Cir. 2002) (citing Foman v. Davis, 371 U.S. 178, 181-82

(1962); Bethany Pharm. Co. v. QVC, Inc., 241 F.3d 854, 861

(7th Cir. 2001)). Amending a complaint would be futile if

the proposed amended complaint fails to satisfy the

requirements of the federal rules. General Elec. Capital

Corp. v. Lease Resolution Corp., 128 F.3d 1074, 1085 (7th

Cir. 1997). Despite the fact that the deficiencies could be

cured through an appropriate pleading, a district court

properly exercises its discretion in dismissing the case

when the plaintiff continually fails to provide a valid

pleading in compliance with the federal rules. See Emery

v. Am. Gen. Fin., Inc., 134 F.3d 1321, 1322-23 (7th Cir.

1998) (“[T]he plaintiff has had three chances over the

course of three years to state a claim and the district

judge was not required to give her another chance.”).

We review a dismissal for failure to comply with Rule

9(b) de novo and take all factual allegations in the complaint as true and make all reasonable inferences in the

plaintiffs’ favor. Borsellino v. Goldman Sachs Group, Inc.,

477 F.3d 502, 507 (7th Cir. 2007) (citing General Elec.

Capital Corp., 128 F.3d at 1078; Goren v. New Vision Int’l,

Inc., 156 F.3d 721, 725-26 (7th Cir. 1998)). “The [False

Claims Act] is an anti-fraud statute and claims under it

are subject to the heightened pleading requirements of

Rule 9(b).” United States ex rel. Gross v. AIDS Research

Alliance-Chicago, 415 F.3d 601, 604 (7th Cir. 2005) (citing
No. 06-4419 15

United States ex rel. Garst v. Lockhead-Martin Corp., 328

F.3d 374, 376 (7th Cir. 2003)).

Rule 9(b) requires that “[i]n all averments of fraud . . .,

the circumstances constituting fraud . . . shall be stated

with particularity.” FED R. CIV. P. 9(b). “A principal

purpose for requiring that fraud be pleaded with particularity is, by establishing this rather slight obstacle to loose

charges of fraud, to protect individuals and businesses

from privileged libel (privileged because it is contained

in a pleading).” Kennedy v. Venrock Assoc., 348 F.3d 584,

594 (7th Cir. 2003) (citations omitted). The heightened

pleading standard requires “the plaintiff to do more than

the usual investigation before filing his complaint. Greater

precomplaint investigation is warranted in fraud cases

because public charges of fraud can do great harm to the

reputation of a business firm or other enterprise (or

individual).” Ackerman v. Nw. Mut. Life Ins. Co., 172 F.3d

467, 469 (7th Cir. 1999) (citations omitted). “A complaint

alleging fraud must provide ‘the who, what, when, where

and how.’ ” Borsellino, 477 F.3d at 507 (quoting Gross, 415

F.3d at 605; Dileo v. Ernst & Young, 901 F.2d 624, 627

(7th Cir. 1990)).

The False Claims Act imposes civil liability for a series

of actions under § 3729(a). The two applicable sections for

this case are §§ 3729(a)(1) and (a)(2). Under § 3729(a)(1),

civil liability is imposed on any person who knowingly

presents a false claim to the government for payment or

approval. 31 U.S.C. § 3729(a)(1). To establish a claim

under this section, “a relator must prove three elements:

(1) a false or fraudulent claim; (2) which was presented, or

caused to be presented, by the defendant to the United

States for payment or approval; (3) with the knowledge

that the claim was false.” United States ex rel. Walker v.

R&F Prop. of Lake County, Inc., 433 F.3d 1349, 1355 (11th

Cir. 2005). Section 3729(a)(2) prohibits a person from

knowingly making a false record or statement to get a
16 No. 06-4419

false or fraudulent claim paid or approved by the government. 31 U.S.C. § 3729(a)(2). The three elements of a

§ 3729(a)(2) claim are: “(1) the defendant made a statement in order to receive money from the government, (2)

the statement was false, and (3) the defendant knew it

was false.” United States ex rel. Crews v. NCS Healthcare

of Illinois, Inc., 460 F.3d 853, 856 (7th Cir. 2006) (quoting

Gross, 415 F.3d at 604).

The first alleged fraud involves billing for returned

prescriptions. The Relators allege that a percentage of

federal employees who received prescription drugs under

their respective health plans returned the drugs unused to

Caremark. Despite receiving the returned merchandise,

the Relators allege that Caremark continued to bill the

government for the cost of these medications or failed to

provide a refund if the government had already paid

before the return was made by the federal employee. The

Relators also argue they have identified specific transactions with particularity as they identified individual

prescriptions that were returned to Caremark and corresponding invoices in which Caremark continued to bill

for this returned merchandise.

We recently addressed a similar type of alleged scheme

in Crews. Crews involved a false claims suit brought by

a pharmacist who worked at a pharmacy providing pharmaceutical services to nursing homes in the local area. 460

F.3d at 854. Approximately 60% of the nursing home

patients served by the pharmacy were on Illinois

Medicaid—which is jointly funded by the State of Illinois

and the Social Security Administration—thus implicating

the False Claims Act. Id. Prescriptions would often be

returneded unused to the pharmacy, for example when a

nursing home patient died. Id. at 855. The returned

medicine would then be recycled and reused by the pharmacy. Id. However, the pharmacy, which we characterized
No. 06-4419 17

as “shoddy,” id. at 854, did not properly restock the

returned medicine but instead commingled the returned

drugs in garbage cans. Id. at 855. In turn, the labels for

the reissued medicine did not properly reflect the lot

number or expiration date. Id. This type of mislabeling

is a violation of federal law and the pharmacy was eventually shut down by the government. Id.

After the pharmacy was shut down, Crews decided to do

a little math. She saw that 60% of the pharmacy’s patients

were on Medicaid and that 10 to 20% of the dispensed

medications were returned, recycled and reissued by the

pharmacy. Id. at 856. Consequently, Crews concluded that

6% to 12% of the recycled medications would have been

redistributed to Medicaid patients, resulting in double

billing and therefore false claims. Id. However, we rejected

this argument because Crews had failed to provide two

vouchers representing two separate charges for the

same pill. Id. at 857.

The Relators present arguments as to Caremark’s billing

for returned prescriptions fail for the same reason. The

Relators allege that they have particularized evidence

demonstrating that Caremark billed for prescriptions

despite the fact that they were returned. However, like the

situation in Crews, the Relators only have one-half of the

evidence they need to survive under Rule 9(b). The

Relators do not present any evidence at an individualized

transaction level to demonstrate that Caremark failed to

provide an appropriate refund or replacement product

for a returned prescription. The Relators see the returned

prescription but they do not know whether Caremark

replaced the returned prescription with another prescription without charge. The Relators also see an invoice

seeking payment for a prescription they allege has been

returned and should not be paid, but they do not have

any evidence to demonstrate that Caremark failed to
18 No. 06-4419

reconcile this excess payment on a future invoice or

through an otherwise proper accounting technique.

The core of the Relators’ failure in this case is caused by

their misunderstanding of what is required to bring a

cause of action under §§ 3729(a)(1) and (a)(2). Both

sections require a false claim or statement and knowledge

that the claim or statement is false. Crews, 460 F.3d at

856; Walker, 433 F.3d at 1355. Remember what the

Relators’ employment positions were at Caremark, they

worked at two of Caremark’s distribution facilities. Thus,

it makes sense that they would see drugs being returned

and this could raise their suspicions. But what they lack

is knowledge of Caremark’s financial activities and in

particular how Caremark addressed these returns. The

Relators err by assuming, without any support, that once

a prescription was returned, Caremark automatically

either kept the money or continued to bill without providing an appropriate credit to the government or replacement prescription to federal employees.

Furthermore, a person must knowingly present a false

claim to the government for payment or knowingly make

a statement in order to receive payment from the government. 31 U.S.C. §§ 3729(a)(1), (a)(2) (emphasis added).

“The mens rea element, ‘knowingly,’ requires that the

defendant have actual knowledge of (or deliberately ignore

or act in reckless disregard of) the truth or falsity of the

information. . . . Thus, ‘innocent mistakes or negligence

are not actionable.” United States ex rel. Durcholz v. FKW

Inc., 189 F.3d 542, 544 (7th Cir. 1999) (citing 31 U.S.C.

§ 3729(b); Hindo v. Univ. of Health Sci. / The Chicago

Med. Sch., 65 F.3d 608, 613 (7th Cir. 1995)). Although the

proposed third amended complaint and its accompanying exhibits span several hundred pages, the Relators

fail to provide any information addressing whether

Caremark knowingly took any improper actions sufficient to implicate the False Claims Act.
No. 06-4419 19

It is also important to stop at this point of the discussion

and note the scope of our review. We are reviewing the

Relators’ proposed third amended complaint to determine

whether the Relators have met the requirements of the

federal rules. As to this alleged scheme, and as we shall

see with all the alleged schemes, the Relators have failed

to meet the Rule 9(b) pleading requirements. That is our

only purpose here and we leave it to others, whether other

relators, the government, consumers, the press, or

Caremark itself, if any group so chooses, to determine

whether there are problems with Caremark’s business

practices. We are simply holding today that the district

court properly dismissed the case because the Relators,

after being given several chances, could not fashion a

complaint in compliance with the federal rules.

The Relators next argue that their proposed third

amended complaint satisfies Rule 9(b) as to the allegations made about the “CCM Program.” The CCM Program

involved a cost saving procedure. Caremark and the

participating private health plans reached an agreement

under which Caremark would review submitted prescriptions and determine whether the prescribed drug could

be appropriately replaced by a less expensive alternative.

Caremark, however, could not unilaterally change the

prescription but instead had to contact the prescribing

doctor who had issued the original prescription. If the

doctor agreed to take Caremark’s cost saving suggestion,

Caremark was allowed under the agreement to bill the

health plans for a percentage of the savings. The Relators

allege that Caremark did not properly contact the prescribing doctor before making the cost saving substitution.

Thus, the Relators allege that Caremark submitted false

claims when it submitted invoices for the cost savings on

prescriptions that were altered despite not being previously approved by the prescribing physician.
20 No. 06-4419

This allegation also fails because the Relators do not

provide any information to satisfy the knowledge requirement of the False Claims Act. There is no evidence in the

proposed third amended complaint that Caremark had

actual knowledge of this issue or otherwise ignored or

disregarded this situation. At best, the “scheme” as

currently alleged by the Relators merely rises to a breach

of contract dispute between the health plans, the government and Caremark. The Relators’ position taken in

relation to this scheme, and permeating throughout this

entire case, is effectively that any allegedly inaccurate

claim is by definition a false claim. This standard would

transform every inaccurate claim into a false claim and

consequently replace the Act’s knowledge requirement

with a strict liability standard.

Finally, the Relators alleged three other schemes. They

argue that Caremark committed fraud when it refused to

substitute a generic for the name brand drug “Prilosec.”

The Relators also allege a “Lost in Transit” scheme and a

“Turnaround” scheme. The Relators take issue with the

district court, arguing that the district court dismissed

these claims with a minimal amount of explanation. Yet,

the Relators’ brief before this court discusses each scheme

over one page each for a total of three pages for all three

schemes. The total citation to authority in the three pages

of briefing consists of one case from the Eastern District of

Pennsylvania. “We repeatedly have made clear that

perfunctory and undeveloped argument, and arguments

that are not supported by pertinent authority, are waived.”

United States v. Hook, 471 F.3d 766, 775 (7th Cir. 2006)

(citations omitted). As such the Relators’ arguments on

these three schemes are waived. Additionally, should we

reach the merits, consistent with our previous discussion,

the Relators have failed to provide any indication that

Caremark knowingly engaging in a fraud.
No. 06-4419 21

In conclusion, the Relators’ proposed third amended

complaint does not meet the requirements of the federal

rules. Therefore, the district court properly exercised

its discretion in denying the Relators’ motion to amend

their pleading and in dismissing the case.

III. CONCLUSION

The judgment of the district court is AFFIRMED.

A true Copy:

Teste: 

 ________________________________

Clerk of the United States Court of

Appeals for the Seventh Circuit 

USCA-02-C-0072—7-27-07