The U.S. Court of Appeals for the Third Circuit has affirmed a lower court’s dismissal of a False Claims Act whistleblower action against CVS Caremark.

In its Nov. 16 ruling, the three-judge appellate panel held that the government’s decision to pay Medicare Part D claims to CVS Caremark was not based on the allegedly false representations made for reimbursement.

Relator Anthony R. Spay, a former pharmacist and co-founder of a pharmacy auditing company, alleged that Part D sponsors—companies that provide prescription plans and subcontract with pharmacy benefit managers like CVS Caremark—intentionally submitted false information about their costs during the reconciliation process with the Centers for Medicare and Medicaid Services, according to Third Circuit Judge Theodore McKee’s opinion.

Spay claimed that this allegedly false information resulted in the government paying the sponsors more than they were actually entitled to during the reconciliation period. According to Spay, the defendants did this by populating prescriber ID records with “dummy IDs,” which the defendants claimed were used to replace erroneous ID data.

However, McKee said that the government knew about the dummy IDs and paid the claims anyway, and never sought repayment from CVS Caremark. Therefore, the defendants could not be held liable for making false claims, the judge said.

The Third Circuit’s discussion focused largely on the government knowledge inference doctrine. Although the court affirmed the trial judge’s decision to dismiss the case, McKee said it did not agree with his reasoning regarding government knowledge.

The government knowledge inference doctrine in relation to whistleblower cases means that if the government knew about the alleged misconduct before a lawsuit it must mean “the government must be aware of the false claims and didn’t need the assistance of private parties to ferret them out. And if the government knew about the information yet did nothing, then the government probably thought the suit meritless, and any private action was apt to be spurious, driven only by the lure of the act’s sizable damages,” according to the 1999 Third Circuit ruling in United States ex rel. Cantekin v. University of Pittsburgh.

McKee said the doctrine didn’t apply in the present case because CVS Caremark did not meet the second prong of the two-prong applicability test. The test requires that  (1) the government agency knew about the alleged false statement(s), and (2) the defendant knew the government knew.

“While it is true that both the government and contractors throughout the industry knew what was happening, there is no evidence of any explicit approval from the government to Caremark of this temporary work-around,” McKee said. “More importantly, this evidence of what was occurring in the industry does not establish that Caremark knew that CMS was aware of the practice of using dummy prescriber IDs. Indeed the record shows that Caremark was simply hopeful that its use of the dummy IDs would be acceptable.”

Marc S. Raspanti of Pietragallo, Gordon, Alfano, Bosick & Raspanti in Philadelphia represented Spay.

“Obviously we are disappointed but respect the decision of the court,” he said in an email.

CVS Caremark’s attorney, Enu Mainigi of Williams & Connolly in Washington, D.C., did not respond to a request for comment.