On Tuesday, the Justice Department announced its record recovery of nearly $5 billion in False Claims Act settlements in 2012, exceeding the previous annual record by $1.7 billion. In the last four years, according to remarks by Acting Associate Attorney General Tony West, the Justice Department had netted $13.3 billion in false claims settlements, much of it from pharmaceutical companies accused of healthcare fraud.

But will a blockbuster ruling Monday by the 2nd Circuit Court of Appeals turn off the spigot of false claims billions from the pharma industry?

As you've probably heard, a divided three-judge panel of the 2nd Circuit vacated the conspiracy conviction of Alfred Caronia, a pharmaceutical sales representative who was involved in the off-label marketing of an FDA-approved narcolepsy drug called Xyrem. The Justice Department, which charged Caronia under the Federal Drug and Cosmetic Act, did not allege that he lied or misrepresented the truth when he told a physician about off-label (but related) uses for the drug, but merely that he conspired to introduce a misbranded pharmaceutical product into interstate commerce. Second Circuit Judges Denny Chin and Reena Raggi found that Caronia's prosecution was a violation of his First Amendment right to free speech. And they went a step further: Citing the U.S. Supreme Court's 2010 decision in Sorrell v. IMS Health, Chin and Raggi held that the FDCA cannot restrict off-label marketing, as long as it's truthful.

"We decline to adopt the government's construction of the FDCA's misbranding provisions to prohibit manufacturer promotion alone as it would unconstitutionally restrict free speech," wrote Chin for himself and Raggi. "We construe the misbranding provisions of the FDCA as not prohibiting and criminalizing the truthful off-label promotion of FDA approved prescription drugs." (Judge Debra Livingston, in a stinging dissent, said that under the majority's reasoning, "if drug manufacturers have a First Amendment right to distribute drugs for any use to physicians or even directly to patients, then the entire FDCA may well be unconstitutional.")

The 2nd Circuit's decision had been hotly anticipated by lawyers on both sides of pharmaceutical fraud and false claims cases, since Caronia is the first defendant to mount an appellate challenge to off-label marketing accusations on First Amendment grounds. (As several lawyers noted in interviews Tuesday, pharmaceutical manufacturers have been reluctant to take on the Justice Department because they face the risk of being debarred from Medicare and Medicaid payments.) Former Justice Department healthcare prosecutor Michael Loucks, now at Skadden, Arps, Slate, Meagher & Flom, and former Food and Drug Administration deputy chief counsel Jeff Senger of Sidley Austin both said that the 2nd Circuit's holding was presaged by the Sorrell case, in which the Supreme Court said that a Vermont statute restricting the sale of pharmacy prescription records violates free speech rights. But the Caronia ruling could have a much broader impact, since the Justice Department has made liberal use of off-label marketing accusations in False Claims Act and criminal actions against pharma companies.

Loucks and several other lawyers said that the Justice Department's enforcement of off-label marketing cases is going to have to change, at least in the 2nd Circuit. To be clear, the appellate decision does not (and cannot) impose First Amendment protection on misrepresentations by pharma companies. Fraud is fraud and can still be prosecuted. Moreover, whistle-blower lawyer (and former Justice Department prosecutor) Suzanne Durrell of the Durrell Law Office told me that the government in recent years has tended only to intervene in "off-label plus" qui tam cases in which there are also allegations of kickbacks or other misconduct. Another whistle-blower lawyer, Erika Kelton of Phillips & Cohen, said the 2nd Circuit holding leaves open the use of off-label marketing claims to support broader misbranding allegations.

But James Beck of Reed Smith, who blogged about the Caronia ruling at his definitive Drug and Device Law site, said that the 2nd Circuit's holding marks "a big change from where the FDA is." Michael Carvin of Jones Day, who wrote a 2nd Circuit amicus brief supporting Caronia on behalf of the Washington Legal Foundation, was even more outspoken about the impact of the 2nd Circuit's ruling, which he said "guts the FDA's regulatory regime" and erects "an absolute roadblock" to what Carvin called "the FDA's grotesquely aggressive approach" to off-label marketing prosecution.

"I'm hoping maybe the government will take a step back," said Kathleen O'Connor of Weil, Gotshal & Manges, who defends pharmaceutical companies in civil cases. "Instead of looking at off-label cases as a way to bankroll the department, I hope Justice will refocus on cases where marketing has really gone off the rails."

I asked Durrell, Loucks and O'Connor whether pharmaceutical companies will be emboldened to skip the expensive and time-consuming FDA approval process for secondary uses of their products, now that they have a green light to tell physicians and patients about favorable off-label drug studies. Durrell said that the 2nd Circuit ruling could undermine the FDA's regulatory power, but defense lawyers Loucks and O'Connor said there's still market value in FDA approval: Doctors and patients feel more confident in a drug when its use has been sanctioned by the government. Pharma companies are also better protected in product liability litigation when their drugs are FDA-approved, O'Connor said.

The big question now is whether the Justice Department will seek review of the 2nd Circuit ruling, either from the appeals court en banc or from the Supreme Court. (My Reuters colleague David Ingram asked the Justice Department for comment on the ruling, but to no avail.) Beck of Reed Smith said that the government may choose to ignore the appellate ruling, which he called "damned well-reasoned," and to bring off-label marketing cases in other circuits. Other lawyers said, however, that refusing to confront the ruling would encourage forum-shopping and would leave both pharmaceutical companies and regulators uncertain of their rights. "There's a downside to the pharmaceutical industry and to society if the Justice Department shies away from further review," said former healthcare fraud prosecutor Loucks. "It's not helpful to drug or device companies to have a lack of clarity. It's also not helpful to the Justice Department."

That said, appealing the ruling is a risk, said Sidley partner Senger. He estimated that at least five Supreme Court justices would vote to affirm the 2nd Circuit majority and might even wipe out more of the FDCA than the appeals court. Despite the doomsday prophecy of Judge Livingston's dissent, Senger said the Supreme Court almost certainly wouldn't find the entire FDCA unconstitutional, since major portions of the law aren't at issue in the Caronia case. Nevertheless, an appeal would put the law's misbranding provisions before a court that has already said, in Sorrell, that pharmaceutical marketing merits First Amendment protection.

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