On July 2, 2015, the U.S. Court of Appeals for the Fourth Circuit affirmed the U.S. District Court for the District of South Carolina’s judgment of $237,454.195 in damages and penalties against Tuomey Healthcare System in United States ex rel. Drakeford v. Tuomey Healthcare System, Inc. (No. 13-2219). The judgment followed a rare False Claims Act (FCA) trial, after which the jury found Tuomey liable for submitting 21,730 false claims to Medicare. While the Fourth Circuit’s Tuomey decision addressed many claims of error advanced by Tuomey on appeal, this post highlights the court’s response to Tuomey’s challenges based on the “advice of counsel” defense and on the computation and size of the judgment.
Tuomey was alleged to have entered into part-time employment contracts with physicians that violated the Stark Law. After one of the physicians expressed compliance concerns about the structure of the proposed arrangement, Tuomey sought Stark Law compliance advice about the contracts from several attorneys – one of whom, Kevin McAnaney, indicated that the contracts raised “red flags” under the Stark Law. McAnaney was jointly retained by Tuomey and the physician, Drakeford, after Tuomey received a legal opinion from its longstanding counsel that the contracts were Stark compliant. Despite McAnaney’s advice, Tuomey elected to move forward with the contracts. Drakeford subsequently filed an FCA qui tam lawsuit against Tuomey, and the extensive litigation ensued.
Tuomey asserted that no reasonable jury could have found that it knowingly violated the FCA because it reasonably relied on the advice of counsel. The Fourth Circuit rejected this challenge, finding the record to be “replete with evidence indicating that Tuomey shopped for legal opinions approving of the employment contracts, while ignoring negative assessments.” According to the court, it was reasonable for the jury to conclude that Tuomey did not rely on counsel’s advice in good faith because it refused to “to give full consideration to McAnaney’s negative assessment of the part-time employment contracts and terminated his representation.” With respect to the more favorable legal opinions Tuomey obtained from others, the court observed that they were issued without knowledge of the concerns raised by McAnaney.
The court’s resolution of the advice of counsel issue presents some obvious questions. Among these are: when a defendant seeks more than one legal opinion on the same issue and the resulting opinions differ, under what circumstances may the defendant follow the opinion that may be more favorable to it without setting itself up for future FCA liability? And, further, absent clear evidence, for example, that the defendant withheld relevant factual information about the structure of the proposed arrangements from any of the attorneys from whom advice was sought, why would the defendant not be permitted the protection that flows from relying on the advice of counsel? The Fourth Circuit cited Tuomey’s alleged withholding of the existence of the negative McAnaney advice from the other law firms as evidence that those firms did not have all relevant information necessary to frame their own analyses of the contracts.
Tuomey also challenged the size of the judgment, consisting of nearly $40 million in actual damages that were then trebled, as well as almost $120 million in civil penalties. Among other things, Tuomey argued that the actual damages figure was wrong because it was based on the total amount of the claims the government paid, rather than the difference between the value of services Tuomey provided and what the government paid—a measure that would have yielded zero damages since, according to Tuomey, the government got exactly what it paid for. In rejecting this argument, the Fourth Circuit cited approvingly to the Seventh Circuit’s decision in United States v. Rogan, 517 F.3d 449, 453 (7th Cir. 2008), for the proposition that compliance with the Stark Law is a condition of payment by the government, and that Stark prohibits payment of any money on claims submitted in violation of that law.
The court’s conclusion with regard to the proper measure of damages did not take into account whether every one of the alleged false claims asserted by the United States actually was proven to be a claim for payment for providing Designated Health Services pursuant to referrals by thepart-time physicians — a prerequisite for Stark Law liability. Although Tuomey did not put on contrary evidence regarding the government’s identification of claims for services referred by the part-time physicians, defendants in future cases certainly could.
Finally, it is noteworthy that the Fourth Circuit rejected Tuomey’s constitutional attack on the judgment pursuant to the Excessive Fines Clause of the 8th Amendment and the Due Process Clause of the 5th Amendment. The court applied the factors courts use to assess the constitutionality of punitive damages awards and, among other things, found that Tuomey engaged in “repeated” fraud because it knowingly submitted 21,730 false claims. The court examined the ratio of punitive to compensatory damages; it categorized part of the trebled damages and all of the penalty as punitive. The court deemed the 3.6 to 1 punitive-compensatory damages ratio “just under the ratio the Court deems constitutionally suspect” and thus upheld it.
The court concluded by acknowledging the concerns raised by the concurring opinion, but held that “it is for Congress to consider whether changes to the Stark Law’s reach are in order.” As the (reluctant) concurrence pointed out, the Stark law has become a “booby trap” for healthcare providers, particularly when combined with the FCA. The concurrence found the result in Tuomey “troubling,” writing that the case illustrates “[a]n impenetrably complex set of laws in regulations that will result in a likely death sentence for a community hospital in an already medically underserved area.”