Why it matters: On July 2, 2015, the Fourth Circuit affirmed a federal jury verdict of over $237 million against Tuomey Healthcare System (Tuomey), the largest judgment ever imposed against a nonprofit community hospital for violations of the Stark Law and False Claims Act in connection with its physician contracts. The opinion focused on Tuomey's assertion of the advice-of-counsel defense, advice received from multiple healthcare attorneys, and the trial court's ultimately damaging admission of testimony from one healthcare attorney who noted numerous "red flags" of illegality regarding the contracts.

Detailed discussion: Commencing around 2000, area doctors who had previously performed outpatient surgery at Tuomey began performing the procedures at their own offices or at off-site surgery centers, resulting in a substantial loss of facility fee revenue to Tuomey. In an attempt to stem the loss, Tuomey decided to negotiate part-time employment contracts with a number of local physicians to bring them back to Tuomey's outpatient surgical facility. Tuomey was "well aware" of the Stark Law restrictions in connection with the proposed employment contracts and, to that end, sought the advice of its longtime legal firm, Nexsen Pruet, in 2003. Nexsen Pruet in turn engaged Cejka Consulting, a national consulting firm that specializes in matters involving physician compensation, which provided Tuomey and Nexsen Pruet with "an opinion concerning the commercial reasonableness and fair market value of the contracts." Tuomey also obtained an opinion on the contracts vis à vis the Stark Law from Richard Kusserow (Kusserow), an attorney and former Inspector General for the U.S. Dept. of Health and Human Services (HSS).

Tuomey's part-time employment contracts, as drafted by Nexsen Pruet, provided for, in relevant part, (1) a 10-year term, during which the physicians could maintain their private practices but were required to exclusively use Tuomey's surgery center for outpatient procedures; (2) physician compensation consisting of an annual guaranteed base salary, "productivity bonus" and "incentive bonus," plus healthcare and covered medical malpractice liability insurance, employment taxes and billing and collection costs; (3) restrictions on the physician having an ownership interest in other outpatient surgery centers in Sumter; and (4) a "non-compete" clause preventing the physicians from performing outpatient surgical procedures within a 30-mile radius of Tuomey for two years after the expiration of the contract.

Tuomey entered into these part-time employment agreements with 19 area physicians; however, one local physician, Michael Drakeford (Drakeford), declined to sign because he believed that the contracts violated the Stark Law. In order to address Drakeford's concerns, in September 2005 Tuomey and Drakeford jointly sought the advice of Kevin McAnaney (McAnaney), a private attorney with Stark Law expertise who, while formerly serving as the Chief of the Industry Guidance Branch of the HSS Office of Counsel to the Inspector General, wrote a "substantial portion" of the Stark Law's implementing regulations. After a review of the employment contracts, McAnaney advised Tuomey and Drakeford that they contained "significant red flags" under the Stark Law in that, among other things, they compensated physicians in excess of the fair market value of their services and their collections and warned that the government would find this an "easy case to prosecute." After receiving McAnaney's negative advice, Tuomey terminated his representation, continued to use the part-time employment contracts as drafted and sought and received yet another positive opinion from Steve Pratt (Pratt), an attorney at the healthcare law firm of Hall Render, although he was not given McAnaney's negative views.

Drakeford ultimately sued Tuomey in federal district court in South Carolina under the qui tam provisions of the False Claims Act (FCA), alleging that, as the part-time employment contracts violated the Stark Law, Tuomey had been knowingly submitting false claims for payment to Medicare in violation of the FCA. The government intervened in the qui tam action and filed additional claims for equitable relief. Two federal jury trials ensued. At the first jury trial, the judge excluded McAnaney's testimony and opinions after Tuomey successfully objected both on duty of loyalty grounds and pursuant to Federal Rule of Evidence 408 (Tuomey claimed that McAnaney was helping the parties settle a dispute). Tuomey also prevented admission of deposition testimony of Gregg Martin (Martin), Tuomey's SVP and CEO, that contained Martin's recollections of a conversation he had with Tuomey's counsel regarding McAnaney's advice. With the testimony and opinions of both McAnaney and Martin excluded, the first jury returned a verdict finding that, while Tuomey had violated the Stark Law with its employment contracts, it had not "knowingly" violated the FCA, since it had relied on advice of counsel.

The district court judge then granted the government's motion for a new trial, agreeing with the government that he had "committed a substantial error" in excluding Martin's deposition testimony (the judge was silent as to his exclusion of McAnaney's testimony). While the government had asked for a new trial based solely on the "knowledge" element of the FCA claim, the judge granted a new trial as to the entirety of the claim, including the Stark Law violation. Notwithstanding this, the judge also granted the government's motion for equitable relief as to the jury's verdict on the Stark Law violation and ordered Tuomey to pay almost $45 million in damages plus pre- and post-judgment interest. Tuomey appealed to the Fourth Circuit, which vacated the $45 million judgment and remanded the case to the district court for a new trial as to all claims.

While the case was on appeal to the Fourth Circuit, the initial presiding district court judge passed away. At the second trial, the new trial judge admitted McAnaney's testimony as well as Martin's deposition testimony. The second jury found that Tuomey violated the Stark Law and "knowingly" violated the FCA. The judge trebled the actual damages and assessed an additional civil penalty as required by the FCA, resulting in a total judgment against Tuomey of $237,454,195.

Tuomey again appealed to the Fourth Circuit, which affirmed the judgment in its recent opinion. The Court began its analysis with a general review of the Stark Law before addressing the issues on appeal. We focus here on two of the issues: (1) whether, after the first trial, the district court erred in ordering a new trial on the FCA claim and (2) whether, after the second trial, the district court erred in denying Tuomey's motion for judgment as a matter of law that a reasonable jury would not have found Tuomey to have "knowingly" violated the FCA. With respect to the first issue, the Court affirmed the district court's order granting a new trial on the FCA claim based on what it considered to be the "glaring error" of the exclusion of McAnaney's testimony at the first trial. The Court found that the government had been prejudiced at the first trial by the exclusion of McAnaney's testimony because "[t]o make its case that Tuomey 'knowingly' submitted false claims under the FCA, the government needed to show that Tuomey knew that there was a substantial risk that the contracts violated the Stark Law, and was nonetheless deliberately ignorant of, or recklessly disregarded that risk. In our view, McAnaney's testimony was a relevant, and indeed essential, component of the government's evidence on that element." The Court noted that the district court had presided over two trials in the case "with strikingly disparate results," with the main difference between the two being McAnaney's testimony: "Coincidence? We think not. Rather, we believe that these results bespeak the importance of what the jury in the first trial was not allowed to consider." The Court reviewed the substance of McAnaney's testimony and found its importance to be "self-evident," concluding that "it is difficult to imagine any more probative and compelling evidence regarding Tuomey's intent than the testimony of a lawyer hired by Tuomey, who was an undisputed subject matter expert on the intricacies of the Stark Law, and who warned Tuomey in graphic detail of the thin legal ice on which it was treading with respect to the employment contracts." In this regard, the Court noted that Tuomey had waived the attorney-client privilege with respect to its communications with McAnaney when it asserted the advice-of-counsel defense to the FCA claim.

The Court next reviewed Tuomey's argument that a reasonable jury would not find that Tuomey "knowingly" violated the FCA because it relied in good faith on the advice of counsel. After reiterating that the term "knowingly" under the FCA means actual knowledge, deliberate ignorance or reckless disregard of the truth, the Court found that there was "ample support" for the jury's verdict as to Tuomey's intent because "the record is replete with evidence indicating that Tuomey shopped for legal opinions approving the employment contracts, while ignoring negative assessments." The Court agreed with the district court's conclusion that a reasonable jury could have found that Tuomey possessed the "'requisite scienter once it determined to disregard McAnaney's remarks,'" stating that "[a] reasonable jury could indeed be troubled by Tuomey's seeming inaction in the face of McAnaney's warnings, particularly given Tuomey's aggressive efforts to avoid hearing precisely what McAnaney had to say regarding the contracts."

The Court acknowledged that "a defendant may avoid liability under the FCA if it can show that it acted in good faith on the advice of counsel" but made clear that consultation with an attorney does not confer automatic immunity and that the defendant has to show the "'full disclosure of all pertinent facts to [counsel] and … good faith reliance on [counsel's] advice.'" As to the favorable opinions Tuomey had obtained from Nexsen Pruet, Kusserow and Pratt, the Court found that Tuomey did not provide Kusserow or Pratt with the "full and accurate" information necessary to support their opinions, and Tuomey failed to disclose to Pratt the negative advice it had received from McAnaney. The Court stated that, for a reasonable jury to find that Tuomey relied in good faith on the advice of counsel, "the jury was entitled to consider all the advice given to it by any source," i.e., McAnaney's negative advice had to be considered as well. As Judge Wynn said in his concurring opinion with respect to the first jury trial, "[h]aving put the advice it got from its lawyers squarely at issue, Tuomey should not have been permitted to cherry-pick which advice of counsel the jury was permitted to hear. Instead, the jury should have been allowed to consider all the advice of all Tuomey's counsel – including McAnaney … [t]he record makes clear that, whatever else McAnaney's assessment was, it was also advice of counsel."

The Court therefore agreed with the district court that "a reasonable jury could have concluded that Tuomey was, after September 2005, no longer acting in good faith reliance on the advice of its counsel," and concluded that "we have no cause to upset the jury's reasoned verdict that Tuomey violated the FCA."

Judge Wynn concluded his concurring opinion by stating "[t]his case is troubling. It seems as if, even for well-intentioned health care providers, the Stark Law has become a booby trap rigged with strict liability and potentially ruinous exposure—especially when coupled with the False Claims Act. Yet, the district court did not abuse its discretion when it granted a new trial and the jury did not act irrationally when it determined that Tuomey violated both the Stark Law and the False Claims Act. Accordingly, I must concur in the outcome reached by the majority." For its part, the Fourth Circuit majority was sympathetic to Judge Wynn's assessment, and seemed to echo his reluctant affirmation of the jury verdict against Tuomey, stating that "we do not discount the concerns raised by our concurring colleague regarding the result in this case. But having found no cause to upset the jury's verdict in this case and no constitutional error, it is for Congress to consider whether changes to the Stark Law's reach are in order."

See here to read the Fourth Circuit opinion in United States ex rel. Michael K. Drakeford, M.D. v. Tuomey, dba Tuomey Healthcare System, Inc., No. 13-2219 (Fourth Cir. 2015).