1. Introduction

United States of America, et al. v. BlueWave Healthcare Consultants, Inc., et al. (9:14-cv-00230-RMG) is a significant qui tam action recently tried to a jury before Judge Richard Gergel in the District of South Carolina. The case offers lessons to seasoned qui tam litigators as well as regulatory health care practitioners. This analysis provides an overview of BlueWave and highlights several topics of interest to those who practice in the area of health care litigation. Given the complexity of the legal and factual issues of BlueWave, these materials are not exhaustive in their discussion of the case. Rather, they touch upon many of the key issues presented.

2. Parties and Procedural History

The Plaintiffs and Plaintiffs-Relators (collectively, “Plaintiffs”) in BlueWave filed a qui tam action to redress an alleged “wide reaching” scheme to provide illegal financial inducements to physicians in exchange for laboratory testing referrals.[i] These inducements, Plaintiffs alleged, ran afoul of the federal Anti-Kickback Statute, the federal False Claims Act, and the false claims acts of several states. The Defendants in the case included BlueWave Healthcare Consultants, Inc. (“BlueWave”), a laboratory marketing agency, and a collection of laboratories for which BlueWave provided marketing services, including Health Diagnostic Laboratory, Inc. (“HDL”), Singulex, Inc. (“Singulex”), and Berkeley Heartlab, Inc. (“Berkeley”). Floyd Calhoun Dent, III, and Robert Bradford Johnson, both executives of BlueWave, and HDL CEO and founder Latonya Mallory were named as individual Defendants.

A collection of individual relators initiated the action on behalf of the United States and the governments of eighteen states.[ii] The relators included, inter alia, Scarlett Lutz, the owner and operator of a health care billing company in Florence, and Kayla Webster, a Registered Nurse for a Florence home health agency. The individuals’ separate complaints were consolidated, and the United States Attorney’s Office for the District of South Carolina intervened to prosecute the case.

3. Allegations

Plaintiffs alleged that the Defendants created and executed a multi-faceted scheme resulting in the submission of hundreds of thousands of fraudulent reimbursement claims to government-sponsored healthcare programs, including Medicare and TRICARE. In brief, they alleged that Berkeley paid inflated and fraudulent processing and handling fees to physicians, and further declined to collect copays and deductibles from those physicians, in an effort to induce the physicians to refer blood testing business to Berkeley.[iii] Berkeley then sought reimbursement for the testing, which was alleged to be medically unnecessary and duplicative, from Medicare and TRICARE. This conduct, Plaintiffs alleged, violated the federal False Claims Act and the federal Anti-Kickback Statute.

Plaintiffs also alleged that BlueWave HDL, Singulex, and a collection of their executives engaged in a similar scheme to illegally induce physicians to refer laboratory testing business to HDL and Singulex. HDL and Singulex then sought reimbursement for certain tests from Medicare and TRICARE. As with the claims submitted by Berkeley, these claims, Plaintiffs alleged, were fraudulent because HDL and Singulex had paid physicians sham processing and handling fees, had improperly waived copays and deductibles (which the physicians then used as a marketing tactic to recruit new patients for their practices), and had conducted medically unnecessary and duplicative testing. Plaintiffs further alleged that HDL and Singulex paid BlueWave a commission based on their revenue, a violation of the Anti-Kickback Statute and the federal False Claims Act. Finally, Mallory and the BlueWave executives were named as individual Defendants as a result of their alleged role in devising, implementing, and profiting off of this scheme.

In sum, the Government’s complaint in intervention asserted five causes of action in the case:

  • Presentation of claims for payment that were false as a result of being connected to sham processing and handling fees, waived copays and deductibles, lack of medical necessity, and improper contingency payments, all in violation of the United States alleged, violated the federal False Claims Act;[iv]
  • Presentation of false requests for reimbursement for services that were obtained via illegal kickbacks, and/or were medically unnecessary, in violation of the federal False Claims Act;[v]
  • Conspiracy to submit false claims in violation of the federal False Claims Act;[vi]
  • Payment by the United States of monies to Defendants based upon mistaken or erroneous understandings of material fact; and,
  • Unjust enrichment by Defendants at the expense of the United States.

The Government sought treble damages for the alleged False Claims Act violations, as well as damages for the common law claims of payment by mistake and unjust enrichment.

4. Settlements, Trial, and Verdict

In April of 2015, the Government announced that it had reached pre-trial settlements with HDL and Singulex, respectively.[vii] HDL agreed to pay $47 million and Singulex agreed to pay $1.5 million to resolve all allegations that they violated the False Claims Act, as well as the Government’s remaining common law claims. Both entities also agreed to enter into corporate integrity agreements with the Department of Health and Human Services, which are designed to “avoid and promptly detect conduct similar to that which gave rise to the[] settlements.”

On May 2, 2017, the Government announced that it had reached a settlement with Quest Diagnostics, Inc., which had acquired Berkeley in 2011.[viii] Quest agreed to pay $6 million to settle the claims against it.

No settlement was reached with respect to the remaining defendants, and a two week trial was held in January 2018 at the federal courthouse in Charleston.[ix] On January 31, 2018, the jury returned a unanimous verdict finding the BlueWave executives and Mallory liable for violations of the Anti-Kickback Statute and federal False Claims Act.[x] The jury held the individual defendants liable for damages in excess of $17 million. Once trebled, the damages amount to $51.2 million (not including the additional penalties that could be imposed upon the BlueWave executives and Mallory. The jury found that BlueWave was not liable.

5. Selected Topics

The sections below include discussion of various issues arising during the course of litigation which may be of interest to health care practitioners. Only a general overview is provided, and readers are encouraged to review the cited court filings for additional detail.

a. Mallory’s Contentions Regarding Attribution, Materiality, and Advice of Counsel

After the jury handed down its verdict, Mallory moved for judgment notwithstanding the verdict or, in the alternate, for a new trial, on several grounds. First, Mallory contended that “there was simply an absence of evidence from which the jury could determine that the damages it found against Mallory [were] attributable specifically to Mallory.”[xi] She argued that the Government failed to introduce evidence to demonstrate which of the claims testified to by the Government’s expert witness were paid by the Government to HDL (Mallory’s laboratory), and which were paid by the Government to Singulex (a laboratory with which Mallory had no association). Instead, Mallory contended, all of the testimony was in the aggregate and failed to differentiate the claims. Mallory argued that such a presentation of evidence was inconsistent with the provisions of the False Claims Act stating that the Government is entitled to recover from a defendant an “amount of damages which the Government sustains because of the act of that person.” As result, Mallory stated, she was potentially (and improperly) held liable for claims paid by the Government to Singulex.

Next, Mallory argued that the Government did not introduce any evidence of “materiality.” Per the False Claims Act, the “misrepresentation about compliance with a statutory, regulatory, or contractual requirement must be material to the Government’s payment decision in order to be actionable.” Mallory argued that the Government continued to pay claims while “knowing of Mallory’s purported misrepresentations.” Thus, Mallory argued, her violations were “immaterial to the government’s decision to pay claims” and were not actionable under the False Claims Act. This, too, Mallory contended, qualified her for judgment notwithstanding the verdict or, in the alternate, a new trial.

Mallory further argued that she was entitled to a new trial because of the Court’s decision to forgo instructing the jury on her “good faith reliance on counsel defense.” In order to rely on this defense, a defendant must prove that she: “(a) fully disclosed of all pertinent facts to an expert, and (b) in good faith relied on the expert’s advice.” Mallory argued that she presented evidence that she disclosed all pertinent facts to her attorneys and that she relied on their advice in good faith. Describing the attorneys whose advice she relied on as “some of the most reputable attorneys in the nation,” Mallory argued that “[r]eliance on counsel was at the center of [her] defense” and, thus, the jury should have been instructed on the defense. Notwithstanding this request, Judge Gergel did not provide the jury with instruction on the advice of counsel defense. Accordingly, Mallory concluded, the Court had committed a substantial error warranting a new trial.

Finally, Mallory argued, inter alia: (a) that the jury’s verdict was flawed because it used an improper “triggering date” in order to calculate the damages amount; (b) that the Government failed to introduce evidence of any illegal remuneration to physicians; (c) that there was no evidence to suggest that the tests at issue were medically unnecessary; and, (d) that she was entitled to a pro tanto (dollar-for-dollar) setoff of all sums from received by the Government from HDL, its owners, and physicians and physicians groups who had previously settled with the Government.

At the time of writing, the Court has not ruled on Mallory’s request for judgment notwithstanding the verdict and/or for a new trial.

b. BlueWave Executives’ Position on Medically Unnecessary Claims and Inappropriate Submission of Evidence Concerning the BlueWave Executives’ Wealth.

Dent and Johnson, the BlueWave executives, also submitted a post-trial motion for judgment as a matter of law or, in the alternate, a new trial.[xii] Like Mallory, the BlueWave executives argued that the Government had failed to prove that it paid any medically unnecessary claims or that the executives had engaged in any improper zero balance billing.

The executives also stated that they were entitled to a new trial because the Government “persisted in making [the] trial about [their] commercial success and their wealth, rather than about their actions.” Such tactics, the executives argued, were intended to “inflame the jury against financially successful businessmen, and it worked.” The executives cited Facebook posts a juror made during the course of the trial which, they contended, were evidence of improper bias. The executives asked the Court to grant them a new trial because the “government’s strategy to tar [them] with their success led to a miscarriage of justice.” Finally, the executives argued that they were entitled to have the judgment for damages completely offset by the Government’s recovery from HDL and Singulex, and that trebling should only be based on the net damage award, if any.

The Court denied the BlueWave executives’ motion for a new trial on the basis of juror misconduct, finding that while the juror violated the Court’s social media policy, there was no evidence that the conduct in question denied the executives a fair trial.[xiii] At the time of writing, the Court has not ruled on the BlueWave executives’ remaining grounds for judgment as matter of law and/or a new trial.

c. The Government’s Motion for Entry of Judgment and Treble Damages

Shortly after the verdict was handed down, the Government moved for an entry of judgment pursuant to Federal Rule of Civil Procedure 54(b).[xiv] The Government noted that the jury had found the BlueWave executives and Mallory responsible for 35,074 false claims for services by HDL, for which the Government paid approximately $16.6 million. The Government further noted that the jury found the BlueWave executives responsible for 3,813 false claims for services by Singulex, for which the Government paid approximately $460,000. All of these findings, the jury concluded, were violations of the False Claims Act. The Government argued that there was no just reason for the court to delay in entering a final judgment on the False Claims Act causes of action, and that the Court should sever and hold the remaining common law causes of action (i.e., payment by mistake of fact and unjust enrichment) in abeyance.

The Government also asked the court to apply a treble multiplier to the amount of the total value of the false claims determined by the jury. The Government argued that treble damages were mandatory under the False Claims Act, and that use of an alternative multiplier was not appropriate because, inter alia, the defendants “did not voluntarily disclose to the [Government] all information known to them about their false claims violations within thirty days after they first obtained the information and before any [False Claims Act] civil action had commenced.”

Next, the Government set forth its requested penalties. It noted that the claims at issue in the case were submitted during the 2010 through 2014 time period and, as such, were subject to “civil penalties amounting to a minimum of $5,500 and a maximum of $11,000” per claim. Given the jury verdict, the Government could seek penalties under the False Claims Act for 38,887 false claims for a total of between $213,878,500 and $427,757,000 in penalties. Nevertheless, the Government opted to exercise its power to accept reduced fees. It asked the court for False Claims Act penalties on 11,285 HDL claims and 315 Singulex claims and, for each such claim, sought $5,500 (the minimum penalty authorized by law). As a result, the Government requested penalties of $62,067,500 for the HDL claims and $1,732,500 for the Singulex claims, an amount which, according to the Government, was less than 15% of the maximum penalties available. The Government argued, further, that an award of such penalties did not run afoul of the Fifth or Eighth Amendments. In total, the Government sought entry of judgment in its favor in the amount of $111,872,273 from the BlueWave executives and Mallory, and in the additional amount of $3,136,305 against the BlueWave executives.

In response, the Defendants argued, inter alia, that the Government was not entitled to a Rule 54(b) judgment because granting such a judgment would allow the Government to “pursue a legal remedy on all 339,5556 [of its] claims and then subsequently pursue an equitable remedy on the claims it lost (327,936 claims).”[xv] They contended that while Rule 54(b) allows a Court to enter judgment on fewer than all of the claims presented in a suit, such piecemeal approach may only occur in the absence of a just reason for delay.[xvi] The Defendants argued that just such a delay existed as “the common law and False Claims Act claims are based on the same facts, and the jury [had] made necessary findings for the entry of judgment resolving all claims. They stated that the time had come for the Government to select its remedies, either legal or equitable, and argued that they had the “right to know, at the time of judgment, the amount which [they] owe[d]” to the Government.

Mallory also argued that treble damages should not be awarded because, inter alia: (a) there was insufficient evidence to support the jury’s findings (see discussion of Mallory’s and the BlueWave executives’ respective post-trial motions, above); and, (b) only net losses suffered by the Government may be trebled, and the Government failed to prove that it had suffered such losses. Mallory further contended that an award of statutory penalties would be inappropriate in light of the fact that the Government had failed to differentiate the HDL and Singulex claims and that certain penalties would run afoul of the Fifth and Eighth Amendments.

The BlueWave executives added that the Government should not enter judgment against them without first determining the appropriate offsets for the settlements by other parties and other payments to the Government. They also opposed the use of the “taint” theory, which the Government employed to argue that “any violation of the Anti-Kickback Statute taints any claims, so that the Government is entitled to recover the full benefit of the tainted claims (irrespective of whether any actual harm is caused).

At the time of writing, the Court has not yet ruled on the Government’s motion for entry of judgment and treble damages.

6. Conclusion

Although post-trial practice continues and it may be many months yet until BlueWave ends, this litigation provides an insightful glimpse into whistleblower litigation in the healthcare context. Defense practitioners may mine the case for insights into topics such as the advice of counsel defense and arguments on the reduction of damages. Further, the case may prompt discussions with health care clients regarding marketing, billing, and compliance practices. Counsel for potential relators may use the litigation as a source of strategy for successfully prosecuting a healthcare qui tam matter.