Welcome to the inaugural edition of Steptoe's First to File, a regular update to keep clients (past, current, and future), fellow practitioners, and others operating in the government contracting space abreast of the latest developments in False Claims Act (FCA) caselaw, enforcement actions, DOJ policy, and suspension/debarment/exclusion actions. Our analysis will cover FCA developments across industries, including healthcare, financial services, higher education, and government contracting. We hope the information and analysis we offer will assist you in navigating the risks and complexities of doing business with the federal government, as you approach both pro-active compliance efforts and defend against government investigations and any ensuing civil or criminal litigation as well as relator-only litigation. Please consider First to File a resource for those aspects of your business that intersect with providing goods and services to federal or state government customers.

Week One: August 29 – September 2, 2022

Here are the top three highlights from last week:

#1: United States v. Honeywell Int'l Inc., No. 21-5179, 2022 WL 3723020 (D.C. Cir. Aug. 30, 2022)

Industry: Government Contracting

Topics: Settlement, Joint and Several Liability

Summary: The United States brought an FCA action against Honeywell for providing the material in allegedly defective bulletproof vests sold to the government. The government sought $11.5 million in damages for the full amount of the vests, trebled to approximately $35 million. It also secured settlements with the other companies involved for $36 million. Honeywell sought to credit the G\government's settlement with the other companies involved in manufacturing and supplying the vests against its own damages liability on a dollar for dollar, pro tanto, basis. The government argued that Honeywell should be credited for the settlement based on a proportionate share approach, where Honeywell would be responsible for its proportionate share of the $35 million regardless of the settlements with other companies.

The DC Circuit examined whether the pro tanto or proportionate share approach was more appropriate in the FCA context. The court found that the pro tanto approach was a more appropriate rule under the FCA given that the FCA has been consistently interpreted to impose joint and several liability without a right of contribution. As such, according to the court, adopting the proportionate share rule would lead to joint and several liability if all parties litigate, but in cases of partial settlement, courts would have to decide relative culpability and assign damages based on fault. Moreover, the government cannot recover more than its total damages under the pro tanto rule, but the proportionate share rule would allow the government to recover more than its total damages solely because some parties settled. The DC Circuit thus concluded that the pro tanto settlement offset rule "best coheres with the FCA and the precedents interpreting it," and is the appropriate method to apply when offsetting settlement credits in FCA cases.

The question in this case was one of first impression, and has taken some in the FCA bar by surprise. In theory, Honeywell could create incentives for defendants to litigate longer in the hope that other defendants, whose pre-verdict settlements could offset the litigating defendant's ultimate liability, will settle first. That said, FCA litigation rarely proceeds to finality, and the government almost never recovers treble damages from defendants settling prior to trial, as it did here.

#2: NovoNordisk settles Trade Agreements Act allegations for $6.3 million

Industry: Healthcare, Government Contracting

Topics: TAA

Last week, the US Attorney's Office for the District of New Jersey announced that global pharmaceutical firm Novo Nordisk, Inc. agreed to pay $6.3 million to resolve allegations that it had violated the FCA by selling items under its Veterans Affairs Federal Supply Schedule (VA FSS) contracts that were manufactured in “non-designated” countries in violation of the Trade Agreements Act (TAA).[1]

The TAA applies to US government acquisitions over certain dollar thresholds, including acquisitions of supplies from Veterans Affairs FSS contracts.[2] Essentially, the TAA provides that the government may acquire only "US-made or designated country end products." Id. To be considered a "US-made" or "designated country end product," the end product acquired by the government must be "wholly the growth, product or manufacture" of the US or of a designated country, or “substantially transformed [in the US or a designated country] into a new and different article of commerce with a name, character, or use distinct from that of the article or articles from which it was transformed."[3] The TAA also requires contractors to certify that each end product meets the applicable requirements.

According to Novo Nordisk’s settlement agreement, the government alleged that between July 2012 and March 2019, Novo Nordisk, under its VA FSS contracts, sold US government agencies (either directly or through wholesalers) its NovoFine 30G 8 mm needles and between May 2016 and November 2020, sold government agencies (either directly or through wholesalers), its NovoFine 32G 6mm needles that were not TAA compliant.[4] As part of the settlement, Novo Nordisk did not admit or deny liability.[5]

Novo Nordisk's settlement signals that the FCA will continue to be among the government's most powerful tools in enforcing the TAA. In 2019, DOJ secured a similar settlement ($3.3 million) from Ambu, Inc., a Danish medical supply manufacturer. DOJ accused Ambu of manufacturing products sold to the Defense Logistics Agency and the VA in non-TAA compliant countries (China and Malaysia) in violation of the TAA.[6]

Contractors must continue to be vigilant to ensure that, where applicable, their sourcing practices and supply chains comply with the TAA and other potentially applicable domestic preference laws such as the "Buy American" Act and the "Buy America" Act.

#3: United States ex rel. Simon v. Fla. Rehab. Assocs., PLLC, 2022 WL 3910607 (11th Cir. Aug. 31, 2022)

Industry: Healthcare

Topics: Retaliation, Improper Coding

Last week, in a per curiam decision, the Eleventh Circuit affirmed a district court's ruling in favor of HealthSouth of Sarasota LP, rejecting a Florida doctor's allegations that HealthSouth had retaliated against her when she raised concerns that HealthSouth was committing fraud when it allegedly told physicians to diagnose patients with "disuse myopathy." Agreeing with the district court, the Court of Appeals held that the plaintiff failed to demonstrate that she had an “objectively reasonable belief" that HealthSouth was violating the FCA.

In addition to permitting plaintiffs "with knowledge of false claims against the government" to file qui tam actions on the government's behalf, the FCA creates a private right of action for an individual whose employer retaliates against her for participating in an FCA action or in response to other efforts the employee engages in to oppose a violation of the FCA.[7] If an employee can establish that she was retaliated against, the FCA entitles the employee to (1) reinstatement with the same seniority status that the employee, contractor, or agent would have had but for the discrimination, (2) two times the amount of back pay and interest on the backpay, and (3) compensation for any special damages sustained as a result of the discrimination, including litigation costs and reasonable attorneys' fees.[8]

As relevant here, HealthSouth operates a for-profit inpatient rehabilitation facility (IRF) in Sarasota, Florida. The plaintiff, Dr. Emese Simon, is a psychiatrist who focuses on "inpatient rehabilitation" and "neurological injuries," who operated an outpatient medical practice through her own company. Dr. Simon was an attending physician with admitting privileges at HealthSouth Sarasota Hospital and had medical direction services and independent contractor agreements with HealthSouth.

Under Medicare regulations, for a hospital to be classified as an IRF and qualify for reimbursement by the Centers for Medicare and Medicaid Services (CMS) through a prospective payment system (PPS), the hospital must serve an “inpatient population of whom at least 60 percent required intensive rehabilitation services for treatment of one or more of the [13 specific] conditions (CMS 13)[9] or for treatment of one of those conditions as a serious comorbidity that has caused significant decline in functional ability in the individual."[10]

According to Dr. Simon's lawsuit, in 2006, HealthSouth began encouraging her (and other physicians) to use a diagnosis of "disuse myopathy" for their patients. Dr. Simon believed that "disuse myopathy" is a condition that does not exist and instead was a diagnosis created by HealthSouth to generate sufficient CMS 13 diagnoses to meet the 60% threshold required of IRFs.

In 2012, Dr. Simon filed a qui tam action alleging HealthSouth had engaged in various acts of fraud against the government, including multiple counts for violations of the FCA, and a retaliation claim.[11] Among other allegations, Dr. Simon alleged that HealthSouth was fraudulently using fabricated disuse myopathy diagnoses. In 2019, the government entered a $48 million settlement with HealthSouth "to resolve allegations that some of its IRFs provided inaccurate information to Medicare to maintain their status as an IRF and to earn a higher rate of reimbursement, and that some admissions to its IRFs were not medically necessary."[12] Dr. Simon and two other whistleblowers who filed qui tam actions were entitled to a share of the recovered amount (collectively $12.4 million).[13]

Following HealthSouth's settlement with the government, Dr. Simon proceeded with her retaliation claim. Specifically, Dr. Simon alleged that she made several verbal complaints about the practice of using disuse myopathy diagnoses in meetings with HealthSouth executives, and HealthSouth’s medical director, and publicly objected to a presentation and PowerPoint on disuse myopathy provided by HealthSouth's former National Healthcare Information Management Director for the West.

Dr. Simon also offered testimony that her use of the disuse myopathy diagnosis was the result of "pressure" from certain people at the hospital and that she was told to "watch out and play by the rules" or risk being terminated.

In 2010, HealthSouth's medical executive committee investigated Dr. Simon after she “completed history and physical forms for a patient that had not been admitted to HealthSouth Sarasota and whom she had not examined.”[14] While the investigation was pending, Dr. Simon was not assigned patients and could not admit patients unless she had signed a letter from the referring doctor that “they wanted her to take care of their patients.”[15] The investigation ultimately concluded that the incident was an “isolated error” and Dr. Simon was subjected to six months of monitoring to ensure that her documentation satisfied applicable requirements.[16]

In 2012, HealthSouth terminated Dr. Simon's medical direction agreement, but did not terminate her medical staff membership or privileges at the hospital. Dr. Simon was later granted medical leave and allowed her admitting privileges to expire.[17]

The district court’s rejection of Dr. Simon’s claim was based on its determination that Dr. Simon had failed to demonstrate that she had at least an objectively reasonable belief that HealthSouth was violating the FCA.

The Eleventh Circuit found that, similar to a Title VII retaliation case, a plaintiff in an FCA retaliation case must establish a prima facie case demonstrating that:

(1) she engaged in statutorily protected activity, (2) an adverse employment action occurred, and (3) the adverse action was causally related to the plaintiff’s protected activities.[18]

The Eleventh Circuit agreed with the lower court that Dr. Simon failed to meet the first prong – that she had engaged in statutorily protected activity – because she could not show that she had “an objectively reasonable belief that her employer violated the FCA.”[19] The Eleventh Circuit found that, although Dr. Simon had a sincere subjective belief that HealthSouth was violating the FCA, Dr. Simon had not established that disuse myopathy was not a valid condition “such that it is a false claim to submit billing based on it for government reimbursement.”[20] The appellate court noted that a reasonable difference of medical opinion is not sufficient to establish falsity under the FCA:

a reasonable difference of opinion among physicians reviewing medical documentation ex post is not sufficient on its own to suggest that those judgments—or any claims based on them—are false under the FCA. A properly formed and sincerely held clinical judgment is not untrue even if a different physician later contends that the judgment is wrong.[21]

Notably, the Eleventh Circuit rejected Dr. Simon’s reliance on the government’s $48 million settlement agreement with HealthSouth as evidence that her belief was “objectively reasonable.” The Eleventh Circuit reasoned that “courts don’t consider settlements as evidence of the validity of underlying claims.”[22]

Although as a practical matter a $48 million settlement may appear inconsistent with a finding that plaintiff’s beliefs were not “objectively reasonable,” the settlement did not involve a determination of liability. The Eleventh Circuit’s decision indicates that plaintiffs may have difficulty establishing a prime facie case of retaliation where the underlying FCA case is settled out of court.

Other Noteworthy Cases

Illinois ex rel. Elder v. JPMorgan Chase Bank, N.A., No. 21 C 85, 2022 WL 3908675 (N.D. Ill. Aug. 30, 2022)

Industry: Financial Services

Topics: Rule 9(b), Scienter, Public Disclosure

Summary and Holding: The relator filed suit against JPMorgan Chase Bank (JPMC) in the Circuit Court of Cook County, which was later removed to federal court, alleging violations of the Illinois False Claims Act (which mirrors the federal FCA in all material aspects) related to JPMC’s procedures for escheating (i.e., reverting to property of the state) certain cashier’s checks. The core of the relator’s theory is that although the cashier’s checks at issue were subject to escheat in Illinois under Illinois law, JPMC had a practice of treating the checks as being subject to escheat in Ohio, where the escheatment laws governing escheatment were more favorable to JPMC. JPMC filed a motion to dismiss arguing that the complaint: (1) alleged claims that were inconsistent with one another; (2) failed to allege fraud with the particularity required by the Federal Rules of Civil Procedure 9(b); (3) failed to allege scienter; (4) failed to allege that the Illinois Treasurer followed the administrative procedure to claim undelivered property; (5) failed to and was unable to name the State of Ohio was an indispensable party under Rule 19 of the Federal Rules of Civil Procedure; and (6) was barred under the Illinois FCA’s public-disclosure rule.

The court dismissed the complaint with leave to amend. Most relevant were the following holdings:

  • The court held that the complaint failed to allege fraud with particularity because the relator assumed, without any knowledge, that JPMC filed certain reports required under Illinois law, which were the purported "claims" at issue.
  • The court also found that the complaint failed to plead scienter because it could not meet the pleading requirement, under Rule 9(b), that the JPMC's interpretation of the relevant statute or regulation was not objectively reasonable and authoritative guidance counseled against the interpretation. Rather, the court found that absent any authoritative guidance, JPMC's interpretation was reasonable.
  • However, the court found that the public-disclosure bar did not apply because the news article on which JPMC based this argument was about another bank’s practices, not those of JPMC.

United States ex rel. NPT Assocs. v. Lab'y Corp. of Am. Holdings, No. 1:07-CV-05696 (ALC), 2022 WL 3718265 (S.D.N.Y. Aug. 29, 2022)

Industry: Healthcare

Topics: Rule 9(b), AKS

Summary: The relator brought an FCA suit against LabCorp on behalf of the United States and 15 different states. The suit alleged violations of the federal FCA and state analogues by LabCorp through “(1) giving ‘kickbacks’ to private insurance companies in the form of discounted lab testing rates and (2) charging Medicare and Medicaid programs prices “‘substantially in excess’ of the prices it charges said private insurers.” LabCorp’s alleged FCA violations stem from its certifications that it was in compliance with the Anti-Kickback Statute (AKS). LabCorp filed a motion to dismiss, which was granted by the court on two different grounds.

First, the relator failed to plead fraud with the particularity required by FRCP 9(b). Specifically, the court held that the relator failed to allege facts sufficient to provide a strong inference that LabCorp’s agreements included illegal side agreements violating the AKS as opposed to wholly legitimate business activity. Further, the court held that the relator provided only conclusory allegations that doctors were “pressured” to participate in the alleged scheme without providing details of how they were pressured and what was said to them. Such conclusory allegations, according to the court, were insufficient to meet the Rule 9(b) standard to plead the alleged kickback scheme and specific false claims for payment with particularity. Second, the court held that the relator failed to identify examples of actual claims alleged to be false or provide “plausible allegations [leading] to a strong inference that specific claims were submitted.” In so holding, the court rejected the relator’s argument that LabCorp is able to identify the false claims at issue through its own records by searching the names of several doctors and medical codes. Upon dismissal of the federal FCA claims, the court declined jurisdiction over the state FCA claims.

United States ex rel. Fadlalla v. DynCorp Int’l LLC et al., No. 8:15-CV-01806-PX, 2022 WL 3716536 (D. Md. Aug. 29, 2022)

Industry: Government Contracting

Topics: Government Action Bar

Summary: Defendant GLS was a proposed awardee of a $4.6 billion US military contract for linguistic support. GLS was required to submit a Small Business Subcontracting Plan detailing the contract funds to be expended through various categories of small businesses and submit annual reports to the military that itemized its subcontractor expenditures. The relator alleged that GLS committed FCA violations by falsely misleading the military into believing that several small business contractors were performing work under the contract while GLS employees actually performed the relevant services. Prior to the FCA suit, the military investigated GLS’ alleged misrepresentations related to its use of some of the subcontractors on the contract at issue and suspended payment on the contract while seeking reimbursement from GLS via the Contract Disputes Act (CDA). GLS appealed and eventually came to a settlement with the military whereby GLS received a portion of the amounts it claimed in exchange for withdrawing its appeal. Critically, as part of an agreement to release the parties from all liabilities related to this matter, the United States expressly reserved the right to pursue future FCA claims against GLS.

GLS argued that the relator’s suit was precluded by the “government action bar” of the FCA, which prohibits private individuals from bringing suit based upon allegations or transactions that are the subject of a civil suit or administrative civil money penalty proceeding in which the US government is already a party and sought leave to amend its answer to the complaint to include the government action bar as a defense. The court rejected this argument, holding that because fraud claims cannot be brought under the CDA, the CDA claims cannot possibly be based upon the same allegations or transactions as the FCA claim, a requirement of the government action bar. Having rejected GLS’ arguments, the court denied the motion to amend the answer, finding the government action bar inapplicable as a matter of law.