Last month, a court in the Northern District of New York dismissed a qui tam action against a dialysis treatment center based on alleged quality of care issues. See United States ex rel. Blundell v. Dialysis Clinic, Inc., No. 5:09-cv-00710 (N.D.N.Y. Jan. 19, 2011). In the Dialysis Clinic case, the relator, a nurse who had been employed by the center, alleged that the center violated certain state and federal standards and regulatory requirements by, e.g., failing to provide adequate staffing, using unqualified personnel, permitting personal care technicians to perform nursing functions, and failing to adequately train employees to handle emergency situations. The relator further claimed that these alleged deficiencies compromised patient care for beneficiaries under the Medicare, Medicaid, and Veterans’ Administration programs. The relator alleged violations of the False Claims Act based on worthless services and false certification theories of liability.

In 1996, the U.S. Attorney’s Office for the Eastern District of Pennsylvania filed the first action seeking to establish FCA liability for substandard patient care in United States v. GMS Management-Tucker, Inc. et al., No. 96-1271 (E.D. Pa. 1996). The government alleged that the Tucker nursing home provided inadequate nutritional and wound care to three residents. The case settled for $600,000 before any court decisions were issued addressing the viability of the government’s novel theory of FCA liability. In 1998, the same U.S. Attorney’s Office obtained settlements from several other Pennsylvania nursing homes based on similar quality of care allegations. See United States v. Chester Care, No. 98-cv-139 (E.D. Pa.); United States v. City of Philadelphia, No. 96-cv-4253 (E.D. Pa.). As with the Tucker settlement, these settlements were reached before any court addressed the merits of the government’s theory of FCA liability.

In 2002, in United States ex rel. Swan et al. v. Covenant Care, Inc., 279 F. Supp.2d 1212, a court in the Eastern District of California issued a summary judgment opinion that cast serious doubt on the viability of quality of care claims under the FCA. In Swan, the relators, both of whom were advocates for nursing home reform, alleged they personally witnessed multiple instances of substandard patient care at various nursing homes operated by the defendant in California and Illinois. The relators further alleged that the defendant nursing homes falsified forms to indicate that patients received care, including bathing, feeding, and wound treatment, that was never provided. The relators alleged this conduct violated the FCA under worthless services and false certification theories. The court held that the relators failed to state a claim under the FCA under any of the theories they alleged. The court held there was no worthless services claim because the relators did not allege that the nursing homes’ care was so poor that it was the equivalent of no performance at all. The court observed that payment by the government to the nursing homes was based on a per diem rate that included a bundle of services, including room, board, and patient care. Because some of these services were provided, the relator’s worthless services claim could not survive. The court also held there was no false certification claim because the relator introduced no evidence to demonstrate that the nursing homes certified compliance with the applicable Medicare regulations as a prerequisite to receiving federal payment. The court granted the nursing homes’ motion for summary judgment and dismissed the action.

Since the Swan decision, a number of other courts have followed suit and dismissed quality of care cases for failure to state a claim under worthless services and/or false certification theories of FCA liability. See, e.g., United States ex rel. Landers v. Baptist Memorial Health Care Corp., 525 F. Supp.2d 972 (W.D. Tenn. 2007) (granting defendants’ summary judgment in qui tam action); United States ex rel. Lockyer v. Hawaii Pacific Health, 490 F. Supp.2d 1062 (D. Haw. 2007) (granting defendants’ motion for summary judgment in action in which government intervened); United States ex rel. Sweeney v. Manorcare Health Services, Inc., 2005 WL 4030950 (W.D. Wash. 2005) (granting defendants’ motion to dismiss in qui tam action).

With that background in mind, let’s turn our attention back to the Dialysis Clinic case. The relator filed a qui tam complaint under seal in June 2009 and filed an amended complaint under seal several weeks later. Seven months later, in February 2010, the government informed the court that it had declined to intervene in the action, and the complaint was unsealed. The defendant moved to dismiss the complaint for failure to state a claim under Rule 12(b)(6); failure to plead fraud with particularity under Rule 9(b); and lack of subject matter jurisdiction under Rule 12(b)(1). The relator sought leave to file a second amended complaint. The court granted the relator’s motion to amend, and then dismissed the second amended complaint with prejudice under Rules 9(b) and 12(b)(6).

The Dialysis Clinic case is a good example for FCA defendants of the grounds that can be successfully asserted in a motion to dismiss a qui tam case in which the government does not intervene. In such cases, Rules 12(b)(1), 9(b), and 12(b)(6) are powerful weapons for the defense. Of the 4,628 relator-only FCA cases that were unsealed between 1987 and 2010, 3,962 (or 86%) of those cases have been dismissed.

Part II of this post will examine the court’s decision on the Rule 9(b) and 12(b)(6) motions, and Part III will discuss the court’s decision on the Rule 12(b)(1) motion based on the FCA’s public disclosure bar.