We are pleased to present Bradley’s annual review of significant False Claims Act (FCA) cases, developments, and trends. From a relatively short article several years ago, the Review has grown to a significant publication that provides readers with a thorough yet succinct guide to FCA-related issues from the past year. The Review’s growth reflects the growth of FCA enforcement, as result of both the Department of Justice’s priorities and the plaintiffs’ whistleblower bar’s aggressiveness.
The Review is organized by key FCA areas, beginning with an overview of the judgments and settlements obtained in 2016.
Thereafter, FCA practitioners will find discussion on familiar topics such as materiality, falsity, the knowingly standard, false certification, public disclosure, and Rule 9(b) pleading. We also give detailed coverage to the significant U.S. Supreme Court decision in Escobar and a roundup of early cases applying Escobar’s principles. While the focus is on appellate decisions, the Review also includes notable lower court activity, including a summary of a rare FCA trial (and government setback) in the AseraCare litigation.
From an industry focus, business leaders will find continued focus on the healthcare industry, including cases involving the Anti-kickback Statute and Stark law, off-label promotion, and Medicare overpayment liability. Similar cases from the banking and mortgage, government contracting, and defense sectors are covered, as well issues of general business import, including successor FCA liability, awarding of fees, and calculation of damages.
Finally, readers will find synopses of the changes in the FCA’s civil monetary penalties and a discussion of cases involving venue transfer, retaliation, reasonable interpretation of law, and personhood. We conclude with trends and developments to watch for in 2017, including continued implementation of the Yates Memorandum involving individual liability and—potentially—the first appellate decision to address statistical extrapolation to prove FCA liability.
Continuing the trend from the last several years, the Department of Justice (DOJ) obtained significant False Claims Act (FCA) recoveries in 2016. According to DOJ statistics, in fiscal year 2016, it obtained more than $4.7 billion in settlements and judgments in FCA cases, the third highest annual total ever. As in years past, several industries accounted for the lion’s share of recoveries. The healthcare industry led the way with $2.6 billion (over 53 percent) of the total, followed by the banking and mortgage industry with $1.6 billion in recoveries. Other industries commonly subject to FCA enforcement, including government contracting, defense, and environmental sectors, also had substantial recoveries.
The year 2016 was significant for the FCA beyond just settlements and judgments. The U.S. Supreme Court issued the most important FCA opinion in some time in Escobar, which upheld the so-called implied false certification theory in certain circumstances. In addition, following the Yates Memorandum issued in September 2015, DOJ in 2016 took an increased focus on individuals for FCA liability. The FCA also underwent a significant change in its per-violation penalties, which nearly doubled from a range of $5,500 to $11,000 per claim to a range of $10,781 to $21,563.
All told, 2016 marked another year of aggressive FCA enforcement by DOJ and whistleblowers. While 2017 will not likely present a watershed case like Escobar, FCA practitioners and their clients will be watching how the new presidential Administration affects FCA enforcement and several key issues, including the first review by a court of appeals on the use of statistical extrapolation to determine liability in an FCA case. As we look forward to the developments in 2017, we look back at an eventful 2016.
This year, the DOJ issued an interim final rule, causing FCA per-violation penalties to nearly double. 81 Fed. Reg. 42491 (June 30, 2016). The increase became effective for penalties assessed after August 1, 2016 for violations occurring after November 2, 2015. Minimum per-claim penalties increased to $10,781, up from $5,500, and maximum per-claim penalties increased to $21,563, up from $11,000. The DOJ cited adjustment for inflation as the cause for the increases.
Increased penalties may mean higher settlement rates given the increased risk of loss for defendants to take cases to trial. These increases may, however, also result in a larger number of constitutional challenges based on excessive fines in violation of the Eighth Amendment in cases with a large number of claims.
Universal Health Services, Inc. v. U.S. ex rel. Escobar , 136 S. Ct. 1989 (U.S. June 16, 2016)
In June, the U.S. Supreme Court unanimously validated the controversial “implied certification” theory of FCA liability. According to that theory, when a defendant submits a claim for payment to the government, it impliedly certifies compliance with various regulatory, statutory, and contractual requirements that otherwise apply to it. The theory holds that noncompliance with one of those separate requirements renders the claim “false” even if the defendant actually provided the government the good or service and made no explicit false statement.
Although the Court upheld the implied certification theory, it limited it. The decision states that implied certification may be viable “at least where two conditions are satisfied”—(1) a claim makes specific representations about a good or service (as opposed to merely requesting payment) and (2) the defendant’s failure to disclose noncompliance with material statutory, regulatory or contractual requirements makes those specific representations “misleading half-truths.” Since the Escobar ruling, lower courts have disagreed on whether these two conditions are necessary or merely sufficient for implied certification liability. The government has argued that the Supreme Court’s language “at least where two conditions are satisfied” indicates that implied certification may also be applicable in other situations. Defendants have argued that the two conditions are required for liability to attach.
The Supreme Court also emphasized the “demanding” nature of the FCA’s materiality standard. It described the materiality standard as turning on the “likely or actual behavior of the recipient of the alleged misrepresentation” and noted that the government’s past practices in paying such claims are relevant to the determination. The Court further stated that the government’s designation of a requirement as a “condition of payment” is relevant but not dispositive. It remains uncertain how the Court’s description of a “demanding” materiality standard turning on “likely or actual behavior” reconciles with the statutory definition of materiality as “having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property.” Since the Escobar ruling, lower courts have increasingly grappled with materiality, including being seemingly more willing to dismiss cases at the pleading stage for insufficiently alleging materiality. For a brief description of several such cases, see the “Post Escobar materiality roundup” in the Materiality section below.
State Farm Fire & Casualty Co. v. U.S ex rel. Rigsby , --- S. Ct. ---, No. 15-513, 2016 WL 7078622 (U.S. Dec. 6, 2016)
In State Farm, the Supreme Court examined the appropriate sanctions for a violation of the FCA’s “seal” requirement, under which a relator’s complaint must be filed and remain until the district court orders the relator to serve the complaint on the defendant. State Farm had moved to dismiss the relators’ complaint after relators’ counsel had violated the seal in disclosures to journalists, a public relations firm, and others. But State Farm “did not request any sanction other than dismissal.” The district court denied the motion, and the Fifth Circuit affirmed, after which State Farm sought review by the Supreme Court.
The Supreme Court affirmed the denial of State Farm’s motion to dismiss. First, the Court held that a violation of the FCA’s seal requirement does not necessarily mandate dismissal of a relator’s complaint. The Court based that holding on its interpretation of the relevant statutory provision and the FCA’s overall structure.
Second, the Court discussed the standard that should govern a district court’s decision whether to dismiss a relator’s complaint based on a seal violation. While the Court held that “the question whether dismissal is appropriate should be left to the sound discretion of the district court,” it stopped short of announcing any specific standard to guide that discretion, saying only that “[t]hese standards can be discussed in the course of later cases.” The Court did, however, discuss the range of potential sanctions that an FCA defendant can seek based on a seal violation. According to the Court, dismissal “remains a possible form of relief,” and lesser “[r]emedial tools like monetary penalties or attorney discipline remain available to punish and deter seal violations even when dismissal is not appropriate.”
In Thomas, the Tenth Circuit affirmed the district court’s grant of summary judgment in favor of Black & Veatch Special Projects Corp (B&V), holding that, even if the qui tam relators could demonstrate B&V violated its contract with the United States Agency for International Development (USAID), they could not prove the violation was material to USAID’s decision to pay B&V pursuant to the contract.
The contract, which involved construction services performed in Afghanistan, required B&V to obtain visas and work permits from the Afghan government. The relators—former B&V employees, Kevin and Carolyn Thomas—claimed B&V used “forged documents” to obtain the visas and work permits from the Afghan government and then falsely certified its compliance with applicable laws in order to obtain payment from USAID. The district court granted B&V’s summary judgment motion, concluding the relators could not prove any alleged false certification was “material” to USAID’s decision to pay B&V.
The Tenth Circuit affirmed. At the outset of its opinion—which was issued two months before the Supreme Court’s decision in Escobar—the Tenth Circuit stated:
[W]hen assessing materiality for purposes of an implied-false-certification claim, the proper focus is on the purpose of the underlying contract and the relevance of the allegedly violated provision to that purpose. Thus, an FCA plaintiff may establish materiality by demonstrating that the defendant violated a contractual or regulatory provision that “undercut the purpose of the contract[ ].”  Alternatively, where a defendant violates only a tangential or minor contractual provision, the plaintiff may establish materiality by coming forward with evidence indicating that, despite the tangential nature of the violation, it may have persuaded the government not to pay the defendant.
The Tenth Circuit went on to note that, in this case, the “undisputed evidence” “confirms that USAID did not withhold payment” from B&V after it learned of the relators’ allegations. Thus, the Tenth Circuit held, even if B&V violated the contract by “altering” the subject documents, “the undisputed facts show that the violation was not material to USAID’s payment decisions.”
U.S. ex rel. Miller v. Weston Educ., Inc. , 840 F.3d 494 (8th Cir. Oct. 19, 2016)
Relators Miller and Sillman, former employees of the for-profit Heritage College, brought a qui tam action under the FCA against Heritage, alleging that it fraudulently induced the Department of Education to provide financial aid funds by falsely promising to keep accurate student records and retaliated against relators for complaining about alleged misconduct. Specifically, Miller and Sillman claimed that Heritage altered grade and attendance records that they were required to keep under a Program Participation Agreement. Heritage in response argued that the Agreement did not require the maintenance of these specific records.
After the United States Supreme Court vacated the Eighth Circuit’s first opinion and remanded, the Eighth Circuit held that a reasonable jury could find that Heritage knew it had to keep accurate grade and attendance records and did not do so, resulting in a factual dispute regarding whether Heritage intended to manipulate its records at the time it signed the Agreement. Furthermore, the Court analyzed the materiality of any false statements by Heritage, noting the Supreme Court’s statement in Escobar that “a false promise to comply with express conditions is material if it would affect a reasonable government funding decision or if the defendant had reason to know it would affect a government funding decision.” Based on that language in Escobar, the Eighth Circuit found that Heritage’s promise to maintain accurate grade and attendance records influenced the government’s decision because the government expressly conditioned Heritage’s participation in Title IV funding in compliance with the recordkeeping requirement. Moreover, the significance and the government’s acts showed that the recordkeeping promise was material.
United States v. Sanford-Brown, Limited, et al., 840 F.3d 445 (7th Cir. Oct. 24, 2016)
In light of its decision in Escobar, the Supreme Court remandedSanford-Brown to the Seventh Circuit for reconsideration. In Sanford-Brown, the defendant for-profit educational institution received Title IV federal subsidies from the Department of Education. In order to receive such subsidies, the defendant entered a statutorily mandated Program Participation Agreement (PPA) in which it agreed to comply with a host of statutory and regulatory requirements. The relator argued that entry into the PPA impliedly certified that Sanford-Brown College (SBC) would comply with all of these requirements, and that such continued compliance was a condition of payment for receipt of any Title IV subsidies. In 2015, the Seventh Circuit affirmed the district court’s grant of summary judgment in favor of SBC and rejected the relator’s implied certification theory of liability.
On remand, the Seventh Circuit reconsidered the relator’s implied certification claim, but once again affirmed summary judgment in favor of the defendant. Under Escobar, the implied false certification theory can be a basis of liability when two conditions are met: first, the claim is not a mere request for payment, but also makes specific representations about the goods and services provided; and second, a defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes the representations about the goods and services provided misleading half-truths. The Court determined that the relator failed to provide any evidence that defendant SBC made false or misleading representations in connection with its claims for payment. Moreover, relator failed to establish materiality, which required that the relator show that the government’s decision to pay SBC would likely or actually have been different had it known of SBC’s alleged noncompliance with Title IV regulations. The Seventh Circuit stated that merely showing that the government would have been entitled to decline payment based on noncompliance is not enough to establish materiality.
U.S. ex rel. Escobar v. Universal Health Services, Inc. , 842 F.3d 103 (1st Cir. Nov. 22, 2016)
On remand from the Supreme Court, the First Circuit held that the Escobars had sufficiently pled that Universal Health Services’ misrepresentations were material to the government’s payment decision. The Escobars alleged that Universal Health Services had submitted false claims to MassHealth for the mental health treatment of their daughter by providers who were unlicensed and/or unsupervised. Though Commonwealth of Massachusetts regulations outlined qualifications for medical staff, including board certification requirements for psychiatrists, doctoral program requirements for psychologists, and supervision requirements for mental health counselors, the Escobars alleged that only four out of the five individuals who treated their daughter were in compliance with these regulations. The Escobars’ daughter ultimately died while being treated at the defendant’s clinic.
In assessing materiality, the First Circuit recounted the Supreme Court’s “demanding” materiality standard, and stated that it would take “a holistic approach” to the determination “with no one factor being necessarily dispositive.” It described its fundamental inquiry as “whether a piece of information is sufficiently important to influence the behavior of the recipient.” The Court divided its analysis into two sections—an analysis of the regulations’ importance to the regulatory scheme and an analysis of the government’s actions when it knew of these or similar violations.
The Court held that the licensing and supervision requirements were material to the government’s payment decisions because they go to the “very essence of the bargain,” as shown by MassHealth’s decision to have a series of regulations in place ensuring that these providers have adequate training and credentials. The Court further noted that there was no evidence yet presented that MassHealth had continued to pay claims after having actual knowledge of the violation. Finally, the Court declined to require that relators allege what the government’s payment practices had been for other similar claims in order to sufficiently plead materiality.
Post-Escobar district court roundup
In addition to the decisions above from the courts of appeals, numerous district courts have grappled with the new materiality standards enunciated in Universal Health Services, Inc. v. U.S. ex rel. Escobar, 136 S. Ct. 1989 (U.S. June 16, 2016), at the motion-to-dismiss and summary judgment stages, including:
- U.S. ex rel. Se. Carpenters Reg. Council v. Fulton County, Ga. , No. 1:14-CV-4071-WSD, 2016 WL 4158392, at *8 (N.D. Ga. Aug. 5, 2016) (dismissing false certification claims against a Government contractor for failing to “show that Defendants misrepresented matters ‘so central’ . . . that the government ‘would not have paid [Defendants’] claims had it known of these violations.’”);
- U.S. ex rel. George v. Fresenius Med. Care Holdings, Inc. , No. 2:12-CV-00877-AKK, 2016 WL 5361666, at *18 (N.D. Ala. Sept. 26, 2016) (granting summary judgment where plaintiff failed to demonstrate materiality under Escobar);
- U.S. ex rel. Lee v. N. Adult Daily Health Care Ctr. , No. 13-CV-4933 (MKB), 2016 WL 4703653, at *11–12 (E.D.N.Y. Sept. 7, 2016) (finding that operative complaint, filed pre-Escobar, failed to allege materiality);
- U.S. ex rel. Williams v. City of Brockton , 2016 WL 4179863, at *5 (ruling that false certification claim could not proceed for violation about which plaintiff failed to sufficiently allege materiality);
- U.S. ex. rel. Dresser v. Qualium Corp. , No. 5:12-CV-01745-BLF, 2016 WL 3880763, at *6 (N.D. Cal. July 18, 2016) (dismissing false certification claim because the complaint “d[id] not explain why” false certifications were material, and granting leave to amend because the complaint was filed pre- Escobar);
- City of Chicago v. Purdue Pharma L.P. , No. 14 CV 4361, 2016 WL 5477522, at *15 (N.D. Ill. Sept. 29, 2016) (dismissing false certification claims under municipal FCA for failure to sufficiently allege materiality, and giving plaintiff “final opportunity” to re-plead because complaint was filed pre- Escobar);
- U.S. ex rel. Voss v. Monaco Enterprises, Inc. , No. 2:12-CV-0046-LRS, 2016 WL 3647872, at *7 (E.D. Wash. July 1, 2016) (dismissing false certification claims for failure to sufficiently allege materiality, and granting leave to amend).
- United States v. Luce , No. 11-C-05158, 2016 WL 6892857, at *2 (N.D. Ill. Nov. 23, 2016) (finding that a certification that no principals of a mortgage company had been criminally convicted was material where HUD actually barred defendant upon learning of the false certification and where not having principals with criminal indictments bearing on their integrity was a “condition of basic eligibility” for the program).
U.S. ex rel. Paradies v. AseraCare Inc. , 176 F.Supp.3d 1282 (N.D. Ala. March 31, 2016) 
In AseraCare, the Court granted summary judgment after the first phase of a bifurcated trial on whether 123 hospice patients were eligible, with the evidence largely limited to conflicting expert testimony. The Court held that the Government had failed to prove its case, because it did not offer falsity evidence other than its expert’s differing opinions and “[a] mere difference of opinion between physicians, without more, is not enough to show falsity.”
The DOJ alleged that AseraCare had a practice of certifying patients as eligible for hospice who were not eligible. By statute, eligibility for the Medicare hospice benefit is premised on a physician’s certification of terminal illness (COTI). The COTI means that, in the physician’s clinical judgment, the patient is “terminally ill”—i.e., that the patient has a medical prognosis that his or her life expectancy is six months or less if the illness runs its normal course.
The DOJ based its case on the testimony of a retained medical expert who reviewed the medical records of a sample of 233 patients and opined on whether the documentation supported the COTIs. The Government planned to extrapolate this medical expert’s findings to a larger universe of approximately 2,200 patients. The Government repeatedly admitted to the court that the medical records and its medical expert’s testimony were the only evidence it had offered to prove falsity. In her opinion, Judge Bowdre described the first phase of the trial:
[The government’s medical expert] testified about why, in his opinion, the excerpts from the patients’ medical records did not support the COTIs of the patients at issue. However, AseraCare’s experts pointed to different pages from the patients’ medical records that in their opinion showed that the patients were eligible for hospice.
The jury deliberated for several weeks before returning its answers to special interrogatories and finding—based on limited jury instructions regarding falsity—that AseraCare had submitted false claims for the majority of the relevant patients.
In November 2015, before the second phase began, Judge Bowdre granted AseraCare’s motion for a new trial, on the ground that the jury should have been instructed that a mere difference of opinion was insufficient to prove falsity. Judge Bowdre then asked the parties to brief whether AseraCare was entitled to judgment as a matter of law based on the Government’s evidence. In ultimately granting summary judgment for AseraCare, the court found:
When two or more medical experts look at the same medical records and reach different conclusions about whether those medical records support the certifying physicians’ COTIs, all that exists is a difference of opinion. This difference of opinion among experts regarding the patients’ hospice eligibility alone is not enough to prove falsity, and the Government has failed to point the court to any objective evidence of falsity.
Bishop v. Wells Fargo & Co. , 823 F.3d 35 (2d Cir. May 5, 2016)
The Second Circuit affirmed the dismissal of FCA claims against Wells Fargo, finding a general certification of compliance with “any laws or regulations” too broad to support an FCA action and cautioning against an expansive reading of the FCA. The FCA action—brought by a pair of whistleblower former employees—alleged the bank falsely certified it was in compliance with various banking laws and regulations when it borrowed money at favorable rates from the discount window operated by the Federal Reserve (Fed). Each time the bank borrowed money from the Fed, the bank made representations and warranties on the Fed’s Operating Circular No. 10, including that the bank “is not in violation of any laws or regulations in any respect which could have any adverse effect whatsoever upon the validity, performance or enforceability of any of the terms of the Lending Agreement.”
Bishop alleged the certifications were false as they related to pre-merger conduct of Wachovia and World Savings Bank. They further alleged that Wachovia used improper accounting practices to hide “toxic” assets and was severely undercapitalized and that World Savings Bank made inappropriate loans and failed to put in place required controls.
The Second Circuit rejected these theories of liability, relying heavily on its 2001 FCA opinion Mikes v. Strauss, 274 F.3d 687 (2d Cir. 2001), which the Ninth Circuit and Southern District of New York had previously limited to the health care industry. The Wells Fargo Court agreed with the lower court opinion that the general certification of compliance with “any laws or regulations” is “too broad to give rise to a claim under the FCA,” and cited the statement in Mikes that the FCA “does not encompass those instances of regulatory noncompliance that are irrelevant to the government’s disbursement decisions.” Responding to Bishop’s argument that this holding would give banks a “free pass” to defraud the government, the Court noted: “The federal government has many tools other than the FCA at its disposal to discipline banks and to ensure compliance with banking laws and regulations, ranging from informal reprimands to fines to involuntary termination of a bank’s status as an insured depository institution.”
U.S. ex rel. May v. Purdue Pharma L.P. , 811 F.3d 636 (4th Cir. Jan. 29, 2016)
Relators Steven May and Angela Radcliffe filed a qui tam action against Purdue Pharma L.P. alleging that Purdue had misrepresented the potency of an oxycodone-based pain medication, resulting in physicians prescribing, and the federal government paying for, a more expensive medication. A nearly identical case had been filed in 2010 by Mrs. Radcliffe’s husband, Ray Radcliffe, a former employee of Purdue. Mr. Radcliffe’s lawsuit was dismissed based on a release that he executed after receiving a severance package from Purdue. Following the dismissal, Mr. Radcliffe’s attorney, Mark Hunt, began to represent May and Mrs. Radcliffe in the instant qui tam case. The district court dismissed the action, and May appealed.
On appeal, the Fourth Circuit affirmed the dismissal, finding that the public disclosure bar was applicable to allegations derived from facts learned by an attorney during the course of representing another client. The specific issue on appeal was whether the public disclosure bar is triggered when allegations are derived from facts that an attorney learned while representing a prior client, and not directly from the public court documents themselves. Despite the fact that May and Mrs. Radcliffe did not become aware of the information they used to support their allegations directly from the public disclosures at issue in this case, the claims were based on information their attorney provided them after representing another client in a matter involving the same allegations, and those allegations were disclosed prior to the this suit being filed. Consequently, the Court found that relators’ qui tam action was of the parasitic type that Congress sought to prevent in creating the public disclosure bar, and affirmed the dismissal.
U.S. ex rel. Moore & Co., P.A. v. Majestic Blue Fisheries, LLC , 812 F.3d 294 (3d Cir. Feb. 2, 2016)
In February, the Third Circuit reversed a dismissal pursuant to the public disclosure bar, after determining that the Affordable Care Act’s amendments to the FCA “radically changed” the bar’s “‘hurdle’ for relators.” The relator Moore & Co. was a law firm that had represented the wife of a deceased fishing captain in a wrongful death lawsuit against Majestic Blue Fisheries and related companies. During the course of that litigation, the law firm discovered that Majestic Blue Fisheries had allegedly obtained fishing licenses from the government by fraudulently certifying that its boats were controlled by U.S. citizens when, in fact, the boats were controlled by Korean entities.
The district court dismissed the complaint after determining that the allegations were publicly disclosed in news articles and FOIA reports and that the law firm was not an “original source,” because all of its knowledge came from the wrongful death litigation. In reversing the dismissal, the Third Circuit agreed that the allegations had been publicly disclosed—agreeing with the defendant that documents attached to FOIA requests were government reports under the FCA—but concluded that the law firm was in fact an “original source.” As the Third Circuit explained, the district court improperly relied on the pre-amendment version of the FCA, wherein a relator qualified as an original source only if his or her knowledge was independent of both information that qualified as a public disclosure under the FCA and all other information readily available in the public domain, such as the wrongful death litigation. By contrast, under the ACA amendments, to qualify as an original source, a relator’s knowledge need only be independent of public sources, not all other information in the public domain. Thus, the law firm was not disqualified by the information it learned during the wrongful death litigation.
Moreover, the Third Circuit also explained that the law firm’s knowledge “materially add[ed]” to the publicly disclosed allegations. Although the “basic elements” of the fraud were publicly disclosed, the Court nevertheless determined that the law firm’s knowledge “added significant details to the essential factual background of the fraud—the who, what, when, where, and how of the alleged fraud—that were not publicly disclosed.”
Notably, on remand, the district court again dismissed the case, this time for failure to state a claim, after determining that fishing licenses were not “property” under the FCA and that unassessed civil penalties for submitting fraudulent certifications were not “obligations” under the reverse FCA provision.
The Fourth Circuit in Beauchamp, dealt with the applicability of the public disclosure bar to amended complaints, and which pleading a court should utilize when conducting a public disclosure analysis. Relators Lyle Beauchamp and Warren Shepherd were security contractors with Academi, and filed a sealed qui tam complaint in April 2011, alleging that Academi submitted false bills and reports to the U.S. State Department during the period of time Academi contracted with the State Department to provide security services in the Middle East. Relators filed their first-amended complaint in May 2011, adding allegations of a separate weapons qualification scheme.
During the pendency of the first-amended complaint, two former firearm instructors with Academi contacted relators’ counsel with additional information about the weapons qualification scheme. Additionally, these two firearm instructors filed a wrongful termination suit against Academi, and were the subject of an online news story published by Wired.com on July 16, 2012. On November 19, 2012, relators filed their second-amended complaint, expanding the allegations as to the weapons qualification scheme with information learned from the two firearm instructors.
The district court dismissed the suit, concluding that the most recent complaint was the proper pleading to evaluate in a public disclosure analysis, and the claims relating to the weapons qualification scheme were prohibited under the public disclosure bar, because the Wired.com article was a qualifying public disclosure, and the second-amended complaint was filed after the public disclosure was made.
On appeal, the Fourth Circuit held that the determination of when a relator’s claims arise for purposes of the public disclosure bar is governed by the date of the first pleading to particularly allege the relevant fraud and not by the timing of any subsequent pleading. Here, the second-amended complaint merely added further detail about a fraudulent scheme already plead in the first-amended complaint, meaning that the weapons qualification scheme was first introduced before the Wired.com public disclosure. Accordingly, because the first-amended complaint was the first pleading to allege the relevant fraud, and because the public disclosure was made after the first-amended complaint was filed, the Wired.com article was not a qualifying public disclosure, and the Court vacated the dismissal.
The Sixth Circuit affirmed the dismissal of an FCA suit against U.S. Bank because the conduct alleged by Advocates for Basic Legal Equality (ABLE) had previously been publicly disclosed in a consent order with the Office of the Comptroller of the Currency (OCC) and in an interagency report by the Federal Reserve, OCC, and Office of Thrift Supervision. ABLE’s suit alleged that U.S. Bank had a practice of initiating foreclosure proceedings on FHA-insured mortgages without complying with servicing and loss mitigation regulations of the Department of Housing and Urban Development (HUD), although it submitted annual certifications to HUD containing a general statement that it was compliant with all HUD-FHA regulations. ABLE alleged that this conduct resulted in $2.3 billion in false claims for FHA insurance benefits.
Here, the Court held that the public disclosure bar prevented ABLE’s claims because the conduct it alleged had violated the FCA had already been publicly disclosed when ABLE filed suit in 2013. The two sources that the Court cited for such public knowledge were (1) a 2011 consent order between U.S. Bank and the OCC requiring U.S. Bank to implement a wide variety of reforms, including loss mitigation and foreclosure prevention efforts; and (2) a 2011 foreclosure practices review from three federal agencies, which stated that a number of banks, including U.S. Bank, had failed to engage in loss mitigation and foreclosure prevention for delinquent loans. The Court found that these documents were sufficient to trigger the public disclosure bar in the FCA because they “put the government on notice of the possibility of fraud.”
Thereafter, ABLE filed a writ of certiorari with the Supreme Court, presenting the following question:
Under the public disclosure bar, may a qui tam action proceed when it is based on specific allegations of fraud that were not the subject of prior public disclosures and that add substantial material information to the public disclosures, and when the publicly disclosed allegations “encompass” the qui tam allegations only if both sets of allegations are characterized at a very high level of generality?
On October 3, the Supreme Court asked the Acting Solicitor General to file a brief in this case expressing the views of the United States.
U.S. ex rel. Oliver v. Phillip Morris USA, Inc., 826 F.3d 466 (D.C. Cir. June 21, 2016)
Relator Anthony Oliver filed a qui tam suit against Phillip Morris USA alleging that Phillip Morris had violated the FCA by charging two U.S. Military Exchanges prices for cigarettes that violated the “most favored customer” provisions of their contract. Phillip Morris filed a motion to dismiss, arguing that Oliver’s allegations were based on information that had been publicly disclosed prior to him filing suit. The trial court agreed, and granted the motion to dismiss.
On appeal, the D.C. Circuit found that the transactions that Oliver alleged gave rise to the inference of fraud had been publicly disclosed through channels enumerated within the FCA statute. In doing so, the D.C. Circuit analyzed what qualified as a “civil hearing” and an “administrative report” within the public disclosure language of the statute. More specifically, the Court concluded that concerns with Phillip Morris’ pricing practices had been disclosed under the “civil hearing” prong, because an inter-office memorandum discussing Phillip Morris’ pricing differential practices was posted to a public website, along with millions of other documents, as part of a separate litigation. In addition, the “most favored customer” provisions of the contracts were publicly disclosed in what the Court characterized as an “administrative report” when a hyperlink to the terms and conditions of contracting with the Military Exchanges was also placed on the website. The Court acknowledged that this information was not readily available to the public, but found that the standard was whether the information was “actually” available. The Court affirmed the lower court’s dismissal based on the additional finding that Oliver was not an original source of the information that had been publicly disclosed.
U.S. ex rel. Saldivar v. Fresenius Medical Care Holdings, Inc. , 841 F.3d 927 (11th Cir. Nov. 8, 2016)
In Saldivar, the relator alleged defendant, Fresenius Medical Care Holdings, Inc., violated the FCA by billing the government for drugs it had obtained at no cost. The district court granted Fresenius’s motion for summary judgment after concluding its actions did not meet the intent requirement of the FCA, which Saldivar appealed. In response to the appeal, Fresenius argued the district court lacked jurisdiction in the first instance because of the public disclosure bar.
The Eleventh Circuit reversed the grant of summary judgment on the merits, and remanded the case for an entry of an order dismissing the case for lack of jurisdiction after concluding Saldivar was not an original source under the FCA. Though the Court agreed with the district court that the allegations had been publicly disclosed, it disagreed with the conclusion that Saldivar was an original source. According to the Court, Saldivar’s secondhand knowledge of the alleged fraudulent billing practices was insufficient to make him an original source. Interpreting the pre-2010 amendment statutory language, the Court declared that the statute places an extreme limit on secondhand knowledge, insofar as it is being used as the basis for a qui tam action, and requires the information to be gleaned directly and independently by the relator. Ultimately, because Saldivar, who worked in inventory and administration, had been told by another person what the billing department was doing and had no direct knowledge of the alleged fraud himself, the Court reasoned his knowledge was too attenuated for him to qualify as an original source.
U.S. ex rel. Johnson v. Kaner Medical Group , 641 F. App’x. 391 (5th Cir. March 7, 2016)
In this unpublished opinion, the Fifth Circuit affirmed the district court’s sua sponte entry of summary judgment in favor of Kaner Medical Group. Kaner ran an allergy clinic at which it provided services paid for by Medicare and TRICARE. A physician, physician’s assistant, or nurse practitioner would refer patients to the clinic, where services would be rendered by medical assistants acting under the supervision of a physician, physician’s assistant, or nurse practitioner. According to Johnson’s allegations, Kaner violated the FCA by placing the referring provider’s National Provider Identifier number in both the “referring provider” and “rendering provider” boxes on the forms it used to submit claims for reimbursement, regardless of which provider was supervising the services rendered at the clinic. The court held that, even if Kaner’s incorrect completion of the forms rendered its claims false, Johnson failed to present any evidence on which a reasonable jury could conclude that Kaner acted with the requisite scienter of actual knowledge, deliberate ignorance, or reckless disregard. At best, the court held, the record showed that Kaner’s misunderstanding of the correct way to fill out the reimbursement form was negligent.
With regard to Johnson’s retaliation claim, the Fifth Circuit also affirmed the district court’s grant of summary judgment. Kaner billed Medicare patients directly. The court held that Johnson failed to show how such direct billing related to the presentation of false claims for payment to the government, and thus failed to raise a genuine issue of material fact as to whether, by investigating the alleged fraud, she engaged in FCA-protected activity.
U.S. ex rel. Burke v. Record Press, Inc. , 816 F.3d 878 (D.C. Cir. March 15, 2016)
In Burke, the DC Circuit affirmed the district court’s dismissal of an FCA action, finding that the relator failed to overcome the contractual parties’ understanding about the terms of the deal and the rate owed.
Brain Burke, the relator, alleged that Record Press, a company that prints appellate briefs for the government under a contract with the Government Printing Office (GPO), violated the FCA by submitting to the GPO false claims for printing services. Central to Burke’s claim was his assertion that the subject contract contemplated a lower rate for printing services than had been charged by Record Press. Contrary to Burke’s portrayal of the contractual arrangement, however, Record Press and the GPO “agree[d] that the rate charged by Record Press accurately reflected the contract price.” For this reason, the government declined to intervene in the suit and, after a bench trial, the district court entered judgment against Burke and in favor of Record Press.
On appeal, the DC Circuit affirmed the district court’s reliance “on the government’s agreement with Record Press about the proper understanding of the contract as evidence that there had been no fraudulent behavior in the first place.” According to the DC Circuit, “‘the knowledge possessed by officials of the United States may be highly relevant’ under the [FCA] because it ‘may show that the defendant did not submit its claim in deliberate ignorance or reckless disregard of the truth.’”
U.S. ex rel. Smith v. The Boeing Company , 825 F.3d 1138 (10th Cir. June 13, 2016)
In Smith, three former employees of Boeing brought an FCA claim against Boeing and one of its suppliers, Ducommun, Inc., alleging that Boeing falsely certified that several aircraft it sold to the government were in compliance with FAA regulations. The district court dismissed the relators’ claims and denied the relators’ motion to strike two FAA investigative reports the court relied on in granting the motions.
On appeal, the Tenth Circuit affirmed the district court’s ruling. Specifically, the Court found that the district court properly admitted the investigative reports under FRE 803(8)(A)(iii), which permits admission of a public record setting out factual findings from a legally-authorized investigation. The Court found the relators’ arguments that the reports were untrustworthy unpersuasive. Alternatively, the Court dismissed relators’ arguments that the district court abdicated its judicial function by deferring to FAA’s position in the investigative reports.
The Tenth Circuit also affirmed the district court’s ruling because there was no evidence presented that Boeing knowingly presented a false claim to the government for payment. The Court found that, at best, the evidence showed conflicting opinions as to whether Ducommun was required to use computerized manufacturing and quality control practices to properly report under the FAA. Therefore, “in light of these conflicting opinions,” the Court rejected the relators’ contention “that their interpretation is so indisputably correct to render Boeing’s certifications ‘knowingly false as a matter of law.’”
U.S. ex rel. Sheet Metal Workers International Association v. Horning Investments, LLC , 828 F.3d 587 (7th Cir. July 7, 2016)
In its first post-Escobar FCA opinion, the Seventh Circuit suggested that the government faces a high bar for establishing that defendants acted with the requisite knowledge where the underlying statutory obligations are ambiguous.
The action involved a dispute that arose between Horning and a union whose members Horning hired to provide labor for construction and renovations to a VA hospital. The parties’ labor agreement was governed by the Davis-Bacon Act, which sets minimum wages and benefits for employees working on federal construction projects. During contract performance, Horning deducted a flat hourly fee from union members’ paychecks for fringe benefits, regardless of whether any individual member currently was eligible for benefits. Rather than making a claim directly under the Davis-Bacon Act, the union brought a qui tam action under the FCA, asserting that Horning submitted false claims for payment to the Department of Veterans Affairs.
The Seventh Circuit affirmed summary judgment in favor of Horning, holding that there was insufficient evidence that Horning acted with the requisite knowledge that its claims were false. In so holding, the Court rejected the district court’s rationale that Horning’s asserted reliance on its accountants was sufficient to refute knowledge under the FCA. The Court noted that, although reliance on the advice of a professional can negate the mental state required for some crimes, Horning failed to furnish the facts needed to establish this defense.
Despite its disagreement with the district court as to the rationale justifying dismissal, the Seventh Circuit nonetheless concluded that the district court properly dismissed the FCA claim on summary judgment, holding that the underlying statutory obligations were ambiguous and, therefore, there was insufficient evidence that Horning acted with the requisite scienter. The Court emphasized that nothing in the Davis-Bacon Act unequivocally requires employers to tailor contributions for fringe benefits to benefits actually received by each individual employee. Accordingly, the Court concluded that “there is enough ambiguity about this matter that we cannot infer that Horning either knew or must have known that it was violating the Davis-Bacon Act.”
Olson v. Fairview Health Services of Minnesota , 831 F.3d 1063 (8th Cir. Aug. 8, 2016)
In Olson, the Eighth Circuit upheld the dismissal of the relator’s FCA claims on the basis that the characterization of the University of Minnesota Medical Center’s children’s unit as a “children’s hospital” was a reasonable interpretation of law. The Eight Circuit held that “a reasonable interpretation of ambiguous statutory language does not give rise to a FCA claim.”
A 2011 amendment to Minnesota law reducing the Medicaid hospital reimbursement rate excluded from the reduction “children’s hospitals whose inpatients are predominantly under 18 years of age.” The University of Minnesota Medical Center (UMMC), a wholly-owned subsidiary of Fairview Health Services of Minnesota, lobbied the Minnesota Department of Human Services to exempt its children’s unit from the rate reduction and sought Medicaid reimbursement at the higher rate for services provided to inpatients under 18 years of age that were admitted to the children’s unit. Olson brought a qui tam action against Fairview Health Services of Minnesota, arguing that, because the children’s unit at UMMC is a hospital within a hospital and does not have its own hospital license, it is not a children’s hospital exempt from the reimbursement rate reduction, and therefore Fairview submitted false claims to Minnesota Medicaid for services provided at the children’s unit at UMMC. The district court dismissed Olson’s claims, holding that because the precise definition of “children’s hospital” is unclear, UMMC’s lobbying efforts to exempt its children’s unit from the rate reduction and its claims for Medicaid reimbursement could not be characterized as false claims under the FCA.
The Eighth Circuit agreed, despite Olson’s argument that the 2011 amendment was unambiguous in light of the legislative history regarding treatment of children’s hospitals in Minnesota. The Court held that, if determining the true meaning of a statutory term requires reference to the “historical legislative backdrop of that term” and contextual considerations, then the language is not unambiguous.
U.S. ex rel. Donegan v. Anesthesia Associates of Kansas City, PC , 833 F.3d 874 (8th Cir. Aug. 12, 2016)
In Donegan, the relator alleged that AAKC, a medical group specializing in anesthesia, violated the FCA by submitting claims for anesthesia services that were not rendered in compliance with certain Medicare conditions of payment. At issue was a requirement that, in order to receive reimbursement for a particular level of anesthesia care, a physician must personally participate in the most demanding aspects of the anesthesia service, including induction and emergence. Donegan alleged that AAKC’s practice failed to meet this requirement because its physicians were rarely present during emergence. AAKC argued that emergence was a process rather than a discrete point in time, and, therefore, its practice of having the physician visit the patient during the patient’s continued recovery in the post-anesthesia care unit was a reasonable interpretation of the requirement.
After the government declined to intervene, AAKC moved for summary judgment. The district court granted the motion, concluding that Donegan failed to establish that AAKC knowingly submitted false claims. The Eighth Circuit affirmed. In its opinion, the Court observed that the term “emergence” was not defined in the relevant regulations or by another controlling source. As a result, the Court found that the regulatory requirement was ambiguous and AAKC’s interpretation was objectively reasonable. The Court concluded that, because Donegan failed to submit evidence refuting the argument that AAKC’s interpretation of an ambiguous requirement was objectively reasonable, it could not find that AAKC knowingly submitted false claims. In so doing, the Court also noted that AAKC did not have a duty to ask the relevant government agency or its contractors whether its interpretation of “emergence” was proper.
Complaint Filed in UnitedHealthcare v. Centers for Medicaid and Medicare, Case No. 16-cv-00157 (D.D.C.)
Although not directly related to the FCA, there was a notable complaint filed this year against the Centers for Medicare and Medicaid (CMS) with regard to overpayments, which can result in FCA liability if not timely returned. On February 1, 2016, UnitedHealthcare, the largest seller of private Medicare insurance policies, filed a lawsuit in the United States District Court for the District of Columbia, challenging the federal government’s interpretation of “overpayments” under Medicare law. United contended that CMS’s implementing rule violated the statute by calculating the “overpayments” that private Medicare plans must return to the federal government based on a flawed actuarial standard. United argued that although the statute requires the Medicare plans to be reimbursed on an “actuarial[ly] equivalen[t]” basis, CMS’s rule requires retroactive adjustments to the diagnostic codes found in patients’ charts, causing the patients in each Medicare plan to later appear to be healthier than they were at the time that the Medicare plan evaluated the group and priced the plan. Because of that change, United contends, Medicare plans appear to have received “overpayments” from the government for those patients, when in fact the payments accurately reflected the patients’ actuarial risk profile at the time the plans were priced.
United also argued that CMS’s requirement for the return of overpayments ignores the statutory criteria that an overpayment must be “identified” first, indicating a situation where the plan has actual knowledge of its existence. By contrast, United contends that CMS’s rule defines “identified” as including instances where the plan should have determined [the overpayment] by exercise of reasonable diligence, which is a negligence standard.
The government moved to dismiss the case in May, arguing that United (and its affiliated co-plaintiffs) lacked constitutional standing. Brief on that motion is now complete, and it is ready for the Court’s decision. Given that the government moved for dismissal on constitutional grounds, the Court could decide to dismiss the case without reaching the merits of United’s arguments about the CMS rule.
Cooper v. Pottstown Hospital Co. LLC , 651 F. App’x 114 (3d Cir. June 10, 2016)
In Cooper, the relator, a surgeon, alleged that Pottstown, a hospital, violated the federal Anti-Kickback Statute and the FCA by entering into two contracts through which the relator provided on-call coverage services. Cooper contended that the real purpose of the contracts was to ensnare him in a scheme through which Pottstown paid him for on-call services in exchange for the exclusive right to receive his referrals of federal health care program patients. These allegations were made after the latter of the two contracts was terminated when Pottstown discovered that Cooper was in breach of a non-compete covenant.
Pottstown moved to dismiss the case, and the district court granted the motion. In a limited, not precedential opinion, the Third Circuit affirmed. The Court noted the relator’s failure to aver any facts that would allow the Court to distinguish the contracts at issue from garden variety, arms-length agreements for on-call coverage services. Finding that the relator failed to allege any indicia of Pottstown’s intent to operate a kickback scheme, the Court concluded that the district court did not err in granting the motion to dismiss. The Court also observed that, with respect to Pottstown’s termination of the contract based on the non-compete provision, it would not infer improper intent based solely on a party’s conduct where that conduct is “completely consistent with a contract that, on its face, bears no evidence of illegality.”
U.S. ex rel. Polansky v. Pfizer, Inc. , 822 F.3d 613 (2d Cir. May 17, 2016)
In this May 2016 decision, the Second Circuit upheld the dismissal of relator Polansky’s FCA claims on the basis that the marketing of Lipitor for patients falling outside the advisory National Cholesterol Education Program Guidelines (“guidelines”) was not “off-label” marketing. Polansky alleged that by marketing Lipitor to patients whose cholesterol levels fell outside the guidelines, Pfizer induced physicians to prescribe Lipitor for an “off-label” use, pharmacists to fulfill the prescriptions, and federal health care programs to pay for them, all in violation of the FCA. Although the guidelines were summarized on the FDA-approved label for Lipitor, the Second Circuit found that the guidelines were advisory only and were never intended to override a physician’s clinical judgment; therefore, the Court held, the guidelines could not have been a “mandatory limitation” incorporated by the FDA into Lipitor’s label. Accordingly, the marketing of Lipitor for patients outside the guidelines was not marketing for an “off-label” use and could not have caused a violation of the FCA.
Although the Second Circuit decided the case on the grounds above, it went on to state its skepticism that, even if the prescription of Lipitor for patients outside the guidelines was “off-label,” “anyone could be identified who actually submitted a false claim.” The Court observed that physicians are permitted to prescribe medications for off-label use; that patients likely would not know that the use for which the medicine was prescribed was off-label; and that prescriptions do not inform pharmacists that the intended use is “off-label.” Thus, the Court noted, “we are dubious of Polansky’s assumption that any one of these participants in the relevant transactions would have knowingly, impliedly certified that any prescription for Lipitor was for an on-label use.” Although the Court was careful to characterize this discussion as dicta, its reasoning demonstrates the potential difficulties plaintiffs may face in basing FCA allegations on the prescription of medications for off-label uses.
U.S. ex rel. Cook-Reska v. Community Health Systems, Inc. , 641 F. App’x. 396 (5th Cir. Mar. 7, 2016)
The relator, Cook-Reska, initially filed an FCA claim against Community Health Systems, Inc. (CHS) for charging the government for unnecessary inpatient procedures at her local medical center. The government subsequently invited Cook-Reska to join in three other FCA claims pending against CHS in federal courts based on similar allegations. After a settlement was reached, Cook-Reska was awarded over $2 million for the nationwide FCA suit against CHS and Cook-Reska’s attorneys moved for over $3 million in attorneys’ fees and costs for the nationwide investigation (“ED Claims”) and Cook-Reska’s individual investigation (“Non-ED Claims”). Upon a motion by CHS pursuant to the FCA’s first-to-file rule, the Court ordered Cook-Reska’s attorneys to limit their attorneys’ fees and costs solely to the Non-ED Claims. Cook-Reska’s attorneys subsequently requested $2,028,019 for 1024 hours solely to Non-ED Claims and 2144 to both Non-ED and ED Claims. They claimed that hours under “both” should be recoverable because the work thereunder would have been required to pursue the Non-ED Claims alone. The District Court awarded only $738,381 after deciding that Cook-Reska’s attorneys could recover, in addition to fees and costs related to the Non-ED Claims, only those fees incurred prior to their involvement in the nationwide investigation for “both,” and that the hourly rates requested should be adjusted to the prevailing market rates.
On appeal, the Fifth Circuit affirmed. Cook-Reska had asked the Court to reconsider the district court’s determination that she failed to meet her “burden [of] maintaining billing time records in a manner that would enable the reviewing court to identify each distinct claim” and Cook-Reska’s attorneys’ fees should be lowered to prevailing market rates in the relevant community. The Court determined that Cook-Reska’s attorneys were on notice after the government informed them that they were dealing with two sets of FCA claims and opined that experienced FCA attorneys should know block billing was insufficient for the court to distinguish between the two claims. Alternatively, the district court’s “carefully explained” decision to reduce rates after reviewing similar cases from the Houston area was not an abuse of discretion.
Associates Against Outlier Fraud v. Huron Consulting Group , 817 F.3d 433 (2nd Cir. Mar. 23, 2016)
In Associates Against Outlier Fraud, the Second Circuit affirmed an award of costs, including deposition transcripts, to defendants-appellees after summary judgment was entered in their favor. The relator, Associates Against Outlier Fraud, appealed the award, arguing that it should have been shielded from the award of costs under Section 3730(d)(4), which restricts the award of “expenses” to prevailing defendants in FCA cases found by a court to be “clearly frivolous.” The relator argued that “costs” and “expenses” are one and the same under the FCA and the Federal Rules of Civil Procedure. The Second Circuit disagreed and joined a number of other circuits observing that fees, expenses, and costs are three distinct categories under the language of the FCA. Therefore, the FCA’s limitation on the recovery of attorneys’ fees and expenses did not bar an award of costs, such as for deposition transcripts, under Federal Rule of Civil Procedure 54.
Additionally, the Second Circuit found that relator’s argument that 28 U.S.C. § 1920 does not include the cost of deposition transcripts cannot be raised for the first time on appeal, but the Court noted the argument would have no merit even if appropriately presented.
U.S. ex rel. Doghramji v. Community Health Systems, Inc. , No. 15-6280, 2016 WL 6872051 (6th Cir. Nov. 22, 2016)
This case focused on a single term of a settlement agreement between Community Health Systems, Inc. (CHS) and seven relators and whether CHS failed to preserve its right to challenge on any basis the entitlement of the relators to attorneys’ fees. The relators argued that the language unambiguously limited CHS’s right to challenge the relators’ entitlement to attorneys’ fees to a specific FCA provision concerning the reasonableness of such fees, and the district court agreed. On appeal, the Sixth Circuit determined that the language was ambiguous and remanded the case to the district court so that extrinsic evidence may be used to ascertain the parties’ original understanding of the terms of the settlement agreement.
The term at issue read as follows: “All Parties agree that nothing in this Paragraph or this Agreement shall be construed in any way to release, waive or otherwise affect the ability of CHS to challenge or object to Relators’ claims for attorneys’ fees, expenses, and costs pursuant to 31 U.S.C. § 3730(d).” While CHS used principles of contract interpretation to argue that the language of the agreement preserved its right to make first-to-file and public disclosure challenges, the relators based their argument on a few “indicia of meaning,” including CHS’s failure to expressly preserve the right to challenge the relators’ entitlement to attorneys’ fees on any basis beyond those addressed in 31 U.S.C. § 3730(d). The relators reasoned that the phrase “pursuant to 31 U.S.C. § 3730(d)” limited the scope of CHS’s objections to those listed solely in that provision of the FCA and did not include first-to-file and public disclosure challenges, which are listed in other provisions of the FCA.
Based on general rules of contract law, the Sixth Circuit determined that both CHS and the relators advanced a reasonable interpretation of the settlement agreement, rendering the language ambiguous. Accordingly, extrinsic evidence may be used to ascertain the parties’ original understanding of the terms.
U.S. ex rel. Wall v. Circle C Construction, LLC , 813 F.3d 616 (6th Cir. Feb. 4, 2016)
In Wall, the Sixth Circuit rejected the government’s argument that its damages resulting from the underpayment of electricians by a subcontractor should be calculated using the “taint” theory. Circle C was a contractor that built 42 warehouses at Fort Campbell, an Army base, under a contract with the Army requiring Circle C and its subcontractors to pay their employees above-market wages per the Davis-Bacon Act. The contract also required Circle C to submit weekly “compliance statements” certifying that Circle C and its subcontractors had paid its employees the required wages for the relevant week. However, in the course of building the warehouses, Phase Tec, Circle C’s subcontractor for electrical work, underpaid its electricians a total of $9,916, rendering false a number of Circle C’s compliance statements and causing Circle C to be liable under the FCA. The government argued that its actual damages should be the entire amount paid by the government for Phase Tec’s electrical work on the basis that all of the work was “valueless” due to it being tainted by the underpayment. The Court disagreed, stating that the government’s theory was belied by its conduct in continuing to use the buildings and that actual damages are “grounded in reality.” In reversing, the Court held that the damages could be calculated as treble the $9,916 difference between the contracted wage and the paid wage, resulting in total damages of $29,748, less the $15,000 settlement with Phase Tec, as opposed to the initial damage award of $777,894.
U.S. ex rel. Bunk v. Gov’t Logistics N.V. , 842 F.3d 261 (4th Cir. Nov. 15, 2016)
More than fifteen years ago, various shipping businesses conjured up a bid-rigging arrangement that was subsequently held to violate the FCA. Bunk, the relator, alleged in his FCA claims that Government Logistics, N.V., was a successor corporation to one of the original bid-rigging defendants, Gosselin Group. In this case, the Fourth Circuit determined that the district court had erred in deciding the successor liability issues. First, the Court held that Bunk had sufficiently outlined the dealings between Government Logistics, N.V., and Gosselin Group to form a solid foundation for the fraudulent transaction theory of successor liability. Second, the court held that the evidence supported a finding by a reasonable juror of fraudulent intention by Gosselin Group and Government Logistics, N.V., as required by the fraudulent transaction theory where there was inadequate consideration, transactions that were different from the usual method of transacting business, transactions in anticipation of suit or execution, and transactions in which the debtor retained benefits.
U.S. ex rel. Sheldon v. Kettering Health Network , 816 F.3d 399 (6th Cir. March 7, 2016)
In Sheldon, the Sixth Circuit limited the circumstances in which a relator can avail herself of the relaxed 9(b) standard for pleading based on “personal knowledge” of an alleged false claim submitted for payment. The case arose when the relator, Vicki Sheldon, received notice from Kettering Health Network (KHN) that her electronic health record (EHR) had been impermissibly accessed on several occasions by her then-husband and his mistress, both KHN employees. Sheldon requested KHN provide her with specific EHR access reports generated by their electronic health information system. KHN refused, and Sheldon filed actions in federal and state court.
In her federal action, Sheldon alleged that KHN had violated the FCA by falsely certifying compliance with the Health Information Technology for Economic and Clinical Health (HITECH) Act and collecting EHR meaningful use incentive payments as a result. Sheldon argued that KHN had violated the HITECH Act when 1) her EHR was inappropriately accessed, breaching her security and privacy, and 2) KHN failed to provide the EHR access reports she had requested. The Sixth Circuit affirmed the District Court’s dismissal of Sheldon’s claims. The Court found that Sheldon had not plausibly alleged that KHN had violated the HITECH Act, because the law requires providers to maintain procedures and address security breaches, which KHN demonstrably had. Similarly, the Court found that the HITECH Act does not require providers to run a specific type of EHR access report, so KHN’s failure to provide such a report to Sheldon did not constitute a violation of the law.
Notably, the Court also held that Sheldon had failed to plead with particularity that KHN had submitted claims for payment under the alleged false certification. “At its most specific,” the Court explained, Sheldon’s “complaint allege[d] that KHN ‘falsely certified to the United States Government that it had complied with the HITECH Act to collect ‘Meaningful Use’ monies. . . .’ Nowhere, however, does the complaint allege a specific false claim for payment.” While the Court acknowledged that FCA jurisprudence allows a relator to allege his or her own first-hand knowledge of allegedly false claims, it observed that “cases applying a relaxed standard [under 9(b)] involved relators with ‘personal knowledge’ that was based either on working in the defendants’ billing departments, or on discussions with employees directly responsible for submitting claims to the government.” Sheldon, by contrast, never alleged that her marriage to a KHN employee or interactions with the company “gave her the sort of ‘personal knowledge’ found in cases applying a relaxed standard.” Thus, the Sixth Circuit affirmed the district court’s dismissal of the case.
Sheldon also filed a state tort action in Ohio court regarding the same incidents. The Sixth Circuit held that the dismissal of Sheldon’s state claim pre-empted her federal FCA claim, providing alternate grounds to affirm the district court’s dismissal of her case.
U.S. ex rel. Kelly v. Novartis Pharmaceuticals Corp. , 827 F.3d 5 (1st Cir. June 17, 2016)
In Kelly, the First Circuit affirmed dismissal of relators’ complaints for failure to plead fraud with sufficient specificity because relators’ allegations relied on insinuation and gave rise only to speculation of false claims submitted, rather than facts and evidence supporting the inference of fraud.
Relators Frank Garcia and Allison Kelly, sales representatives for Genentech and Novartis, respectively, alleged that their employers “illegally promoted Xolair for off-label uses, paid kickbacks to doctors, encouraged sales representatives to improperly complete and influence the completion of Statement of Medical Necessity (‘SMN’) forms, and targeted Disproportionate Share Hospitals.” The district court dismissed the complaints, for, among other things, failure to plead fraud with the specificity required by Federal Rule of Civil Procedure 9(b).
On appeal, the First Circuit emphasized the following guideposts for pleading fraud with particularity in an FCA context: (1) pleading facts that merely suggest the possibility of fraud—such as, for example, that a scheme was wide-ranging and thus false claims must have been submitted—is insufficient, and (2) illegal conduct, without more, does not create a valid fraud claim. Garcia and Kelly alleged that their employers incentivized various doctors who were enrolled in federal reimbursement programs to prescribe Xolair. But Garcia and Kelly did not “tie these independently unexceptional allegations together into particularized charges about specific fraudulent claims for payment.” Thus, the allegations were insufficient to pass Rule 9(b) muster.
U.S. ex rel. Driscoll v. Todd Spencer M.D. Medical Group, Inc. , No. 13-17624, 2016 WL 4191896 (9th Cir. Aug. 9, 2016)
In Driscoll, the Ninth Circuit reversed the dismissal of relator Driscoll’s complaint, holding that because certain of his claims were pled with the particularity required by Rule 9(b), he should be permitted to amend his complaint to address its deficiencies and narrow its scope.
Relator Driscoll alleged that defendants (1) conducted unnecessary CT scans and (2) “‘unbundled’ procedures in order to increase billings artificially.” Driscoll provided detailed examples of the alleged misconduct, including dates and accounts of misconduct that he personally observed. Accordingly, the Court reasoned that the allegations were not based on speculation, but were “sufficiently specific” to allow defendants to answer them and state a defense.
United States v. United Healthcare Insurance Co., et al. , 832 F.3d 1084 (9th Cir. Aug. 10, 2016) amended at No. 13-56746, 2016 WL 7378731 (9th Cir. Dec. 16, 2016)
In United Healthcare Insurance, relator Swoben alleged that various Medicare Advantage organizations and a physician group submitted false certifications of the accuracy of patient diagnosis codes in order to increase Medicare payments based on patient risk profiles. Specifically, Swoben alleged that defendants structured a retrospective review of medical records that “identif[ied] and report[ed] only under-reported diagnosis codes . . . not over-reported codes.” In other words, defendants allegedly crafted a review of medical records that “deliberately . . . avoid[ed]” the identification of improperly submitted diagnosis codes.
The Ninth Circuit held that Swoben’s allegations satisfied Rule 9(b) because they alleged “the who, what, when, where, and how of the misconduct charged.” Specifically, Swoben provided the dates of the retrospective reviews, the type of software used for the reviews, and the dates the defendants used the reviews to report results to CMS. Despite Swoben’s failure to “describe any specific instances of falsity,” the Court held that Swoben had alleged “particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted.” The Court also held that Swoben’s failure to differentiate between defendants and allege separate allegations for each did not contravene Rule 9(b): “There is no flaw in a pleading, . . . where, as here, collective allegations are used to describe the actions of multiple defendants who are alleged to have engaged in precisely the same conduct.”
U.S. ex rel. Hanna v. City of Chicago , 834 F.3d 775 (7th Cir. Aug. 22, 2016)
In Hanna, the Seventh Circuit affirmed the district court’s decision to grant defendant City of Chicago’s motion for summary judgment after concluding that relator Hanna had failed to allege the circumstances of the purported fraud with sufficient particularity as required under Federal Rule of Civil Procedure 9(b).
Hanna alleged that the City of Chicago violated the FCA because it falsely certified compliance with civil rights obligations in order to receive federal funding. Ultimately, the Court concluded Hanna failed to specify which statutes or regulations the City of Chicago violated or plead any alleged link between those statutes or regulations and any specific alleged false certification. Further, he failed to allege when the alleged violations occurred, how he learned of them, which documents evidenced the violations, or anything indicating how he had insider knowledge of the alleged fraud. Despite Hanna’s arguments to the contrary, the Court held that the 9(b) pleading requirement must be satisfied in the complaint, not via subsequent affidavits or briefs.
U.S. ex rel. Presser v. Acacia Mental Health Clinic, LLC , 836 F.3d 770 (7th Cir. Sept. 1, 2016)
In Presser, the Seventh Circuit clarified that, to meet the heightened pleading standard of Rule 9(b), an FCA plaintiff must not only describe the alleged conduct giving rise to the fraud claim, but sufficient context for a reader to understand why that conduct violates the law. In the case, Rose Presser, a nurse practitioner at Acacia Mental Health Clinic (Acacia), filed a qui tam action against Acacia under the FCA and its Wisconsin state equivalent on several grounds. Presser alleged that Acacia upcoded certain services in its claims for Medicare payment, using CPT codes that indicated services had been performed by a physician when they were in fact performed by lower-level practitioners. Presser also alleged that Acacia maintained several policies to enable it to provide and bill for medically unnecessary services; for example, Acacia required patients to see four different practitioners before providing medication and required patients undergo a urine drug screening at every visit.
The district court held that Presser had not stated her claims with particularity under Rule 9(b) and granted Acacia’s motion to dismiss on all counts. On appeal, the Seventh Circuit distinguished between Presser’s claims that Acacia upcoded services—for which the Court found she had provided a clear explanation of why the relevant code did not reflect the medical care provided—and her claims that Acacia provided medically unnecessary services in violation of Medicare laws. The Court noted that Presser “provide[d] no medical, technical, or scientific context which would enable a reader of the complaint to understand why Acacia’s alleged actions amount to unnecessary care forbidden by statute.” The Court explained that, without context, Presser’s allegations were too vague to state a claim. This was particularly so because the allegations were based entirely on Presser’s own estimation of medical necessity—an estimation she had “not supported in any concrete manner.” The Court concluded that such concrete support was necessary to meet the heightened standard for pleading with particularity in fraud actions. Accordingly, the Court reversed the district court’s dismissal of Presser’s claim regarding upcoding and affirmed its dismissal of the claims regarding unnecessary medical services.
U.S. ex rel. Prather v. Brookdale Senior Living Communities, Inc. , 838 F.3d 750 (6th Cir. Sept. 30, 2016)
In Prather, the Sixth Circuit found that the relator, a utilization review nurse handling internal Medicare claims documentation, had sufficient “personal knowledge” of the alleged false claims activities to plead with particularity under Rule 9(b). Brookdale Senior Living Communities (Brookdale) hired Marjorie Prather as part of a company-wide effort to finalize and submit a backlog of thousands of Medicare claims for payment. As she would later allege in her complaint, Prather discovered that Brookdale instructed, and even paid, its physicians to complete required certifications months after the relevant care had been rendered—and long after Medicare’s required “as soon as possible” timeline. Prather surmised that Brookdale had been providing home health services without enlisting a physician’s aid and then found physicians willing to validate the care after the fact.
Prather filed an FCA action against Brookdale, alleging that the claims Brookdale presented to the government did not comply with Medicare physician-certification and physician face-to-face documentation requirements. The district court dismissed Prather’s claim on the grounds that 1) her allegations did not state a claim for legal falsity under the FCA and 2) that she had not articulated her claims with sufficient particularity. Regarding the former, the district court found that the Medicare regulation’s requirement that a physician certify a plan of care “as soon as possible” after its completion was too murky to serve as grounds for a false certification claim. Regarding the latter, the district court found that Prather had failed to allege with particularity the submission of a specific request for payment to the government.
The Sixth Circuit disagreed on both counts. First, the Court noted that while Medicare’s “as soon as possible” deadline for physician certifications was not concrete, its meaning was clear, and Brookdale’s failure to provide any justification for the months-delayed certifications rendered the associated claims for final payment impliedly false. Second, the Court explained that, while Prather did not identify specific claims for payment, she had alleged significant detail regarding the fraudulent scheme. For example, she provided specific accounts of the nursing care and delayed certification timelines for four patients whose documentation she had reviewed. Moreover, the Court noted, Prather possessed extensive personal knowledge of the alleged scheme from her role as a utilization review nurse. Thus, Prather’s role in reviewing and submitting the same documentation she alleged had been falsified satisfied the relaxed Rule 9(b) standard applicable where “even though a relator is unable to produce an actual billing or invoice, he or she has pled facts which support a strong inference that a claim was submitted.” The Sixth Circuit thus reversed the dismissal of Prather’s false certification claims.
United States v. Quicken Loans, Inc. , No. 15-613, 2016 WL 6838186 (D.D.C. Nov. 14, 2016, revised Nov. 18, 2016)
In Quicken Loans, the U.S. District Court for the District of Columbia held that transfer from the District of Columbia to the Eastern District of Michigan was warranted for the government’s FCA case against Quicken for allegedly falsely certifying compliance with the Fair Housing Act (FHA) in approving loans.
In April 2012, the government initiated an investigation into Quicken’s origination and underwriting of single family residential mortgages issued by the FHA. After negotiations broke down, the government informed Quicken that it intended to file suit by mid-April 2015. Quicken preempted the government’s suit and, less than a week before the government filed its complaint, initiated an Administrative Procedure Act (APA) claim against the government in the Eastern District of Michigan. Quicken’s APA claim was dismissed with prejudice a few months later.
Quicken later filed a motion to transfer the FCA case from the District of Columbia to the Eastern District of Michigan. The Court concluded that although the party moving for a transfer bears a heavy burden of establishing that the plaintiff’s choice of forum is inappropriate because “the plaintiff’s choice of forum is entitled to substantial deference,” the government had little interest in litigating the case in the District. The Court diminished the government’s argument that it chose to file in the District due to the “intimate involvement of FHA and HUD” employees who received and processed Quicken’s FHA certifications, holding that the location where the claims arose outweighed the government’s choice of forum and favored transfer of venue. The Court likewise overruled the government’s argument that Quicken engaged in improper forum shopping by filing its preemptive action, rejecting the idea that Quicken’s failed APA suit should weigh against transfer. The Court emphasized that Quicken is incorporated and headquartered in Michigan, and the underwriting of the loans in question and alleged false certifications occurred in Michigan. In balancing the other factors, the Court determined that the relative congestion of the federal courts weighed slightly against transfer, but stronger local interests favored transfer of venue to the Eastern District of Michigan. Accordingly, the Court granted Quicken’s motion to transfer.
Elkharwily v. Mayo Holding Co. , 823 F.3d 462 (8th Cir. May 20, 2016)
In Elkharwily, the Eighth Circuit held that, to successfully assert a retaliation claim under the FCA, a plaintiff must establish that the alleged retaliatory act was pretext for retaliation or that it was motivated solely by a plaintiff engaging in a protected activity ( e.g., reports of FCA violations).
A physician, Dr. Elkharwily, brought action against a hospital (Mayo) and certain members of its staff for wrongful employment termination and retaliation. He claimed that the alleged retaliation was motivated, at least in part, by his reports of fraudulently billing patients for unlicensed care in violation of the FCA. However, Mayo presented extensive proof regarding Dr. Elkharwily’s poor performance and detailed the staff’s concerns in his performance evaluation in support of its termination decision.
The Court affirmed the district court’s grant of Mayo’s motion for summary judgment and dismissed Dr. Elkharwily’s claims, finding that “Mayo articulated a legitimate, nondiscriminatory reason for terminating [his] employment; namely, his poor job performance.” The Court further stated that “[n]othing in the record suggests pretext or retaliatory motive,” and “Dr. Elkharwily failed to meet his burden of establishing pretext.”
Carlson v. Dyncorp International LLC, No. 14-1281, 2016 WL 4434415 (4th Cir. Aug. 22, 2016)
In Carlson, the Fourth Circuit held that a contractor who knowingly submits a false claim to the government does not violate the FCA unless it results in an overcharge to the government. Scott Carlson, a former employee of Dyncorp International, brought suit against Dyncorp, alleging that he had been fired in retaliation for reporting what he believed to be fraudulent billing practices. Carlson claimed that Dyncorp had repeatedly underbilled the government by understating its indirect costs associated with the government contracts, and that he was fired for his attempt to stop Dyncorp from continuing with these practices.
The FCA retaliatory provision protects two kinds of employee activity: (1) activity which supports an FCA action against the employer alleging a fraud on the government; and (2) activity which is part of an effort to stop an FCA violation. Carlson argued that in questioning Dyncorp’s accounting and billing practices, he was attempting to stop Dyncorp from violating the FCA, and his termination was in retaliation for this protected activity. The Fourth Circuit found that the FCA protected efforts to stop FCA violations “where those efforts are motivated by an objectively reasonable belief that the employee’s employer is violating, or soon will violate the FCA.” Despite this conclusion, the Court held that Carlson failed to show that his belief that Dyncorp was violating the FCA was objectively reasonable. Carlson claimed that Dyncorp had been underbilling the government, yet a claim does not violate the FCA unless it would result in financial loss to the government. Thus, because Carlson could not demonstrate that there was even a plausible claim that what he observed was part of an FCA violation, his belief that Dyncorp was violating the FCA was unreasonable, and his whistleblowing activity was not protected under the FCA retaliation provision.
U.S. ex rel. Uhlig v. Fluor Corp. , 839 F.3d 628 (7th Cir. Oct. 11, 2016)
In Uhlig, the relator made two allegations against defendant Fluor Corporation. First, he alleged that Fluor violated the FCA by knowingly employing unlicensed electricians in breach of its contract with the U.S. Army and submitted invoices to the government for payment. The Seventh Circuit determined that the relevant licensing requirement was self-imposed by Fluor, and was not a requirement for payment under Fluor’s contract with the Army, thus there could be no false statement under the FCA. The Court affirmed the district court’s grant of summary judgment in favor of Fluor on this claim.
Uhlig’s second claim alleged he was unlawfully discharged in retaliation for engaging in protected conduct under the FCA. To successfully bring a retaliation claim, the former employee must prove he was in fact engaged in protected activity, and he must do this by showing he had a subjective good faith belief as well as a reasonable objective belief that his employer was defrauding the government. Here, Uhlig failed to show that a reasonable employee in his position would have believed Fluor was defrauding the government at the time he brought his allegations to the government’s attention. In other words, when Uhlig attempted to blow the whistle on Fluor, he had not read the contract between Fluor and the Army, he had no other firsthand knowledge of a supposed licensing requirement, and he had no way to establish such a requirement otherwise existed. Uhlig failed to show how a similarly situated employee would reasonably believe Fluor was defrauding the government, and ultimately the Seventh Circuit affirmed the district court’s dismissal of this claim.
U.S. ex rel. Willette v. University of Massachusetts, Worcester , 812 F.3d 35 (1st Cir. Jan. 27, 2016)
In United States ex rel. Willette v. University of Massachusetts, Worcester , Michael Willette brought an FCA suit against the University of Massachusetts Medical School (the “Medical School”), alleging that it had retaliated against him after he notified his superiors of fraud committed by his former boss. The Medical School moved to dismiss the FCA claim, arguing that it was protected from such a claim as an arm of the State of Massachusetts under Vermont Agency of Natural Resources v. United States ex rel. Stevens , 529 U.S. 765, 787-88 (2000), and the district court granted the motion.
On appeal, the United States Court of Appeals for the First Circuit affirmed. Joining with every other court of appeals that had encountered the question, the Court held that because the Medical School was a state entity for the purposes of Eleventh Amendment immunity, it was not a “person” who could be liable under the FCA.
Willette has petitioned the United States Supreme Court for a writ of certiorari, and the Supreme Court requested that the Medical School file a response. The Supreme Court is expected to rule soon as to whether it will accept review of the case.
In 2016, we began to see the ramifications of the DOJ’s increasing focus on prosecuting individual employees alongside corporations for corporate wrongdoing, announced in the memo by Deputy Attorney General Sally Quillian Yates on September 9, 2015. Over the course of the year, individual executives took part in large settlements involving both North American Health Care, Inc. and Life Care Centers of America Inc. In addition, the former CEO Tuomey Healthcare System entered into a settlement and four year exclusion from participation in federal healthcare programs.
Deputy Attorney General Yates stated on November 30, 2016 that she expects “in coming months and years, when companies enter into high-dollar resolutions with the Justice Department, you’ll see a higher percentage of those cases accompanied by criminal or civil actions against the responsible individuals.” Yates also noted that she does not expect this new policy directive to be affected by the change in political administration.
As we reported in our 2015 year-in-review, the Fourth Circuit is expected to rule in U.S. ex rel. Michaels et al. v. Agape Senior Community, Inc., which may (or may not) be the first federal appeals opinion to address the use of sampling and extrapolation in FCA cases. In Michaels, former employees of nursing home operator Agape brought an FCA suit against their employer alleging widespread Medicare fraud for hospice care and general inpatient services, allegedly impacting between 53,000 and 61,000 claims. The government elected not to intervene in the suit. After briefing and argument on the issue of using statistical sampling and extrapolation, the District of South Carolina ruled that it would not allow the relator to use statistical sampling to prove liability and damages. The parties then reached an agreement to settle the case for $2.5 million, which the government rejected based upon its independent assessment by statistical sampling and extrapolation that the case was worth $25 million. The District Court reviewed the case law on extrapolation and found that the current case was not one suited for statistical sampling because of the fact-intensive inquiries required for each patient to determine whether care was medically necessary. As the relator’s pre-trial expenses without sampling would amount to between $16.2 million and $36.5 million, possibly exceeding the government’s assessed value of the case, the district court certified two issues for interlocutory appeal to the Fourth Circuit: (1) the government's right to reject a settlement in an FCA action in which it has not intervened, and (2) the use of statistical sampling to prove liability and damages. This could be the first court of appeals opinion to address whether the use of statistical sampling and extrapolation is permissible to prove elements of liability under the FCA, but based upon the questioning at oral argument on October 26, 2016, it seems unlikely that the Court will rule on the sampling/extrapolation question.
A New Administration
In general, the FCA does not tend to be a political issue. Enforcement and recoveries have increased over the past few decades without regard to which party is in power at any particular time. With a new political administration stepping in and Jeff Sessions nominated for Attorney General, it will be interesting to see whether this trend continues and what changes, if any, are made to DOJ enforcement policy.