The First Circuit Court of Appeals in Boston recently reversed the dismissal of a whistleblower's claims brought under the federal False Claims Act (FCA) against a medical device manufacturer. U.S. ex rel. Hutcheson v. Blackstone Medical, Inc. (June 1, 2011) (http://tinyurl.com/3mzvf4y). Rather than merely reversing the trial court — which had granted the defendant's motion to dismiss all claims — the First Circuit ruled broadly, rejecting the analytical framework that many federal courts have developed to decide FCA cases. Following this ruling, whistleblowers may find it easier to assert FCA claims in the First Circuit. The ruling also may invite Supreme Court review to definitively resolve analytical differences among the circuits. Providers may, however, take preventative steps to minimize their exposure to Blackstone-like FCA claims.
The False Claims Act
The FCA — a preferred civil enforcement tool of the federal government — permits the government to recover treble damages and large penalties when it is defrauded. As a general matter, the FCA is violated when a defendant knowingly submits to the government, or causes someone else to submit, a false claim for payment. The FCA allows a private whistleblower (called a "relator") who has direct knowledge of alleged fraud to sue in the government's name, and — if successful — to recover a significant percentage of the government's damages. The FCA has been recently amended to expand its reach and scope, and is increasingly employed to combat alleged fraud in the health care industry.
The Federal Anti-Kickback Statute
The Anti-Kickback Statute (AKS) prohibits the payment and receipt of anything of value (a "kickback") in return for either procuring or recommending the procurement of a good, facility, or item to be paid in whole or in part by a federal health care program. The AKS was amended in 2010 by the health care reform Patient Protection and Affordable Care Act (PPACA) to provide that any submitted claim that resulted from a violation of the AKS could be considered false or fraudulent under the FCA. With this change, claims may well be considered "false" even when submitted by innocent third parties — such as hospitals or physicians — who had no knowledge there was a taint of an alleged kickback somewhere in the underlying transaction.
The Blackstone Case
The relator in Blackstone was a former regional manager who claimed to have observed business practices at Blackstone that violated the AKS, including the payment of cash and other benefits to surgeons to induce them to use Blackstone's devices in certain spinal surgeries. Because hospitals and physicians then submitted claims for payment to Medicare, the relator alleged that Blackstone had caused false claims to be submitted, and had violated the FCA.
The trial court in Boston dismissed all of relator's claims. The case presented the question of whether Blackstone could have violated the FCA when the only claims submitted to the government were by hospitals who did not certify the underlying transactions were free of AKS violations or by physicians who only billed for their own services — and not for the medical devices at all. The trial court ruled for a number of reasons that Blackstone could not have violated the FCA. In reaching its decision, the trial court utilized a legal framework also adopted by numerous other federal appeals courts, as well as other federal trial courts in Boston, including that if the provider itself did not submit a certification (or a claim based on a prior certification), it could not be false. (Because the case began before PPACA's passage, the amendment to the AKS noted above was not applied retroactively.)
The First Circuit's Opinion
On appeal, the First Circuit took the opportunity to issue a lengthy and detailed opinion in which it explicitly rejected much of the accepted analytical framework employed by the trial court by and other circuit courts for consideration of FCA claims. See e.g., U.S. ex rel. Kirk v. Schindler Elevator Corp., 601 F.3d 92 (2d Cir. 2010); U.S. ex rel. Lemmon v. Envirocare of Utah, Inc., 614 F.3d 1163 (10th Cir. 2010).
As a threshold matter, the First Circuit rejected what it termed "the judicially created conceptual framework employed by the [trial] court," and refused to "adopt any categorical rules as to what counts as a materially false or fraudulent claim under the FCA." The Court further explained, "Courts have created these categories in an effort to clarify how different behaviors can give rise to a false or fraudulent claim. Judicially-created categories sometimes can help carry out a statute's requirements, but they can also create artificial barriers that obscure and distort those requirements. The text of the FCA does not refer to ‘factually false' or ‘legally false' claims, nor does it refer to ‘express certification' or ‘implied certification.' Indeed it does not refer to ‘certification' at all. … In light of this, and our view that these categories may do more to obscure than clarify the issues before us, we do not employ them here." In making these statements, the appellate court refused to follow recognized and accepted paradigms for determining when a claim is "false."
The Appeals Court then took a much broader view of whether the hospitals and physicians had made a specific representation that there was no underlying AKS violation, and reversed the dismissal. In essence, the Court ruled it would not be bound by what it termed "formalistic" readings of certifications, and that vaguer contractual references to the AKS could make a claim false. The case now returns to the district court for what could be extensive fact discovery and further proceedings to determine, among other things, whether by submitting a claim, a provider also is certifying it has not been procured as a result of an AKS violation.
Taken as a whole, the First Circuit's opinion suggests an analytical approach that is considerably friendlier to relators and the government, and less so to defendants. Defendants will often assert a preliminary defense early in an FCA case that a claim is not "false" because it does not conflict with a statutory or regulatory requirement, or a defendant's specific certification. This opinion suggests that it will be more difficult to prevail on such early, pre-discovery arguments. Rather than focus on falsity, the Court suggests the proper way for defendants to limit meritless suits is to prove that any alleged violation did not affect the government's decision to pay the claim (was not "material") or that the defendant did not act "knowingly" — both of which are fact-based determinations that typically can be made only at a later stage of litigation.
Statutory changes to the FCA and AKS — along with dramatically increased whistleblower and prosecutorial activity — indicate the number and frequency of FCA claims will continue to increase. If the Blackstone opinion results in a broader First Circuit approach to FCA liability, it will be more difficult to defeat claims at an early stage of the litigation.
While it appears likely that the proper standard for reviewing FCA claims will not be known until the Supreme Court addresses this circuit split, providers can still take actions to minimize liability. The Blackstone opinion, together with the PPACA amendment, demonstrate the increasing need to implement robust internal compliance programs that are adopted and embraced by individuals in management positions. Moreover, providers should be proactive in investigating potential issues as they arise; an ounce of prevention really is worth a pound of cure. If and when FCA litigation arises, providers should quickly and aggressively investigate the allegations, and proactively implement remedial actions. It is important that any provider be able to demonstrate to the government that there is no basis for a claim, or that submitted claims were not directly tainted by any AKS violation. Finally, in the event of litigation, it is critical that in making arguments to dismiss FCA claims, providers and their counsel be aggressive, and also tailor their arguments to respond to the appropriate Circuit Court's analysis.