A highly contentious topic in False Claims Act litigation is the application of the pleading standard in Rule 9(b) of the Federal Rules of Civil Procedure to qui tam complaints. Rule 9(b) provides:
In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person’s mind may be alleged generally.
Relators’ counsel argued for many years that this pleading requirement did not apply to False Claims Act cases, but that argument has been thoroughly discredited in every circuit. See John T. Boese, Civil False Claims and Qui Tam Actions § 5.04 (3d ed. 2006 & Supp. 2009-2). Failing to eliminate the requirement to comply with Rule 9(b) in qui tam cases in court, relators’ lobbyists have strongly pressed Congress to eliminate Rule 9(b)’s pleading requirements in qui tam cases on the grounds that some courts have applied the rule inflexibly to dismiss properly-pleaded FCA complaints. See H.R. 1788, §4(e), 111th Cong. (2009); H.R. 4854, §4, 110th Cong. (2007).
Two recent circuit court decisions have interpreted Rule 9(b)’s specificity requirements in a manner that provides some flexibility for plaintiffs pleading fraud in certain types of FCA cases. See United States ex rel. Duxbury v. Ortho Biotech Prods., No. 08-1409, 2009 WL 2450716 (1st Cir. Aug. 12, 2009); United States ex rel. Grubbs v. Kanneganti, 565 F.3d 180 (5th Cir. 2009). These recent decisions are important because they provide concrete examples of circumstances in which a flexible approach to FCA complaints has been applied under Rule 9(b). They are also important now as Congress decides whether to take up a pending proposal that would change the pleading requirements in FCA cases. The Duxbury and Grubbs decisions demonstrate that legislative change is unnecessary because courts already do apply Rule 9(b) flexibly when the relator’s allegations provide a strong inference that false claims were submitted to the government.
The First Circuit Decision in Duxbury. In Duxbury, the First Circuit held that the district court erred by interpreting Rule 9(b) too strictly by mandating that relators provide “details that identify particular false claims for payment that were submitted to the government.” 2009 WL 2450716, at *14 (emphasis in original). The First Circuit acknowledged that the complaint did not allege that the defendant drug company itself submitted false claims to the government. Rather, it alleged that providers who accepted the defendant’s free samples under various false pretenses submitted false claims for reimbursement to Medicare. The court noted that a similar scheme was alleged in United States ex rel. Rost v. Pfizer, Inc., 507 F.3d 720 (1st Cir. 2007), but in that case the allegations were dismissed because they merely suggested that fraud was possible. Although the Duxbury complaint did not identify specific claims submitted to Medicare, it alleged that false claims were submitted under a scheme involving eight providers, and it provided details about the illegal kickbacks as to each provider, including amounts, time periods, and locations. The court found that these specific allegations about the who, what, where, and when of the fraudulent scheme, under the facts of that case, warranted a strong inference – for pleading purposes – that false claims were submitted. Accordingly, the court held that the complaint satisfied Rule 9(b) under the “more flexible standard” that applied in these circumstances.
The Fifth Circuit Decision in Grubbs. In Grubbs, the Fifth Circuit observed that the FCA does not require proof of all elements that must be proved in a common law fraud action, and it noted that a person who submits false claims to the government could be liable under the FCA even though the claims were never paid. It also found that Rule 9(b) did not require the level of detail that would be required to prevail at trial, and noted that the particular circumstances of the fraud may often be in the scheme:
A hand in the cookie jar does not itself amount to fraud separate from the fib that the treat has been earned when in fact the chores remain undone. Standing alone, raw bills--even with numbers, dates, and amounts--are not fraud without an underlying scheme to submit the bills for unperformed or unnecessary work. It is the scheme in which particular circumstances constituting fraud may be found that make it highly likely the fraud was consummated through the presentment of false bills.
565 F.3d at 190. The court concluded that Rule 9(b)’s time, place, contents, and identity requirements are not “a straitjacket.” Rather, the rule is “context specific and flexible.” The Fifth Circuit held that, if the relator cannot plead specific details of a false claim that was actually submitted to the government, the complaint may still pass muster under Rule 9(b) if it alleges “particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted.” Id.
With regard to the false records allegedly submitted by the doctor defendants to the hospital in Grubbs, the court found that the complaint set forth the particulars of the doctors’ scheme that had been communicated directly to the relator, including the dates that falsely claimed services were provided, and other evidence of false billing. Taking these allegations as true, the court ruled that the only logical conclusion to be drawn was that the hospital submitted fraudulent bills based on the doctors’ false records to the government. The court did not find it necessary for the relator to plead direct evidence, such as invoice numbers and dollar amounts, of the fraudulent bills submitted in these circumstances.
Together, these recent decisions show that courts are able to distinguish between generalized allegations of FCA fraud that cannot withstand Rule 9(b) scrutiny and situations in which the relator has sufficiently alleged the specifics of a fraudulent scheme such that there is a strong inference that false claims for payment were submitted to the government as a result of that scheme. In those instances in which a fraudulent scheme has been adequately alleged under Rule 9(b), defendants will still be able to assert, as appropriate, that no “false claims” inference should be drawn or that such an inference is too speculative or remote to allow the case to proceed, and courts will have to decide whether the inference is appropriate. Importantly, nothing in these decisions eases the application of Rule 9(b) to the alleged underlying scheme. The flexibility applied by these courts focuses on those instances in which that adequately pled scheme gives rise to a strong inference that false claims were submitted, but omits the specifics of the actual claims for payment.
H.R. 1788 and the FERA
While Congress did not address Rule 9(b)’s pleading requirements in the FCA amendments that were enacted in the Fraud Enforcement and Recovery Act of 2009 (“ FERA”), there have been a number of recent proposals that would change the pleading standard in FCA cases. See, e.g., H.R. 4854, 110th Cong. (2007); H.R. 1788, 111th Cong. (2009). The language proposed in section 4(e) of H.R. 1788 provides:
a person shall not be required to identify specific claims that result from an alleged course of misconduct if the facts in the alleged complaint, if ultimately proven true, would provide a reasonable indication that one or more violations of section 3729 are likely to have occurred, and if the allegations in the pleading provide adequate notice of the specific nature of the alleged misconduct to permit the Government effectively to investigate and defendants fairly to defend the allegations made.
The requirement that the complaint must merely provide “a reasonable indication that one or more violations of section 3729 are likely to have occurred” is, at best, imprecise, and at worst, could be interpreted as such a low standard as to be nonexistent. Enacting this new standard would strip the rule’s pleading requirements of its important “gatekeeper” role of blocking relators with meritless and speculative fraud claims from discovery and putting defendants on notice of the allegations against them. In view of the First and Fifth Circuits’ decisions allowing flexibility under Rule 9(b), it is clear that federal judges can be trusted to apply Rule 9(b) in a way that prevents suits based on speculation and supposition, yet allows qui tam suits based on well-pleaded facts about the false claims at issue to proceed.