On Aug. 20, 2014, the Seventh Circuit struck another blow against relators’ and the federal government’s increasingly aggressive False Claims Act theories of liability. Rejecting the relators’ use of the “worthless services” theory, the court in United States ex rel. Absher v. Momence Meadows Nursing Center Inc., Nos. 13-1886 & 13-1936 (7th Cir. Aug. 20, 2014) overturned a $9 million jury verdict and cast doubt on the efforts to pursue similar cases in which a business allegedly provides services of diminished, but still some, value.

Background

Momence Meadows Nursing Center was a 140-bed nursing home facility based in Illinois. It served almost exclusively Medicare and Medicaid patients and received reimbursement on a flat per diem for each resident. To receive that reimbursement, Momence had to provide certain billing and care-assessment data for each patient, certifying its truthfulness and accuracy.

In 2004, the relators, both former nurses of the facility, filed a qui tam (or whistleblower) complaint alleging that Momence defrauded the government by providing substandard services to the patients under defendants’ care while seeking reimbursement for patient care of higher value. While still under seal, the complaint was amended multiple times through 2009. Eventually, the government declined to intervene and the district court unsealed the complaint.

Relators elected to press forward with the case, and it later proceeded to trial. At trial, relators presented evidence of a host of shortcomings and noncompliance at Momence relating to infection control, cleanliness, food and water temperature, administration, patient care and other issues. The jury ultimately ruled for relators, finding over 1,700 false claims and awarding compensatory damages over $3 million and fines of over $19 million. The district court entered judgment for the relators, which — after trebling the damages — resulted in an award of over $9 million. The court separately vacated the fines imposed by the jury based on the Eighth Amendment’s excessive fines clause.

Worthless Services Theory

On appeal, Momence advanced several arguments, most notably challenging the district court’s jury instructions based on relators’ worthless services theory of FCA liability. The relators filed a cross appeal challenging the vacating of the statutory penalties. Although the government had not intervened in the case, it filed an amicus curiae brief in support of the relators’ cross appeal.

The worthless services theory — adopted by the Second, Eighth and Ninth Circuits — allows a qui tam relator to bring claims for violations of the FCA premised on the theory that the defendant received reimbursement for products or services that were worthless. Unlike express or implied certification theories, which construe claims as “legally false” because they are predicated on a false certification of compliance with a statute or regulation, worthless services theory derives from allegedly “factually false” claims, that is, the service was so lacking it was effectively no service at all. See, e.g. Mikes v. Straus, 274 F.3d 687 (2d Cir. 2001).

In Absher, the district court had instructed the jury that “[s]ervices can be worthless, and the claims for those services can, for that reason be false, even if the nursing facility in fact provided some services to the patient. To find the services worthless, you do not need to find that the patient received no services at all.” The district court further told the jury that, “if Uncle Sam paid Momence 200 bucks and they only got $120 worth of value, [then] Momence defrauded them of $80 worth of services.”

On appeal, the Seventh Circuit rejected the district court’s instruction. In doing so, the court acknowledged that several circuits had adopted the worthless services theory. But, the court noted, for the theory to apply, the “performance of the service [must be] so deficient that for all practical purposes it is the equivalent of no performance at all.” Absher at 18 (quoting Mikes v. 274 F.3d at 703). Further, “[i]t is not enough to offer evidence that the defendant provided services that are worth some amount less than the services paid for. That is, a ‘diminished value’ of services theory does not satisfy this standard.” Id. The court concluded that, simply put, “services that are ‘worth less’ are not ‘worthless.’” Id.

Turning to the legal viability of a worthless services theory, the court noted that, while truly worthless services could be evidence that a claim was false under a false-certification theory, the Seventh Circuit had never adopted worthless services as a separate theory of liability under the FCA. It declined to do so in Absher, finding that there was no need to reach that legal question since relators offered no evidence showing that Momence’s services were “truly or effectively ‘worthless.’”

False Certification

Although the court’s analysis of the worthless services theory has received most attention, it also addressed the relators’ false-certification theory. Under a false-certification theory, the relators had to prove that Momence certified — either impliedly or expressly — that it had complied with statutes or regulations that were conditions or prerequisites to government payment and knowingly failed to comply with those conditions. The Seventh Circuit rejected both relators’ implied-certification claim and their express-certification claims.

First, relators contended that Momence impliedly certified that it was in compliance with Medicare and Medicaid regulations by accepting the per diem payments when it was actually violating those regulations. Without addressing whether an implied-certification theory was valid in the Seventh Circuit, the court found the issue waived on appeal because relators did not present this theory to the jury.

In dicta, the court did, however, cast doubt on the relators’ specific underlying theory. Relators had maintained that compliance with the regulations was a condition of payment because failure to comply could result in termination from Medicare and Medicaid, thereby resulting in no future payments. As the court noted, such a theory would make even a single regulatory violation a condition of “any and all” future payments received because the regulators “could terminate the facility for practically any deficiency.” Rejecting such a far-reaching theory, the court found that “[s]uch a result would be absurd.”

Second, relators contended that Momence made various express certifications in its plans of correction and MDS forms that gave rise to FCA liability. With respect to plans of correction, the court again found such an argument waived on appeal because it was never presented to the jury. With respect to the MDS forms, the court found that the relators had presented it to the jury, but that they had failed to show the type or quantity of false certifications with sufficient specificity.

It stated: “The problem is not simply that the relators failed to come forth with evidence that particular MDS forms contained false certification or evidence of precisely how many of the MDS forms contained false certifications. Rather, the relators have failed to offer evidence establishing that even a roughly approximate number of forms contained false certifications.” Id. Ultimately, the court found that while a “reasonable jury may be able to say that some of Momence’s claims were false,” that was not sufficient to satisfy relators’ burden of proof. Id.

After addressing the other issues on appeal and finding that realtors’ claims failed as a matter of law, the Seventh Circuit vacated the judgment for the relators and remanded to the district court with instructions to enter judgment for Momence. Because the relators’ claims failed, the court did not address relators’ cross appeal regarding the set aside of the $19 million in fines.

Other takeaways:

  • While evidence of diminished (not nonexistent) value may not satisfy a worthless services theory, diminished value still may pose FCA risks as evidence of a false certification (express or implied), depending on the certification at issue. For that reason, close attention to certifications in government contracts — and determination of what truly is a condition of payment versus a condition of participation — are critical.
  • The Seventh Circuit only addressed services. Worthless goods — as opposed to worthless services — may present greater susceptibility to a worthlessness argument. While unqualified or substandard services likely still have some value in most situations, a tangible good that is defective or nonconforming is more likely to be completely unusable. See, e.g., United States ex rel. Badr v. Triple Canopy Inc., 950 F. Supp. 2d 888 (E.D. Va. 2013).
  • For government contractors, health care providers and other entities that are regularly inspected, positive government inspections can be used as a strong defense against worthless services allegations. In Absher, the court found relators’ worthless services claim “absurd” given that it had been allowed to continue to operate despite regular visits by government surveyors.
  • Though not at issue in Absher, even in an otherwise viable worthless services or worthless goods claim, the government still must satisfy the pleading requirements of Fed. R. Civ. P. 9(b). Thus, even if the service was allegedly worthless, it must be plead with particularity as to the “who, what, when, where, or how” of the claim. See United States ex rel. Steury v. Cardinal Health Inc., 736 F.3d 202, 208 (5th Cir. 2013) (rejecting worthless goods claims because they failed to satisfy Rule 9(b)’s pleading requirement); United States ex rel. Lee v. SmithKline Beecham Inc., 245 F.3d 1048, 1053-54 (9th Cir. 2001) (same).

Takeaways

While the Absher decision leaves open the potential that a worthless services theory could give rise to FCA liability, the Seventh Circuit’s interpretation severely limits such liability to those cases in which a defendant effectively provided no service of value at all. In doing so, it joins the other circuits that have placed tight constraints on a potentially expansive theory. See, e.g., Mikes, 274 F.3d at 703; Chesbrough v. VPA, PC, 655 F.3d 461, 468-69 (6th Cir. 2011) (defendant must have sought reimbursement for services “not just of poor quality” but of “no medical value” for plaintiffs to sustain worthless services allegations); United States ex rel. Roop v. Hypoguard USA Inc., 559 F.3d 818, 824 (8th Cir. 2009) (allegations that products caused adverse consequences when misused was insufficient to support worthless services claim).

Republished with permission from Law360 (2014). This article first appeared in Law360 on September 10, 2014.