The First Circuit recently reinstated part of a False Claims Act complaint against a drug-testing laboratory, and in so doing, may have limited the reach of the FCA’s public disclosure bar. In U.S. ex rel. Cunningham v. Millennium Labs. of Cal., Inc., 2013 WL 1490435 (1st Cir. April 12, 2013), the First Circuit held that the district court erred in dismissing the entire FCA complaint merely because the action was based in part on prior public disclosures. The lower court should have instead analyzed each factual allegation and dismissed only those claims arising out of the public disclosures. This decision potentially creates a conflict with other circuit authority holding that an FCA action even “partly based upon” public disclosures is jurisdictionally barred.
The FCA complaint in this case alleged three distinct theories of fraudulent billing practices: (1) overbilling for tests run; (2) performing more tests than medically necessary; and (3) performing unnecessary confirmation testing after the fact. The defendant laboratory moved to dismiss the complaint under the FCA’s public disclosure defense, which bars actions “based upon the public disclosure of allegations or transactions,” unless the plaintiff qualifies as an “original source.” See 31 U.S.C. § 3730(e)(4)(A) (2006). The laboratory claimed that these allegations had previously been disclosed in another lawsuit. The district court agreed and dismissed the entire complaint with prejudice under the public disclosure bar.
The First Circuit affirmed in part and reversed in part. The court agreed that the first and third theories were disclosed in the prior litigation, and thus affirmed dismissal as to these claims. However, the court held the previous litigation did not disclose the allegations related to the second theory. The court therefore vacated dismissal of that claim because the factual allegations underlying the second theory were not subject to the public disclosure bar.
The First Circuit’s holding could limit the scope of the FCA’s public disclosure bar. It also arguably creates a conflict with other circuit authority holding that an FCA action “even partly based upon public allegations or transactions is nonetheless ‘based upon’ such allegations or transactions.” See Fed. Recovery Servs., Inc. v. Crescent City E.M.S., 72 F.3d 447, 451 (5th Cir. 1995) (quoting United States ex rel. Precision Co. v. Koch Indus., Inc., 971 F.2d 548, 552 (10th Cir. 1992)). Companies raising a public disclosure defense should therefore be aware of this developing circuit split.