1. Background

On June 6, 2014, in Foglia v. Renal Ventures Management, LLC the Third Circuit revived a dismissed False Claims Act (“FCA”) lawsuit, holding that the New Jersey District Court applied Federal Rule of Civil Procedure 9(b) too rigorously when granting Renal’s 12(b)(6) motion to dismiss.  Under Rule 9(b), an FCA whistleblower must allege “with particularity the circumstances constituting fraud or mistake.”

Foglia was hired in 2007 as a registered nurse for Renal Ventures Management, a dialysis provider, and was terminated in 2008.  Foglia alleged in his second amended complaint that Renal violated the FCA by falsely certifying to Medicare that it was in compliance with state regulations regarding quality of care, falsely submitting claims for reimbursement for the vitamin D drug Zemplar, and by reusing the remainder of single-use Zemplar vials while charging Medicare for the full content of the vial.  Foglia’s allegations derived from Renal’s inventory logs.  Based on the number of patients seen throughout a given month, Foglia alleged that Renal would have needed 50 vials of Zemplar per day (assuming Renal was not reusing vials).  Because Renal was only using 29 to 35 vials per day, Foglia alleged that Renal was reusing vials and overcharging Medicare because the vials are reimbursed for the full content of the vial, regardless of how much is used.

The district court held that Foglia’s complaint failed to satisfy Rule 9(b)’s “particularity” requirement because it failed to provide a “representative sample” or “identify representative examples of specific false claims made to the Government.”  The United States did not intervene in the litigation.

  1. Circuit Split on Applying Rule 9(b) in FCA Context

Circuit Courts of Appeal are split on the proper application of Rule 9(b)’s “particularity” requirement in the FCA context.  In a unanimous decision, the Third Circuit panel aligned itself with the First, Fifth, and Ninth Circuits, which endorse a more lenient approach to how precisely whistleblowers must plead FCA claims.  In these circuits, it is generally sufficient to allege “particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted.”  On the other hand, the Fourth, Sixth, Eighth, and Eleventh Circuits are known for a stricter application of Rule 9(b), often requiring whistleblower complaints to include “representative samples of the alleged fraudulent conduct, specifying the time, place, and content of the acts and the identity of the actors.”

Acknowledging this as a “close case,” the Third Circuit articulated several reasons for ultimately adopting a more “nuanced” and lenient standard for evaluating the sufficiency of FCA complaints.  First, the court found a stringent approach to be textually inconsistent with the FCA—asserting that “it is hard to reconcile the text of the FCA, which does not require that the exact content of the false claims in question be shown, with the ‘representative samples’ standard favored by the Fourth, Sixth, Eighth, and Eleventh Circuit.”  Second, the court cited the recent amicus curiae brief filed by Solicitor General Donald Verrilli, Jr. in connection with the writ of certiorari in U.S. ex rel. Nathan v. Takeda Pharmaceuticals.  See 707 F.3d 451 (4th Cir. 2013), cert. denied, 81 U.S.L.W. 3650 (Mar. 31, 2014) (No. 12-1349).  In that case, the Solicitor General asserted that the “heightened or ‘rigid’ pleading standard required by the Fourth, Sixth, Eighth, and Eleventh Circuits is ‘unsupported by Rule 9(b)’” and “undermines the FCA’s effectiveness as a tool to combat fraud against the United States.”

  1. Impact of the Foglia Decision

It is unclear what impact this opinion will have on other courts and lawmakers, especially because it appears subtly at odds with several key tenets that are trending in other circuits.  For example, Fogliadownplays the rigorous Rule 9(b) pleading standard by stating that “the purpose of Rule 9(b) is to ‘provide[] defendants with fair notice of the plaintiffs’ claims’” and holding that Foglia’s complaint met the Rule 9(b) standard because it “suffice[d] to give Renal notice of the charges against it, as is required by Rule 9(b).” (emphasis added).  While notice is indeed one objective of Rule 9(b), perhaps the more prominent objective is discouraging frivolous and speculative lawsuits—not simply apprising the defendant of the plaintiff’s claims.

Further, the panel’s reversal of the district court’s decision revived allegations that included violations of conditions of participation.  Conditions of participation are quality of care standards directed towards an entity’s continued ability to participate in federal health care programs, rather than prerequisites to government reimbursement.  On the other hand, conditions of payment are requirements that must be satisfied before the government will reimburse a claim.  Unlike a condition of participation, noncompliance with a condition of payment may properly support an FCA suit under the theory that the government should not have paid a claim that failed to comply with one or more prerequisites to payment.

Here, Foglia’s allegation about the practice of reusing Zemplar vials was permissible if certain HHS conditions were followed to ensure patient safety.  Foglia alleged that these conditions were conditions ofpayment, notwithstanding how they related to quality of care—a hallmark of conditions of participation.  The district court held that even if Foglia met the Rule 9(b) requirements, his complaint “provided no authority under an express or implied false certification theory that the claims submitted . . . violated a rule or statute establishing compliance as a condition of payment.”  On appeal, the Third Circuit held that, though it was “highly doubtful” that the HHS safety conditions were conditions of payment, “we must accept as true the allegations in the complaint” and “that Renal did not, in fact, comply with the required recommendations by HHS for the safe re-use of Zemplar vials.”

Consistent with judicial reluctance to expand the FCA into an all-purpose statute that polices all forms of regulatory noncompliance, courts are increasingly holding that legally false claims must allege conduct that would violate a condition of payment, not merely a condition of participation.  The Third Circuit balking at dismissing Foglia’s condition of participation claim may undermine the persuasiveness of this opinion on other courts where Rule 9(b) particularity may be an issue of first impression.

  1. Conclusion

This opinion is a victory for whistleblowers pleading FCA violations in the Third Circuit.  Though the Third Circuit clearly aligns itself with the First, Fifth, and Ninth Circuits endorsing a more relaxed interpretation of Rule 9(b), the subtle yet contentious findings in the opinion make it unclear whether it will have a durable impact.

The June 6, 2014 opinion was vacated and amended on June 10, 2014 to correct a typographical error in articulating the circuit split.  The amended opinion is available by clicking here.