Seventh Circuit Limits “Worthless Services” Theory under False Claims Act

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On August 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 United States ex rel. Absher v. Momence Meadows Nursing Ctr, 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.

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 others 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.

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. 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. Straus, 274 F.3d 687, 703 (2d Cir. 2001)). 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.’”

After addressing the other issues on appeal and finding that relators’ 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.

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 few 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.