False Claims Act: 2014 Year In Review
In what is becoming an annual refrain, 2014 marked another year of robust False Claims Act (FCA) enforcement by the U.S. Department of Justice (DOJ) and mushrooming qui tam lawsuits by whistleblowers. Indeed, fiscal year 2014 surpassed the significant growth of the last two years, setting a new record of $5.69 billion in settlements and judgments from civil cases. Since 2009, total recoveries under the FCA have exceeded $22.75 billion.
Several factors contributed to the record-setting recoveries in 2014. The foremost difference from recent years was the significant settlements involving the mortgage and banking industries. While healthcare had been the leading industry affected in 2013 and 2012, the mortgage and banking industries led the way in 2014 with over $3 billion in recoveries. That figure was composed of a few massive, well-publicized awards, including the $1.85 billion settlement involving Bank of America Corporation and large settlements involving JPMorgan Chase & Co. ($614 million), SunTrust Mortgage, Inc. ($428 million), and U.S. Bank ($200 million).
Notwithstanding the surge of banking settlements, the healthcare industry continued to be a prime target for FCA enforcement. The $2.3 billion in healthcare-related recoveries in 2014 was only slightly off the $2.6 billion in recoveries in 2013 and marks the third straight year in which recoveries exceeded $2 billion. As in the banking recoveries, one particularly notable settlement—$1.1 billion paid by Janssen Pharmaceuticals and Scios—accounted for a large portion of the overall amount. Government contracting, another traditional area of FCA enforcement, also continued to be targeted by DOJ, resulting in noteworthy lawsuits brought against Kellogg Brown & Root (KBR), CA Technologies, Inc., and BNP Paribas.
The upward trend of whistleblower lawsuits also continued. For the second straight year, more than 700 such complaints were filed, over double the average of such lawsuits between 2000 and 2009. The increased lawsuits have led to increased whistleblower awards ($2.47 billion since 2009) and an emboldened plaintiffs’ qui tam bar. Aside from financial awards, DOJ has also signaled an increased willingness to consider FCA complaints as potential criminal cases, especially when there may be individual liability. While parallel civil-criminal investigations have long been government policy, DOJ has expressed—most notably in Assistant Attorney General Leslie Caldwell’s September 2014 remarks—its renewed emphasis on sharing qui tam complaints with criminal fraud prosecutors and seeking to hold individuals accountable.
In sum, while 2014 saw some courts limit attenuated FCA theories and some commentators call for FCA reform, those largely remained voices in the wilderness. With expanding government regulation over the financial services, healthcare, and public procurement industries, FCA enforcement is unlikely to slow in the near future. Likewise, the increased success of whistleblowers (and their attorneys) in collecting large awards—and the reduction of traditional tort litigation due to tort reform—makes the FCA an increasingly attractive vehicle for the plaintiffs’ bar.
The year 2015 will likely see these trends continue along with further FCA developments, including an anticipated U.S. Supreme Court decision on the applicability of the Wartime Suspension of Limitations Act to the FCA in Kellogg Brown & Root Services, Inc. v. United States ex rel. Carter. As we ready for those and other issues in 2015, we look back at the key developments and decisions from 2014.
Fed. Rule Civ. P. 9(b)
U.S. ex rel. Foglia v. Renal Ventures Mgmt., LLC, 754 F.3d 153 (3d Cir. 2014)
The appropriate pleading standard under Rule 9(b) continues to be an area of significant debate in FCA jurisprudence. Rule 9(b) states that “in alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.” But the circuit courts have differed on the requirements of Rule 9(b)’s particularity standard—especially whether actual representative claims must be pleaded or whether allegations leading to an inference of false claims are sufficient.
In June 2014, in Foglia, the Third Circuit joined the First, Fifth, and Ninth Circuits by adopting a flexible standard that allows claims to go forward on the basis of “reliable indicia” that leads to a “strong inference” of false claims. In doing so, the Third Circuit rejected the stricter standard adopted by the Fourth, Sixth, Eighth, and Eleventh Circuits, which requires at least representative claims to have been pleaded to survive a motion to dismiss. For a related analysis of Rule 9(b), see United States v. Bollinger Shipyards, Inc., – F.3d – , 2014 WL 7335007 (5th Cir. Dec. 23, 2014), discussed below in the “Government Knowledge” section.
The consistent split among the circuits on this key FCA issue would appear to make it ripe for Supreme Court resolution in the coming years.
U.S. ex rel. Purcell v. MWI Corp., 15 F. Supp. 3d 18 (D.D.C. 2014)
In Purcell, a jury found MWI Corporation liable under the FCA for false statements MWI made to support the issuance of loans from the Export-Import Bank of the United States (Ex-Im Bank) to the Federal Republic of Nigeria. The parties did not dispute the treble damages amount of $22.5 million. They did, however, disagree on whether the $108 million that Nigeria had paid the Ex-Im Bank in principal and interest throughout the lives of the fraudulently obtained loans should be applied as an offset against the $22.5 million in damages.
In considering the issue, the district court reviewed United States v. Bornstein, 423 U.S. 303 (1976), in which the Supreme Court addressed offsets for compensatory payments. The Purcell court declined to read Bornstein narrowly to mean that an FCA defendant is only entitled to offsets for amounts paid to the government by another “tortfeasor,” or culpable participant, in the FCA violation. “Rather,” the court noted, “the cases have applied the Supreme Court’s statement in Bornstein that the offset encompasses ‘compensatory payments previously received from any source’ literally.” Purcell, 15 F. Supp. 3d at 27 (emphasis in original). For that reason, Purcell found that the $108 million paid by Nigeria to the Ex-Im Bank should entirely offset the $22.5 million in damages because the government was made completely whole by those payments. The offset was not applied against MWI’s civil penalties, nor did MWI argue that it was entitled to any such offset.
U.S. ex rel. Martin v. Life Care Ctrs. of Am., No. 08-cv-251, 2014 U.S. Dist. LEXIS 142660 (E.D. Tenn. Sept. 29, 2014)
In Life Care, the Eastern District of Tennessee rejected a motion for summary judgment on claims for which liability was supported only by statistical extrapolation. The government’s complaint alleged that a chain of skilled-nursing service providers submitted fraudulent claims to Medicare as part of a nationwide scheme to provide medically unnecessary services. Life Care moved for partial summary judgment based on the government’s plan to present specific evidence only on a sample of 400 patient admissions and then extrapolate both liability and damages to an additional 54,396 unidentified patient admissions, resulting in 154,621 claims total. Life Care argued that the government could not satisfy its burden of proving knowing falsity as to the unidentified claims merely by extrapolation and that allowing it to do so would violate Life Care’s right to due process. The court reviewed the voluminous case law on extrapolation cited by both sides and found no dispositive case law in the Medicare overpayment context. It noted that “using extrapolation to establish damages when liability has been proven is different than using extrapolation to establish liability.” Id. at *39.
Nonetheless, the court ultimately rejected Life Care’s motion, allowing extrapolation analysis to be used as evidence in this instance and noting that “the Government could specify in detail the specific claims” it alleges are false, but doing so would require “more time and resources than would be practicable for any single case.” Id. at *45. While the court acknowledged that unique factors will determine the individual type and amount of therapy received by a patient, it found that such factors did not necessarily preclude using extrapolation evidence. Instead, the court noted that defendant could challenge the extrapolation through cross examination and competing witness testimony at trial and the jury would ultimately decide the weight of such evidence.
Gonzales v. Planned Parenthood, 759 F.3d 1112 (9th Cir. 2014)
In Gonzales, a relator alleged that the defendant knowingly submitted false claims for reimbursement to the California Department of Health Care Services (California DHS) in violation of the FCA and included, as exhibits, letters between the defendant and California DHS to support the allegations. The district court dismissed the complaint based on the government’s knowledge of the allegedly improper practice.
On appeal, the Ninth Circuit affirmed. It found that the plaintiff’s claims were “compellingly contradicted” by the exhibits that showed that the defendant explained its billing practices to California DHS and that California DHS acknowledged its concern that “conflicting, unclear, or ambiguous misrepresentations have been made to providers” about the proper billing practices. Id. at 1115. In light of the letters, the Ninth Circuit held “[t]hat these attachments fatally undercut Gonzalez’s allegations of knowing falsity to the point where he cannot state a plausible claim under the FCA.” The Court continued: “Stated simply, even if bills sent by [defendant] were false in portraying its costs, one cannot plausibly conclude that there was knowing falsity on the part of [defendant] given the explicit statements addressing this subject made by the State of California through [California DHS] and the State’s silence after being told what procedures [defendant] was following.” Id. at 1116. Although the opinion does not explicitly mention “government knowledge,” it effectively affirms dismissal at the motion-to-dismiss stage based on government knowledge evident from the complaint.
United States v. Bollinger Shipyards, Inc., – F.3d – , 2014 WL 7335007 (5th Cir. Dec. 23, 2014)
In Bollinger, the government filed an FCA action alleging that Bollinger knowingly submitted false statements and false claims to the government related to a government contract for modifying several U.S. Coast Guard vessels. The district court dismissed the case for failure to state a claim under Fed. R. Civ. P. 12(b)(6), and the government appealed.
On appeal, after construing the standards under Rules 12(b)(6) and 9(b), the Fifth Circuit reversed. First, the Court found the district court erred by requiring the government to plead the knowledge element with particularity under Rule 9(b). It noted that, while Rule 9(b) requires particular details to be pleaded, “knowledge need not be pled with particularity.” Bollinger, 2014 WL 7335007, at *4. Under that more lenient standard, the Court found that the government adequately pleaded facts to establish knowledge.
Second, the Fifth Circuit addressed whether the “government knowledge” defense applied at the motion-to-dismiss stage as the district court had found. Bollinger had contended that the FCA claims should be dismissed because the Coast Guard continued to make payments and accept delivery of the ships after it knew that Bollinger's modified ships failed to meet certain required specifications. The Court noted that the “government knowledge” defense was inaptly named because it was not a statutory defense to FCA liability. Rather, when a contractor and the government were working together outside the written provisions of an agreement, the defense could be used to rebut the government’s assertion of a “knowing” presentation of a false claim. Id. at *7. Here, the Court found the defense inappropriate at the motion-to-dismiss stage, which requires all inferences to be drawn in favor the plaintiff, but potentially proper at summary judgment or trial.
Worthless Services Theory
U.S. ex rel. Absher v. Momence Meadows Nursing Ctr., Inc., 764 F.3d 699 (7th Cir. 2014)
In Momence, two former nurses of Momence, an Illinois-based nursing home facility, filed a whistleblower complaint alleging that the defendant-facility defrauded the government by providing substandard services to the patients under defendant’s care while seeking reimbursement for patient care of higher value. After the government declined, the relators litigated the case and prevailed at trial. The jury returned compensatory damages and fines over $22 million.
On appeal, Momence challenged the district court’s jury instructions on the “worthless services” theory, which premises FCA liability on a defendant submitting claims for services that were worthless. The district court instructed that services could be considered “worthless” even if some services had in fact been provided. The Seventh Circuit rejected that interpretation. Relying on Mikes v. Straus, 274 F.3d 687 (2d Cir. 2001), the Court found that 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.” Momence, 764 F.3d at 710. 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.
Further discussion of the Momence decision can be found in Bradley’s Compliance Alert here.
Regulatory Violations and False Certification
U.S. ex rel. Rostholder v. Omnicare, Inc., 745 F.3d 694 (4th Cir. 2014)
In Rostholder, the relator, a former Omnicare employee, alleged that Omnicare violated several Food and Drug Administration (FDA) packaging requirements and other regulations designed to guard against contamination of penicillin. He contended that by failing to abide by these regulations, any claims submitted for reimbursement were false under the FCA.
The district court granted Omnicare’s motion to dismiss under Fed. R. Civ. P. 12(b)(6). On appeal, the Fourth Circuit affirmed. The primary issue was whether the relator had adequately alleged a false statement or other fraudulent conduct in support of his FCA claim. The relator contended that Omnicare falsely certified compliance with the various FDA regulations when submitting its claims to the government. The Fourth Circuit, however, noted that compliance with those regulations was “not required for payment by Medicare and Medicaid.” As a result, “Omnicare has not falsely stated such compliance to the government, as contemplated by the FCA[,]” and the alleged regulatory violations “fail to support FCA liability.” Id. at 702. The Court went on to note the limited purpose of the FCA: “Were we to accept relator’s theory of liability based merely on a regulatory violation, we would sanction use of the FCA as a sweeping mechanism to promote regulatory compliance, rather than a set of statutes aimed at protecting the financial resources of the government from the consequences of fraudulent conduct.” Id.
Public Disclosure Bar
U.S. ex rel. Heath v. Wisconsin Bell, Inc., 760 F.3d 688 (7th Cir. 2014)
Heath involved E-Rate, a program through which the federal government subsidizes telecommunication costs of eligible school districts. Participating telecommunication companies are required to offer schools the “lowest corresponding price”—i.e., the lowest price charged to “non-residential customers who are similarly situated to a particular school.” The relator filed a qui tam complaint alleging that Wisconsin Bell failed to offer schools the same premium rates it offered to certain governmental agencies and universities, thereby depriving the school districts of the lowest corresponding price benefit and causing the federal government to pay higher subsidies.
The district court applied the public-disclosure bar to dismiss the suit. It found that the other pricing structure was published on the agency’s website, and the relator relied on these details in bringing the suit. On appeal, the Seventh Circuit reversed and remanded. The appeals court reasoned that, although the relator’s allegations required reliance on the publicly available details, they also “required independent investigation and analysis to reveal any fraudulent behavior.” Heath, 760 F.3d at 691.
Malhotra v. Steinberg, 770 F.3d 853 (9th Cir. 2014)
In 2006, the Malhotras declared bankruptcy and became victims of a corrupt trustee—Robert Steinberg. Working with a real-estate agent from whom he received a “referral fee,” Steinberg sold debtors’ homes at less than market value to associates, who then “flipped” the properties for a profit.
The United States Trustee investigated Steinberg and, during a deposition, the real-estate agent admitted to the referral scheme. The Malhotras then brought suit, alleging that Steinberg presented fraudulent claims to the court when he failed to disclose his referral arrangement and practice of flipping properties. The district court dismissed the case on public-disclosure grounds.
On appeal, the Ninth Circuit affirmed. The Court held that the referral arrangement had been publicly disclosed because the agent’s deposition was part of an administrative investigation and that the Malhotras failed to demonstrate knowledge of the referral scheme prior to the deposition. As such, they were not the original sources of the details. Notably, the court did not require a disclosure to the public at large for the public-disclosure bar to apply.
U.S. ex rel. Ahumada v. NISH, 756 F.3d 268 (4th Cir. 2014)
The Javits-Wagner-O’Day Act (JWOD) promotes jobs and training for the blind and severely disabled. In Ahumada, a former employee of the National Center for the Employment of the Disabled brought various FCA claims against his former employer, several corporate executives, certain suppliers, and the National Industries for the Severely Handicapped (NISH). The United States intervened and settled the claims against the corporation and corporate executives. Thereafter, the district court dismissed the claims against the remaining defendants on public-disclosure grounds. On appeal, the Fourth Circuit affirmed, applying a narrow test for the public-disclosure bar by considering whether the allegations were “actually derived from the public disclosure itself.” Id. at 274. The court held that (1) the allegations in Ahumada’s complaint had in fact been “derived from” public disclosures—namely, newspaper articles about the corporation’s questionable practices—and (2) Ahumada had failed to establish that he had “direct and independent knowledge” of the facts supporting the allegations.
U.S. ex rel. Schumann v. Astrazeneca Pharm., 769 F.3d 837 (3d Cir. 2014)
Karl Schumann, a former vice president at Medco, brought FCA claims against two pharmaceutical companies based on his knowledge of confidential agreements between Medco and the companies, his discussions about the history of those agreements, and his negotiations of the agreements’ extension.
The district court dismissed the claims, and the Third Circuit affirmed. Interpreting the statutory language existing before the Affordable Care Act amendments, the court found Schumann did not have “direct and independent knowledge” of the information that formed the basis of his allegations. The Third Circuit defined direct knowledge as “knowledge obtained without any intervening agency, instrumentality, or influence.” By contrast, Schumann’s knowledge was not direct because it derived from reviewing documents and discussing events with the individuals who participated in them. The Court concluded that such an “experience-based belief that misconduct [is] occurring” is not a substitute under the FCA for actual direct and independent knowledge of the misconduct. Schumann, 769 F.3d at 848.
U.S. ex rel. Oliver v. Phillip Morris USA, Inc., 763 F.3d 36 (D.C. Cir. 2014)
In this government-contracting case, the relator, the CEO of a rival tobacco company, alleged that Phillip Morris submitted false claims by falsely certifying that cigarettes sold to U.S. military entities complied with Phillip Morris’s contract’s most-favored-nation clause. The district court dismissed, finding that the allegations were known to the government and therefore barred by the public disclosure bar. On appeal, the District of Columbia Circuit reversed, holding that § 3730(e)(4)(A) barred suits based on publicly disclosed information through one of several delineated channels and “the government's own internal awareness of the information is not one such channel.”
U.S. ex rel. Johnson v. Planned Parenthood of Houston and Southeast Tex., Inc., 570 F. App’x 386 (5th Cir. 2014)
Relator Abby Johnson alleged that Planned Parenthood falsely billed the Texas Women’s Health Program for non-reimbursable procedures and unperformed laboratory tests, supported its fraudulent billings with false notations in client charts, and acknowledged to its employees that it would conceal its actions and retain the improperly received reimbursements in violation of the FCA and the Texas Medicaid Fraud Prevention Act (TMFPA).
Previously, a different relator brought a qui tam suit alleging generally that Planned Parenthood billed Medicaid and other federal and state programs for unnecessary medical services and services not rendered, created false documentation to support its fraudulent billing, and conspired to violate the FCA and TMFPA.
In Johnson, the district court granted Planned Parenthood’s motion to dismiss Johnson’s suit, and the Fifth Circuit affirmed. The Fifth Circuit found that an investigation into the allegations contained in the first complaint would have uncovered the same fraudulent activity that was alleged with greater specificity in Johnson’s later complaint. As a result, the Court concluded that Johnson’s lawsuit was barred under the FCA’s first-to-file rule.
U.S. ex rel. Ven-A-Care of the Fla. Keys v. Baxter Healthcare Corp. , Nos. 13-1732, 13-2083, 2014 WL 6737102 (1st Cir. Dec. 1, 2014)
In Ven-A-Care, the district court dismissed a second qui tam complaint against Baxter related to alleged Medicaid and Medicare fraud. On appeal, the First Circuit affirmed the dismissal, explaining that the first qui tam complaint—which detailed the pricing mechanism used to carry out the alleged fraud, the drugs involved, and the time frame in which the scheme occurred—gave the government sufficient notice to initiate an investigation into allegedly fraudulent practices and to satisfy the first-to-file rule. The First Circuit held that the second qui tam suit merely included more details regarding the specific actors and the roles they played in the fraudulent scheme than the earlier filed qui tam suit.
With this decision, the First Circuit reiterated that “the first-to-file rule does not necessarily protect more detailed, later-filed complaints from less detailed, earlier filed ones, so long as the first complaint sets forth the ‘essential facts’ of the fraud alleged in the second complaint.” Id. at *6. There is no bright-line rule defining exactly how specific a complaint must be to provide the “essential facts”; instead, it requires a fact-specific inquiry based on the case at hand.
U.S. ex rel. Wilson v. Bristol-Myers Squibb, Inc., 750 F.3d 111 (1st Cir. 2014)
Wilson involved the alleged promotion of prescription drugs for off-label uses. At issue were two complaints, one filed in 2006 and another filed in 2009. Both complaints alleged that the same defendants were promoting off-label uses for the same prescription drugs on a nationwide scale, resulting in the submission of false claims under the federal Medicaid program. The only difference between the two complaints was that the 2006 complaint alleged that the two drugs were being promoted for different diseases and symptoms than did the 2009 complaint.
Due to the significant overlap of the two complaints, the district court dismissed the 2009 complaint as barred by the first-to-file rule. The First Circuit affirmed, finding that the 2009 complaint failed to “alert the government to a new type of fraudulent scheme or to new aspects of the existing scheme allegedly being perpetrated by the defendants.” Id. at 116-17.
U.S. ex rel. Shea v. Cellco P’ship, 748 F.3d 338 (D.C. Cir. 2014)
Shea involved two complaints filed by the same relator: the first filed in 2007 and the second in 2012. Both complaints alleged that Verizon engaged in a scheme to defraud the United States government by knowingly billing the government for non-allowable surcharges. The only difference between the complaints was that the 2012 complaint expanded the allegations to more contracts, more charges, and more governmental agencies.
The district court dismissed the 2012 complaint because it was “related” to the 2007 complaint and was therefore barred by the first-to-file-rule. The D.C. Circuit affirmed, explaining “[a] second action is related [to the first action] if it incorporates the same material elements of fraud as the earlier-filed action,” and that the facts need not be identical to implicate the first-to-file rule. Id. at 341. The D.C. Circuit also agreed with the district court, finding that the first-to-file rule bars an original relator from subsequently filing a second lawsuit that is related to the first, even if the first lawsuit is no longer pending.
Statute of Limitations
U.S. ex rel. Landis v. Tailwind Sports Corp., No. 10–cv–00976, 2014 WL 2772907 (D.D.C. June 19, 2014)
Landis involved professional cyclist Lance Armstrong’s use of banned performance-enhancing techniques during his cycling career and addressed several FCA issues, including the statute of limitations issue taken up by the U.S. Supreme Court in Kellogg Brown & Root Services, Inc. v. United States ex rel. Carter (discussed below).
The relator alleged that Armstrong, along with companies and individuals associated with him, violated the FCA by breaching doping-related requirements in sponsorship agreements between the U.S. Postal Service and Armstrong’s professional cycling team and concealing those violations while continuing to collect payments from the Postal Service. Among other things, the court decided that the Wartime Suspension of Limitations Act (WSLA)—a law that tolls the statute of limitations for offenses involving fraud against the government when the United States is at war—does not suspend the running of the statute of limitations for civil FCA cases. In doing so, the court noted that the U.S. Supreme Court in United States v. Grainger, 346 U.S. 235 (1953), found that the WSLA applies to offenses that include “fraud as an essential element.” The district court then observed that Congress amended the FCA in 1986 to provide that “no proof of specific intent to defraud is required” to find that a defendant acted “knowingly” for purposes of FCA liability. “Thus,” the court stated, “it is clear in this Circuit that civil FCA actions under the modern version of the statute do not require proof of fraud as an ‘essential element,’ which is required by the holdings in Bridges [v. United States] and Grainger for the WSLA to apply.” Landis, 2014 WL 2772907, at *20.
United States v. Aleff, 772 F.3d 508 (8th Cir. 2014)
In Aleff, the defendants pleaded guilty to conspiring to defraud the United States by submitting false applications for loan-deficiency payments. As a result of their guilty plea, the defendants were ordered to pay around $304,000 in restitution. Thereafter, the government sued the defendants under the FCA. The district court granted the government’s summary judgment motion and ordered the defendants to pay over $1.3 million, which consisted of trebled damages ($911,000), plus the number of claims multiplied by a $5,000 statutory penalty ($660,000), less the amount of restitution already paid ($195,000). Relying on United States v. Lippert, 148 F.3d 974 (8th Cir. 1998), the Eighth Circuit affirmed the district court’s ruling. Under Lippert, the “Double Jeopardy Clause prohibits ‘multiple criminal punishments for the same offense.’” Accordingly, the Court found the $1.3 million to be a civil rather than criminal sanction and, as such, not barred by the Double Jeopardy Clause. The Court likewise rejected the defendants’ claim under the Excessive Fines Clause.
Retaliation: Definition of “Employee”
Boegh v. EnergySolutions, Inc., 772 F.3d 1056 (6th Cir. 2014)
Starting in 1992, relator worked as a landfill manager for a U.S. Department of Energy (DOE) plant that was operated by a private contractor. The contractor further subcontracted the plant’s waste-management services to another entity for which the relator worked. It was undisputed that, while in his position, the relator engaged in various types of “protected activity,” including reporting environmental violations.
In 2006, DOE awarded the plant contract to a new contractor that used defendant EnergySolutions as the subcontractor for its waste-management services. Relator applied to EnergySolutions to be the new landfill manager, but it hired another candidate. Thereafter, relator filed a lawsuit alleging employment-related claims under multiple statutes, including retaliation under § 3730(h) of the FCA.
The district court granted the government’s summary judgment motion. Upon considering relator’s first appeal, the Sixth Circuit reversed and remanded with respect to EnergySolutions in 2013. On remand, the district court again granted summary judgment for EnergySolutions, this time based on relator’s lack of standing because he was an “applicant,” not an “employee,” and therefore did not have statutory standing. Relator appealed again.
On the second appeal, the Sixth Circuit affirmed the dismissal, holding, inter alia, that, under the 2009 amendments to the FCA, retaliation claims were limited to employees, agents, or contractors. Noting that this was a matter of first impression in the Sixth Circuit, the Court drew support from the legislative history and several district courts that found that FCA retaliation liability only extended to employees or those in an employment relationship. In reaching its conclusion, the Sixth Circuit rejected relator’s arguments in support of broadly construing the term “employee,” instead noting that the “plain meaning” of the term did not include applicants. Id. at 1064.
Tax Treatment of Settlements
Fresenius Med. Care Holdings v. United States, 763 F.3d 64 (1st Cir 2014)
In Fresenius, the First Circuit broke with Ninth Circuit reasoning on the tax deductibility of FCA settlements. The previous leading case on the subject held that for a party to deduct more than the single damages amount of a settlement, it must prove that the parties “intended” some portion of the payment in excess of single damages to be compensatory in an explicit agreement. Talley Indus., Inc. v. C.I.R., 77 T.C.M. (CCH) 2191 (T.C. 1999) aff'd, 18 F. App'x 661 (9th Cir. 2001). The First Circuit rejected that holding, recognizing that relying solely on such an agreement “would give the government a whip hand of unprecedented ferocity: it could always defeat deductibility by the simple expedient of refusing to agree—no matter how arbitrarily—to the tax characterization of a payment.” Fresenius Med. Care Holdings, 763 F.3d at 70. The court therefore allowed other evidence to be considered in determining whether any part of the multiplier damages was compensatory, suggesting that additional compensatory amounts could include “the expenses of prosecuting the action,” “the time-value of the delayed receipt of single damages (generally represented by an imputation of interest),” and “perhaps, whistleblowers’ fees.” Id. at 68-69.
Anti-Kickback Statute Safe Harbors on Motions to Dismiss
U.S. ex rel. Fox Rx. Inc. v. Dr. Reddy’s Inc. , No. 1:13-cv-03779, 2014 U.S. Dist. LEXIS 166501 (S.D.N.Y. Dec. 1, 2014)
The complaint in Fox alleged that Omnicare, a pharmacy services provider, and Dr. Reddy’s, a pharmaceutical manufacturing company, engaged in an illegal rebate kickback scheme involving the sale of certain prescription drugs. The defendants filed a motion to dismiss, which the court granted, finding that the rebates fell within the safe harbor provisions of the Anti-Kickback Statute (AKS), and were therefore not in violation of the statute. The district court agreed, explaining that because the complaint failed to allege that the rebates fell outside the statue’s safe-harbor provisions, the relator did not plausibly allege an unlawful kickback.
United States v. Millennium Radiology Inc., No. 1:11-cv-00825, 2014 WL 4908275 (S.D. Ohio Sept. 30, 2014)
In contrast with the Southern District of New York’s decision in Fox, the Southern District of Ohio refused to consider the defendants’ argument regarding its compliance with the AKS safe-harbor provisions. The court concluded that arguments regarding safe-harbor provisions were appropriate at summary judgment or trial but not on a motion to dismiss. Finding the other elements of an FCA claim to be adequately pleaded, the court denied the motion to dismiss.
For the mortgage and banking industry, the most significant FCA news in 2014 related to the major settlements described above, in particular the record-setting $1.85 billion settlement extracted from Bank of America. Aside from that and other major settlements with financial institutions, several courts also addressed common FCA issues in the mortgage and banking context.
United States v. Americus Mortgage Corp., 4:12-CV-02676, 2014 WL 4274279 (S.D. Tex. Aug. 29, 2014)
In Americus, the government alleged that two residential mortgage companies and several of their officers violated the FCA by making false statements in loan applications in a scheme to obtain home-mortgage insurance from the U.S. Department of Housing and Urban Development (HUD) on loans they issued. The government alleged two theories: that defendants (1) falsely certified that they complied with HUD rules and requirements and that the loans submitted for insurance were eligible under HUD rules and (2) fraudulently induced the government to take on an obligation to pay.
The defendants moved to dismiss, arguing that applications for the insurance did not cause payment of any government funds and that the certifications, even if false, were only conditions of participation in the program, not conditions of payment. The district court rejected those arguments and found that both the false-certification and fraudulent-inducement theories were adequately pleaded. The court noted, among other things, that the government did not need to allege “fraudulent conduct at each step of the [insurance-claim] process” when it “has alleged fraud at the mortgage origination stage.” Id. at *9. In other words, “but for” the false statements on the applications, the government “would not have insured the mortgages and, as a result, would not have incurred losses” from paying out the insurance claims. Id.
United States v. Movtady, 13 F. Supp. 2d 325 (S.D.N.Y. 2014)
In a similar case to Americus, the government in Movtady alleged that defendants falsely certified compliance with requirements of certain government-insured home mortgage programs. Specifically, the government claimed that defendants falsely affirmed “the existence of a compliant quality-control program” and that a series of loans were eligible for insurance “despite loan-documentation deficiencies.” Id. at 329.
The defendants moved to dismiss, arguing, inter alia, (1) that the FCA claims at issue were not requests for payment and therefore could not be false claims, (2) lack of causation, and (3) failure to plead with sufficient particularity under Rule 9(b). The court denied the motion with respect to the FCA claims. It noted that the defendants certified compliance with the “core eligibility requirements” of the insurance programs and, as “explicit conditions of eligibility,” they were conditions of payment. Id. at 331. Likewise, causation was adequately pleaded because the ultimate loan defaults “were related to the false statements in the application.” Id. at 332 (internal quotations omitted). Finally, the court found that Rule 9(b) was satisfied because the government pleaded the scheme with particularity and offered examples of specific false claims. Id. at 333.
U.S. ex rel. Grenadyor v. Ukrainian Village Pharmacy, Inc., 2014 WL 6783033 (7th Cir. Dec. 3, 2014)
In Grenadyor, the Seventh Circuit affirmed the dismissal of an FCA action because the relator failed to plead the alleged fraud with particularity sufficient to satisfy Rule 9(b). However, the court remanded the case to the district court to proceed on the relator’s retaliation claim, which is not subject to Rule 9(b)’s stricter pleading standard.
The complaint alleged that Village Pharmacy (1) made gifts to customers and waived co-pays to induce customers to bring business to the pharmacy over defendant’s competitors and (2) failed to reverse charges to the government for prescriptions that were never picked up by customers. In affirming dismissal of the complaint, Judge Posner noted that the relator failed to allege that the pharmacy had determined to undertake the alleged kickbacks at the time it signed its Medicare program enrollment agreement or that any specific customer for whom the pharmacy had filled a prescription or given a gift had submitted a claim to Medicare. In addition, the Court observed that the relator offered no basis for his allegation, which claimed upon “information and belief” that charges for non-delivered medications were never reversed.
The Seventh Circuit’s holding serves as a reminder that employers must be mindful of the lower pleading standards for FCA retaliation claims, which can result in a viable retaliation claim premised on a seemingly frivolous FCA claim.
U.S. ex rel. Fox Rx, Inc. v. Omnicare, Inc., No. 11-cv-962, 2014 WL 2158412 (N.D. Ga. May 23, 2014)
In Omnicare, the Northern District of Georgia granted summary judgment to a pharmacy charged with filling off-label prescriptions.
The relator, a Medicare Part D plan sponsor, alleged that Omnicare had actual or constructive knowledge that it was submitting “false” claims for off-label, non-reimbursable uses because Omnicare’s consultant pharmacists regularly reviewed patient records and recorded diagnosis information in Omnicare’s computer system.
In granting summary judgment for Omnicare, the court found insufficient evidence that the pharmacists had actual knowledge of, or access to, the patients’ diagnoses. Furthermore, the court noted that even if the pharmacists had knowledge, there was no proof that they knew the uses were off-label, and that the pharmacists were under no duty to ensure that a drug was being dispensed for medically acceptable indications.
U.S. ex rel. Fox Rx, Inc. v. Omnicare, Inc. , No. 12CV275, 2014 WL 3928780 (S.D.N.Y Aug. 12, 2014) and U. S. ex rel. Fox Rx, Inc. v. Walgreen Co., No. 12 Civ. 7382, 2014 WL 4066223 (S.D.N.Y. Aug. 18, 2014)
In these related cases both involving Fox Rx, Inc., the Southern District of New York dismissed both suits, which alleged that several major pharmacies, including Walgreen Co., Omnicare, Inc., PharMerica Corp., NeighborCare Inc., and MHA Long Term Care had overbilled Medicare and Medicaid programs for branded and expired drugs.
Relator Fox Rx Inc., the corporate parent of a former Medicare Part D prescription drug plan sponsor, alleged that the defendant pharmacies violated the FCA by failing to substitute generic drugs for branded equivalents in states that require such substitution and also dispe,nsing medications after their National Drug Code (NDC) expiration dates.
After the government declined to intervene in the case, the district court granted defendants’ motions to dismiss in two parallel opinions. The court based its decision on the relator’s failure to identify a violation of either a statute or regulation that is a condition of payment for Medicare Part D.
First, the court found that the pharmacies’ use of dispense-as-written codes, which do not indicate a preference as to generic or branded, could not be deemed fraudulent. The court also determined that, while the relator may have alleged violations of state pharmacy regulations mandating the use of generic drugs, those allegations did not establish an FCA claim.
Second, the court rejected Fox’s arguments that the defendants violated the Medicare requirement to satisfy “minimum standards of [state] pharmacy practice” and provided “worthless” services by dispensing drugs after their NDC termination dates. The court noted that an NDC termination date is not the same as a shelf-life expiration date, as the former may be based on other factors, such as the change in the quantity of pills in a package.
Ultimately, the court determined that the relator’s allegations described violations that “are ‘irrelevant’ to the government’s disbursement decisions” and therefore “do not constitute legally false certifications.”
Small-Business Subcontracting Decision
U.S. ex rel. Tran v. Computer Sciences Corp., --- F.Supp.2d ---, 2014 WL 2989948 (D.D.C. July 3, 2014)
In a significant case to government contractors subject to small business subcontracting plan requirements, the district court denied two defendants’ motions to dismiss FCA allegations premised on small-business subcontractors passing through work to a large business. In a sprawling opinion touching on a number of issues, the court held that the complaint sufficiently alleged that Computer Sciences Corp. (“CSC”) submitted false invoices and certifications when its small-business subcontractors passed through work to large business Modis, Inc. The court also upheld claims that Modis violated the FCA, finding that the complaint sufficiently alleged that Modis’s participation in planning and implementing the pass-through scheme constituted a “substantial factor in causing” CSC to submit false claims. The court, however, dismissed the claims against CSC’s small-business subcontractor Sagent Partners, LLC (“Sagent”), reasoning that while the complaint alleged Sagent passed through work to Modis, it did not allege that Sagent was aware of CSC’s small business subcontracting requirements or of any link between those requirements and the pass-through arrangement.
The court squarely rejected CSC’s contention that there is nothing improper or illegal about small business subcontractors passing through work to large businesses. CSC argued that the Federal Acquisition Regulation provision requiring small businesses receiving set-aside service contracts to use their own employees to perform at least 50% of the cost-of-contract performance indicates that small-business subcontractors are permitted to “pass through” up to 50% of the contract work to large businesses. But the court found the small business set-aside regulations irrelevant to interpreting a large-business contractor’s small-business subcontracting obligations. While acknowledging that the statute and regulations are silent as to whether pass-through subcontracting is ever permitted in the context of a small-business subcontracting plan, the court refused to interpret this silence as “evidence of an intent to bless the pass-through arrangement.” Under the court’s reasoning, pass-through subcontracting arrangements may be a basis for FCA liability whenever work intended to meet small-business subcontracting goals is ultimately performed by a large business.
What to Watch in 2015
Upcoming Supreme Court Decision: Kellogg Brown & Root Services, Inc. v. U.S. ex rel. Carter, No. 12-1497
On January 13, 2015, the U.S. Supreme Court will hear oral argument in Kellogg Brown & Root Services, Inc. v. United States ex rel. Carter, a qui tam action in which the Court will address several issues: (1) whether the Wartime Suspension of Limitations Act (WSLA) applies to civil FCA cases and, if so, whether the WSLA applies to cases brought by qui tam relators; (2) whether the phrase in the WSLA, “[w]hen the United States is at war,” is only triggered by a formal declaration of war; and (3) whether the FCA’s first-to-file bar functions as a “one-case-at-a-time” rule, allowing a series of related FCA claims so long as no prior claim is pending at the time of filing.
The Supreme Court’s decision in Carter will be significant for several reasons. In many cases, applying the WSLA to civil FCA cases can extend the time available to bring an FCA suit well beyond the ten-year maximum established by the FCA's statute of repose. The Court’s decision on the first-to-file bar issue will be especially significant for large national and multinational companies operating in the healthcare, financial services, and government contracts industries, given that those companies more often face multiple related qui tam whistleblower suits alleging similar fraud schemes. A Supreme Court decision in favor of KBR would assist these companies in obtaining early dismissal of related qui tam actions.
Overpayment Theory: U.S. ex rel. Kane v. Continuum Health Partners, Inc., 1:11-cv-02325 (S.D.N.Y. 2014)
In 2014, DOJ intervened for the first time in an FCA action based on a provider’s failure to return an alleged Medicaid overpayment. The Affordable Care Act requires the report and return of any federal health-care program overpayment by the later of 60 days after the overpayment is “identified” or the date the corresponding cost report is due, if applicable. 42 U.S.C. § 1320a-7k(d). If not repaid within the allotted time, the overpayment becomes an “obligation,” the knowing avoidance of which triggers liability under the FCA. 31 U.S.C. § 3729(a)(1)(G).
In Kane, a whistleblower filed an FCA action under seal in 2011, 60 days after emailing his managers a spreadsheet naming 900 allegedly erroneous claims. Even though Continuum had repaid all 900 claims by early 2013, DOJ intervened in the whistleblower’s FCA suit in 2014. In its pending motion to dismiss, Continuum argues that the whistleblower’s email is not sufficient by itself to “identify” overpayments and trigger the 60-day window, because the company first had to investigate and corroborate his allegations. The government has responded that Continuum’s interpretation of when overpayments are “identified” would allow companies to retain overpayments indefinitely, as long as they have not been confirmed. The court’s ruling is expected in 2015.