False Claims Act: 2015 Year in Review

This year continued the trend of aggressive False Claims Act (FCA) enforcement by the Department of Justice (DOJ) and high volumes of qui tam lawsuits brought by whistleblowers. In fiscal year 2015, the DOJ marked the fourth year in a row that it recovered over $3.5 billion in FCA settlements and judgments. These recoveries came largely from the healthcare ($1.9 billion) and government contracting ($1.1 billion) industries. Recoveries in the financial services industry accounted for only $365 million in 2015, well below the $3 billion recovered last year, as 2015 brought fewer record-setting mortgage settlements.

While the number of qui tams filed in 2015 dipped to 632, the lowest it has been since 2010, the amount of money awarded to relators reached a record high, with a marked increase in the total relators’ shares for cases in which the United States declined to intervene. Such recovery statistics make the number of whistleblower-driven FCA actions unlikely to recede in the near future.

Looking toward 2016, we expect these trends to continue and anticipate several significant developments, including an anticipated U.S. Supreme Court decision on the viability of the implied false certification theory, a Fourth Circuit decision on the much-debated topic of extrapolating liability, and an increase in statutory civil penalty amounts. FCA lawyers and their clients will also be closely watching the effect the DOJ’s renewed focus on individual prosecutions will have on the FCA cases brought, parallel civil-criminal investigations, and FCA settlements. As we prepare ourselves for these developments in the coming year, we take stock of the most notable developments and decisions of interest from 2015.

Implied Certification

U.S. ex rel. Escobar v. Universal Health Services, Inc. , 780 F.3d 504 (1st Cir. 2015)

In Universal Health, the relators’ daughter died after receiving treatment at a mental-health clinic from various unlicensed and unsupervised providers. They later filed an FCA complaint alleging that the clinic impliedly misrepresented that its staff was licensed, as required by state regulation, each time it submitted a claim for reimbursement under Massachusetts’s Medicaid program. The district court disagreed and dismissed the complaint, finding that none of the regulations at issue were conditions of payment, which would have made the clinic’s claims “legally false,” but rather were merely conditions of participation that did not trigger FCA liability.

On appeal, the First Circuit reversed. It held that, even though not labeled as such, the regulations were conditions of payment and that the clinic “implicitly communicated” compliance with these regulations by submitting claims. In doing so, the Court took a broad view of what makes a claim “legally false.” Specifically, it framed the question as “whether the defendant, in submitting a claim for reimbursement, knowingly misrepresented compliance with a material precondition of payment,” noting that such preconditions could be found in “statutes, regulations, and contracts” and need not be “expressly designated.” This theory of liability is known as “implied false certification.”

There remains a circuit split regarding whether a claim is “legally false” if a party provides products or services but, in doing so, fails to comply with a statute, regulation or contractual provision that is not explicitly stated to be a condition of payment. On December 4, 2015, the U.S. Supreme Court granted certiorari to resolve this split.

U.S. ex rel. Badr v. Triple Canopy, Inc., 775 F.3d 628 (4th Cir. 2015)

In Triple Canopy, the Fourth Circuit joined several other circuits in adopting the “implied- certification” theory of falsity under the FCA. The case involved a government contract to provide security guards at an airbase in Iraq. The contractor allegedly hired guards who did not meet a marksmanship requirement contained in the contract, and allegedly created false shooting scorecards to disguise the deficiency. The relator, a Triple Canopy employee, filed an FCA complaint, and the government later intervened on one count. The district court subsequently dismissed the complaint, finding, among other deficiencies, the government failed to plead a demand for payment containing an objectively false statement.

On appeal, the Fourth Circuit held that the government adequately pleads a false claim when it alleges that the government contractor “made a request for payment under a contract and ‘withheld information about its noncompliance with material contractual requirements’.” Further, “[t]o establish materiality, the Government must allege the false statement had a natural tendency to influence, or [was] capable of influencing, the Government’s decision to pay.”

Applying those standards, the Court found the marksmanship requirement was material because “common sense strongly suggests that the Government’s decision to pay a contractor for providing base security in an active combat zone would be influenced by knowledge that the guards could not, for lack of a better term, shoot straight.” The Court also noted that the contractor’s alleged efforts to cover up the deficiency also suggested materiality.

Similarly, the Fourth Circuit rejected Triple Canopy’s argument that the government failed to establish materiality in its false records claim under § 3729(a)(1)(b). Triple Canopy argued the plaintiff failed to properly allege that the falsified scorecards were material because there was no allegation that the government official in charge of payment actually reviewed the scorecards. Rejecting this reasoning, the Court stated that “the FCA reaches government contractors who employ false records that are capable of influencing a decision, not simply those who create records that actually do influence the decision.”

Triple Canopy filed a petition for certiorari that remains pending before the U.S. Supreme Court. The Supreme Court recently granted cert to address the validity of the implied-certification theory in the Universal Health Services case (discussed above), and FCA practitioners continue to watch for related developments in Triple Canopy.

United States v. Sanford-Brown, Ltd. , 788 F.3d 696 (7th Cir. 2015)

In Sanford-Brown, the Seventh Circuit declined to adopt the theory of implied false certification, instead explicitly aligning itself with the Fifth Circuit’s decision in United States ex rel. Steury v. Cardinal Health, Inc., 625 F.3d 262, 270 (5th Cir. 2010). The defendant, a for-profit educational institution, received Title IV federal subsidies from the Department of Education. In order to receive such subsidies, the defendant entered a statutorily mandated Program Participation Agreement (PPA) in which it agreed to comply with a host of statutory and regulatory requirements. The relator argued that entry into the PPA created a continuing obligation on the part of Sanford-Brown to comply with all of these requirements, and that such continued compliance was a condition of payment for receipt of any Title IV subsidies.

The court roundly rejected this theory, stating that it would be “unreasonable for us to hold that an institution’s continued compliance with the thousands of pages of federal statutes and regulations incorporated by reference into the PPA are conditions of payment for purposes of liability under the FCA.” The court went on to explicitly reject the implied false certification theory, noting that, “under the FCA, evidence that an entity has violated conditions of participation after a good-faith entry into its agreement with the agency is for the agency—not a court—to evaluate and adjudicate.”

First-to-File

Kellogg Brown & Root Services, Inc. v. U.S. ex rel. Carter, 135 S. Ct. 1970 (2015)

In May, the Supreme Court issued its much-anticipated decision in Kellogg Brown & Root v. U.S. ex rel. Carter, holding that (1) the Wartime Suspension of Limitations Act (WSLA), 18 U.S.C. § 3287, suspends the statute of limitations only for criminal offenses involving fraud against the federal government and not for civil claims like those under the FCA, and (2) for purposes of the first-to-file rule, a qui tam FCA suit ceases to be “pending” after it is dismissed.

The first holding is significant in rejecting a theory recently embraced by relators and prosecutors that the WSLA tolls the FCA statute of limitations whenever the United States is at war or Congress has authorized use of the Armed Forces (such as the United States military presence in Iraq and Afghanistan) until five years after termination of hostilities. After examining the history of the statute, the Court concluded that the term “offense” in the WSLA “applies solely to crimes.”

The Carter Court’s second holding is equally significant in clarifying that the first-to-file rule (found in the FCA at 31 U.S.C. § 3730(b)(5)) only bars a relator from bringing an FCA suit based on the same underlying facts as a currently pending suit. An FCA action that has been dismissed does not forever bar subsequent suits based on the same facts.

U.S. ex rel. Heath v. AT&T, Inc., 791 F.3d 112 (D.C. Cir. 2015)

In Heath, the relator alleged that AT&T, Inc. and 19 subsidiaries falsely billed the Universal Service Administrative Company for Internet and telephone services provided to schools and libraries through the “E-Rate” program. Heath alleged that AT&T failed to offer schools and libraries the lowest price charged to similarly situated, non-residential customers as required by the program. Heath had previously made similar allegations in a separate qui tam action brought against Wisconsin Bell, Inc., a wholly owned subsidiary of AT&T. In the earlier case, Heath alleged that Wisconsin Bell charged certain E-Rate-eligible schools higher rates than others and failed to give school districts the same favorable pricing that it offered to state agencies.

Based on that earlier lawsuit, the district court dismissed the latter case on first-to-file grounds. On appeal, the D.C. Circuit reversed the district court’s dismissal, holding that “Heath’s two complaints target factually distinct types of fraud.” The Wisconsin Bell case alleges fraud at one entity and involves affirmative misrepresentations regarding prices. In contrast, the AT&T case concerns (1) practices occurring across the nation “through institutionalized disregard of the lowest corresponding-price requirement altogether in AT&T’s employee-training and billing procedures,” and (2) knowing concealment of violations to avoid reimbursement.

Public Disclosure Bar

The public disclosure bar requires courts to dismiss FCA allegations that are substantially similar to information disclosed in certain public sources, unless the relator qualifies as an “original source” of the information. Before the Affordable Care Act (ACA), the term “original source” was defined as someone with “direct and independent knowledge” of the publicly disclosed information. The ACA modified the definition to mean someone who either voluntarily discloses the relevant information prior to the public disclosure or has “independent knowledge of and materially adds to” the publicly disclosed information, 31 U.S.C. § 3730(e)(4)(B). Several appellate courts considered the pre- and post-amendment language in 2015.

U.S. ex rel. Osheroff v. Humana, Inc., 776 F.3d 805 (11th Cir. 2015)

In Osheroff, the relator alleged that healthcare clinics and insurers provided various free services to patients, including limo rides, meals, and salon services, in violation of the Anti-Kickback Statute and Civil Monetary Penalties Law. The relator also alleged the conduct violated the FCA under an implied-certification theory. After the government declined to intervene, the defendants moved to dismiss the case, and the district court granted the motion on public disclosure grounds.

On appeal, the Eleventh Circuit affirmed the district court’s decision to dismiss and declined to take a broad reading of the original-source exception to the public disclosure bar. After finding that newspaper articles and advertisements and the clinics’ websites constituted public disclosure as “news media,” the Court considered whether the relator was an “original source” under the amended definition of the term. The relator argued he was an original source because he conducted his own investigation of the programs offered at the clinics and identified some details not in the public disclosures, including the destinations of the free transportation, the types of food provided, and the frequency of the salon services. Unpersuaded, the Eleventh Circuit held that merely adding background details to the information available in the public disclosures does not qualify one as an original source. Separately, the Court held that, as amended, the public-disclosure bar is no longer jurisdictional—i.e., it creates grounds for dismissal for failure to state a claim rather than for lack of jurisdiction.

U.S. ex rel. Wilson v. Graham County Soil & Water Conversation District, 777 F.3d 691 (4^th Cir. 2015)

In 2001, the relator filed this qui tam action against a North Carolina county, various county entities, and individuals alleging that fraudulent invoices had been submitted in connection with disaster-recovery work conducted under the Emergency Watershed Protection (EWP) Program. Before the qui tam action was filed, an audit and other government reports detailing various issues with the handling of the EWP Program were published, each indicating it was for official use only.

In 2013, the district court dismissed the qui tam action for lack of jurisdiction, concluding that the government reports constituted public disclosures under the pre-ACA version of the FCA, that the relator had based her allegations on them, and that the relator was not an original source. The Fourth Circuit reversed and held that a public disclosure “requires that there be some act of disclosure outside of the government.” The Court reasoned that, to constitute a public disclosure, the information must reach the public domain and that merely because the reports were eligible for disclosure through the use of a public records act request did not suffice. In doing so, the Court declined to follow the Seventh Circuit’s reasoning in United States v. Bank of Farmington, 166 F.3d 853, 861 (7th Cir. 1999), which found that disclosure to a “competent public” official was sufficient to constitute public disclosure.

U.S. ex rel. Antoon v. Cleveland Clinic Foundation , 788 F.3d 605 (6^th Cir. 2015)

Surgical patient Col. Antoon and his wife brought an action against a hospital, surgeon and a medical device manufacturer asserting claims under the FCA, including allegations that the surgeon fraudulently billed the government for his surgery. Antoon had previously filed a medical malpractice suit, and the Court dismissed his FCA claims on the basis that the medical malpractice action was a public disclosure and Antoon was not an "original source" for his subsequent FCA action. Interpreting the pre-ACA version of the FCA, the Court held that, while "direct" knowledge for original source purposes can be acquired "by the relator's own efforts," the relator at issue had not met that standard because his review of medical records only allowed him to "speculate" about a physician's involvement in certain surgeries at issue. Because that review conferred only informed speculation rather than "direct and independent knowledge" of an FCA claim’s elements, Antoon did not qualify as an original source.

U.S. ex rel. Whipple v. Chattanooga-Hamilton County Hospital Authority, 782 F.3d 260 (6th Cir. 2015)

In Whipple, the relator alleged that defendant, Chattanooga-Hamilton County Hospital Authority d/b/a Erlanger Medical Center (Erlanger), violated the FCA by knowingly submitting false or fraudulent claims for reimbursement to federally funded healthcare programs. The relator claimed that he discovered the alleged fraud during a six-month period that he worked at Erlanger. Specifically, he claimed that he identified the fraud by analyzing past billing data, reviewing patient records, and observing operations in the revenue-cycle departments. He also claimed to have direct knowledge of the fraudulent practices from supervising patient admissions and discharges. The district court dismissed the relator’s claims, concluding that his claims were jurisdictionally barred under the FCA’s public-disclosure bar based on a prior administrative audit and investigation of Erlanger’s inpatient billing practices which, unbeknownst to the relator, the government had conducted several years before the suit.

On appeal, the Sixth Circuit reversed dismissal of the complaint finding that disclosures made to government auditors did not constitute public disclosures under the public-disclosure bar. To determine whether the public-disclosure bar applies, the Court noted that it considers, “first, whether there has been any public disclosure of fraud . . . and second, whether the allegations in the instant case are based upon the previously disclosed fraud.” Discussing the first requirement of a public disclosure of fraud, the Court noted that other circuits to address this have held that “the plain meaning of § 3730(e)(4) requires some affirmative act of disclosure to the public outside the government.” The Court found that “[i]f a disclosure to the government in an audit or investigation would be sufficient to trigger the bar, the term ‘public’ would be superfluous.” Thus, the Court concluded that Erlanger’s disclosure of information to the government in the administrative audit did not constitute a public disclosure that would trigger the bar. The Court also noted that disclosures made to private auditors working on behalf of the government did not constitute “public disclosures.”

U.S. ex rel. Hartpence v. Kinetic Concepts, 792 F.3d 1121 (9th Cir. 2015)

In Hartpence, the Ninth Circuit analyzed the pre-ACA version of the FCA and held that the FCA’s public-disclosure bar did not require a relator to have had “a hand in the [public] disclosure” to qualify as an original source. Hartpence involved two relators who had commenced actions, later consolidated, alleging that their former employer fraudulently claimed reimbursements from Medicare in violation of the FCA. Before filing of the relators’ complaints, however, the allegations of fraud had already been publicly revealed in a federal audit report and in a decision by an administrative law judge. As a result, the trial court dismissed both actions, finding that the relators did not qualify as “original sources” under the FCA’s public disclosure bar because neither had a “hand in the public disclosure,” a requirement announced in a 1992 Ninth Circuit case.

On appeal, the Ninth Circuit made it clear that having a “hand in the public disclosure” was an incorrect inference taken from the FCA’s legislative history that was unsupported by the plain text of the statute itself. Instead, the Ninth Circuit held that there are only two requirements necessary for a relator to be an “original source” under the pre-ACA version of the FCA: (1) Before filing a complaint, the relator must voluntarily inform the government of the facts underlying the allegations of the complaint; and (2) the relator must have direct and independent knowledge of the allegations in the complaint. The Ninth Circuit expressly overruled its earlier precedent by holding that the question of whether a relator played a part in the public disclosure of the allegations was irrelevant with respect to being an original source.

U.S. ex rel. Morgan v. Express Scripts, Inc., 602 F. App’x 880 (3d Cir. 2015)

In Express Scripts, the Third Circuit affirmed the dismissal of a pharmacist relator’s FCA suit against a group of pharmaceutical wholesalers because his allegations were based on publicly disclosed information under the pre-ACA version of the FCA. In his suit, the relator alleged that a group of pharmaceutical wholesalers profited from artificially inflating the average wholesale prices (AWP) for brand-name drugs. He stated that he discovered the price inflation “through his diligence,” which amounted to “an eyeball comparison” of two publicly available price listings and his quantification of the AWP differential. The Court noted, however, that the relator had “no direct and independent knowledge of the information on which the allegations [were] based.” Notably, the relator was never employed by any of the entities that allegedly profited from the scheme, and his general knowledge of the pharmaceutical industry “d[id] not make him an original source.” Moreover, in applying the two-step analysis under the public-disclosure bar, the Court found, first, that the relator’s allegations were disclosed in the news media, previously disclosed lawsuits and in a congressional report, and, second, the relator demonstrated actual familiarity with those public disclosures before filing his suit. Accordingly, the Court upheld the dismissal of the claims.

United States v. U.S. Bank, N.A., No. 3:13-cv-704, 2015 WL 2238660 (N.D. Oh. May 12, 2015)

In U.S. Bank, a legal aid group, Advocates for Basic Legal Equality, Inc. (ABLE) brought an FCA lawsuit alleging that U.S. Bank initiated foreclosures on over 22,000 mortgage loans insured by the Federal Housing Administration (FHA) without complying with the Department of Housing and Urban Development’s (HUD) loss-mitigation regulations and falsely certified its compliance with these regulations.

The district court dismissed the complaint under the public disclosure bar. The Court held that the action was barred by the FCA public disclosure bar, as amended by the ACA, because the specific issue of whether lenders had complied with HUD’s loss mitigation requirements had been “litigated nationwide,” including in Ohio state courts against qui tam defendant U.S. Bank. Additionally, the Court noted that allegations of FHA non-compliance involving U.S. Bank were made public through a 2011 Consent Order issued by the Office of the Comptroller of the Currency, a 2011 Federal Reserve report, and a 2011 settlement between HUD and the bank. Although these disclosures may not have specifically alleged fraud, the Court determined that “sufficient information was publicly disclosed regarding U.S. Bank's loss mitigation failures from which the Government could infer the alleged fraudulent transactions referenced in the Complaint.”

The Court also held that ABLE failed to establish itself as an original source. ABLE’s allegations were based on consultations with people whose mortgages had been foreclosed upon by U.S. Bank. The Court found that ABLE could not qualify as an original source based on the information it derived from others and could not “become an original source of information by putting its own spin on prior public disclosures of U.S. Bank's regulatory failures.”

Reckless Disregard

Urquilla-Diaz v. Kaplan University, 780 F.3d 1039 (11th Cir. 2015)

In Urquilla-Diaz, three former Kaplan University workers, Carlos Urquilla-Diaz, Jude Gillespie, and Ben Wilcox, filed qui tam actions under the FCA alleging that Kaplan University had fraudulently obtained financial aid funding by falsely certifying that it was in compliance with various federal statutes and regulations, including the Rehabilitation Act. The district court granted summary judgment in favor of Kaplan, finding that Gillespie had failed to prove the necessary elements of an FCA claim, and that Urquilla-Diaz and Wilcox had failed to plead their claims with sufficient particularity.

On appeal, the Eleventh Circuit upheld much of the district court’s decision. In particular, the Court upheld the district court’s dismissal of Gillespie’s FCA claim based upon his failure to demonstrate that Kaplan acted with the requisite scienter. The Court noted that nothing in the record supported Gillespie’s contention that Kaplan knew or recklessly disregarded the fact that its policies violated the Rehabilitation Act and its implementing regulations when Kaplan executed the program participation agreement. The Court described the reckless disregard standard as one that imposes a “limited duty to inquire,” rather than a “burdensome obligation,” on government contractors and punishes only “those who act in gross negligence, [i.e.,] those who fail to make such inquiry as would be reasonable and prudent to conduct under the circumstances,” not “honest mistakes or incorrect claims submitted through mere negligence.”

Specifically, the Court rejected Gillespie’s argument that the evidence called into question whether Kaplan acted with reckless disregard because Kaplan’s vice president of human resources and general counsel were not sufficiently up-to-date on the relevant legal issues concerning the Rehabilitation Act and thus did not have the skill necessary to draft Kaplan’s nondiscrimination policies. The Court pointed out that even if Gillespie’s “personal assessment that [Kaplan’s general counsel] should have performed her job better were true, this would not establish a jury question about whether Kaplan certified its compliance with the Rehabilitation Act . . . with reckless disregard for the truth.”

United States ex rel. Purcell v. MWI Corp., No. 14-5210, 2015 WL 759 7536 (D.C. Cir. Nov. 24, 2015)

In the latest opinion in an FCA action initiated in 1998, the D.C. Circuit reversed a verdict for the government and remanded with instructions to enter judgment for MWI. In this action, the relator alleged that MWI made a false certification to the Export-Import Bank of the United States to secure loans to finance its sale of water pumps to Nigeria. The certification in question stated that MWI had paid only “regular commissions” to the sales agent to secure the sales contract. MWI argued that it could not have knowingly submitted a false certification because it reasonably interpreted the undefined and ambiguous term “regular commissions” to mean what exporters had historically paid an individual sales agent. Further, it argued that the Bank had not issued any guidance indicating that MWI’s interpretation was incorrect.

The Court found that MWI could not have acted with appropriate knowledge under the FCA where the requirement allegedly violated is ambiguous, the defendant’s interpretation is reasonable, and no guidance warned the defendant away from its interpretation. The Court also noted the potential due process problems posed by “penalizing a private party for violating a rule without first providing adequate notice of the substance of the rule.”

Materiality

U.S. ex rel. Am. Sys. Consulting, Inc. v. ManTech Advanced Sys. Int’l, 600 F. App’x 969 (6th Cir. 2015)

In ManTech, the Sixth Circuit addressed a significant and oft-litigated issue in FCA cases: how to determine whether a false statement is material—that is, whether it matters to a government decision maker. In addressing materiality, the Court made two significant holdings: first, that materiality is an issue of law to be determined by the court and not reserved for the jury; and second, that the government’s continued performance under a contract, despite knowledge of a misrepresentation, may weigh against a finding that the misrepresentation was material, though it does not necessarily preclude materiality.

ManTech involved two competing bidders on a government contract. The contract’s request-for-proposal (RFP) guidelines required identification of the project manager, which ManTech did. When the manager later resigned, however, ManTech did not disclose his resignation in later RFP submissions. Plaintiff ASCI, the competing bidder, protested the bid and ultimately filed an FCA complaint. At summary judgment, the district court found the alleged misrepresentations immaterial as a matter of law and granted summary judgment for ManTech.

On appeal, the Sixth Circuit affirmed. Relying on U.S. ex rel. Wall v. Circle C. Constr., LLC, 697 F.3d 345 (6th Cir. 2012), the Court held that a statement’s materiality under the FCA was an issue of law that a judge can decide rather than an issue of fact reserved for the jury. In doing so, the Court also found that the district court correctly applied the Sixth Circuit’s “natural tendency” materiality test under which a statement is material if it “has the objective, natural tendency to influence a government decision maker.”

In addition, in its materiality analysis, the Sixth Circuit discussed the government’s decision to continue to contract with ManTech after discovering the manager’s resignation. The Sixth Circuit concluded that, while the decision to continue to contract after disclosure did not “necessarily preclude” a materiality finding, such a decision “may weigh against a finding of materiality.” Although the Court’s analysis did not mention the “government knowledge” defense, its discussion was based on similar reasoning as found in several recent circuit cases regarding the significance of the government’s continued performance after discovering an alleged falsity or misrepresentation.

U.S. ex rel. Miller v. Weston Educational, Inc., 784 F.3d 1198 (8th Cir. 2015)

In Weston, two former employees of Heritage College brought a qui tam action against Heritage, alleging that the college fraudulently induced the Department of Education (DOE) to provide funds under Title IV by falsely promising to keep accurate student grade and attendance records. Specifically, the relators claimed that Heritage committed fraudulent inducement by signing a PPA with the DOE without intending to maintain “records as may be necessary to ensure proper and efficient administration of funds” as required by the PPA, as well as under Title IV and federal regulations. The district court granted summary judgment to Heritage, finding that Heritage did not promise to keep perfect records, and any promise was not material to the disbursement of funds.

On appeal, the Eighth Circuit reversed. On the issue of intent, the Court found the evidence sufficient to survive summary judgment. Although noting that intent was undermined because “none of the identified altered records impacted Title IV disbursements or refunds,” the Court found that the evidence of Heritage’s policies requiring maintenance of accurate records, its agreement to comply with Title IV and its regulations, its pattern of altering records both before and after it signed the PPA, and its goal to maximize Title IV funds were enough to establish a disputed material fact.

Likewise, on the issue of materiality, the lack of a connection in the evidence between the altered records and the specific Title IV disbursements of funds had no impact on the Court’s finding of materiality. Rather, the Court noted that the proper inquiry centered on the “false statements that induced the government to enter the contract.” Because Heritage “could not have executed the PPA without stating it would maintain adequate records,” and “without the PPA, Heritage could not have received any Title IV funds,” the Court found that “[t]his form[ed] a ‘causal link’ between the promise and the government’s disbursement of funds” sufficient to establish materiality. Simply put, the PPA was a condition, or prerequisite, of payment­­—if Heritage had not agreed to comply with it, the college would not have received funding. Thus, the Court concluded that the district court erred in determining Heritage’s promise under the PPA was not material to the government’s disbursement of funds.

Overpayments

U.S. ex rel. Kane v. Continuum Health Partners, Inc. , No. 11-2325, 2015 WL 4619686 (S.D.N.Y. Aug. 3, 2015)

This year, the Southern District of New York issued the first judicial opinion addressing when a healthcare provider has “identified” a Medicare or Medicaid overpayment under the ACA’s requirement that providers return overpayments within 60 days of the date the payment is identified or face potential liability under the FCA. The Court concluded that “the sixty-day clock begins ticking when a provider is put on notice of a potential overpayment, rather than the moment when an overpayment is conclusively ascertained.”

The FCA, as amended by the Fraud Enforcement and Recovery Act, provides liability for one who “knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government,” 31 U.S.C. § 3729(a)(1)(G). Under the ACA, an overpayment retained after the deadline is an “obligation” under the FCA. 42 U.S.C. § 1320a-7k(d)(3).

In Continuum, whistleblower Robert P. Kane, a Continuum employee, sent an email to several members of company management with a spreadsheet listing more than 900 claims (totaling over $1 million) that Kane believed were incorrectly billed. Kane’s email indicated that further analysis would be needed to confirm his findings. Kane was terminated four days after sending his email, and he filed a qui tam complaint 61 days after sending his email. In denying Continuum’s motion to dismiss, the Court agreed with the government that Kane’s email and spreadsheet “identified” overpayments within the meaning of the ACA, and that these overpayments matured into “obligations” in violation of the FCA when they were not reported and returned by defendants within 60 days.

Jury Instructions

U.S. ex rel. Paradies v. AseraCare Inc., No. 2:12-cv-00245 (N.D. Ala.)

The FCA case against hospice provider AseraCare Inc. went to trial in August 2015. The government alleged that AseraCare submitted false claims to Medicare for patients who were not eligible for the Medicare hospice benefit. In May 2015, the Court ordered that the trial be bifurcated into two phases, with the first phase addressing the falsity element of the government’s FCA claim and the second phase addressing the remaining FCA elements and all other claims (Dkt. 298, May 20, 2015). In the first phase of the trial, the government’s medical expert testified that, in his opinion based on his review of the medical records, 123 sample patients were not eligible for the Medicare hospice benefit for all or part of the time they received hospice care because they did not have a prognosis of six months or less to live. By special interrogatories at the conclusion of phase one, the jury found that false claims had been submitted for 104 of these sample patients.

After phase one concluded, however, the Court granted AseraCare’s motion for a new trial, holding that it should have instructed the jury, as requested by AseraCare, that “the FCA requires proof of an objective falsehood” and that “a mere difference of opinion, without more, is not enough to show falsity” (emphasis in original), and stated that “failure to instruct the jury on these key points of law was reversible error” (Doc. 482 at 13, Nov. 3, 2015). The Court wrote:

The Government’s proof under the FCA for the falsity element would fail as a matter of law if all the Government has as evidence of falsity in the second trial is [the Government’s medical expert’s] opinion based on his clinical judgment and the medical records that he contends do not support the prognoses for the 123 patients at issue in Phase One. An expert’s opinion disagreeing with the clinical judgments of the certifying physicians, without more, is not enough to prove falsity under the FCA.

The Court then gave notice to the parties that it would sua sponte consider summary judgment under Rule 56(f)(3) after allowing the Government “to point to objective evidence in the Phase One record that the court may have overlooked that shows a particular claim was false, other than [the Government’s medical expert’s] testimony” and considering AseraCare’s response. As of this writing, the parties have not yet completed briefing, and the Court has not yet made a determination on the issue of whether summary judgment is warranted. [1]

Stark Law Settlements

U.S. ex rel. Drakeford v. Tuomey Healthcare Sys., Inc., 792 F.3d 364 (4th Cir. 2015)

After more than a decade of litigation, the Tuomey Healthcare System case ended with Tuomey agreeing to pay $72.4 million in settlement with the DOJ and to sell the rural, non-profit hospital system to a multi-hospital system. The October settlement followed a July decision in which the Fourth Circuit upheld a $237.5 million FCA judgment against Tuomey arising out of violations of the Stark Law.

The relator alleged that Tuomey, concerned about lost revenue from outpatient procedures migrating from its facilities to physician-owned facilities, entered into part-time employment agreements with physicians requiring them to refer their outpatient procedures to Tuomey and provided compensation exceeding fair market value.

On appeal, the Fourth Circuit affirmed the jury verdict against Tuomey, addressing, among other issues, the advice-of-counsel defense and damages in FCA actions premised on Stark Law violations. While acknowledging the availability of the advice-of-counsel defense generally to disprove intent, the Court found that the jury could reasonably have rejected it in this case, where one attorney had advised Tuomey that the agreements raised significant concerns and the later attorney who had approved the agreements had not been informed of the first attorney’s opinion. The Fourth Circuit next rejected Tuomey’s argument that the proper measure of damages was the difference between the amount the government paid for the claims at issue and the value of the services provided, noting that the Stark Law “expresses Congress’s judgment that all services provided in violation of that law are medically unnecessary,” and the government was entitled to the “full amount of the payments.” The Court also found that the damages award did not constitute an unconstitutional penalty under either the Excessive Fines Clause of the Eighth Amendment or the Due Process Clause of the Fifth Amendment. The Court concluded that “while the penalty is certainly severe, it is meant to reflect the sheer breadth of the fraud Tuomey perpetrated on the federal government.” In a separate opinion, one judge bemoaned the “impenetrably complex set of laws and regulations that will result in a likely death sentence for a community hospital in an already medically underserved area,” but nevertheless concurred in the outcome.

In the wake of Tuomey, the DOJ announced several multimillion-dollar settlements with other health systems premised on Stark Law allegations, including:

• On September 4, 2015, the DOJ announced that Georgia hospital system Columbus Regional Healthcare System agreed to a five-year Corporate Integrity Agreement (CIA) and a settlement of $25 million, plus up to $10 million in contingency payments.
• On September 15, 2015, the DOJ announced that Florida special taxing district North Broward Hospital District agreed to a five-year CIA and a settlement of $69.5 million.
• On September 21, 2015, the DOJ announced that Florida-based hospital chain Adventist Health System agreed to a settlement of $119 million.

Though the specific allegations differed in each of these FCA settlements, they each involved allegations of physician compensation arrangements in violation of the Stark Law.

Awarding Costs

U.S. ex rel. Assocs. Against Outlier Fraud v. Huron Consulting Grp., Inc ., No. 09-cv-01800-JSR, 2015 WL 539672 (S.D.N.Y. Feb. 3, 2015)

In a case alleging inflation of Medicare outlier payments, Judge Jed S. Rakoff in the Southern District of New York granted summary judgment against relator Associates Against Outlier Fraud and awarded costs to the defendants Huron Consulting Group, Inc. and Empire HealthChoice Assurance Inc. Associates Against Outlier Fraud argued against the costs award under Fed. R. Civ. P. 54(d)(1) because the lawsuit was not “clearly frivolous, clearly vexatious, or brought primarily for purpose of harassment,” as required by the FCA. The Court affirmed the award of costs, observing that fees, expenses, and costs are three distinct categories under the language of the FCA. The Court held that the FCA’s limitation on the recovery of attorneys’ fees and expenses does not bar an award of costs under Rule 54.

Admissibility of Relator’s Share Testimony

Jones ex rel. U.S. v. Mass. Gen. Hosp. , 780 F.3d 479 (1st Cir. 2015)

In Jones, the relator alleged that defendant hospitals and physicians violated the FCA by submitting a grant application to the National Institute on Aging for Alzheimer’s disease research that was based on falsified data. The data in question consisted of re-measurements of the entorhinal cortex of the brain that supported a correlation with Alzheimer’s, whereas the initial measurements had not supported such a correlation. After a jury verdict for the defendants, the relator appealed the Court’s decision to deny his motions for judgment as a matter of law and for a new trial.

The First Circuit affirmed. Notably, the Court reviewed the trial court’s decision to allow the defense to question the relator about his statutory share of any recovery in the action. The First Circuit found that, “[w]hile in some cases it may prove inappropriate or unnecessary to delve into the financial incentives of a relator, in this case Jones’s testimony and credibility were critical to the FCA claim,” and further noted that “information as to bias can be of great assistance” to a jury in making credibility determinations.

Dismissal Theories of Note

Smith v. Clark/Smoot/Russell, 796 F.3d 424 (4th Cir. 2015)

Relator Brian K. Smith alleged that his employer, a government contractor, failed to pay him appropriate wages required by the Davis-Bacon Act while falsely certifying compliance with the Act. Shortly after filing the FCA complaint, Smith’s attorney disclosed its existence to Smith’s employer, violating the FCA’s seal provisions. The district court dismissed relator Smith’s complaint with prejudice, partially based on the violation of the seal.

On appeal, the Fourth Circuit reversed. The Court acknowledged that an FCA case may be dismissed with prejudice for violation of the statute’s seal provisions where the violation “results in an incurable and egregious frustration of the statutory objectives underlying the filing and service requirements.” Here, however, the Court found that the seal violation did not mandate dismissal of the case because the violation did not frustrate the purposes of the seal requirement, noting that the government was still able to investigate the claims and the disclosure was between the parties and not to the public, so that the employer’s reputation was not harmed.

U.S. ex rel. Long v. GSD & M Idea City, LLC, 798 F.3d 265 (5th Cir. 2015)

After filing for Chapter 13 bankruptcy and being subject to a confirmed bankruptcy plan, relator filed a qui tam complaint against his employer alleging that GSD & M Idea City violated the FCA by misrepresenting its profits and overhead when negotiating contracts with the U.S. Air Force. Although FCA claims are considered property under the Bankruptcy Code, Long had not disclosed his FCA claims to the bankruptcy court.

Upon discovering his failure to disclose his FCA claims in bankruptcy court, the district court dismissed the FCA action on judicial estoppel grounds. The Fifth Circuit affirmed the finding that the relator’s concealment of the FCA claims from the bankruptcy court had not been inadvertent, as he had knowledge of the facts underlying the claims before the “halfway point in his five-year bankruptcy plan” and had a financial motive to conceal the claims—namely, avoiding the potential modification of his favorable bankruptcy plan.

In a later opinion, the Fifth Circuit affirmed an award of costs against the relator under Fed. R. Civ. P. 54(d) for the defendant’s expenses related to transcripts, videography, exemplification and copying, printing, and witness fees (see No. 14-11049, 2015 WL 7744578 (5th Cir. Dec. 1, 2015).

What to Watch in 2016

Civil Penalties to Increase

The per-claim civil penalty under the FCA is set to increase significantly in the coming year due to the recent passing of the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015 (the Act) in the Bipartisan Budget Act of 2015, H.R. 1314, 114th Cong. § 701. The Act requires federal agencies to increase civil monetary penalty amounts to account for inflation by August 1, 2016, and again on January 15 of each subsequent year. The penalties are to be increased initially by a cost-of-living adjustment percentage determined by comparing the Consumer Price Index for October 2015 to the Consumer Price Index for October of the year the penalty was last adjusted, which was 1999 for the FCA. The Act allows for some discretion by the agency in reducing the penalty adjustment, if the agency follows a notice-and-comment process on the social costs or negative impact of the penalty increase and the Office of Management and Budget concurs in its analysis.

Upcoming Supreme Court Decision on Implied Certification

As noted above, the U.S. Supreme Court has granted certiorari in U.S. ex rel. Escobar v. Universal Health Services (1st Cir. 2015). The questions presented are (1) whether the “implied-certification” theory of legal falsity under the FCA—applied by the First Circuit below but recently rejected by the Seventh Circuit—is viable; and (2) if the “implied-certification” theory is viable, whether a government contractor's reimbursement claim can be legally “false” under that theory if the provider failed to comply with a statute, regulation, or contractual provision that does not state that it is a condition of payment (as held by the First, Fourth, and D.C. Circuits); or whether liability for a legally “false” reimbursement claim requires that the statute, regulation, or contractual provision expressly does state that it is a condition of payment (as held by the Second and Sixth Circuits).

Upcoming Fourth Circuit Decision on Extrapolation

In U.S. ex rel. Michaels et al. v. Agape Senior Community, Inc., former employees of nursing home operator Agape brought an FCA suit against their employer alleging widespread Medicare fraud for hospice care and general inpatient services, allegedly impacting between 53,000 and 61,000 claims. The government elected not to intervene in the suit. After briefing and argument on the issue of using statistical sampling and extrapolation, the District of South Carolina ruled that it would not allow the relator to use statistical sampling to prove liability and damages. The parties then reached an agreement to settle the case for $2.5 million, which the government rejected based upon its independent assessment by statistical sampling and extrapolation that the case was worth $25 million. The District Court reviewed the case law on extrapolation and found that the current case was not one suited for statistical sampling because of the fact-intensive inquiries required for each patient to determine whether care was medically necessary. As the relator’s pre-trial expenses without sampling would amount to between $16.2 million and $36.5 million, possibly exceeding the government’s assessed value of the case, the district court certified two issues for interlocutory appeal to the Fourth Circuit: (1) the government's right to reject a settlement in an FCA action in which it has not intervened, and (2) the use of statistical sampling to prove liability and damages. This is set to be the first court of appeals opinion to address whether the use of statistical sampling and extrapolation is permissible to prove elements of liability under the FCA.

Yates Memo

A memorandum issued by Deputy Attorney General Sally Quillian Yates on September 9, 2015, stated a number of policy directives and clarifications for the DOJ with regard to increasing focus on prosecuting individual employees alongside corporations for corporate wrongdoing. Civil FCA investigations are included within the scope of this policy statement. It remains to be seen whether there will be an actual increase in civil FCA actions against individuals and how companies under investigation may change the scope of their cooperation with the government in light of this new memorandum.