American Health Lawyers Association
Total Page：16
File Type：pdf, Size：1020Kb
American Health Lawyers Association
2015 Fundamentals of Health Law
Introduction to the False Claims Act: The Government’s Favorite Fraud Fighting Weapon
Michael E. Paulhus Jennifer S. Lewin Ramsey B. Prather
TABLE OF CONTENTS1
I. False Claims Act Basics...... 1 II. Defense—Materiality...... 3 III. Defense—Intent...... 8 IV. Defense—Falsity...... 10 V. Defense—Public Disclosure Bar...... 15 VI. Defense—First-to-File Bar...... 18 VII. Defense—Federal Rule of Civil Procedure 9(b)...... 18 VIII. Defense—Constitutional...... 22 IX. Collateral Issues...... 24 Appendix Recent Amendments to the FCA...... 27
1. False Claims Act Basics.
The False Claims Act (“FCA”) is codified at 31 U.S.C. §§ 3729-3733. The FCA’s origins trace back to the Civil War when Congress passed legislation to curb perceived abuses in armament sales to the Union Army. The FCA was little used until Congress made substantial amendments in 1986. In 2009, Congress passed the Fraud Enforcement and Recovery Act of 2009 (“FERA”), which contains the most significant changes to the Act since the 1986 amendments. Congress made additional changes to the FCA in 2010, by the Patient Protection and Affordable Care Act (“PPACA”), including important changes to the public disclosure bar and original source provisions, as well as the definition of overpayment for purposes of the “reverse false claims” provision. On July 21, 2010, the President signed into law H.R. 4173, the Dodd-Frank Wall Street Reform
1 Discussion of the concepts in this paper are quoted in/derived from an article previously published by the American Health Lawyers. See Michael E. Paulhus, False Claims Act: Key Concepts, Recent Changes, and Effective Defense Strategies (Fall 2010); Michael E. Paulhus, Jennifer S. Lewin, & Ramsey B. Prather, Introduction to the False Claims Act: The Government’s Anti-Fraud Tool of Choice, American Health Lawyers Association, 2013 Fundamentals of Health Law; Michael E. Paulhus, Jennifer S. Lewin, & Ramsey B. Prather, Primer on the False Claims Act: The Government’s Key Weapon in Combatting Fraud, American Health Lawyers Association, 2014 Fundamentals of Health Law; Michael E. Paulhus, Jennifer S. Lewin, & Ramsey B. Prather, Introduction to the False Claims Act: The Government’s Go-To Fraud Enforcement Mechanism, American Health Lawyers Association, 2015 Fraud and Compliance Forum. Any further reproduction of this work requires the advance written permission of the American Health Lawyers Association. and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (the “Financial Reform Act”), which further amended the FCA to strengthen the anti-retaliation provisions in 31 U.S.C. § 3730(h). This paper provides an overview of key provisions of the FCA, changes made by recent legislation, and strategies relevant to health lawyers defending FCA actions.
Liability Provisions.
After FERA, the FCA imposes liability upon any person who, inter alia:
(a)(1)(A)—“knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval;”
(a)(1)(B)—“knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim;”
(a)(1)(C)—“conspires to commit a violation of subparagraph (A), (B), (D), (E), (F), or (G);”
(a)(1)(G)—“knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the Government, or 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.
FCA penalties and damages are substantial. Pursuant to 31 U.S.C. § 3729(a), violations of the FCA are punishable by: (1) statutory civil penalties of $5,500-$11,000 per false claim and (2) treble damages.
There are four primary elements of an FCA violation:
(1) knowledge (or intent);
(2) materiality;
(3) causation; and
(4) the existence of a false claim.
The FCA defines “knowingly” to mean acting: (1) with actual knowledge; (2) in reckless disregard; or (3) with deliberate ignorance of the truth or falsity of the claim. “Recklessness,” which sets the lowest bar for proving scienter, is not defined in the statue.
2 Whistleblower Provisions.
Private citizens (“relators”) may file complaints alleging violations of the FCA. These suits are called “qui tam” actions. Initially, a qui tam complaint is filed under seal. The number of whistleblower actions has been steadily increasing in recent years.
Pursuant to 31 U.S.C. § 3730(e)(4), prior to FERA if the information providing the basis for the relator’s allegations had been publicly disclosed, the relator’s action was jurisdictionally barred unless the relator was an “original source” of the information, meaning the relator had direct and independent knowledge of the underlying facts. After PPACA, the jurisdictional bar is removed and to be an “original source” the relator must have knowledge that is “independent of and materially adds” to the underlying facts or voluntarily provide information to the government prior to a public disclosure.
Once a whistleblower files an FCA action, the Department of Justice (“DOJ”) must decide whether to “intervene” (i.e., take over and prosecute the action). DOJ has by statute 60 days after service to investigate the claims and decide whether to intervene, although it typically requests an extension of time to reach its decision.
If the government does not intervene, the case is unsealed and the relator may proceed on his/her own with some government monitoring. If the government intervenes, the case is unsealed, and the government takes the lead in the case with the relator taking a secondary role. Many cases are resolved prior to unsealing.
The relator receives a certain percentage of the government’s recovery if the relator prevails in the action, either through litigation or in a settlement. These percentages can range from 0% under certain circumstances to 30%, depending on whether the government has intervened. See 31 U.S.C. § 3730(d).
The government and relator may also recover attorney’s fees and costs from the defendant. If the defendant prevails, it may recover attorney’s fees from the relator if the claim was frivolous, vexatious, or brought primarily for the purpose of harassment.
The FCA also punishes retaliation against certain relators. Codified at 31 U.S.C. § 3730(h), the provision prior to FERA and the Dodd-Frank Financial Reform Act, prohibited discrimination against an employee “in the terms and conditions of employment by his or her employer because of lawful acts … in furtherance of an action under [the FCA].”
2. Defense—Materiality.
Prior to FERA, the majority of courts had held that a relator was required to prove that the alleged falsity was material to the government’s payment decision. Allison Engine Co. v. United States ex rel. Sanders, 128 S. Ct. 2123, 2126 (2008). There was some debate in the courts regarding the standard for determining materiality—between the weaker materiality standard that asked whether the claim was “capable of influencing” or had a “natural tendency to influence” the government payment decision,
3 as opposed to the “outcome materiality” test that asked whether the government actually relied on the information. Compare United States ex rel. A+ Homecare, Inc. v. Medshares Mgmt. Group, Inc., 400 F.3d 428 (6th Cir. 2005) (natural tendency test); Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 789 (4th Cir. 1999) (same), with Costner v. URS Consultants, Inc., 153 F.3d 667, 677 (8th Cir. 1998) (outcome materiality test). FERA clarified that the weaker “natural tendency” standard applies to claims under 31 U.S.C. §§ 3729(a)(1(B) and (a)(1)(G).
Overview of Materiality Element.
United States ex rel. Miller v. Weston Educ., Inc., 784 F.3d 1198 (8th Cir. 2015).
Former employees of a college alleged that the college altered grade and attendance records to maximize Title IV funds and brought an FCA action alleging numerous theories of FCA liability.
The college argued that the “falsified grade and attendance records did not cause improper disbursement or retention of Title IV funds, and thus were not material to government funding decisions.” Id. at 1207. However, the Eighth Circuit disagreed, holding that participation in Title IV was conditioned on compliance with adequate recordkeeping, and that the college represented it would maintain adequate records in order to enter into a written program participation agreement (PPA). Id. at 1208. The court held that the college “could not have executed the PPA without stating it would maintain adequate records. And without the PPA, [the college] could not have received any Title IV funds. This forms a ‘causal link’ between the promise and the government’s disbursement of funds.” Id.
The court also noted that actual harm is not an element of materiality. Id. at 1209.
United States ex rel. Lemmon v. Envirocare of Utah, Inc., No. 09- 4079, 2010 WL 3025021 (10th Cir. Aug. 4, 2010).
Former employees of government contractor brought qui tam claims under the FCA, alleging that the contractor violated its contractual and regulatory obligations by improperly disposing of hazardous
4 waste and falsely representing to the government that it had fulfilled its obligations.
The Tenth Circuit held that the FCA’s materiality requirement makes a false certification actionable “only if it leads the government to make a payment which, absent the falsity, it may not have made.” Id. at *4 (emphasis added). The Plaintiffs, therefore, were not required to show conclusively that the Government would not have paid Defendant if it were aware of the falsity.
United States ex rel. Longhi v. Lithium Power Techs., Inc., 575 F.3d 458 (5th Cir. 2009), cert denied, 130 S. Ct. 2092 (2010).
Relying on FERA’s adoption of the “natural tendency to influence” test, the Fifth Circuit adopted a broader materiality requirement than the “outcome materiality” test it had previously advanced. Id. at 470.
Specifically, the Fifth Circuit held that materiality requires only a showing “that the false or fraudulent statements have the potential to influence the government’s decisions.” Id. (emphasis added). Under this standard, the Court concluded that the defendant’s false statements were material and violated the FCA.
United States v. Bourseau, 531 F.3d 1159, 1163-64 (9th Cir. 2008).
Hospital operators were alleged to have submitted false claims for cost reports that included improper expenses.
The Ninth Circuit recognized that the FCA contains an implicit materiality requirement, specifically in the § 3729(a)(7) reverse false claims context. Id. at 1170-71.
Defendants argued that the inclusion of the improper claims on hospital cost reports was immaterial because the fiscal intermediaries did not actually review the cost reports in making payment decisions. The court rejected this argument, applying the “natural tendency” test of materiality to conclude “Appellants’ cost report entries were
5 material because they had the potential effect, or natural tendency, to decrease the amount . . . owed Medicare in overpayments, despite the fact that cost reports were never audited.” Id. at 1171.
United States ex rel. Sanders v. N. Am. Bus Indus., Inc., 546 F.3d 288, 290 (4th Cir. 2008).
Relator filed qui tam action under the FCA alleging that the defendant underpaid duties on bus frames it imported from Hungary and falsely certified that buses it manufactured using those frames were eligible for federal subsidies.
After examining whether the alleged false statements and conduct had a “natural tendency to influence” or were “capable of influencing” the government, the court held that the false statements were immaterial. Id. at 299.
United States v. Rogan, 517 F.3d 449, 452 (7th Cir. 2008).
The Seventh Circuit held that omissions in a hospital’s reimbursement claims, which failed to disclose that illegal referrals had occurred or that kickbacks had been paid, were material to the government’s claims under the FCA.
The court applied the “capable of influencing” the government’s payment decision standard, which would apply “even if those who make the decision are negligent and fail to appreciate the statement’s significance.” Id. at 452.
Materiality Defense Based on Reimbursement Context.
In FCA cases alleging false claims to Medicare, Medicaid, TRICARE/CHAMPUS, or the Veterans Administration, it is important to develop a detailed understanding of how each program reimburses claims for payment. Reimbursement decisions often turn on details such as the location of service (hospital inpatient department, hospital outpatient department, ambulatory surgery center, skilled nursing facility, physician office), the provider of care (hospital, physician, nursing staff), and product (pharmaceutical, durable medical equipment, implantable device, or professional services).
6 One trend worth noting is cases finding that claims for individual products listed on claim forms submitted to Medicare/Medicaid, such as drugs, implantable devices, and disposable supplies for inpatient treatments are not material to a government payment decision because the government reimburses general, acute care hospitals a fixed amount based on the particular Diagnosis Related Group (“DRG”) assigned to the patient’s hospital stay according to the patient’s particular illness.
United States ex rel. Stephens v. Tissue Sci. Labs., Inc., 664 F. Supp. 2d 1310 (N.D. Ga. 2009).
Former contract sales representatives alleged off- label promotion of TSL’s hernia repair device Permacol. The court found under Federal Rule of Civil Procedure 12(b)(6) that Relators could not establish the FCA’s materiality requirement as to Medicare/Medicaid claims because the government pays a predetermined amount for each admission based on the DRG assigned to the patient’s illness.
United States ex rel. Digiovanni v. St. Joseph’s/Candler Health Sys., Inc., No. CV404-190, 2008 WL 395012 (S.D. Ga. Feb. 8, 2008).
Dismissing complaint alleging submission of false claims to Medicare that included “impermissible charges for supplies and reusable equipment,” the court stated that “[b]ecause the PPS system pays a standard rate based on a patient diagnosis and the DRG code, the itemized charges on the patient’s bill are immaterial to the amount of reimbursement a provider receives from Medicare Part A,” and thus, cannot establish a viable claim under the FCA. Id. at *6.
United States ex rel. Kennedy v. Aventis Pharm., Inc. , No. 03 C 2750, 2008 WL 5211021 (N.D. Ill. Dec. 10, 2008).
The court dismissed FCA allegations based on off- label promotion of a drug, Lovenox. The court recognized that “the government paid the hospitals according to the previously determined [D]RG rate, which has nothing to do with the particular drugs prescribed or used in the patient’s treatment. . . . Because relators cannot show that individual patient bills were material to the government’s decision to
7 pay, they cannot prove an essential element of their claim.” Id. at *3.
The court has since permitted relators to survive a motion to dismiss with a later-amended complaint based on claims regarding outlier payments. See United States ex rel. Kennedy v. Aventis Pharm., Inc., 610 F. Supp. 2d 938, 944 (N.D. Ill. 2009).
United States ex rel. Magid v. Wilderman , No. 96-CV-4346, 2004 WL 945153, at *8-9 (E.D. Pa. Apr. 29, 2004).
Granting summary judgment, in part, on FCA claims because Medicare did not specifically reimburse for certain lab tests due to use of DRGs.
United States ex rel. Schell v. Battle Creek Health Sys. , No. 1:00-CV- 143, 2004 WL 784978, at *4 (W.D. Mich. Feb. 25, 2004), rev’d on other grounds, 419 F.3d 535 , 537 n.1 (6th Cir. 2005) (DRG materiality ruling regarding inpatients not at issue on appeal).
Granting summary judgment because, under DRG payment system, claims of overcharges for medication provided to inpatients would not have affected payment.
3. Defense—Intent.
The FCA’s scienter requirement provides that “no proof of specific intent to defraud is required,” and it defines a “knowing” violation as committed by a person who:
(1) has actual knowledge of the information;
(2) acts in deliberate ignorance of the truth or falsity of the information; or
(3) acts in reckless disregard of the truth or falsity of the information.
31 U.S.C. § 3729(b)(1). “Recklessness,” which sets the lowest bar for proving scienter, is not defined in the statute, and recent cases have shed light on the contours of this element.
8 Objective Intent of Recklessness Required.
Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47, 68-71(2007).
In Safeco, the Court interpreted the requirements for a finding of “recklessness” sufficient to violate the Fair Credit Reporting Act.
The defendant did not believe the provision at issue applied to its conduct, which belief the Court determined was incorrect as a matter of law. Nevertheless, the Court found the defendant had not acted recklessly. Id. at 71.
The court explained that “recklessness” is understood as “conduct violating an objective standard: action entailing ‘an unjustifiably high risk of harm that is either known or so obvious that it should be known.’” Id. at 68. In this case, there was no court of appeals decision on the statute and no authoritative guidance from the FTC. The Court concluded, “[g]iven this dearth of guidance and the less-than-pellucid statutory text, Safeco’s reading was not objectively unreasonable, and so falls well short of raising the ‘unjustifiably high risk’ of violating the statute necessary for reckless liability.” Id. at 70.
United States ex rel. K&R Ltd. P’ship v. Mass. Hous. Fin. Agency, 530 F.3d 980, 983-84 (D.C. Cir. 2008).
Applied the Safeco analysis of recklessness to the FCA.
An FCA qui tam action against the Massachusetts Housing Finance Agency (“MassHousing”) alleged that the MassHousing knowingly submitted excessive subsidy payment claims to the HUD under a mortgage assistance program. Id. at 981.
The dispute involved differing interpretations of ambiguous contract language, with the court applying the Safeco analysis of recklessness to the FCA. The court held that because there was nothing “‘that might have warned [MassHousing] away from the view it took,’ . . . there [was] no
9 genuine issue as to whether MassHousing knowingly presented false claims to HUD.” Id. at 984 (quoting Safeco, 551 U.S. at 70).
See also United States v. Sodexho, Inc., No. 03- 6003, 2009 WL 579380, at *16 n.7 (E.D. Pa. Mar. 6, 2009) (citing K&R Ltd. approvingly and granting MTD), aff’d, 364 F. App’x 787 (3d Cir. 2010).
See also United States ex rel. Thomas v. Siemens AG, 991 F. Supp. 2d 540, 568 (E.D. Pa. 2014) (“Without more than a relator's subjective interpretation of an imprecise contractual provision, a defendant's reasonable interpretation of its legal obligation precludes a finding that the defendant had knowledge of its falsity.”) (citing K&R Ltd.).
Scienter and Error Rates.
(1) United States ex rel. Stone v. Omnicare, 2011 WL 2669659 (N.D. Ill. July 7, 2011).
The relator attempted to allege fraud by stating that the error rate was so high in probe sample audits that the defendant “knew or should have known that false or fraudulent claims were being made.” Court disagreed. A high error rate does not mean the claims must be false and that the defendant knew or should have known of the falsity.
4. Defense—Falsity.
It is important to recognize the difference between arguing a defense based on the inability to establish “intent” because conduct was not reckless given the uncertainty of the state of the law, and the similar but distinct argument that regulatory ambiguity leads to the conclusion that a given claim is not “false.”
This distinction, sometimes blurred by courts, is important because falsity is a defense available in arguing a motion to dismiss, whereas courts generally hold that intent is not properly resolved on a motion to dismiss. United States ex rel. Roop v. Hypoguard USA, Inc., 559 F.3d 818, 825 (8th Cir. 2009) (affirming dismissal of FCA claim for failure to sufficiently plead falsity); United States ex rel. Cox v. Iowa Health Sys., 29 F. Supp. 2d 1022, 1026 (S.D. Iowa 1998) (dismissing relator’s action because it gave no “indications of the claims’ falsity”).
10 Regulatory Ambiguity.
Several courts have held that claims cannot be deemed “false” under the FCA when a reasonable interpretation is applied to an ambiguous contract, statute, or regulation.
United States ex rel. Arnold v. CMC Engineering, 2014 U.S. App. LEXIS 10150 (3d Cir. June 2, 2014).
The relator argued that engineering firm submitted false claims for services of inspectors who worked on highway projects because the inspectors did not have the qualifications that entitled them to the pay rates claimed. Court held that the contracts setting forth the qualifications necessary to trigger each pay rate were ambiguous, and as a result, there was no evidence from which a reasonable jury could find that the defendant “knowingly” made a factually false claim or false certification.
United States ex rel. Rostholder v. Omnicare, Inc., 745 F. 3d 694 (4th Cir. 2014).
Court noted that the “correction of regulatory problems is a worthy goal, but is ‘not actionable under the FCA in the absence of actual fraudulent conduct.” (emphasis in original). Court held that allegations of regulatory violations fail to support FCA liability because compliance with the regulation at issue was not required for payment.
United States ex rel. Williams v. Renal Care Group, Inc., 696 F.3d 518 (2012).
Court noted that the FCA is “not a vehicle to police technical compliance with complex federal regulations.” Court also held that violating “conditions of participation” in a federal program does not render claims “false” under the FCA.
United States ex rel. Streck v. Allergan, Inc. et al., 894 F. Supp. 2d 584, 595-96 (E.D. Pa. 2012).
Court noted that reasonable reliance on regulatory guidance – particularly guidance that the government itself has admitted is “opaque” – does
11 not amount to knowledge or reckless disregard as to falsity.
United States ex rel. Jamison v. McKesson Corp., 784 F. Supp. 2d 664, 676-77 (N.D. Miss. 2011).
“ [T]he Government’s contention here rests not on an objective falsehood, as required by the FCA, but rather on its subjective interpretation of Defendants’ regulatory duties. . . . If the regulations were thoroughly unclear, as a matter of law, the FCA’s knowledge and falsity requirements have not been met . . . . Indeed, imprecise statements or differences in interpretation growing out of a disputed legal question are similarly not false under the FCA.”
United States ex rel. Hixson v. Health Mgmt. Sys., Inc., 657 F. Supp. 2d 1039, 1056-57 (S.D. Iowa 2009), aff’d No. 09-3439, 2010 WL 2977396 (8th Cir. July 30, 2010).
Court found defendants did not make any false claims to the government because they “acted according to a plausible interpretation of the law that no court had ever contradicted,” acknowledging that the Medicaid laws and regulations at issue “created an ambiguity in who should pay.”
United States ex rel. Wilson v. Kellogg Brown & Root, Inc., 525 F.3d 370, 378 (4th Cir. 2008).
An FCA relator cannot base a claim on “nothing more than his own interpretation of an imprecise contractual provision” and to “hold otherwise would render meaningless the fundamental distinction between actions for fraud and breach of contract.”
United States ex rel. Morton v. A Plus Benefits, Inc., 139 F. App’x 980, 984 (10th Cir. 2005).
“ Expression of a legal opinion, in this case depending, as it does, on the resolution of two sets of inherently ambiguous determinations by
12 defendants, cannot form the basis for an FCA claim.”
Accordingly, the court affirmed a 12(b)(6) dismissal for failure to “allege the required ‘false or fraudulent’ claim.” Id.
United States v. Southland Mgmt. Corp., 326 F.3d 669, 684 (5th Cir. 2003) (en banc) (Jones, J. concurring).
“ Where there are legitimate grounds for disagreement over the scope of a contractual or regulatory provision, and the claimant’s actions are in good faith, the claimant cannot be said to have knowingly presented a false claim.”
United States ex rel. Lamers v. City of Green Bay, 168 F.3d 1013, 1018 (7th Cir. 1999).
Court held that “errors based simply on faulty calculations or flawed reasoning are not false under the FCA. . . [a]nd imprecise statements or differences in interpretation growing out of a disputed legal question are similarly not false under the FCA.”
Hagood v. Sonoma Cnty. Water Agency, 81 F.3d 1465, 1477 (9th Cir. 1996).
“ How precise and how current the cost allocation needed to be in light of the [Water Supply Act’s] imprecise and discretionary language was a disputed question within the [Government]” and “shows only a disputed legal issue[] that is not enough to support a reasonable inference that the allocation was false within the meaning of the [FCA].”
Differences With Respect to Clinical Judgments.
Several courts have held that claims cannot be deemed “false” under the FCA with respect to clinical judgments where reasonable minds can differ. This principle has particular significance in the context of differing views due to reasonable variations in clinical judgment regarding medical necessity and/or patient eligibility for certain services.
13 United States ex rel. Wall v. Vista Hospice Care, Inc., 778 F. Supp. 2d 708, 718 (N.D. Tex. 2011).
Court held that “an FCA complaint attacking defendant’s clinical judgment must be predicated on the presence of an objectively verifiable fact at odds with the exercise of that judgment, not a matter of subjective clinical analysis.”
United States ex rel. Morton v. A Plus Benefits, Inc., 139 F. App’x 980, 983 (10th Cir. 2005).
“ Expressions of opinion, scientific judgments, or statements as to conclusion about which reasonable minds may differ cannot be false. . . . We agree that liability under the FCA must be predicated on an objectively verifiable fact.”
United States v. Prabhu , 442 F. Supp. 2d 1008, 1026 (D. Nev. 2006).
“ [C]laims are not “false” under the FCA when reasonable persons can disagree regarding whether the service was properly billed to the Government.” Id.
“ The Government . . . failed to prove falsity as a matter of law, by failing to dispute the overwhelming evidence that [the defendant] was following the instructions he received from his carrier in billing for pulmonary stress tests as part of his pulmonary rehabilitation program.” Id. at 1027.
Quality of Care.
In recent years, the government and qui tam relators have increasingly attempted to establish falsity under a “worthless service” theory in healthcare FCA cases. This theory of falsity purports that “the performance of the service is so deficient that for all practical purposes it is the equivalent of no performance at all.” Mikes v. Straus, 274 F.3d 687, 703 (2d Cir. 2001).
The Seventh Circuit recently cast doubt on the worthless services theory of FCA liability. See United States ex rel. Absher v. Momence Meadows Nursing Ctr., Inc., 764 F.3d 699 (7th Cir. Aug. 20, 2014). As the Seventh Circuit explained, “[i]t is not enough to offer evidence that the defendant provided services that
14 are worth some amount less than the services paid for” to establish falsity under this theory. Thus, “[s]ervices that are ‘worth less’ are not ‘worthless.’”
See also United States ex. rel. Campie v. Gilead Sciences, Inc., No. C-11-0941 EMC, 2015 WL 3659765, at *8 (N.D. Cal. June 12, 2015)
“To have a factually false certification claim based on worthless services, the services must be medically worthless. . . . In the instant case, Relators have made allegations that suggest reduced medical value, but have failed to adequately plead no medical value at all.”
Sampling.
In United States ex rel. Martin v. Life Care Centers of America (slip op. Sept. 29, 2014), the United States District Court for the Eastern District of Tennessee ruled that, in complex healthcare FCA cases involving a large number of claims, the government is permitted to extrapolate the results of a statistically valid sample of claims to a larger universe to prove (1) the number of claims that the defendant submitted to the government, (2) whether those claims were false, and (3) whether the claims were material to the government’s decision to pay.
The government alleged in Martin that a large, multi-state SNF provider defrauded the government by providing medically unnecessary rehabilitation therapy to its patients. The government sought to extrapolate its findings with respect to a sample of 400 patients to a larger universe of patients at 85 of the provider’s SNFs.
The nursing home provider argued that it would be improper to allow the government to prove its FCA case through sampling for several reasons. The provider argued that the government should be required to prove that each claim at issue had actually been submitted to the government. Rejecting this argument, the court responded that the provider offered no authority to support its argument that proving up claim submission could not be accomplished through sampling and extrapolation.
After gaining traction last year, 2015 has seen continued attempts by qui tam relators and the government to rely on statistical sampling and extrapolation in establishing both liability and damages in False Claims Act cases. Although the trend seemed to be that federal district courts would approve of sampling in FCA litigation involving large numbers of claims, a district court recently rejected this approach in a healthcare case involving more than 10,000 claims. See United States ex rel. Michaels v. Agape Senior Community, Inc., No. 12-3466, 2015 WL 3903675, at *8 (D.S.C. June 25, 2015). The Michaels court reasoned that statistical sampling is not appropriate in healthcare FCA cases in which proving liability and damages requires a “highly fact- intensive inquiry involving medical testimony after a thorough review of the detailed
15 medical chart of each individual patient.” Id. at 17. The Fourth Circuit recently decided to take up this question for interlocutory review.
5. Defense—Public Disclosure Bar .
The FCA’s “public disclosure bar” provides a useful tool for dismissing relators from FCA cases. Although the provision does not preclude the government from bringing an FCA action, in cases in which the government declines to intervene, the provision can be determinative in ending the case. Accordingly, this is one of the most heavily-litigated sections of the FCA. See App’x, Sections II(C) and (D) for a detailed discussion of the changes PPACA made to the public disclosure bar.
After PPACA's enactment, § 3730(e)(4) provides that a “court shall dismiss an action or claim” when the provision applies. The few district courts to have addressed the issue are split as to whether the public disclosure provision remains jurisdictional in nature. Compare United States ex rel. Paulos v. Stryker Corp., No. 11–0041–CV–W– ODS, 2013 WL 2666346, at *3 (W.D.Mo. June 12, 2013) (“After the 2010 amendment, the bar does is [sic] not described as jurisdictional in nature.”) and United States v. Chattanooga–Hamilton Cnty. Hosp. Auth., 1:10–CV–322, 2013 WL 3912571, at *7 n. 6 (E.D.Tenn. July 29, 2013) (“[T]he pre-PPACA language made the public disclosure bar jurisdictional in nature whereas the post-PPACA language still provides a basis for dismissal but that basis is no longer jurisdictional.”), with United States ex rel. Beauchamp v. Academi Training Ctr., Inc., No. 1:11cv371, 2013 WL 1189707, at *9 (E.D.Va. Mar. 21, 2013).
Schindler Elevator Corp. v. United States ex rel. Kirk, 131 S. Ct. 1885 (2011)
In Schindler Elevator Corp., the Supreme Court held that, under the pre-PPACA public disclosure bar, a federal agency’s written response to a Freedom of Information Act (“FOIA”) request for records constitutes a “report” within the meaning of the FCA’s public disclosure bar.
United States ex rel. Osheroff v. Humana, Inc., 776 F.3d 805 (11th Cir. 2015)
In Osheroff, the relator alleged that certain clinics provided a variety of free services for patients and health plan members in violation of the Anti-Kickback Statute. The Eleventh Circuit held that “news media” has a “broad sweep” and includes newspaper advertisements and the clinics’ publicly available websites for the purpose of the public disclosure analysis. The court went on to find that the relator was not an original source because his information “did not materially add to the public disclosures,
16 which were already sufficient to give rise to an inference that the clinics were providing illegal remuneration to patients.”
Rockwell Int’l Corp. v. United States, 549 U.S. 457 (2007).
In Rockwell, the Supreme Court held that a qui tam plaintiff alleging environmental crimes by his previous employer was not an “original source” of information as required by the FCA. The relator did not possess “direct and independent knowledge” of the allegations because the actual false claims were not discovered until after his employment ended. The district court accordingly lacked jurisdiction to enter judgment in the plaintiff’s favor, since the plaintiff was not qualified as an original source.
The Court emphasized that the relator must be the original source of all the allegations in the complaint, including any amendments thereto, rather than the original source of any public disclosures. Second, if the case shifts after the government’s investigation and the allegations change, as they did with Rockwell, the court may lose subject matter jurisdiction (for pre-PPACA cases) over the plaintiff’s claims, causing the plaintiff to be excluded from any potential recovery. Third, the Court’s strict interpretation of “original source” renders the prospect of speculative qui tam complaints by whistleblowers less likely, as relators will not be rewarded with large recoveries for “predicting” certain outcomes of which they lack direct knowledge.
Graham Cnty. Soil & Water Conservation Dist. v. United States ex rel. Wilson, 130 S. Ct. 1396 (2010).
Relator filed an FCA action which was based on county and state reports. The Fourth Circuit had allowed the case to proceed on the theory that the provisions of the public disclosure bar only applied to federal audits, reports and investigations.
The Supreme Court reversed and held that nothing in the statute or legislative history indicated that the provisions of the public disclosure bar were to be limited to federal sources. Specifically, information in state and local governmental sources could also qualify as public disclosures.
PPACA explicitly limits the public disclosure bar to federal hearings and federal audits, investigations and reports. Therefore, the result in Graham County will be moot for disclosures taking place after March 23, 2010, the effective date of PPACA.
17 United States ex rel. Hockett v. Columbia/HCA Healthcare Corp., 498 F. Supp. 2d 25 (D.D.C. 2007).
A relator brought a qui tam suit under the FCA against related Medicare service providers for allegedly inflating costs at certain facilities in order to defraud Medicare.
The court cited Rockwell to hold that because some of relator’s claims were based upon a public disclosure, the relator was not an original source for purposes of the jurisdictional bar of the public disclosure provision and granted the defendants’ motion to dismiss.
United States ex rel. Montgomery v. St. Edward Mercy Med. Ctr., No. 4:05-CV-00899, 2007 WL 2904111 (E.D. Ark. Sept. 28, 2007).
The relators brought an FCA action and alleged that the defendants submitted false or fraudulent claims to Medicare, Medicaid, TRICARE, and other federal health insurance programs for medically unnecessary surgical procedures.
In following Rockwell and even expanding its reasoning to the definition of a “public disclosure,” Montgomery noted that if the amended allegations could contain information for which the relator was not an original source, “the relator [would be] free to plead a trivial theory of fraud for which he had some direct and independent knowledge and later amend the complaint to include theories copied from the public domain or from materials in the Government’s possession.” The court granted the defendants’ motions to dismiss plaintiff’s amended complaint for lack of subject matter jurisdiction.
6. Defense—First-to-File Bar.
The FCA’s first to file rule, set forth at 31 U.S.C. § 3730(b)(5), provides that “[w]hen a person brings an action . . . no person other than the Government may intervene or bring a related action based on the facts underlying the pending action.” In a unanimous Supreme Court decision issued May 26, 2015, Kellogg Brown & Root Services, Inc. v. United States ex rel. Carter (KBR), 135 S. Ct. 1970 (2015), the United States Supreme Court considered whether the first-to-file rule keeps new claims out of court only while related claims are still alive (i.e., pending), or whether it may bar those claims in perpetuity. The Court resolved a circuit split, holding that under the FCA, “an earlier suit bars a later suit while the earlier suit remains undecided but ceases to bar that suit once it is dismissed.” The Court rejected the petitioner’s position that the first-filed
18 action remains “pending” even after it has been dismissed and would forever bar any subsequent related action.2
7. Defense—Federal Rule of Civil Procedure 9(b).
FCA claims must comply with the heightened pleading standard of Federal Rule of Civil Procedure 9(b), which requires plaintiffs to plead the circumstances constituting fraud with “particularity.” Fed. R. Civ. P. 9(b); United States ex rel. Clausen v. Lab. Corp. of Am., Inc., 290 F.3d 1301, 1308-09 (11th Cir. 2002). Rule 9(b) can provide a strong defense to an FCA action; as relators, especially pharmaceutical and medical device manufacturer sales representatives, frequently do not have knowledge of or access to actual claims submitted in furtherance of the alleged fraud. Numerous courts have dismissed cases based on relators’ inability to plead the submission of an actual false claim with specificity.
On March 31, 2014, the United States Supreme Court denied certiorari in the case United States ex rel. Nathan v. Takeda Pharmaceuticals North America, Inc., et al., No. 12-1349. The relator sought review of the Fourth Circuit’s dismissal of the FCA suit after finding that the relator failed to specifically state which false claims the defendant allegedly submitted to the government for payment. The Fourth Circuit rejected the relator’s argument that the relator need only allege the existence of a fraudulent scheme that supports the inference that false claims were presented to the government for payment. United States ex rel. Nathan v. Takeda Pharmaceuticals North America, Inc., 707 F.3d 451, 457-58 (4th Cir. 2013). The Court’s refusal to review this cases leaves a split in the circuits over whether the relator must plead details of an actual false claim to survive Rule 9(b).
Nevertheless, the rationale of the Solicitor General’s briefing in Takeda has been persuasive to courts who are being asked whether Rule 9(b) requires qui tam relators to plead specific examples of allegedly false claims. For example, in June of this year, the D.C. Circuit rejected a defense argument that Rule 9(b) requires a relator to plead “representative examples” of the false claims. In doing so, the court (quoting language from the Solicitor General’s briefing in Takeda) stated that “[t]he federal government itself already has records of those payments and thus ‘rarely if ever needs a relator's assistance to identify claims for payment that have been submitted [.]’” United States ex rel. Heath v. AT & T, Inc., No. 14-7094, 2015 WL 3852180, at *11 (D.C. Cir. June 23, 2015) (citation omitted).
The bottom is line is that the proper application of Rule 9(b) continues to be hard- fought by litigants, and the Supreme Court will be called on again to resolve this question.
2 The Supreme Court in KBR also held that the Wartime Suspension of Limitations Act (WSLA), which lengthens the time to prosecute criminal fraud offenses against the United States during times of war or when Congress has enacted a specific authorization for use of the Armed Forces, did not apply to civil claims brought under the FCA and only applied to criminal charges.
19 Foglia v. Renal Ventures Mgmt., LLC, 754 F.3d 153, 154 (3d Cir. 2014)
The United States Court of Appeals for the Third Circuit recently rejected the strict approach taken by many federal circuit courts to Federal Rule of Civil Procedure 9(b) that requires a qui tam relator bringing a False Claims Act (FCA) case to plead details of false claims that were actually submitted to the government in order to survive dismissal.
In doing so, the Third Circuit stated that it was joining some other federal appeals courts that have taken what the court described as a “more nuanced” approach to Rule 9(b).
The Third Circuit ruled that, to avoid dismissal for failure to satisfy Rule 9(b), “it is sufficient for a plaintiff to allege particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted.”
Chesbrough v. VPA, P.C., 655 F.3d 461 (6th Cir. 2011)
Complaints alleging FCA violations must comply with Rule 9(b)' s requirement that fraud be pled with particularity because “defendants accused of defrauding the federal government have the same protections as defendants sued for fraud in other contexts.”
Rule 9(b) requires that “[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally.”
The Rule's purpose is to alert defendants “as to the particulars of their alleged misconduct” so that they may respond.
Ebeid ex rel. United States v. Lungwitz, 616 F.3d 993 (9th Cir. 2010).
The relator alleged inter alia that the defendants had violated Arizona common law prohibiting the corporate practice of medicine. The court found the relator failed to plead these allegations with specificity as required by Federal Rule of Civil Procedure 9(b).
The court rejected the reasoning of other circuits that require a relator to identify specific false claims to survive a Rule 9(b) motion to dismiss. Rather, the court followed the reasoning of the Fifth Circuit in United States ex rel. Grubbs v. Kanneganti, 565 F.3d 180, 190 (5th Cir. 2009), concluding “a plaintiff may, but 20 need not, provide representative examples to establish the payment element of the prima facie case. The rule 9(b) standard may be satisfied by pleading with particularity a reasonable basis to infer that the government either paid money or forfeited moneys due.” Id. at *4 n.4.
United States ex rel. Laucirica v. Stryker Corp. , No. 1:09-CV-63, 2010 WL 1798321 (W.D. Mich. May 3, 2010).
The relator pled a legal theory of Anti-Kickback Statute violations coupled with a false certification of compliance with applicable laws on Medicare reimbursement forms. Id. at *2. His complaint, however, did “not actually allege that Defendants submitted a false claim; only that they must have done so.” Id.
The court found Rule 9(b) requires FCA plaintiffs to plead the existence of a “particular false claim,” id. at *5, and relator “simply speculates that Dr. Parvataneni (whether by himself or through the healthcare organizations with which he worked) must have sought Medicare reimbursement over the years.” Id. This was found to be insufficient under Rule 9(b).
The court also determined the Complaint failed to state a claim under Fed. R. Civ. P. 8(a)(2), as interpreted by Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), and Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009). The court found under found the facts pled “could just as easily support an inference of legality as of illegality. A medical device company’s funding of research and training is not per se illegal. Legality depends on whether the funding was bona fide and in compliance with applicable rules . . . . Nothing in Plaintiff’s allegations make the inference of illegal intent and conduct any more plausible than the inference of legal intent and conduct.” Id. at *5.
United States ex rel. Duxbury v. Ortho Biotech Prods., L.P., 579 F.3d 13, 17-20 (1st Cir. 2009), cert. denied , 130 S. Ct. 3454 (2010).
Relator brought a qui tam action alleging that Ortho Biotech used an illegal scheme to promote sales of one of its drugs such that it caused providers to submit false claims to federal health care programs for those drugs.
Noting a distinction between qui tam actions like Duxbury’s that allege defendants induced third parties to file false claims to the government and qui tam actions that assert defendants themselves made the false claims, the First Circuit held that Rule 9(b) is
21 satisfied for the former actions so long as a relator provides “factual or statistical evidence to strengthen the inference of fraud beyond possibility,” even without providing details of each false claim.
United States ex rel. Hopper v. Solvay Pharmaceuticals, 588 F.3d 1318, 1327, 1329-30 (11th Cir. 2009), cert. denied , 130 S. Ct. 3465 (2010).
Relator brought a qui tam action alleging that Solvay used an illegal off-label marketing campaign to promote sales of one of its drugs that caused providers to submit false claims to federal health care programs for those drugs.
The Eleventh Circuit held that the relator’s complaint was deficient because it did not contain particularized allegations that Solvay intended its false statements to influence the government’s decision to pay a false claim.
The court did not reach the question of how the particularity requirements of Rule 9(b) affect actions alleging that a third party submitted false claims to the government.
United States ex rel. Grubbs v. Kanneganti, 565 F.3d 180, 190-91 (5th Cir. 2009).
Physician brought a qui tam action alleging a hospital and physicians billed Medicare and Medicaid for services not performed.
The Fifth Circuit held that Rule 9(b) permits a relator to bring a claim, despite the fact that he or she may not know the details of the fraudulent billing.
Rule 9(b) requires only allegations of circumstances constituting fraud, which must merely make relief plausible when accepted as true. Under the FCA, the contents of a presented bill need not be pled with particular detail.
United States ex rel. West v. Ortho-McNeil Pharm., Inc. , No. 03 C 8239, 2007 WL 2091185, at *4 (N.D. Ill. July 20, 2007).
The relator, a former sales representative of Ortho-McNeil, alleged that, with the knowledge and consent of the defendant, sales representatives marketed Levaquin and Ultram for off-label uses.
22 Despite the relator’s allegations, the court dismissed his claim for failure to plead fraud with sufficient particularity. “While West need not plead every false statement made by Defendants or every false claim made, he does not set forth the circumstances of any particular false statement or cite a single example of a false claim or a provider that made a false claim.” Id. at *4. “[G]eneralized allegations are insufficient where ‘they do not even hint at the identity of those who made the misrepresentations, the time misrepresentations were made, or the places at which the misrepresentations were made.” Id.
8. Defense—Eighth Amendment: Excessive Fines
The FCA’s damages provision, 31 U.S.C. § 3729(a)(1), provides the potential for massive penalties, allowing for treble damages and a penalty of up to $11,000 per “false claim” submitted to the government. FCA damages are “essentially punitive in nature,” see Vermont Agency of Natural Resources v. United States, 529 U.S. 765, 784 (2000), and per claim penalties are often exceedingly disproportionate to the Government’s actual damages. Defendants have had success, however, challenging FCA penalties under the Eighth Amendment’s Excessive Fines Clause. In United States v. Bajakajian, the Supreme Court articulated the standard for evaluating fines under the Eighth Amendment, asserting that “a punitive forfeiture violates the Excessive Fines Clause if it is grossly disproportional to the gravity of a defendant’s offense.” 524 U.S. 321, 333-334 (1998); see also United States v. Mackby, 261 F.3d 821, 830 (9th Cir. 2001) (“Inquiry must be made…to determine whether the payment required by the district court is so grossly disproportionate to the gravity of [defendant’s] violation...”). That said, recent decisions conflict regarding whether the Eighth Amendment’s prohibition on excessive fines may successfully be used to defend against damages and penalties assessed under the FCA.
United States ex rel. Absher et al. v. Momence Meadows Nursing Center Inc. et al., United States Court of Appeals for the Seventh Circuit, Case. No. 04-2289 (Status Conference Reports dated February 11 and 12, 2013 [Dkt. 481, 482])
o Allegations that nursing home had provided worthless services to residents and concealed its unlawful conduct. Jury awarded maximum $11,000 civil penalty for each of 1,729 bills nursing home submitted to the government, totaling $19 million, as well as government damages of more than $3 million (trebled to $9 million), among other damages.
o However, the Court entered only the $9 million judgment, ruling that the other $19 million in penalties violated the Eighth Amendment’s prohibition on excessive fines.
23 United States ex rel. Drakeford v. Tuomey Healthcare System, Inc., 792 F.3d 364 (4th Cir. 2015)
o The Fourth Circuit upheld a judgment against Tuomey Healthcare System of more than $237 million, noting that defendant’s conduct “involved repeated actions, as it submitted 21,730 false claims.”
o “While the Court has been reluctant to fix a bright-line ratio that punitive damages cannot exceed for purposes of the Due Process Clause, it has suggested that an award of more than four times the amount of compensatory damages might be close to the line of constitutional impropriety. Here, the ratio of punitive damages to compensatory damages is approximately 3.6-to-1, which falls just under the ratio the Court deems constitutionally suspect. We therefore conclude that the damages award is constitutional under the Fifth and Eighth Amendments.”
United States ex rel. Bunk v. Gosselin World Wide Moving, N.V., 741 F.3d 390 (4th Cir. 2013)
o Upholding $24 million FCA penalty under fraud-in- the-inducement theory despite absence of proof of any actual damage).
o The Fourth Circuit reversed the district court’s ruling that the penalty violated the Eighth Amendment.
9. Collateral Issues
There are a variety of collateral issues related to enforcement in the FCA context. Below is a broad overview of issues to consider:
Exclusion
The OIG has the authority to exclude individuals and entities from federal healthcare program participation for a variety of prohibited conduct. Exclusion can be mandatory or permissive. See 42 U.S.C. § 1320a–7. The exclusion period is a minimum of one year and but in some situations can be permanent. The following are key implications of exclusion:
Exclusion from Medicare, Medicaid, and all federal healthcare programs
24 No federal healthcare program payments for items or services furnished, ordered, or prescribed directly or indirectly
No payment of salary or benefits
No administrative/management services
Cannot be an employee or contractor of Medicare or Medicaid providers
Cannot order services or write prescriptions for Medicare or Medicaid beneficiaries
Name listed on OIG List of Excluded Individuals/Entities (LEIE)
Entities that bill Medicare or Medicaid in violation of the above are liable (“knew or should have known” standard) for return of payments and civil monetary penalties.
In addition, OIG has the authority to exclude individuals pursuant to 42 U.S.C. § 1320a-7(b)(15) (known as “(b)(15) exclusion”). In general, the exclusion of individuals requires some type of affirmative conduct. However, pursuant to OIG’s (b)(15) exclusion authority, OIG may exclude owners of a sanctioned entity if they knew or should have known of the conduct that led to the sanction. OIG is also permitted to exclude officers or managing employees solely based on their positions with the sanctioned entity. A presumption of exclusion exists for an owner, officer, or manager who knew or should have known of the conduct. However, this presumption may be overcome by weighing the following factors: circumstances of conduct and seriousness of offense, individual’s role within sanctioned entity; individual’s actions in response to the conduct; general facts about the sanctioned entity’s structure and compliance history.
B. Civil Monetary Penalties
In addition to exclusion, the OIG may seek civil monetary penalties (“CMPs”) for a wide variety of conduct, including, false claims, kickbacks, Stark violations, or the retention of overpayments. See 42 U.S.C. § 1320a-7a.
C. Criminal Prosecution
Criminal prosecution is another tool available to the government to aid in enforcement. Key statutes include: Health Care Fraud (18 U.S.C. § 1347); False Statements (18 U.S.C. § 1001); Mail Fraud (18 U.S.C. § 1341); and Wire Fraud (18 U.S.C. § 1343).
In addition, the Responsible Corporate Officer Doctrine is a criminal liability theory based on United States v. Dotterweich, 320 U.S. 277 (1943), and United States v. Park, 421 U.S. 658 (1975). Pursuant to this theory, the Government can seek to obtain misdemeanor convictions of a company official for alleged violations of the Food Drug
25 & Cosmetic Act – even if the corporate official was unaware of the violation – if the official was in a position of authority to prevent or correct the violation and did not do so. There are several limitations to application of this theory, however: (1) the officer must have a “responsible relationship” with respect to the alleged criminal conduct; and (2) there is an “impossibility” defense (i.e., evidence that the officer exercised extraordinary care).
D. Corporate Integrity Agreements
As Gregory E. Demske, Chief Counsel to the Inspector General, stated: “CIAs are designed to put the entity at the frontline of promoting compliance.” As part of settlements of federal healthcare program investigations, the OIG negotiates corporate integrity agreements (“CIAs”) with healthcare providers or entities. CIAs have various common elements, but each CIA is tailored to address the specific facts at issue. According to the OIG, CIAs typically last five years and include the following requirements:
hire a compliance officer/appoint a compliance committee;
develop written standards and policies;
implement a comprehensive employee training program;
retain an independent review organization to conduct annual reviews;
establish a confidential disclosure program;
restrict employment of ineligible persons;
report overpayments, reportable events, and ongoing investigations/legal proceedings; and
provide an implementation report and annual reports to OIG on the status of the entity's compliance activities.3
3 Office of Inspector General, U.S. Department of Health and Human Services, Corporate Integrity Agreements, https://oig.hhs.gov/compliance/corporate-integrity-agreements/ (last viewed Oct. 15, 2015). 26 Appendix – Recent Laws Amending the FCA
Fraud Enforcement and Recovery Act of 2009.
A. Passage of the Legislation.
On May 20, 2009, the President signed into law S. 386, the Fraud Enforcement and Recovery Act of 2009, Pub. L. No. 111-21, 123 Stat. 1617 (“FERA”). FERA includes revisions to the False Claims Act that its sponsors claim make the FCA consistent with Congress’s intent in the 1986 FCA Amendments by overturning certain judicial interpretations of the FCA. Among other changes, FERA sought to establish clear liability for fraudulent claims submitted to government contractors and grantees—such as contractors administering the Medicaid program—and to create liability for certain attempts to avoid repayment of overpayments, including improper retention of Medicare and Medicaid funds.
B. Overturn Allison Engine to Clarify that the FCA Covers Claims to Government Contractors.
As outlined in the Senate Judiciary Committee’s Report accompanying S. 386, one goal of the amendments is to overturn the Supreme Court’s reading in Allison Engine Co. v. United States ex rel. Sanders, 128 S. Ct. 2123, 2128-31 (2008), that 31 U.S.C. §§ 3729(a)(2) & (3) preclude liability for claims involving government contractors. See S. Rep. No. 111-10, at 10-12 (2009). Congress also sought to overturn the D.C. Circuit’s ruling in United States ex rel. Totten v. Bombardier Corp., 380 F.3d 488, 490, 492 (D.C. Cir. 2004), that 31 U.S.C. §§ 3729(a)(1) requires presentment of a false claim to the government, not a government grantee such as Amtrak.
The revisions to the substantive liability provisions of 31 U.S.C. §§ 3729(a)(1)-(3) are as follows:
(1) knowingly presents, or causes to be presented, to an officer or employee of the United States Government or a member of the Armed Forces of the United States a false or fraudulent claim for payment or approval;
(2) knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim to get a false or fraudulent claim paid or approved by the Government;
27 (3) conspires to commit a violation of subparagraph (A), (B), (D), (E), (F), or (G) defraud the Government by getting a false or fraudulent claim allowed or paid;4
Pub. L. No. 111-21, § 4(a) (emphasis added) (codified at 31 U.S.C. §§ 3729(a)(1)(A), (B), and (C)).
The statute further clarifies that conspiracy liability under § 3729(a)(3) may be premised on any of the FCA’s substantive provisions in § 3729(a). The text of § 3729(a)(3) before the amendment did not explicitly cover all of the FCA’s substantive liability provisions. This change overturns cases such as United States ex rel. Huangyan Import & Export Corp. v. Nature’s Farm Products, Inc., 370 F. Supp. 2d 993, 1004-05 (N.D. Cal. 2005), which found § 3729(a)(3) did not reach conspiracies to violate § 3729(a)(7). See S. Rep. No. 111-10, at 13.
C. Expand Definition of “Claim.”
The statute expands the definition of a “claim” to reverse United States ex rel. DRC, Inc. v. Custer Battles, LLC, 376 F. Supp. 2d 617, 641 (E.D. Va. 2005).5 In that case, the court held that a defense contractor who had defrauded the government in connection with work in Iraq fell outside of the FCA’s ambit because the money lost was Iraqi money under the United States government’s control. Id. at 646. The amendments allow FCA suits based on claims made to the federal government for money or property to which the United States does not have title but which is under the control of the United States government.
FERA revises the definition of claim to expand the definition:
(2) the term “claim”— (A) means any request or demand, whether under a contract or otherwise, for money or property and whether or not the United States has title to the money or property, that— (i) is presented to an officer, employee, or agent of the United States; or (ii) is made to a contractor, grantee, or other recipient, if the money or property is to be spent or used on the Government’s behalf or
4 The reference to “Subparagraph (A), (B), (D), (E), (F), or (G)” is to the recodified substantive liability provisions previously found at 31 U.S.C. §§ 3729(a)(1)-(7). 5 In fact, on April 10, 2009, the Fourth Circuit reversed and remanded the holdings in the district court’s decision in Custer Battles regarding the definition of a “claim.” See 562 F.3d 295, 305 (4th Cir. 2009). 28 to advance a Government program or interest, and if the United States Government— (I) provides or has provided any portion of the money or property requested or demanded; or (II) will reimburse such contractor, grantee, or other recipient for any portion of the money or property which is requested or demanded; and (B) does not include requests or demands for money or property that the Government has paid to an individual as compensation for Federal employment or as an income subsidy with no restrictions on that individual’s use of the money or property.
Pub. L. No. 111-21, § 4(a) (emphasis added) (codified at 31 U.S.C. § 3729(b)(2)).
This provision is very broad and has the potential for significant litigation. One can expect suits based on requests for money made to a recipient of federal funds, if the United States government has provided any portion of the money demanded, and the money would advance a government interest.
Indeed, recognizing the potentially broad scope of this provision, the Senate passed the bill with an amendment included in the text above that carves out claims for funds paid to federal employees and Social Security beneficiaries. Fraud perpetrated against other recipients of federal funds could implicate this definition of a “claim.”
D. Expansion of Reverse Claim Liability to Include Overpayments.
A major change of interest to the healthcare industry is the revision of re-designated § 3729(a)(1)(G)’s prohibition of “reverse false claims.” The pre-amendment text of what was then 31 U.S.C. § 3729(a)(7) imposed liability on anyone who
knowingly makes, uses, or causes to be made or used, a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the Government.
FERA expanded § 3729(a)(1)(G) to cover not only the use of false records to decrease an obligation, but also actions to decrease an obligation in which no false record is used. According to the
29 legislative history, this change is intended to make § 3729(a)(1)(G) parallel not only to § 3729(a)(1)(B)’s use of a false record, but also to § 3729(a)(1)(A)’s inclusion of knowing concealment alone without use of a false record or statement. See S. Rep. No. 111-10, at 14. The revised provision imposes liability on anyone who:
knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the Government, or knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government.
Pub. L. No. 111-21, § 4(a) (emphasis added) (codified at 31 U.S.C. § 3729(a)(1)(G)).
Courts are beginning address the significance of the language “knowingly and improperly avoids or decreases,” which FERA added to re-designated § 3729(a)(1)(G).
FERA also added a definition of “obligation,” which was not previously defined in the statute. The new provision provides:
the term “obligation” means an established duty, whether or not fixed, arising from an express or implied contractual, grantor-grantee, or licensor-licensee relationship, from a fee-based or similar relationship, from statute or regulation, or from the retention of any overpayment.
Pub. L. No. 111-21, § 4(a) (codified at 31 U.S.C. § 3729(b)(3)).
The Committee Report notes that this provision is not intended to capture simple retention of an overpayment permitted by a reconciliation process so long as it is not the product of any willful act to increase payments to which the entity is not entitled. Id. See also 155 Cong. Rec. H5260, 5268 (daily ed. May 6, 2009) (Statement of Rep. Maffei). But see S. Rep. No. 111-10, at 15 (leaving open possibility of liability even during pending reconciliation periods in cases of an “action or scheme to intentionally defraud the Government by receiving overpayments”).
See, e.g., Simoneaux v. E.I. du Pont de Nemours & Co., No. CIV. 12-219-SDD-SCR, 2014 WL 4352185, at *2 (M.D. La. Sept. 2, 2014)
30 “The Court concluded that the 2009 amendments had changed the meaning of obligation within the FCA by providing a statutory definition for this term, which could apply to regulations, such as the [Toxic Substances Control Act (“TSCA”)]. Strictly construing this new statutory language, the Court found that because the TSCA gives rise to an obligation to report chemical leaks, and failure to do so will result in the imposition of a fine or penalty, whether fixed or not, the 2009 Congressional definition of obligation was satisfied; therefore, the Court denied DuPont's summary judgment motion.”
E. Addition of Materiality Requirement.
The revised language adds an explicit materiality requirement to currently-numbered §§ 3729(a)(1)(B) and (a)(1)(G), which is defined in § 3729(b)(4) as “having a natural tendency to influence, or be capable of influencing, the receipt of money or property.” Pub. L. No. 111-21, § 4(a).
One key question related to the addition of a materiality requirement to §§ 3729(a)(1)(B) and (a)(1)(G), but not § 3729(a) (1)(A), is how the requirement will impact materiality defenses to § 3729(a)(1)(A).
F. Expanded Retaliation Protection.
Section 3730(h) was amended by FERA to include retaliation against “contractors and agents” in addition to employees. Pub. L. No. 111-21, § 4(d). Interestingly, the word “employer” in the provision was deleted by FERA. The protected conduct was also modified to mean lawful acts in furtherance of “efforts to stop one or more violations” of the FCA. See Section IV below, however, for additional changes made by the Dodd-Frank financial reform legislation.
G. Effective Date.
All revisions to substantive liability provisions take effect on the date of enactment and apply prospectively to “conduct on or after the date of enactment,” with the exception of the amendment to § 3729(a)(2). Pub. L. No. 111-21, § 4(f). The amendment to § 3729(a)(2) is applied retroactively “as if enacted on June 7, 2008,” two days before Allison Engine was decided, and shall apply to all “claims under the False Claims Act (31 U.S.C. 3729 et seq.) that are pending on or after that date.” Pub. L. No. 111-21, § 4(f)(1). By comparison, in FERA § 4(f)(2), Congress specified that certain
31 procedural changes made by FERA apply to “cases pending on the date of enactment” (emphasis added).
Congress clearly intended to eliminate defenses based on Allison Engine to some extent, but the precise application of the retroactive effective date is not clear.
The emerging majority position among federal courts is that “claims” refers to requests for payment and not to cases. See, e.g., U.S. ex rel. Barko v. Halliburton Co., 952 F. Supp. 2d 108, 117–18 (D.D.C. 2013); Hopper v. Solvay Pharm., Inc., 588 F.3d 1318, 1327 n.3 (11th Cir. 2009) (following Sci. Applications Int’l Corp. in holding that FERA applies to pending claims, not cases), cert denied 130 S. Ct. 3465 (2010); United States ex rel. Burroughs v. Cent. Ark. Dev. Council, No. 4:08CV2757, 2010 WL 1875580, at *2 (E.D. Ark. May 10, 2010). But see United States ex rel. Stephens v. Tissue Sci. Labs., 664 F. Supp. 2d 1310, 1315 n.2 (N.D. Ga. 2009) (because case was pending on June 7, 2008, FERA applies).
The legislation applies new procedural sections—relation back of complaints in intervention, modification of CID procedures, and service on state or local authorities—to all cases pending on the date of enactment. See Pub. L. No. 111-21, § 4(f)(2).
The retroactive application of a punitive statute also may implicate the Ex Post Facto Clause of the U.S. Constitution. In United States ex rel. Sanders v. Allison Engine Co., 667 F. Supp. 2d 747 (S.D. Ohio 2009), the court found FERA’s retroactive effective date for certain claims pending on or after June 7, 2008 to be a violation of the Ex Post Facto Clause because of the FCA’s punitive nature. The court quoted numerous statements by legislators regarding their intent to use the FCA to “punish” defendants and concluded “Congress intended to impose punishment when it enacted the FCA and the amendments thereto.” Id. at 756.
H. Procedural Amendments.
FERA added three noteworthy procedural amendments.
(1) Expanded Civil Investigative Demands.
A civil investigative demand is a powerful tool that allows the government to seek document production, data, written answers to interrogatories, and/or sworn deposition testimony prior to the
32 commencement of litigation so long as that person may be in possession of information relevant to a False Claims Act investigation. See 31 U.S.C. § 3733(a)(1).
Prior to FERA, the Attorney General was required to authorize the issuance of a CID. FERA permitted the Attorney General to delegate authority to issue CIDs. Pub. L. No. 111-21, § 4(c) (codified at 31 U.S.C. § 3733(a)). On March 24, 2010, the Department of Justice published a final rule delegating to all 93 U.S. Attorneys the authority to issue CIDs in matters arising under the False Claims Act. See 75 Fed. Reg. 14,070 (Mar. 24, 2010).
The Attorney General or his delegates can share information gained from a CID with relators if “necessary as part of any false claims act investigation.” 31 U.S.C. § 3733(a)(1).
(2) Government Complaints in Intervention Relate Back to Date of Relator’s Complaint.
The government may intervene and file its own complaint or amend a relator’s complaint, and the pleading will be deemed to relate back to the filing date of the original complaint if it arises from the same conduct, transactions, or occurrences. Pub. L. No. 111-21, § 4(b) (codified at 31 U.S.C. § 3731(c)).
(3) Service on State or Local Authorities.
The seal does not preclude the federal government from sharing the complaint, any other pleadings, or the qui tam disclosure with any state or local government entity named as a co-plaintiff. Pub. L. No. 111-21, § 4(e) (codified at 31 U.S.C. § 3732(c)).
Patient Protection and Affordable Care Act.
A. Passage of the Legislation.
On March 23, 2010, the President signed into law H.R. 3590, the Patient Protection and Affordable Care Act, Pub. L. 111-148, 124 Stat. 119 (“PPACA”). PPACA revised several elements of the
33 FCA, most notably the public disclosure bar and original source provision, and the definition of overpayment for purposes of the “reverse false claims” provision. PPACA expanded on FERA’s changes, which impose penalties on any person who knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the government. By linking the retention of overpayments and FCA liability PPACA has increased the potential exposure for healthcare providers under the FCA.
On March 30, 2010, the President signed H.R. 4872, the Health Care and Education Reconciliation Act of 2010, Pub. L. 111-152, 124 Stat. 1029, in order to amend and reconcile House and Senate versions of health care reform legislation.
B. Identified Overpayment Retention Creates An “Obligation.”
Section 6402(d) of PPACA amends provisions relating to Medicare and Medicaid Program Integrity. This provision only covers claims paid under the Medicare or Medicaid programs. As described above, under FERA, Congress expanded liability for the retention of overpayments to eliminate the requirement of taking the affirmative step of using a “false record or statement.”
PPACA provides that if a person has received an overpayment, the person shall: “(A) report and return the overpayment to the Secretary, the State, an intermediary, a carrier, or a contractor, as appropriate, at the correct address; and (B) notify the Secretary, State, intermediary, carrier, or contractor to whom the overpayment was returned in writing of the reason for the overpayment.”
Pub. L. No. 111-148, § 6402(d)(1) (emphasis added).
Section 6402(d) of PPACA provides a deadline for the reporting and return of overpayments which is the later of (1) “the date which is 60 days after the date on which the overpayment was identified” or (2) “the date any corresponding cost report is due.” In addition, PPACA establishes that any overpayment retained after this deadline is an “obligation” for purposes of the FCA. However, this also presumably means that for FCA liability to attach, there must also be a “knowing[] and improper[] retention of the overpayment.” See 31 U.S.C. §3729(a)(1)(G).
As discussed above, the legislative history of FERA clarifies that interim retention of an overpayment associated with the cost report reconciliation process is not an FCA violation unless the retention
34 is the product of a willful act to increase payments to which the entity is not entitled. The text of PPACA confirms this intent when it defines “overpayment” as “any funds that person receives or retains under title XVIII or XIX to which the person, after applicable reconciliation, is not entitled under such title.” Pub. L. No. 111-148, § 6402(d)(2) (emphasis added).
Pursuant to PPACA, any overpayment retained by a person after the 60 day reporting period would be an “obligation” for purposes of the FCA’s “knowing and improper retention” liability. Complicating matters, PPACA offers no guidance on when an overpayment is “identified.” As such, what constitutes an “identified” overpayment, thereby triggering the 60 day reporting period, is unknown at this point and likely to be the subject of litigation, unless further agency guidance is provided.
But see Kane ex rel. United States v. Healthfirst, Inc. , No. 11 Civ. 2325 (ER), 2015 WL 4619686 (S.D.N.Y. Aug. 3, 2015).
Hospitals allegedly erroneously billed New York Medicaid as a secondary payor after they had already been paid in full by Healthfirst, the patients’ Medicaid managed care plan.
The billing errors were allegedly caused by a coding error in the remittances produced by Healthfirst. Although the hospitals allegedly learned of the computer coding error in February 2011, they did not make the final refund payments to New York Medicaid until March 2013.
DOJ and New York State Attorney General's Office intervened in 2014.
In August 2015, the district court denied the hospitals’ motion to dismiss and ruled that a provider identifies an overpayment when it is “put on notice of a potential overpayment, rather than the moment when an overpayment is conclusively ascertained.”
C. Public Disclosure Bar.
The overall goal of PPACA’s changes to the public disclosure bar is to make it easier for the government and relators to avoid the dismissal of FCA complaints. Whether the changes will be interpreted in this manner remains to be seen.
The pre-PPACA public disclosure bar (31 U.S.C. § 3730(e)(4)(a)) states:
35 “No court shall have jurisdiction over an action under this section based upon the public disclosure of allegations or transactions in a criminal, civil, or administrative hearing, in a congressional, administrative, or Governmental Accounting Office report, hearing, audit, or investigation, or from the news media, unless the action is brought by the Attorney General or the person bringing the action is an original source of the information.”
Section 10104(j)(2) of PPACA strikes 31 U.S.C. § 3730(e)(4)(a) and replaces it with the following:
“ The court shall dismiss an action or claim under this section, unless opposed by the Government, if substantially the same allegations or transactions as alleged in the action or claim were publicly disclosed—
(i) in a Federal criminal, civil or administrative hearing in which the Government or its agent is a party;
(ii) in a congressional, Governmental Accountability Office, or other Federal report, hearing, audit or investigation; or
(iii) from the news media
unless the action is brought by the Attorney General or the person bringing the action is an original source of the information.”
PPACA introduces several key changes to the public disclosure bar:
First, the government is now statutorily entitled to be heard on the public disclosure bar. Under the pre-PPACA provision, previous public disclosure of the FCA allegations in one of the statutory categories stripped the court of subject matter jurisdiction over the cause of action. Under PPACA, the jurisdictional bar is removed and the government may weigh in and seek to prevent the dismissal of an FCA cause of action as a result of the public disclosure bar. The statutory language may be read to permit the court to nevertheless dismiss the relator’s complaint in the face of government opposition, and this issue will have to be resolved by the courts.
Second, under the pre-PPACA bar, the allegations or transactions in the FCA complaint had to be “based upon” 36 publicly disclosed information in order for the jurisdictional bar to be triggered. There was a significant amount of case law interpreting that phrase and the necessary relationship between the complaint and the public disclosures necessary to raise the public disclosure bar. The PPACA eliminates that language, and introduces a new, undefined standard—“substantially the same.”
Finally, PPACA further restricts the potential sources of publicly disclosed information to federal proceedings in which the government is a party, federal reports, audits, and investigations, and the news media. Under the pre- PPACA public disclosure bar, it was unclear whether reports, audits, hearings and investigations from state and local governmental entities could also qualify to trigger the public disclosure bar. This issue was addressed in Graham County Soil & Water Conservation District v. United States ex rel. Wilson, 130 S. Ct. 1396 (2010), in which the Supreme Court found that a state report was sufficient to trigger the public disclosure bar under the pre-PPACA provision.
D. Original Source.
If there has been a public disclosure of information upon which a qui tam complaint is based, the relator may still survive operation of the public disclosure bar if the relator qualifies as an original source of the information.
The pre-PPACA version of 31 U.S.C. § 3730(e)(4)(b) read:
“For purposes of this paragraph, ‘original source’ means an individual who has direct and independent knowledge of the information on which the allegations are based and has voluntarily provided the information to the Government before filing an action under this section which is based on the information.”
Section 10104(j)(2) of PPACA strikes 31 U.S.C. § 3730(e)(4)(b) and replaces it with the following:
“For purposes of this paragraph, ‘original source’ means an individual who either:
(i) prior to a public disclosure under subsection (e)(4)(a), has voluntarily disclosed to the Government the
37 information on which allegations or transactions in a claim are based, or
(ii) who has knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions, and who has voluntarily provided the information to the Government before filing an action under this section.”
The most important change in PPACA on this issue is that a relator may now qualify as an original source under one of two different categories. The first category, which is new, simply requires disclosure of the relator’s information to the government prior to any public disclosure.
The second category alters the former provision’s “direct and independent knowledge” requirement in favor of a standard of “knowledge that is independent of and materially adds” to publicly disclosed information. Furthermore, the relator’s information must be independent of “the publicly disclosed allegations or transactions” rather than “independent of…the information on which the allegations are based.”
Financial Reform Act.
A. Anti-Retaliation Provisions.
The Financial Reform Act, signed into law on July 21, 2010, redefines “protected conduct” for 31 U.S.C. § 3730(h) claims. FERA narrowed the retaliation cause of action by redefining “protected conduct” as “lawful acts done . . . in furtherance of other efforts to stop 1 or more violations,” thereby protecting only conduct that involves attempts to stop the alleged fraud. Section 1079A of the Financial Reform Act, however, enlarges the retaliation cause of action by redefining “protected conduct” as “lawful acts done . . . in furtherance of [an FCA action] or other efforts to stop 1 or more violations . . . .”
In addition, § 1079A of the Financial Reform Act revises the scope of persons who may engage in protected conduct to include “associated others.”
B. Three Year Statute of Limitations for Retaliation Actions.
Prior to the Financial Reform Act, the FCA did not specifically set a statute of limitations for anti-retaliation claims. The six-year statute of limitations in the False Claims Act did not govern FCA
38 civil actions for retaliation; rather, in assessing timeliness of an FCA retaliation claim, courts borrowed the most closely analogous state limitations period. Graham Cnty. Soil & Water Conservation Dist. v. United States ex rel. Wilson, 545 U.S. 409, 414 (2005).
Section 1079A of the Financial Reform Act, however, expressly provides a three year statute of limitations for retaliation suits under 31 U.S.C. § 3730(h) of the FCA.
39