FCA Now

On April 21, 2022, the Northern District of Georgia granted a motion to dismiss a False Claims Act (“FCA”) suit brought against ERMI LLC (“ERMI”), a medical device manufacturer, describing the complaint as a “shotgun pleading.” This action was brought by Relator Elizabeth Cooley, ERMI’s former chief compliance officer. Cooley alleged that ERMI, its CEO Dr. Thomas P. Branch, and other defendants defrauded federal insurance programs in violation of the FCA by overbilling tens of millions of dollars. Specifically, Cooley’s complaint alleged that ERMI billed the Government for equipment that was not medically necessary, was priced above market rates, or otherwise did not conform to government standards across five different fraud schemes. In addition, Cooley alleged that ERMI regularly provided cash and free equipment to clinicians who agreed to prescribe ERMI products to patients covered by federal health care programs, in violation of federal anti-kickback statutes. Cooley alleged ERMI fired her in retaliation for her attempts to resolve these compliance issues. Cooley filed her initial complaint in October 2020, and the government declined to intervene in July 2021. Subsequently Cooley filed the amended complaint at issue in September 2021. Defendants in the case moved to dismiss on the basis that Cooley’s complaint had impermissibly bundled “multiple claims for relief and multiple theories of liability into single counts, and its allegations lump together multiple Defendants without distinguishing which ones engaged in what specific conduct.” Judge Thomas W. Thrash Jr. agreed, reasoning that Cooley’s amended complaint had all the cornerstones of a “shotgun pleading” making it “unclear which factual allegations are meant to support which legal theories, and which legal theories are meant to support which claims for relief.” Citing the higher pleadings standard for FCA claims found in Rule 9(b), the Court reasoned that to survive a motion to dismiss under the FCA, a plaintiff “must state with particularity the circumstances constituting fraud or mistake,” and instead of doing that, Cooley’s complaint “muddies the waters further by reciting the same conclusory, formulaic theories of liability” on at least eight counts. The court went on to add that “the shortcomings . . . do not end here. The Relator asserts all of her claims against multiple defendants but in some instances fails to differentiate the acts and omissions giving rise to each one’s liability.” The court’s order emphasized that in the Eleventh Circuit these types of pleadings are ineffective because they are an “undue burden not only on defendants but also on courts,” wasting resources, unnecessarily broadening discovery, and clogging court dockets and harming the “public’s respect for the courts.” Given this view, the Court went on to explain “there is thus little tolerance for shotgun pleadings in this circuit.” Despite this, the Court ruled that parties have a right to amend and ultimately gave Cooley 30 days from the April 21 order to cure the pleading deficiencies. The Court’s opinion reminds plaintiffs that FCA pleadings should make sure to explain claims with specificity, and defendants of such claims that they can object to such muddy causes of actions and allegations.

Walmart successfully ended eight years of protracted litigation under the False Claims Act (“FCA”) on June 4, 2021, when the Sixth Circuit affirmed dismissal of Medicare and Medicaid fraud allegations against the major retailer.  The case was first filed in February 2013.  See United States ex rel. Sheoran v. Wal-Mart Stores E., No. 13-10568, 2019 U.S. Dist. LEXIS 140710, at *2 (E.D. Mich. Aug. 20, 2019). The case was originally filed by Ashwani Sheoran, a former Walmart pharmacist.  See United States v. Wal-Mart Stores E., LP, No. 20-2128, 2021 U.S. App. LEXIS 16763, at *2 (6th Cir. June 4, 2021).  The basis for Sheoran’s allegations stemmed from observing a Michigan physician (and co-defendant) writing what Sheoran believed were improper prescriptions for high doses of opioid pain medications.  Id. at *3.  Sheoran alleged that filling those prescriptions violated the FCA and the Michigan Medicaid False Claims Act due to their purportedly excessive doses.  Id.  The case was finally unsealed in September 2018 after the United States government and the state of Michigan declined to intervene.  In August 2019, Walmart’s motions to dismiss were granted.  Wal-Mart, 2019 U.S. Dist. LEXIS 140710 at *14.  Sheoran moved for reconsideration, which was denied.  United States v. Wal-Mart Stores E., LP, No. 13-10568, 2020 U.S. Dist. LEXIS 177251, at *9 (E.D. Mich. Sep. 28, 2020).  Sheoran then appealed. On appeal, Sheoran argued that the district court granted the motions to dismiss in error; that it was error for the lower court to exclude his Medicaid False Claims Act claims in its summary of claims; and that the court abused its discretion by waiving oral argument on the motions.  Wal-Mart, 2021 U.S. App. LEXIS 16763 at *4. To establish a claim under the FCA, Sheoran was required to allege that “(i) the defendant presented a claim of payment to the government, (ii) the claim was false or fraudulent, (iii) the defendant knew it was false or fraudulent, and (iv) the false claim was material to the government’s payment.”  Id. at *5.  Because FCA claims necessarily involve allegations of fraud, a plaintiff must also meet the particularity requirements under Federal Rule of Civil Procedure 9(b) by alleging the “time, place, and content of the alleged misrepresentation . . . [;] the fraudulent scheme; the fraudulent intent of the defendants; and the injury resulting from the fraud.” Id. at *4–5 (internal quotations and citations omitted). Focusing on particularity, the Sixth Circuit determined that Sheoran failed to sufficiently plead each of the four elements of an FCA violation. First, the Court held Sheoran failed to allege that a claim for payment was presented to the government.  Id. at *5.  To support the claim, Sheoran submitted a document that listed all opioid payments with a $1-2 copay.  Id. at *6.  Based on the low copay value, Sheoran argued that the government must have provided reimbursement through Medicaid or Medicare.  Id.  The Court rejected that assumption, noting that many other reasons could explain a low copay.  Id. The Court concluded that alleging presentment effectively requires more than “mere speculation.”  Id. Second, the Court held Sheoran was unable to effectively plead that any of the alleged claims were “false or fraudulent.”  Id.  See 31 U.S.C. § 3729(a)(1)(A), (B).  Although Sheoran had alleged the prescriptions were written for “high doses” of opioid pain medications that “would kill the person” if taken as prescribed, Sheoran provided no information about the patient’s medical history or needs to help the Court evaluate whether the doses were too high.  Id. *7.  Accordingly, the Court could not accept that falsity was supported. Third, the Court held the pleadings failed to allege that Walmart “knowingly” presented false claims to the government.  Id.  In order to establish knowledge, a defendant must “know[] of, or ‘act[] in deliberate ignorance’ or ‘reckless disregard’ of, the fact that he is involved in conduct that violates a legal obligation to the United States.”  Id. (internal quotations and citations omitted).  The Court determined that Sheoran’s mere assumption that payment was submitted to the government was insufficient, and that the pleadings lacked allegations indicating that Walmart even suspected the claims were illegal, false, or fraudulent.  Id. Finally, the Court concluded that materiality was also insufficiently alleged.  To meet this “demanding” standard, the alleged misrepresentation must have been “material” to the government’s decision to reimburse the claim.  Id. at *8.  The Court reasoned that if all of the claims had indeed been submitted to the government, the government had the same knowledge about the allegedly “high doses” and yet still paid those claims.  Id.  This evidence of payment was considered to be “very strong evidence that the requirements were not material.”  Id. (citing Universal Health Servs., Inc. v. United States, 136 S. Ct. 1989, 2001 (2016)). The Sixth Circuit summarily dismissed Sheoran’s remaining arguments.  In regards to the denial of oral argument, the Court reasoned that “this was a straightforward FCA case that was properly decided on the briefs.”  Id. at *12.  Unfortunately for Walmart and its co-defendants, this “straightforward” case required eight years of protracted litigation and expense that finally concluded due to the FCA’s exacting pleading standard.

On March 19, 2021, a Southern District of New York judge denied a motion to dismiss a False Claims Act (“FCA”) suit alleging that Omnicare—a subsidiary of CVS Health Corp.—“dispensed drugs based on invalid prescriptions to potentially tens of thousands of individuals living at more than 3,000 residential facilities.” See United States ex rel. Bassan v. Omnicare, Inc., No. 1:15-cv-4179 (CM), 2021 U.S. Dist. LEXIS 52323 *3 (S.D.N.Y. Mar. 19, 2021).  The long-pending suit, which was originally brought by qui tam relator Uri Bassan in 2015, alleges that Omnicare consistently issued prescriptions to individuals in long-term care facilities that were not supported by valid prescriptions between 2010 and 2018. The Court explained that the defendants’ motion “present[ed] what can only be described as a novel reason why the Government’s pleading is insufficiently particular.”  Id. at *27.  The “novel” argument was that the regulation upon which the Government relied to demonstrate that filling invalid prescriptions was illegal took effect on January 1, 2013, rendering the prior alleged conduct of dispensing prescription drugs without a prescription legal.  The Court denied the motion on three bases. First, the Court explained that the Government’s pre-2013 claims arose under three different government insurance programs and the regulation at the core of the defendants’ argument only concerned one.  As a result, the Court determined that the allegations related to the two other programs precluded dismissal of the pre-2013 claims. Second, the court reasoned that because the Government was able to show in detail that Omnicare’s Medicare reimbursements after January 1, 2013 were also the product of alleged false claims, the claim could not be dismissed in full. Third, the Court, relying on several regulations and guidance materials, “reject[ed] Omnicare's suggestion that it was perfectly legal to dispense drugs paid for by Medicare without a valid prescription prior to 2013.” Id. at *28-29.  To do so, the Court first cited to Centers for Medicare and Medicaid Services regulatory guidance pre-dating 2013 which provided that "we have consistently maintained that drugs cannot be eligible for [Medicare] coverage unless they are dispensed upon prescriptions that are valid under applicable State law."  Id. at 28-29 (citing 76 Fed. Reg. 63,018, 63,059 (Oct. 11, 2011).  The Court also relied on other federal statutory schemes such as the Federal Food Drug and Cosmetic Act, which described a prescription drug as one that can only be dispensed upon a valid prescription.  See 21 U.S.C. § 353(b)(1). This case is a reminder that the litigation of alleged false claims spanning several years can often be impacted by the different statutory schemes and regulations that are in effect, or not in effect, over the course of the alleged false claims.

On February 5, the U.S. District Court for the Eastern District of Pennsylvania rejected a defendant’s public disclosure bar defense, allowing the relators to proceed with their qui tam action under the False Claims Act. Sturgeon, et al., v. PharMerica Corp, No. 15-cv-6829, 2020 WL 586978, at *1 (E.D. Pa. Feb. 5, 2020).  In denying defendant PharAmerica’s motion to dismiss, the Court explained why the FCA’s public disclosure bar under 31 U.S.C. § 3730(e)(4)(A)—which generally shields defendants from liability when a relator’s allegations have already been publicly disclosed elsewhere—was inapplicable. PharMerica is a long-term care pharmacy that processes prescriptions from nursing home physicians.  As alleged by the relators, PharMerica defrauded Medicare and Medicaid by billing for prescriptions with altered dosages, form (i.e., tablet vs. capsule), and kind (i.e., brand name vs. generic).  More specifically, the relators’ complaint alleges that when PharMerica technicians manually entered data, they did so in a way that did not match the prescription authorized by the physicians.  This conduct allegedly enhanced PharMerica’s profit margins by increasing reimbursements from suppliers. PharMerica moved to dismiss the relators’ allegations under the FCA’s public disclosure bar.  This bar, created by Congress to prevent parasitic lawsuits, generally requires the dismissal of FCA claims when the allegations are “substantially the same” as allegations made public through earlier litigation.  At the time the lawsuit commenced, PharMerica had previously litigated fraud allegations in United States ex rel. Denk v. PharMerica, No. 09-720, (E.D. Wis. July 23, 2009).  Because both lawsuits involved allegations of prescription fraud, PharMerica argued that the allegations are “substantially the same” warranting dismissal. The Court disagreed.  Cautioning against a generalized inquiry, the Court recognized that “a careful look at the details of each alleged fraud” does not demonstrate “substantially the same fraud.”  In particular, the Court noted that although the Denk litigation alleged a number of prescription fraud schemes, each scheme involved the absence of a prescription.  By contrast, the allegations at issue in Sturgeon include the altering of valid prescriptions in a way that maximizes reimbursements.  In other words, the fact that both matters alleged fraudulent prescriptions was not sufficient to trigger the public disclosure bar and preclude liability.  Instead, the Court explained, the relevant inquiry is whether the way each fraudulent scheme is effectuated is “substantially the same.” This decision serves as a reminder that the public disclosure bar requires something more than generic or superficial similarity: it requires a similar “mode and means” of allegedly fraudulent conduct.  Thus, FCA defendants seeking to trigger the public disclosure bar should strive to connect the alleged misconduct to the “how” and “why” of previously disclosed schemes.

Following the passage of the Affordable Care Act (“ACA”), which placed new limits on physician-owned hospitals, St. Luke’s Health System (“System”) took action to change one of its hospital’s ownership structures through a buy-out of the physicians’ partnership interests pursuant to the Texas Securities Act (“TSA”). The TSA allows rescission for the original price paid for a security, plus interest, in exchange for a release of potential liability under TSA. Three of the physician-owners, who resisted the System’s attempt to rescind their ownership interests, sued the System and other defendants in connection with the buy-out alleging state-law violations and violations of the Anti-Kickback Statute (“AKS”), 42 U.S.C. § 1320a-7b(b), the Stark Law, 42 U.S.C. § 1395nn, and by extension, the False Claims Act (“FCA”), 31 U.S.C. § 3729-3733. The district court dismissed the federal claims with prejudice. U.S. ex rel. Patel v. Catholic Health Initiatives, 312 F. Supp. 3d 584 (S.D. Tex. 2018). Relying heavily on the district court’s lengthy and thorough decision, the United States Court of Appeals for the Fifth Circuit affirmed in a nonprecedential decision. U.S. ex rel. Patel v. Catholic Health Initiatives, 2019 U.S. App. LEXIS 34741 (5th Cir. Nov. 20, 2019) (per curiam). The physician Relators first alleged that the process by which the physician-owners were bought out under the TSA resulted in payments to the physician-owners substantially above market value of their stakes in the hospital. According to the Relators, these high prices were set with the intent by the System of maintaining referral relationships with those physicians, in violation of the AKS and Stark Law. The Relators’ second alleged scheme concerned the System’s false representations to federal and state health care programs about the true ownership of the hospital. The Relators alleged that despite their retained ownership in the hospital after the partial buyout process, the System began representing to the government that the partnership was defunct and that a different entity owned the hospital. According to the Relators, this rendered the System’s representations factually false, leading to violations of both the FCA and the Texas Medicaid Fraud Prevention Act. Ultimately, the district court reasoned that while the Relators “might well have had legitimate grievances” and that the complaint had “an abundance of detail,” the claims “[did] not add up to liability under the [FCA]” because “the [FCA] ‘is not an all-purpose antifraud statue or a vehicle for punishing garden-variety breaches of contract or regulatory violations.’” U.S. ex rel. Patel, 312 F. Supp. 3d at 589 (quoting Univ. Health Servs., Inc. v. U.S. ex rel. Escobar, 136 S. Ct. 1989 2003 (2016)). “More is needed to establish that false or fraudulent claims have been made on the government.” Id. The Fifth Circuit affirmed, rejecting the Relators’ AKS and Stark Law claims because the System “had a reasonable basis to utilize the TSA approach” to try to comply with the ACA, “and nothing ties the allegedly high payment for physician shares to any inducement or referrals.” U.S. ex rel. Patel, 2019 U.S. App. LEXIS 34741, at *5. In affirming the dismissal of the FCA claims, and rather than relying on the district court’s analysis of whether the ownership representations were factually or legally false, the Fifth Circuit “conclude[d] that the alleged falsity, under the circumstances of this case, was not material.” Id. at *8. Because “[n]othing in Relators’ filings suggests that that the government would stop the flow of funds to this hospital if it knew the truth of its ownership,” and because “the System has continued to submit claims and receive reimbursement, even after a court determined that the entity designated as owner of the [h]ospital was not really the owner,” the Fifth Circuit found the alleged falsity immaterial. Id. at *9-10. “This suggests that the government does not care who the 'rightful' owner of the hospital is, and Relators have not alleged facts to the contrary.” Id. at *10. The case is another example of Escobar in action, and a reminder that FCA claims, even if very detailed with allegations of breaches of contract and regulatory violations, are unlikely to survive a motion to dismiss unless the materiality of the false claims can be established.

The Second Circuit Court of Appeals recently emphasized the heightened pleading standard that a relator in a qui tam False Claims Act (“FCA”) suit must satisfy to avoid dismissal under Rule 12(b)(6). United States ex rel. Gelbman v. City of New York, Case No. 18-3162, 2019 U.S. App. LEXIS 30889 (2d Cir. Oct. 17, 2019). In Gelbman, the relator, a former information specialist for the New York State Department of Health (“NYSDOH”), filed a complaint against New York City (“the City”) and the New York City Health and Hospital Corporation (“HHC”) under the FCA claiming more than $14 billion in fraudulent billings. United States ex rel. Gelbman v. City of New York, Case No. 14-cv-771, 2018 U.S. Dist. LEXIS 169435 (S.D.N.Y. Sept. 30, 2018). The relater alleged that he, in his former position with the NYSDOH, participated in regular meetings for approximately 9 years in which representatives from the City and the NYSDOH “conspired to manipulate and rig” the manner in which Medicaid claims were processed through an automated computer screening tool. Id. at *5. Upon observing the alleged scheme, the relator alleged he pressed his supervisor to explain why certain Medicaid claims were being paid despite not meeting the requisite criteria, to which his supervisor responded that the payments were necessary to avoid the City’s “financial ruin” and “political problems [in] the administration.” Id. In his complaint, the relator included specific details of the alleged scheme. Specifically, the relator described five types of false claims the City allegedly caused the State to pay – untimely claims, claims lacking valid prior approval, duplicative claims, provider ineligible claims, and claims already paid by other insurance. Id. at *5-6. For each type of claim, the relator provided at least one “exemplar claim,” which included payment information such as dates, amounts, and the edit codes used in the claims processing platform. Id. at *6. According to the relator, each of these five categories of claims had been routinely flagged as “edits” by the online processing system as ineligible claims but were nevertheless submitted by the City to the federal government for reimbursement. Id. Despite these details, the district court dismissed the complaint for failing to satisfy the particularity requirements imposed by Rule 9(b). The court noted that “[t]he crux of Relator's allegations is that certain edit codes . . . were applied to claims that various New York City medical providers submitted to Medicaid.” Id. at *19. The court concluded inter alia that this allegation, even when coupled with detail about the edit code and exemplar claims, was insufficient to plead fraud because the relator failed “to allege how the existence of an edit rendered the claim false or why the claim was not ultimately entitled to payment.” Id. On appeal, the Second Circuit Court of Appeals affirmed the district court’s decision. Gelbman, 2019 U.S. App. LEXIS 30889. Even though the relator alleged irregularities in the City’s Medicaid claim process to support his fraud theory, coupled with corroborating evidence, the Second Circuit concluded that the “flagged edits” that suggested fraud were not sufficient to meet the Rule 9(b) standard. That claims were flagged as ineligible prior to their submission for payment did not necessarily mean the claims were fraudulent. Id. at *7-8. For instance, the flag itself might have been error later discovered and corrected, or the underlying problem that caused the flag may have been addressed prior to submission. Id. Thus, to adequately plead FCA claims under the relator’s theory, the relator needed to allege how the online payment processing system was rigged or who in particular carried out the rigging to cause the fraudulent submissions to close the missing link in his theory and establish “the eligibility status of the Medicaid claims at the time of their submission to the federal government.” Id. at *7 (emphasis in original). The relator did neither. For this reason, among others, the Court affirmed the dismissal of the FCA claims because it was “left to speculate as to the specific design and implementation of a scheme that purportedly defrauded the federal government of more than $ 14 billion over the course of six years.” Id. at *9-10. As evidenced by the Second Circuit’s decision in Gelbman, where “there’s smoke, there’s fire” is an adage not applicable to many claims asserted under the FCA. The decision serves as a reminder that the FCA’s heightened pleading standards operate to winnow out claims that do not plead the alleged fraud with particularity by specifying the fraudulent statements, who made them, where and when they were made, and why the statements were fraudulent. Id. at *6-7.

Last month, the D.C. Circuit revived a False Claims Act (“FCA”) retaliatory discrimination claim by a former employee of Howard University contending that she was fired by the University for objecting both internally and externally to the University’s alleged failure to maintain the humane laboratory animal living conditions on which the University’s receipt of federal funding was conditioned. See Singletary v. Howard University, No. 18-7158 (D.C. Cir. Sept. 20, 2019). The lower court dismissed the case for failure to state a claim and denied the employee’s motion for leave to amend her complaint on the grounds of futility. In reversing the lower court’s decision, the D.C. Circuit reasoned that the lower court took too narrow of a view of the FCA’s protection for whistleblowers, and clarified the proper standards for analyzing what constitutes protected activity under the FCA’s anti-retaliation statute. As a voluntary recipient of funding from the federal government for research activities involving live animals, the University is subject to the Animal Welfare Act and the Health Research Extension Act. In addition to mandating internal compliance with these acts and their corresponding regulations, they also require that each qualifying institution file a report with the Department of Agriculture and the National Institutes of Health (“NIH”) certifying compliance with the required animal welfare standards. These certifications are necessary for research institutions to receive and retain grant monies. In her proposed amended complaint, the plaintiff, Dr. Sylvia Singletary, alleged the following. In 2013, Singletary was retained by the University for a 30-month appointment as the Attending Veterinarian at its Medical School. Singletary alleges that over an approximately nine month period she repeatedly warned her direct reporting superior that the air temperature in the laboratory animals’ living quarters was too high, was not in compliance with the NIH standards, and constituted violations of the terms and conditions of the University’s grants from the NIH. She urged him to take corrective action to remedy the temperature deviations and report the non-compliance to the federal government, but her superior did neither. She then voiced her concerns with the Dean of the Medical School and another superior, who both likewise were unresponsive. Over the same time period that Singletary was registering warnings and complaints internally, the University made certifications to the NIH and other federal agencies that the laboratory animals were being maintained and cared for under certain federally mandated ambient living conditions. Things came to a head when in mid-April 2014, Singletary arrived at work to find 21 mice dead from apparent heat exhaustion. Because she believed her superiors had not acted in response to her prior complaints, she took matters into her own hands by e-mailing the NIH directly to report the rodents’ deaths and air temperature issues generally. The NIH thanked Singletary and directed her superior to submit a corrective action plan; this prompted the University to finally solve the air temperature problem. Shortly thereafter, Singletary’s superior excoriated her at a faculty meeting and the University subsequently notified Singletary that it was cutting her appointment short by six months. Singletary subsequently filed a lawsuit against the University alleging that the University’s termination of her employment constituted a violation of the FCA’s anti-retaliation provision (31 U.S.C. § 3730(h)). The FCA offers protection to whistleblowers who seek to expose or to prevent government fraud. To make out a claim of retaliation under the FCA, a plaintiff must plead facts showing: (1) that he/she engaged in protected activity, (2) because of which he/she was retaliated against. To satisfy the second element, a plaintiff must further allege (a) that the employer knew he/she engaged in protected activity, and, at least in the D.C. Circuit, (b) that the retaliation was motivated at least in part by his/her protected activity (the majority of circuits require “but-for” causation). As the Court explained in its opinion, protected activity under the FCA takes two forms: (1) lawful acts done in furtherance of an action under the FCA – that is, steps taken antecedent to a FCA proceeding; namely, investigating matters that reasonably could lead to or have a distinct possibility of leading to a viable FCA claim; or (2) lawful acts done in furtherance of other efforts to stop one or more violations of the FCA. In Singletary, the Court focused its analysis on the second protected activity prong, which unlike the first, is not tied to the prospect of a FCA proceeding. Instead, it focuses on the whistleblower’s efforts to stop violation of the statute before they happen or recur. As the Court explained, “[t]o put it simply, the focus of the second prong is preventative—stopping ‘violations’—while the first prong is reactive to an (alleged) actual violation of the statute.” Like the first prong, the second prong requires that the employee’s efforts pertain to fraud in connection with the submission of a claim for federal government funds. That test is met if the employee has an objectively reasonable belief that the employer is violating, or will violate, the FCA. This reasonable belief standard is meant to avoid burdening a lay person with the “sometimes impossible task” of correctly anticipating how a given court will interpret a particular statute. The Court found that Singletary’s proposed amended complaint sufficiently alleged protected activity under the second prong, and thus reversed the lower court. In doing so, the Court first reasoned that the lower court had incorrectly analyzed the second protected activity prong to require the plaintiff to have investigated matters that reasonably could lead to a viable FCA claim. The Court clarified that this requirement only applies to the first prong, as the second prong focuses exclusively on preventing or abating violations of the law in the first place. Second, the Court stated that the lower court had wrongly required Singletary to allege that her efforts were outside the scope of her responsibilities as Attending Veterinarian; a causal inquiry that also only applies to the first prong. Thus, the Court held that when viewed through the proper lens, the proposed complaint plausibly alleges that Singletary undertook lawful acts in furtherance of her efforts to stop one or more violations of the FCA. The Court also went on to find that Singletary had plausibly alleged the remaining elements of a retaliation claim, which require a showing of (a) a qualifying retaliatory employment action; (b) the University’s knowledge that she was engaged in protected activity; and (c) facts showing that the employment action was caused by engagement in that activity. The Court also pointed out that the lower court incorrectly suggested that FRCP 9(b)’s heightened pleading standard for fraud is applicable to the relation claim. The Court clarified that while FRCP 9(b) does apply to FCA qui tam actions, it does not extend to retaliation claims because such claims do not themselves assert or seek to prove actual fraud. The D.C. Circuit’s opinion provides a useful clarification for lower courts regarding the differing and applicable standards for analyzing what constitutes protected activity under the first and second prongs of the anti-retaliation statute. As the Court reiterated throughout its opinion, the second prong is focused on conduct that is meant to prevent or abate violations of the FCA, when the employee reasonably believes the employer has or will violate the law.

In early August, the U.S. District Court for the Western District of Texas granted a hospital system’s motion to dismiss a False Claims Act case that illustrates the increasing intersections in FCA litigation between data analytics and health care providers’ efforts to increase revenue through aggressive management of coding and billing practices. United States ex rel. Integra Med Analytics, LLC v. Scott et al., No. 5:17-CV-886-DAE, 2019 U.S. Dist. LEXIS 136547 (W.D. Tex. Aug. 5, 2019). Plaintiff Integra Med Analytics bills itself as a data analytics and litigation support firm, but it also files FCA cases as a relator. Integra alleged the defendants, including Baylor University Medical Center-Dallas and related entities, engaged in a scheme to submit fraudulent Medicare claims by systematically upcoding claims with “Complication or Comorbidity” (“CC”) or “Major Complication or Comorbidity” (“MCC”) codes, which add $1,000 to $25,000 to the value of reimbursement claims. Integra’s allegations focused on the defendants’ training programs that allegedly encouraged doctors to apply MCC and CC codes, and encouraged use of terminology in medical records that would justify application of these codes. Integra pressed for an inference of fraud based on its statistical analysis, which purportedly showed the defendants’ use of certain MCC and CC codes was above average as compared to other hospitals. The defendants moved to dismiss, attacking the case as a classic “parasitic” FCA claim brought by a serial relator and argued the FCA’s public disclosure bar foreclosed the suit because Integra’s analytics brought no new information to the government beyond what was already inherent in the underlying CMS data. They also contended Integra’s allegations of fraud were mere conclusions and opinions, unsupported by specific factual allegations, and thus Integra had failed to state a plausible claim for relief under Rule 8(a) or plead the alleged fraud with particularly under Rule 9(b) of the Federal Rules of Civil Procedure. The Court agreed that Integra failed to plead sufficient facts to make out a plausible claim for relief. Citing CMS guidance “encourag[ing] hospitals to engage in complete and accurate coding,” and to “focus their documentation and coding efforts to maximize reimbursement,” the Court concluded that the “mere fact that Defendants took targeted steps to increase their coding of CCs and MCCs to increase hospital[] revenues is neither fraudulent, nor improper per se.” Ultimately, the Court found Integra’s allegations were “‘not only compatible with’ but arguably ‘more likely explained by’ lawful conduct.” That is, at least as plausible as an inference of fraud was the inference that the defendants’ targeted coding programs and above-average utilization of certain codes were explained by their simply being “better than their peers in their efforts to ensure their medical documentation and coding maximized the opportunities for legitimate reimbursement from CMS.” Integra failed to plead any specific facts suggesting the defendants applied any of the codes with fraudulent intent, and in the absence of such facts, the mere fact that the defendants’ training and coding practices were effective in increasing revenue did not mean they were fraudulent. The case stands as a reminder to healthcare providers that programs designed to maximize reimbursement opportunities can give rise to litigation exposure, particularly in the era of big data. Of course, such programs can be entirely legitimate and legal—as the Court emphasized in this case—but providers would be wise to ensure that any program focused on driving revenue through coding practices places equal emphasis on compliance, integrity, and honesty.

Within the last five years, district courts in the Seventh Circuit have repeatedly denied motions to dismiss qui tam lawsuits brought under the FCA that allege a scheme to defraud government health programs by reporting inflated “usual and customary” prices for prescription drugs. By contrast, at least one district court in the Sixth Circuit recently granted such a motion under Rule 9(b). On March 7, 2019, a district court in the Tenth Circuit—considering similar prescription drug allegations for the first time—sided with the Seventh Circuit and denied defendants’ motion to dismiss plaintiffs’ FCA claims. In United States ex rel. Strauser v. Stephen L. LaFrance Holdings Inc., plaintiffs allege that between 2008 and 2012, defendants charged cash-paying customers four dollars for a thirty-day supply of any one of more than 300 commonly prescribed generic medications. Unlike cash-paying customers, plaintiffs allege that defendants charged Medicaid beneficiaries a higher price for the same drugs and reported that higher price as the “usual and customary charge to the general public” for purposes of receiving Medicaid reimbursement. Because Medicaid bases its payments on the so-called usual and customary prices reported by the pharmacies, plaintiffs allege that defendants did not extend the same four-dollar discount pricing to Medicaid in an effort to increase their reimbursement. In their complaint, Plaintiffs allege that defendants’ practices constituted fraudulent claims for payment under the FCA because it was understood throughout the pharmacy industry that “usual and customary charge” referred to the amount a pharmacy charged cash-paying customers. Plaintiffs also allege that defendants attempted to avoid detection by not advertising the four-dollar generic pricing in the media or through brochures, signs, or other promotional materials. Defendants moved to dismiss plaintiffs’ FCA claims by arguing, among other things, that plaintiffs failed to plead scienter with sufficient particularity. Defendants argued that the relevant FCA provisions—i.e., 31 U.S.C. § 3729(a)(1)(A), (B), and (G)—apply only to persons who act “knowingly.” Defendants argued that they could not have acted knowingly because excluding discount pricing of generic drugs from the usual and customary charges “was a reasonable interpretation of [an] ambiguous legal framework and not clearly proscribed by law.” The court found defendants argument unpersuasive. The court noted that defendants’ argument was “in tension with the plain meaning of the words ‘usual and customary,’” as well as plaintiffs’ allegation that the phrase is understood throughout the pharmacy industry to refer to the amount a pharmacy charges cash-paying customers. The court’s decision is notable in that expands the Seventh Circuit’s general acceptance of FCA claims regarding “usual and customary” prices for prescription drugs to a different jurisdiction. The court’s decision also serves as yet another win for whistleblowers complaining of fraudulent prescription drug practices and prices. The decision is found at: United States ex rel. Strauser v. Stephen L. LaGrance Holdings, Inc., 2019 U.S. Dist. LEXIS 36385 (N.D. Okla. Mar. 7, 2019).