FCA Now

Drug manufacturers participating in the Section 340B Drug Pricing Program now face a significant new litigation risk under the False Claims Act (“FCA”).  In a recent decision, Adventist Health System v. AbbVie, the Ninth Circuit reversed a district court to hold that a covered entity can pursue an FCA qui tam action premised on 340B overcharging even though Section 340B itself provides no private right of action. For hospitals, health systems, and other 340B-participating entities, the ruling deserves careful attention. Background: The 340B Program and Astra USA v. Santa Clara County The 340B Program, created in 1992, requires drug manufacturers that participate in Medicaid to sell drugs to qualifying covered entities, such as safety-net hospitals, federally qualified health centers, and similar facilities, at ceiling prices set by a statutory formula.  Covered entities use the discounted acquisition costs to stretch limited resources for low-income and uninsured patients. For years, the principal legal obstacle to covered entities pursuing overcharge claims has been Astra USA, Inc. v. Santa Clara County, 563 U.S. 113 (2011). The Supreme Court held that Section 340B suits by covered entities to enforce manufacturers’ Pharmaceutical Pricing Agreements are “in essence” suits to enforce the statute itself, which are barred because the statute does not create a private right of action.  If a covered entity believed it was overcharged, the exclusive remedy was Section 340B’s Administrative Dispute Resolution process, administered by the Health Resources and Services Administration (“HRSA”). Covered entities have complained for years that the ADR process is slow, resource-intensive, and provides only direct remedies like overcharge reimbursement or PPA termination.  Notably, the ADR process does not provide anywhere near the scope of damages and penalties available under the FCA, which allows treble damages and per-claim penalties. Adventist’s Allegations Adventist, a nonprofit operator of clinics and hospitals, alleged that AbbVie, AstraZeneca, Novartis, and Sanofi knowingly charged prices that violated 340B’s ceiling price formula for many years.  According to the qui tam complaint, all four manufacturers dropped the prices for several categories of drugs to $0.01, the default price when 340B’s ceiling price formula results in a ceiling price of $0 under HRSA’s penny pricing rule.  Adventist contends that market forces could not explain the sudden uniformity of the decrease, but instead that the drop is explained by years of inappropriate price increases followed by belated correction. Adventist brought suit as a qui tam relator on behalf of the federal and state governments, alleging that the inflated manufacturer prices caused Medicaid and Medicare to reimburse covered entities at fraudulently inflated rates, that critical access hospitals overbilled Medicare at 101% of costs, and that government-funded prisons and clinics paid unlawfully inflated prices. The Ninth Circuit’s Holding The Court reversed the district court’s dismissal on two independent grounds.  First, the Court reasoned that the absence of a private right of action under Section 340B does not bar an FCA qui tam action.  The Court ruled that the FCA provides its own independent right of action and creates a cause of action on behalf of the government.  As a result, Adventist was not suing to vindicate its own interests as a covered entity.  Rather, it was suing on behalf of the government.  The Court analogized to an earlier decision holding that the absence of a private right of action under the Service Contract Act did not bar a relator from bringing FCA claims premised on violations of that Act.  To the Court, what mattered was whether false claims were presented to the government, not whether the relator could independently enforce the underlying regulatory requirement. Second, the Court explained that Adventist’s claims are not “in essence” an attempt to enforce Section 340B in an end run on Astra USA.  There, the plaintiff sought compensatory damages for breach of contract, relief that mirrored what the 340B ADR process provides.  Here, Adventist seeks treble damages and civil penalties under the FCA for false claims submitted to government healthcare programs.  The Court concluded this difference placed Adventist’s claims in a different category, noting that Adventist’s claims of an FCA violation required more because “the violation of a statute does not itself create a violation of the FCA.” The Court also rejected the defendants’ arguments regarding a failure to allege falsity, holding that the plain text of the statutory ceiling price formula independently required penny pricing regardless of any regulation, and that HRSA’s 2011 written guidance had formally adopted that interpretation years earlier. What This Means Going Forward For covered entities, the decision potentially opens a previously unavailable avenue to pursue fraud losses the government sustained from 340B overcharging, which is beyond the losses recoverable through the ADR process.  Covered entities sitting on pricing anomaly data, or on evidence of precipitous price decreases like those alleged here, may have a viable FCA theory to evaluate alongside the ADR route. For drug manufacturers, the exposure calculus has changed materially, particularly in the Ninth Circuit.  FCA liability means treble damages plus per-claim civil penalties, consequences that would be far steeper than ADR reimbursement.  The FCA’s statute of limitations and statue of repose, however, may limit the scope of potential liability based on Adventist’s theory. The decision highlights the importance of documentation around 340B ceiling price calculations and compliance histories.  The Court permitted Adventist’s pre-2019 claims to survive at the pleading stage based on the theory that the statutory formula was self-executing.  What discovery reveals about how the defendant manufacturers calculated and what the defendants knew about ceiling prices in earlier years will likely be key to ultimate exposure. The Ninth Circuit’s ruling has no immediate effect outside the circuit, and it may well be contested further.  But given the scale of the 340B program, which facilitated more than $80 billion in drug purchases in 2024 alone, and the relative novelty of FCA theory, the Adventist decision is a development that organizations and practitioners across the spectrum will monitor closely.

This is the third post in the Dorsey FCANow Blog’s FCA Basics Series covering the fundamentals of the False Claims Act (“FCA”), outlining FCA procedure, and highlighting key facets of FCA practice. Today’s post introduces the qui tam provisions of the FCA. The FCA’s Qui Tam Device Under the qui tam provisions of the FCA, private citizens—called relators—bring FCA lawsuits on behalf of the United States.  Relators are incentivized to expose and prosecute fraudulent activity because the FCA allows relators to collect a portion of the government’s recovery, whether it was obtained via settlement or through final judgment.  The number of FCA lawsuits filed by relators has increased in recent years, and qui tam cases composes a majority of all filed FCA cases. Qui tam lawsuits are a major driver of FCA settlement and judgment recoveries. In fiscal year 2024, the Department of Justice obtained over $2.9 billion in FCA recoveries. Of that $2.9 billion, approximately $2.4 billion came from qui tam lawsuits. The Qui Tam Procedure To initiate a qui tam lawsuit, a relator files a lawsuit on behalf of the United States against an organization or person allegedly defrauding the government. The lawsuit is first filed under seal and served to the U.S. Attorney in the district, meaning initially only the relator and the government know about the lawsuit and the allegations. The complaint remains under seal for at least 60 days while the Department of Justice has an opportunity to evaluate and investigate the claim. But those investigations often take a year or more. After the government completes its investigation, it generally does one of three things: (1) intervenes and takes over the case from the relator; (2) declines to intervene, leaving the relator to prosecute the claim; or (3) move to dismiss the action. When the government intervenes, it directly controls and prosecutes the action. After intervening, government may file an amended complaint adding or removing defendants and pleading new claims, particularly any unavailable to the relator due to lack of standing. The FCA also allows the government to settle the case notwithstanding the objections of the relator, so long as the court determines the settlement is “fair, adequate, and reasonable under the circumstances.” The relator remains a party to the litigation. The government may partner with the relator and their counsel in the prosecution of the case or limit the relator’s role. Decline to intervene. The government may decide after its investigation that pursuit of the litigation is not worth the investment of resources, which may or may not reflect the strength of the relator’s case. If the government declines to intervene, relators continue to prosecute the action under the FCA’s qui tam provisions and may receive a larger share of any recovery. The government remains the real party in interest and can still later seek to enter the case. The relator(s) and defendant(s) still must seek government approval of agreements to resolve the litigation, and the relator’s share of any settlement is determined by the government within the statutory range. Move for dismissal. The government may seek dismissal of a qui tam action, at the end of its investigation or at later junctures in the litigation. Relators receive notice and an opportunity to be heard. Where the government declines to intervene because it believes the case to be meritless, there is no affirmative duty under the FCA to seek dismissal. Justice Department guidance, however, instructs government attorneys to exercise the dismissal power to curb meritless or duplicative actions. As recently as 2023, the Supreme Court affirmed in United States ex rel. Polansky v. Executive Health Res., Inc., 599 U.S. 419 (2023) that broad judicial deference should generally be given to the government’s decision to dismiss qui tam A Unique Form of Litigation The FCA’s qui tam device is unique and a bit unusual. There is peculiar co-plaintiff posture created by empowering relators to sue on behalf of the United States. The requirement that a qui tam action initially be filed under seal without notice to the defendant. The statutory mandate that the government investigate the allegations. The incentive structure created by the statutory relator’s share. The FCA’s qui tam device gives rise to numerous novel legal questions. Several constitutional principles are implicated by qui tam lawsuits. The case or controversy requirement of standing doctrine exists in some tension with the relator’s lack of a particularized injury in fact. See Vermont Agency of Natural Resources v. United States ex rel. Stevens, 529 U.S. 765 (2000). Separation of powers questions arise, too. Article II’s Vesting and Take Care Clauses empower and burden the President with execution of the laws of the United States. Through the qui tam device, Congress imbues relators with prosecutorial authority, but based on the powers vested in Article I.  Similarly, Article II’s Appointments Clause applies to “inferior” officers of the United States. See Lucia v. SEC, 585 U.S. 237 (2018).  In 2023, in dissenting and concurring opinions in Polansky v. Executive Health Res., Justices Thomas, Kavanaugh, and Barrett opined “there are substantial arguments that the qui tam device is inconsistent with Article II and that private relators may not represent the interest of the United States in litigation.” Since Polansky, one federal district court has held that the Appointments Clause required that an FCA qui tam relator be appointed by the President. This case, United States ex rel. Zafirov v. Florida Medical Associates, is now before a three-judge panel in the Eleventh Circuit Court of Appeals. The Eleventh Circuit heard arguments in Zafirov on December 12, 2025, and is now poised to possibly become the first court of appeal to strike down the FCA’s qui tam provisions on constitutional grounds. Qui tam lawsuits raise other unique questions. Issues arise when multiple relators file similar qui tam claims on behalf of the government. Legal and ethical questions emerge when a relator brings a qui tam suit over fraudulent conduct the relator initiated or contributed to. Additionally, the settlement process can be complicated by potentially conflicting interests between the government and relator. Special concerns animate all stages of qui tam litigation.  Dorsey’s FCA Basics Series will cover these and more features of FCA litigation in upcoming posts.

Under the False Claims Act (FCA), private individuals—i.e. qui tam relators—file suit on behalf of the government against individuals or organizations, seeking to redress alleged frauds on the government.  See 31 U.S.C. § 3730(b).  The FCA’s qui tam provisions have faced constitutional challenges in the past.  But until recently, courts have almost uniformly turned those challenges away, often emphasizing the statute’s “long pedigree” and the role relators have played in enforcing federal law.[1]  This Friday, December 12, a three-judge panel of the Eleventh Circuit will hear argument on whether the qui tam relator, particularly one lacking an appointment to the position by the President (which is to say, all of them), is consistent with the dictates of Article II in United States ex rel. Zafirov v. Florida Medical Associates. Recent Supreme Court jurisprudence has put the FCA qui tam provisions back in the constitutional crosshairs.  In a recent dissent, Justice Thomas reignited debate over the constitutionality of the FCA’s qui tam provisions, questioning whether qui tam relators were consistent with Article II’s prescriptions of executive power.  See United States, ex rel. Polansky 599 U.S. 419, 449 (Thomas, J. dissenting) (2023) (“The FCA’s qui tam provisions have long inhabited something of a constitutional twilight zone.  There are substantial arguments that the qui tam device is inconsistent with Article II and that private relators may not represent the interests of the United States in litigation.”).  In a short and single-purpose concurrence earlier this year, Justice Kavanaugh echoed Just Thomas’ concerns around the FCA’s qui tam provisions, noting the FCA’s “qui tam provisions raise substantial constitutional questions under Article II.”  See Wisconsin Bell, Inc. v. United States ex rel. Heath, 604 U.S. __, __ (2025) (Kavanaugh, J. concurring) (recognizing the constitutional questions were not before the Court, Justice Kavanaugh wrote that “in an appropriate case, the Court should consider the competing arguments on the Article II issue”). Federal district courts across the country have been asked to revisit the constitutionality of the FCA’s qui tam provisions in the wake of these recent opinions from Justice Thomas and Justice Kavanaugh.  The first successful challenge has now made its way to the United States Court of Appeals for the Eleventh Circuit.  Ahead of oral argument, this blog post summarizes the background of Zafirov and the arguments the defendants, relator, and government assert, and highlights how other recent decisions may (or may not) influence the Eleventh Circuit’s decision. United States ex rel. Zafirov v. Florida Medical Associates In May 2019, in the United States District Court of the Middle District of Florida, Dr. Clarissa Zafirov filed a sealed FCA complaint alleging the defendant organizations inflated risk-adjusted payments by submitting diagnosis codes portraying patients as sicker than they were.  After its investigation of the allegations, the government declined to intervene, but the relator pursued its claim, and the case proceeded through discovery for multiple years.  In 2024, five years into the litigation and after Justice Thomas’s dissent in Polansky, the defendants moved for judgment on the pleadings, raising Article II constitutional challenges to the FCA’s qui tam provisions, including that the provisions violate the Vesting, Take Care, and Appointment Clauses. District Judge Kathryn Mizelle, a former clerk for Justice Thomas, concluded that Zafirov could not prosecute the case because a qui tam relator was an “officer of the United States” who required an appointment by the President, which Zafirov did not have.  In determining Zafirov was acting as an “officer of the United States,” the court looked to the Supreme Court’s test in Lucia v. SEC, which asks whether the person (1) exercises significant authority pursuant to the laws of the United States and (2) occupies a continuing position established by law.  See 585 U.S. 237, 245 (2018).  Judge Mizelle reasoned that Zafirov, as an FCA qui tam relator, exercised significant executive power by, among other things, deciding whether to initiate litigation in the name of the United States and controlling that litigation.  Further, the court held relators are in a “continuing position” because the relator is potentially in that position for years and is not removable.  As a result, Judge Mizelle dismissed the suit.  Zafirov and the government appealed. The Arguments The parties have extensively briefed the various aspects of Article II executive power, the functional and legal status of a qui tam relator, whether Congress’s exercise of its power in Article I to enact the FCA’s qui tam provision is inconsistent with Article II, and whether the historical practice of qui tam relators ameliorates any potential constitutional infirmity. The government focuses on the legal status of a relator for its argument for constitutionality.  The government contends relators are not “officers of the United States” and therefore do not require appointment.  In the government’s view, relators do not exercise executive power or enforce federal law in a manner inconsistent with the Vesting and Take Care Clauses.  They do not hold government jobs, nor do they exercise sovereign authority.  The government remains in control during the entire duration of the lawsuit—even when it does not intervene, the government has the authority to monitor filings, pause discovery, veto settlements, and even dismiss the case under the FCA.  Rather, to the government, relators’ role in a qui tam action more similarly mirrors that of a private plaintiff in a civil rights suit than a presidentially appointed officer.  Among other authorities, the government relies on Vermont Agency of Natural Resources v. United States ex. Rel. Stevens, 529 U.S. 765 (2000), which considered whether the FCA’s qui tam provisions were consistent with Article III standing jurisprudence and held that qui tam relators had standing to bring suit despite that the injury to be redressed was to the government, not qui tam relators.  The government argues Stevens reinforces that relators act as partial assignees of the government’s claim as distinct from “officers of the United States.”  Therefore, the government contends, qui tam relators do not require appointments under Article II’s Appointments Clause. Zafirov relies on precedent and history to argue the FCA’s qui tam provisions comply with Article II.  Zafirov emphasizes that federal appellate courts that have considered the question—including the Fifth, Sixth, Ninth, and Tenth Circuits—have all upheld the FCA against Article II challenges.  Further, the Supreme Court has repeatedly described relators as “private persons,” not “officers of the United States,” and has adjudicated qui tam cases for over a century without raising constitutional doubts.  Zafirov contends that, from a historical perspective, qui tam provisions like the FCA’s were ubiquitous in the United States’ earliest days.  If qui tam actions violated Article II, Zafirov argues, such a defect would have surfaced during early legal debates in the history of the United States.  The lack of historical debate over the propriety of the qui tam mechanism, Zafirov argues, demonstrates its acceptance and consistency with the constitutional framework. Zafirov also echoes the government’s arguments on the Appointments Clause, asserting that relators are not “officers of the United States” because they do not hold continuing positions or exercise significant authority. The Appellees reiterate their arguments to the district court: the FCA’s qui tam provisions violate three provisions of Article II: the Appointments Clause, Vesting Clause, and Take Care Clause. First, Appellees contend the FCA’s qui tam provisions violate the Appointments Clause because relators exercise core executive power without constitutional appointment.  The Appellees counter the government and Zafirov’s dismissive characterizations of the power of a qui tam relator, nothing relators initiate and conduct litigation in the name of the United States and seek treble damages and civil penalties for injuries.  This authority—deciding whether to sue, what claims to pursue, and how to litigate—is a quintessentially executive power, according to the Appellees.  Because qui tam relators wield this significant authority without appointment under the Appointment Clause, Appellees argue that the entire qui tam scheme is unconstitutional. Second, Appellees assert that because the qui tam provision undermines presidential control, it violates the Vesting and Take Care Clauses.  Article II vests all executive power in the President, such that executive power can be exercised only through the President directly or through appropriate delegation.  The President may supervise and remove those exercising that power.  Appellees argue the FCA’s qui tam provisions strip that control away, infringing on the constitutional division of power.  For example, Appellees contend that relators authorize their own appointment, define their own jurisdiction, and cannot be removed by the President.  According to the Appellees, this lack of oversight prevents the President from ensuring faithful execution of the laws and creates an enforcement regime driven by private profit rather than public accountability, violating Article II of the Constitution. Other Recent Decisions Courts elsewhere are grappling with the constitutional challenges, too, which may offer potential insight about how the Eleventh Circuit may approach the questions before it: United States ex. rel. Montcrief v. Peripheral Vascular Associates, 133 F.4th 395 (5th Cir. 2025). Writing in a concurrence, Judge Duncan noted that, despite the obstacle of a precedential en banc opinion upholding the FCA’s constitutionality stands in the way, see Riley v. St. Luke’s Episcopal Hospital, 252 F.3d 749, 751 (5th Cir. 2001) (en banc), there is cause to question the constitutionality of the FCA’s qui tam  Judge Duncan explained that qui tam relators exercise “core executive power” because they “appoint themselves” and litigate on behalf of the United States without presidential oversight, which is inconsistent with Article II’s structure.  Judge Duncan’s concurrence is another example of growing judicial willingness to revisit long-standing FCA precedent. United States ex. rel. Gentry v. Encompass Health Rehab, No. 25-20093, 2025 U.S. App. LEXIS 28755 (5th Cir. 2025). Also in the Fifth Circuit, Judge Ho called for the court to reconsider Riley in a recent concurrence.  Judge Ho likened relators to “unaccountable federal employees” who wield executive power without democratic accountability and “enjoy[ing] a de facto form of life tenure, akin to that of Article III judges.”  Judge Ho believes qui tam relators present constitutional concerns by presuming to represent the United States government in federal court and to defend the interests of the United States Treasury against fraud without appointment by or accountability to the President. United States ex. rel. Gose v. Native American Services Corp., No. 8:16-cv-03411-KKM-AEP, 2025 U.S. Dist. LEXIS 101549 (M.D. Fla. May 29, 2025). Consistent with her order in Zafirov, Judge Mizelle granted the defendants’ motion for judgment on the pleadings on the ground that the relator lacked a presidential appointment and therefore could not prosecute the case consistent with the Appointments Clause.  Judge Mizelle noted that this case presented stronger facts than Zafirov because the relator who initiated the case had passed away and the executor of the estate substituted, which was more evidence that the position of qui tam relator was a continuing position.   United States ex. rel. Health v. Wisconsin Bell, No. 08-CV-724, 2025 U.S. Dist. LEXIS 217468 (E.D. Wis. Oct. 29, 2025). On remand from the Supreme Court’s recent decision, the defendant sought summary judgment on the basis that the FCA’s qui tam provisions are unconstitutional.  The court denied summary judgment, concluding that qui tam relators were not “officers of the United States” requiring appointment and noting that the historical practice of qui tam litigation was persuasive, if not dispositive, evidence that the FCA’s qui tam provisions are consistent with the original understanding of Article II. Conclusion The Eleventh Circuit panel faces a spectrum of constitutional questions.  And, unlike other circuits, there is no binding precedent on these Article II questions that cabins this panel to a particular outcome.  See Yates v. Pinellas Hematology & Oncology, P.A., 21 F.4th 1288, 1312 (11th Cir. 2021) (“Those [Article II] issues are not before us, so we take no position on our sister circuits' ultimate conclusions.”).  Against the backdrop of Supreme Court Justices telegraphing “substantial” constitutional concerns over the qui tam mechanism and multiple appellate and district court judges inveighing against it, the Eleventh Circuit could become the first appellate court to strike down the FCA’s qui tam provisions. Dorsey’s FCA Now Blog will be following the oral arguments closely and will publish post-argument analysis next week. [1] See, e.g., United States ex rel. Stone v. Rockwell Int’l Corp., 282 F.3d 787 (10th Cir. 2002); Riley v. St. Luke’s Episcopal Hosp., 252 F.3d 749 (5th Cir. 2001) (en banc); United States ex rel. Taxpayers Against Fraud v. General Elec. Co., 41 F.3d 1032 (6th Cir. 1994); United States ex rel. Kelly v. Boeing Co., 9 F.3d 743 (9th Cir. 1993).

A recent decision by the U.S. District Court for the Northern District of California to reject a proposed $57 million settlement in a False Claims Act (FCA) litigation highlights the unique challenges and complexities that surround the resolution of FCA cases—challenges that set them apart from ordinary civil litigation. Background: The Tetra Tech Case The settlement arises from a case about the Hunters Point Naval Shipyard in southeast San Francisco, which is a Superfund cleanup site due to radiological contamination. In the 1990s, the U.S. Navy agreed to convey the shipyard piecemeal as it was remediated to San Francisco to develop for residential or commercial purposes. From about 2005 to 2018, the defendant in the litigation, Tetra Tech EC, did remediation work on contracts worth approximately $262 million. Whistleblowers (qui tam relators) filed a sealed complaint under the FCA in 2013.  In 2019, the government filed a complaint-in-intervention alleging that the defendant, among other things, violated the False Claims Act by submitting soil samples for testing that were known to be clean, manipulating other testing data, and reporting these false results to the Navy. Earlier this year, the government and Tetra Tech separately agreed to a $40 million settlement a claim under Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) for remediation costs at the former Navy site.  That included an agreed consent decree, which the court had already approved. That was just one of five counts against the defendant, however. The government and Tetra Tech recently reached an agreement to settle the remaining four claims, including two counts under the FCA, a common law fraud count, and a breach of contract count, for $57 million. The settlement allocated $51.87 million to “soil fraud allegations” and $5.13 million to “building scan fraud allegations.” Court Scrutiny: More Than a Rubber Stamp Like ordinary civil litigations, the FCA allows resolution of claims under the statute and for the parties to seek dismissal of the claims. But the FCA also uniquely conditions voluntary dismissal of FCA claims on “written consent” from the court and the Department of Justice “and their reasons for consenting.” See 31 U.S.C. § 3730(b)(1).  In addition, where a qui tam relator objects to a settlement reached between the government and the defendant, the FCA requires the court approve only settlements that are “fair, adequate, and reasonable under all the circumstances.” See 31 U.S.C. § 3730(c)(2)(B). In this case, the government and the qui tam relators disagreed on the share of the proceeds due to the relators. But the government sought approval of the settlement despite the continuing dispute over the share. The court declined to approve the settlement on the current record, noting that the government’s justifications were vague and generic, and did not address the specific concerns raised by the case, such as the adequacy of the settlement considering the serious radiation remediation issues. The court emphasized that it cannot simply “rubber stamp” the government’s decision and must conduct a meaningful review. Another layer of complexity in FCA cases is the determination of a qui tam relator’s share of the settlement. In this case, the qui tam relators sought a 23% share as a group, while the government proposed different allocations based on the nature of the allegations and invoked a statutory bar, the “first-to-file” rule, as to three the qui tam relators. The court found both sides’ proposals lacking in specificity and evidentiary support, directing the parties to provide detailed, claim-by-claim analyses addressing whether and what award should be made jointly or individually to each qui tam relator. The Court directed the parties to file supplemental briefing to address these issues. Takeaways: Why FCA Settlements Are Different The Tetra Tech case is a vivid illustration of why FCA settlements are often not routine. Settling FCA cases can be complex for several reasons. Courts are called to provide a rationale for even a basic dismissal and, where a relator objects, may review settlements for reasonableness and fairness.  Alleged frauds against the government run the gamut of potential public policy interests, from environmental safety (like in this case) to public health and welfare to national defense and security. The government’s interests in resolution of an FCA action may diverge from those of whistleblowers, inviting careful judicial balancing of those interests.

On June 1, 2023, a unanimous Supreme Court decision sought to clarify the meaning of “scienter” in the FCA context, which deals with the defendant’s knowledge (or lack thereof) that a claim for payment was false and intent to submit the false claim.  See United States ex rel. Schutte v. SuperValu Inc., 143 S. Ct. 1391 (2023) (“SuperValu”).  There, the Court ruled that “[f]or scienter, it is enough if respondents believed that their claims were not accurate.”  Id. at 1404.  According to the SuperValu decision, only that subjective belief as to the claim’s falsity matters, and whether there is an “objectively reasonable” explanation for the false claim is irrelevant.  Id. at 1399 (“The FCA’s scienter element refers to respondents’ knowledge and subjective beliefs—not to what an objectively reasonable person may have known or believed.”). While explaining the basis for the decision, Justice Thomas wrote that “the FCA’s standards focus primarily on what respondents thought and believed,” discussing how the three different FCA knowledge standards—actual knowledge, deliberate ignorance, and reckless disregard—each rely on the defendant’s subjective knowledge.  Id. at 1400-01.  Describing “reckless disregard” in the FCA context, Justice Thomas explained that the term “captures defendants who are conscious of a substantial and unjustifiable risk that their claims are false, but submit the claims anyway.”  Id. That sentence is already being used to argue that SuperValu heightened the government’s burden when it is attempting to prove reckless disregard—that to establish reckless disregard the government must show that the defendant was, as Justice Thomas described, “conscious of a substantial and unjustifiable risk that their claims are false.”  If courts rely on this as the standard for establishing reckless disregard in the future, it could heighten the government's burden as compared to tests currently used by courts.  For example, in July 2022 the Middle District of Georgia described the reckless disregard standard in the FCA context as when the defendant “knows or has reason to know of facts that would lead a reasonable person to realize that harm like a false claim is the likely result of the relevant act.” United States ex rel. Hockaday v. Athens Orthopedic Clinic, P.A., 616 F. Supp. 3d 1339, 1354 (M.D. Ga. 2022) (quoting Urquilla-Diaz v. Kaplan Univ., 780 F.3d 1039, 1058 (11th Cir. 2015)) (cleaned up). As one example of how defendants are already using the Court’s language, in a June 23 brief to the Western District of Virginia District Court discussing the impact of the SuperValu decision, the defendants in the Miller case contended that “[t]he Supreme Court clarified that the FCA’s ‘reckless disregard’ standard ‘captures defendants who are [1] conscious of a [2] substantial and [3] unjustifiable risk that their claims are false, but submit them anyway.’”  See, e.g., United States ex rel. Miller v. Reckitt Benckiser Group PLC, 1:15-cv-00017, Dkt. No. 149 at 10-11 (W.D. Va. July 7, 2023).  DOJ responded that there is no three-part test to establish reckless disregard, and instead the effect of the SuperValu decision is simply rejecting any argument that the FCA’s scienter element incorporates an objective test.  Id., Dkt. No. 150 at 3.  According to DOJ, the Court was not “establishing new and restrictive criteria” to show reckless disregard, but was merely “summarizing” existing case law.  Id. The Western District of Virginia has not yet made a ruling relevant to these arguments, but the eventual ruling will be one of the first to test a potential new argument available to FCA defendants resulting from the SuperValu decision, and may provide an additional hurdle for the government to prove reckless disregard.

On November 30, 2022, the Third Circuit Court of Appeals vacated dismissal of a retaliation action brought by Don Ascolese (“Ascolese”) under the False Claims Act (“FCA”).  See United States ex rel. Don Ascolese v. Shoemaker Constr. Co., No. 21-2899, ECF No. 30 (3d Cir. 2022) (“3d Cir. Opinion”). In the complaint before the lower court, Ascolese alleged that Shoemaker Construction Co., McDonough Bolyard Peck (“MBP”), and Shoemaker Synterra JV falsely certified construction work in a public housing project for the Philadelphia Housing Authority (“PHA”) such that the project was not in compliance with build specifications or in accordance with established building and safety codes. See United States ex rel. Don Ascolese v. Shoemaker Constr. Co., No 2:18-cv-01864-MSG, ECF No. 26 (E.D. Penn. May 3, 2018).  Ascolese also claimed he was fired for raising the issue internally, which allegedly violated the FCA’s anti-retaliation provisions because whistleblowing is a protected activity.  Id. In response to the allegations, all three Defendants moved to dismiss all claims on the basis that Ascolese’s complaint failed to meet threshold-pleading requirements.  On April 19, 2021, the District Court dismissed the vast majority of Ascolese’s claims against the Defendants, including dismissing all retaliation claims.  Id. at ECF No. 42.  In finding Ascolese’s retaliation claims were not plausibly plead, the District Court explained that Ascolese had not demonstrated that MBP had knowledge that Ascolese was engaging in protected conduct and that because Ascolese was not an employee of Shoemaker Construction or Shoemaker Synterra JV, as a matter of law Ascolese could not pursue a claim for retaliation against them.  Id. at 22-24. Following dismissal of his claims for retaliation, Ascolese moved for leave to file a Second Amended Complaint, which MBP opposed.  The District Court denied the motion, finding that Ascolese had failed to plead “reliable indicia” for the court to infer false claims were submitted to MBP, and that Ascolese had merely “re-package[d]” his previously deficient claims of retaliation.  Id. at ECF No. 48.  Ascolese appealed. In an opinion dated November 30, 2022, the Third Circuit Court of Appeals vacated the District Court’s decision to deny Ascolese the opportunity to file a Second Amended Complaint, explaining that the District Court did not take into consideration statutory changes to the FCA retaliation standard introduced by Congress in 2009 and 2010.  3d Cir. Opinion at 3-4. The Third Circuit explained that Congress had previously “expanded the universe of protected conduct to whistleblowers who lawfully try to stop one or more violations of the Act, without regard to whether their conduct advances a qui tam suit under the Act.”  Id. at 4.  In effect, Congress had taken steps not only to protect “potential or actual” qui tam actions, but also to remedy misconduct “whether or not such steps are clearly in furtherance of a potential or actual qui tam action.”  Id. at 5.  Therefore, the Third Circuit explained, the 2009 and 2010 FCA amendments expanded the anti-retaliation standard to protect “lawful acts in furtherance of either an action under the FCA or other efforts to stop 1 or more violations of the Act.”  Id. at 12 (emphasis in the original). Under the new standard, the Third Circuit found that Ascolese had sufficiently plead that he engaged in “protected conduct” when he “went outside of his chain of command to report his concerns of fraudulent work to the PHA,” raised project “issues and safety concerns” with superiors at MBP and to PHA, and sufficiently plead that MBP was on notice of his protected conduct and retaliated against him because of it.  Id. at 14-16. Accordingly, the Third Circuit vacated the District Court’s denial of Ascolese’s motion for leave to file a Second Amended Complaint and remanded to the District Court. Companies and practitioners should familiarize themselves with the ever-changing standards implemented by Congress and the courts, especially in jurisdictions that have not yet explicitly adopted the post-amendment standards for retaliation under the FCA. Understanding the scope of the amendments, and what is required to allege retaliation, will be vital for companies to ensure they are not running afoul of the expanded standards under the FCA.

On July 26, 2022, the Eighth Circuit Court of Appeals issued an opinion interpreting the standard for the causal link the government must show to establish that a “false or fraudulent” claim under the False Claims Act (“FCA”) included “items or services resulting from a violation” of 42 U.S.C. § 1320a-7b(g), the federal anti-kickback statute.  United States ex rel. Cairns v. D.S. Med. LLC, 2022 U.S. App. LEXIS 20584 (8th Cir. Jul. 26, 2022) (emphasis added). In Cairns, the Eighth Circuit reviewed a jury verdict from the Eastern District of Missouri where a neurosurgeon named Sonjay Fonn and a medical implant company owned by his fiancée were found liable for violations of the FCA.  According to the Court’s opinion, Dr. Fonn used spinal implants in his medical practice to treat degenerative-disc disease and other spinal disorders.  Id. at *3-4.  Because of the large commissions associated with each implant sold, Fonn was “in a powerful position” to impact the economic fortunes of prospective implant distributors.  Id. at *4.  Dr. Fonn chose to use implants distributed by defendant DS Medical, which was owned by his fiancée.  Id.  The arrangement resulted in commissions of more than $1 million in a single year from one manufacturer for DS Medical, and Fonn was offered the opportunity to purchase company stock.  Id. Several area physicians filed a qui tam complaint based on Fonn’s high implant use and his financial relationship with DS Medical.  Id. at *4-5.  The Government intervened and the case proceeded to trial.  Id. at *5.  The Government’s theory of liability was that the couple and their businesses submitted false or fraudulent Medicare and Medicaid claims after having violated the anti-kickback statute.  Id.  The district court instructed the jury that the Government could establish falsity or fraud if it proved, by a preponderance of the evidence, that the defendants submitted Medicare or Medicaid claims which failed to disclose the violations of the anti-kickback statute.  Id.  The jury returned a verdict for the Government on several of the claims.  Id. On appeal, the defendants argued that the district court committed two reversible errors.  Id. at *8.  First, the defendants argued that the district court erred by applying a “preponderance of the evidence” standard of proof for the anti-kickback violations and should have instead applied a “proof beyond a reasonable doubt” standard.  Id. at *9–10.  While the plain text of the FCA provides that the government need only prove each “essential element” of a claim by a “preponderance of the evidence,” the defendants argued that because a violation of the anti-kickback statute – a criminal offense – normally has to be proven with proof “beyond a reasonable doubt” that the higher standard should apply to the FCA claim.  Id.  Second, the defendants argued that the district court erred in failing to provide a jury instruction on but-for causation.  Id. at *8. Rejecting the first argument, the Eight Circuit affirmed the district court’s use of the “preponderance of the evidence” standard of proof.  Id. at *9–10.  The Court explained that “[t]he fact that the False Claims Act expressly provides a preponderance-of-the-evidence standard for all ‘essential elements’ leaves no doubt” that FCA violations, due to their status as civil sanctions, can be proven under the lower standard.  Id.  As such, the government may “establish an illegal kickback by a preponderance of the evidence as part of a larger False Claims Act case.”  Id. at *10. The Eighth Circuit then turned to the Defendants’ argument that they were entitled to a jury instruction on but-for causation.  On this issue, the Court agreed with the Defendants, reversing the verdict and remanding the case for a new trial.  Id.  Explaining its reasoning, the Court found that the statutory language at issue (the 2010 amendment to the anti-kickback statute) was unambiguous, and that the issue turned on the plain meaning of the phrase “resulting from.”  Id. at *10-11.  After briefly reviewing case law acknowledging and considering the plain meaning of “resulting,” the Court determined that the statute required a showing of but-for causation.  Id. at *11.  In concrete terms, this means that a plaintiff who seeks to establish falsity or fraud based on claims “resulting from” a violation of the anti-kickback statute must show that “a defendant would not have included particular ‘items or services’ but for the illegal kickbacks.”  Id. at *17.  The court rejected the alternative constructions suggested by the Government, such as that liability could be shown by proving claims were “tainted by” or “provided in violation of” the anti-kickback statute.  Id. at *14. The Court concluded by explaining that its ruling was narrow and it did not imply that every case arising under the FCA requires a showing of but-for causation.  Id. at *17.

The Department of Justice recently announced that it resolved two civil lawsuits filed under the qui tam, or whistleblower, provisions of the False Claims Act to the tune of nearly $4 million. The suits alleged that a suburban Chicago diagnostics company, SNAP Diagnostics, LLC, that provides home testing for sleep disorders was defrauding Medicare and four other federal health care programs through kickbacks and unnecessary testing. Since Medicare began covering home sleep testing in 2009, SNAP has received nearly $9 million from Medicare - almost all of it the result of fraud and kickbacks, according to the government's allegations. As alleged by the government, SNAP, its founder Gil Raviv, and its vice president Stephen Burton violated the False Claims Act and the Anti-Kickback Statute through various fraudulent billing practices. In particular, Raviv allegedly instructed SNAP to submit claims for patients' second and third nights of home sleep testing when the company knew they were medically unnecessary because only a single night of testing was needed to effectively diagnose certain sleep disorders. In addition, the government alleged that SNAP’s business model relied on multiple unlawful kickback schemes. First, SNAP purportedly paid commissions and bonuses to its sales force for selling multi-night testing to providers, and it gave free home sleep tests to physicians and their families to induce referrals. Second, after its sleep testing was performed, SNAP personnel allegedly interpreted the results and gave unsigned reports to referring physicians who in turn would bill as if the physicians had performed the professional service of interpreting the results themselves. This allowed providers to “keep” the billing for the professional component of home sleep testing services. SNAP intentionally allowed physicians to fraudulently bill for this service as a way of increasing referrals and driving the volume of SNAP's business. Other allegations against SNAP include the unnecessary and unlawful multiplication of the copays of federal health care beneficiaries including senior citizens on Medicare. The settlement requires that SNAP pay $3.5 million, Raviv pay $300,000, and Burton pay $125,000 for a total settlement amount of $3.925 million. This is not the first home-health services company to settle with the DOJ in recent months (see our March 8, 2022 blog) and serves as yet another reminder to healthcare companies of the importance of internal controls and due diligence - especially when federally-funded treatment is involved.