FCA Now

The Justice Department announced in a recent press release that it obtained more than $2.8 billion in settlements and judgments from cases involving fraud and false claims against the government. The vast majority of this amount—$2.1 billion—came from lawsuits filed by whistleblowers, or “relators” suing on behalf of the government, under the qui tam provisions of the False Claim Act (“FCA”). Included in the qui tam recoveries was $5 million from former professional cyclist and seven-time Tour de France winner, Lance Armstrong, which he paid to resolve a lawsuit alleging his admitted use of performance enhancing drugs resulted in the submission of millions of dollars in false claims to the United States Postal Service for sponsorship payments. Altogether, qui tam actions in FY2018 generated over 70% of the recoveries and represented over 80% of new cases (645 out of 767). The Department’s historical statistics show that qui tam actions, in fact, have consistently accounted for the substantial majority of settlements and new cases since 1986 when Congress increased the incentives for whistleblowers. Will 2019 show continued reliance on qui tam actions?  As reported earlier this year, the nominee to be the next Attorney General of the United States, Bill Barr, has expressed skepticism regarding the constitutionality of the FCA’s qui tam provision. Given the Department’s continued success in recouping large settlements and deterring future misconduct through qui tam actions, however, it may prove difficult to suddenly reverse the Department’s traditional reliance on such actions. In the press release announcing the FY2018 statistics, Assistant Attorney General for the Civil Division Jody Hunt voiced strong support for qui tam plaintiffs, saying: “Whistleblowers have played a vital role in unmasking fraudulent schemes that might otherwise evade detection. The Taxpayers owe a debt of gratitude to those who often put much on the line to expose such schemes.” Whether the Department continues to rely heavily on qui tam actions, there is no doubt the Department will continue to prosecute FCA cases in 2019. And although the FY2018 statistics demonstrate FCA actions may cover just about anything—even qui tam against former Tour de France winners—they are more likely to involve highly scrutinized fields such as healthcare and defense. Nearly 90% of 2018 FCA recoveries involved the healthcare industry, and 2018 marked the ninth consecutive year that recoveries from the healthcare industry exceeded $2 billion. Thus, all companies and professionals, but particularly those operating in the healthcare industry, must remain vigilant to protect against such claims, and would be well-advised to bolster compliance programs to ensure the integrity of claims submitted to the government. Or, as Armstrong’s many yellow jerseys perhaps should have suggested:  proceed with caution.

A divided panel of the U.S. Court of Appeals for the Sixth Circuit again revived an FCA suit against home-health services providers premised on the providers’ alleged improper procurement of physician medical necessity certifications supporting Medicare claims. In United States v. Brookdale Senior Living Communities, Inc., --- F.3d ----, 2018 WL 2770598 (6th Cir. June 11, 2018), a nurse alleged she was hired by several related companies that operate senior communities, assisted living facilities, and home health care providers. She claimed these providers sought to enroll as many of their assisted living facility residents in home health care services as possible but failed to keep up with submitting Medicare claims for those services. The nurse asserted she was hired to help clear a backlog of unsubmitted Medicare claims for which the providers had not compiled the appropriate documentation. One document she said was frequently missing was a physician’s certification that the services delivered were medically necessary. Federal regulations require that these physician certifications “be obtained at the time the plan of care is established or as soon thereafter as possible and must be signed and dated by the physician who establishes the plan.” 42 C.F.R. § 424.22(a)(2). The nurse accused the providers of failing to comply with this timing requirement and instead submitting claims without a certification or paying physicians to review outstanding claims and sign certifications long after the care occurred. This dispute has stretched over several years. The nurse filed her case in 2012. After the United States declined to intervene in 2014, the providers successfully moved to dismiss, but the Sixth Circuit reversed in 2016 before the Supreme Court’s decision in Universal Health Services., Inc. v. United States ex rel. Escobar, which clarified the materiality element of an FCA claim. In its 2016 decision, the Sixth Circuit held that submitting a Medicare claim based on a late physician certification is false if the length of the delay is not justified by the reasons the home-health agency provides for it. Following remand, the district court dismissed the nurse’s complaint again, concluding she failed to adequately plead materiality. She appealed. To create FCA liability, a defendant’s false statement to the government that the defendant complied with a statutory, regulatory, or contractual requirement must be material to the government’s decision to pay the claim the statement supports. In Escobar, the Supreme Court called this materiality requirement “demanding” and necessitating a “holistic” analysis, factors relevant to which include (1) whether the government expressly identified the requirement as a condition of payment, (2) whether the government consistently refuses to pay claims based on non-compliance with the requirement, and (3) whether the noncompliance is minor or goes “to the very essence of the bargain.” These factors are neither exhaustive nor dispositive. The Sixth Circuit first held that compliance with the timing requirement for physician certifications was a condition of payment. The court held 42 C.F.R. § 409.41(b) expressly identifies the physician certification as a condition for payment by referencing 42 C.F.R. § 424.22. The preface to § 424.22 provides: “Medicare Part A or Part B pays for home health services only if a physician certifies and recertifies the content specified in paragraphs (a)(1) and (b)(2) of this section, as appropriate.” The court rejected the providers’ argument that because the timing requirement appears in paragraph (a)(2)—not (a)(1) or (b)(2)—it was not a condition of payment. The court reasoned that the use of the word “certifies” in the preface to § 424.22 requires defining “certification” by reference to all of paragraph (a), including the timing requirement in paragraph (a)(2). The Sixth Circuit then held the nurse did not need to allege in her complaint that the government had previously rejected Medicare claims that lacked a physician’s certification. The court determined that the government’s response to similar claims was not relevant because the nurse alleged that the government did not know that the providers’ claims were false. The court also held that the timing requirement went to the essence of the government’s bargain for home health services. It cited administrative guidance from HHS referencing the importance of the timing requirement in deterring fraud. Finally, the court held the nurse’s allegations that she and others raised concerns about the providers’ practices, but that those concerns were dismissed, were sufficient to plead scienter. In a long and detailed opinion, Circuit Judge David W. McKeague dissented from the majority’s conclusion. He argued the nurse should have been required to provide more detail about how and why the providers’ delay in obtaining the physician certifications deceived the government. He highlighted the practical problem for providers created by the Sixth Circuit’s 2016 decision that a physician certification can create FCA liability if the length of the delay is not justified by the reasons the home-health agency provides for it. According to Judge McKeague, the standard forms submitted during the Medicare claims process do not explicitly call for information about when the physician certification was signed. Providers are merely required to warrant that they have the physician certification on file. Thus, a provider is not prompted to explain the reasons why a certification was late, or even indicate that it was late at all. At least two lessons can be drawn from the Sixth Circuit’s decision. First, providers should take a broad view when reading regulations to determine if compliance with a requirement is a condition of payment. To borrow a phrase from the majority, “overly crabbed” interpretations of regulations are unlikely to be successful. Second, providers cannot rely on Medicare claims submission forms to ensure they have met all the requirements for submitting a claim. They need to understand the claim-submission requirements adopted through administrative guidance and court decisions in their jurisdiction and disclose required information whether or not called for explicitly in a Medicare form. The case is far from over—the nurse must now actually prove the allegations in her complaint. But the providers will at minimum face the typically expensive consequence of defending themselves against FCA claims. And if unsuccessful, they may face the draconian penalties for FCA violations. These risks should encourage all providers to proceed with caution when managing physician certifications and other Medicare claims compliance issues.

Rejecting the views of the Fourth and Tenth Circuits, the Eleventh Circuit held the FCA’s three year statute of limitations period in § 3731(b)(2) applies to a relator’s claim even when the United States declines to intervene, and in so doing held it is the knowledge of a government official, not the relator, that triggers the three year limitations period, rejecting the contrary view of the Ninth Circuit. In United States ex rel. Hunt, No. 16-12836, 2018 U.S. App. LEXIS 9065 (11th Cir. Apr. 11, 2018), the Eleventh Circuit construed the FCA’s statute of limitations provision in § 3731(b) to decide whether the Relator’s claim was time-barred.  Section 3731(b) states: (b) A civil action under section 3730 may not be brought- (1) more than 6 years after the date on which the violation of section 3729 is committed, or (2) more than 3 years after the date when facts material to the right of action are known or reasonably should have been known by the official of the United States charged with responsibility to act in the circumstances, but in no event more than 10 years after the date on which the violation is committed, whichever occurs last. Because the Relator failed to file his qui tam action within the six year limitations period in (b)(1), the question was whether his action was time-barred under (b)(2).  The defendants argued that it was, because the government declined to intervene.  The Fourth and Tenth Circuits, in fact, had previously held that a Relator can only avail him- or herself of the limitations period in (b)(2) if the government remains a party to the action by intervening.  United States ex rel. Sanders v. N. Am. Bus Indus., Inc., 546 F.3d 288, 293 (4th Cir. 2008); United States ex rel. Sikkenga v. Regence Bluecross Blueshield of Utah, 472 F.3d 702, 726 (10th Cir. 2006) (“Surely, Congress could not have intended to base a statute of limitations on the knowledge of a non-party.”). The Eleventh Circuit, however, found “the phrase ‘civil action under section 3730’ … includes § 3730(b) qui tam actions when the government declines to intervene.”  2018 U.S. App. LEXIS 9065, at *18.  The Court further explained: Nothing in § 3731(b)(2) says that its limitations period is unavailable to relators when the government declines to intervene. In the absence of such language, we conclude that the text supports allowing relators in non-intervened cases to rely on § 3731(b)(2)’s limitations period. Id. at *18. The Eleventh Circuit also said the contrary holdings from the Fourth and Tenth Circuits “do not persuade us,” because “[t]hey failed to consider the unique role that the United States plays even in a non-intervened case.”  Id. at *27.  The court described the government’s role in non-intervened cases as “significant” because the government may “request to be served with copies of all pleadings and deposition transcripts, seek to stay discovery[,] . . . veto a relator’s decision to voluntarily dismiss the action,” and may be permitted to intervene later.  Id. at *12-13. The court emphasized that the majority of a recovery, even in a non-intervened case, still belongs to the government as the victim of the fraud.  Id. at *25.  “Given this unique role, we cannot say that it would be absurd for Congress to peg the start of the limitations period to the knowledge of a government official even when the United States declines to intervene.”  Id. at *26. The court also rejected the defendants’ arguments that such an interpretation rendered the statute superfluous, and found “little” legislative history on the statute and none that undermined the court’s interpretation.  Id. at *28-39.   The court next had to “address whether that limitations period is triggered by the knowledge of a government official or of the relator.”  Id. at *39.  The court again relied on the statutory text: Section 3731(b)(2) is clear that the time period begins to run when “the official of the United States charged with responsibility to act in the circumstances” knew or reasonably should have known the material facts about the fraud.  31 U.S.C. § 3731(b)(2).  Nothing in the statutory text or broader context suggests that the limitations period is triggered by the relator's knowledge. Id. at *39.  As a result, the court rejected the “legal fiction” of the Ninth Circuit’s contrary view, United States ex rel. Hyatt v. Northrop Corp., 91 F.3d 1211, 1217 (9th Cir. 1996), and held “that it is the knowledge of a government official, not the relator, that triggers the limitations period” in § 3731(b)(2).  Id. at *39-40. As a result of holding that § 3731(b)(2) applies in non-intervened cases and is triggered by the knowledge of a government official, not of the relator, the court reversed the district court’s decision dismissing the relator’s complaint for untimeliness.  Id. at *40.

Federal scrutiny of charities that assist patients with accessing prescription drugs has increased with rising prescription drug prices.  Some prescription drug charities receive funding from medical providers or drug manufacturers, which can raise questions about whether the charities’ funders are using the charities to generate improper recommendations or referrals. In December 2017, the U.S. Department of Health and Human Services Office of Inspector General rescinded a 2006 advisory opinion that had assured a patient-assistance charity that its subsidies for individuals’ prescription drug purchases would not subject it to federal Anti-Kickback Statute liability. The OIG’s rescission could signal shifting federal policy towards increased scrutiny of drug charities funded by drug manufacturers. Amidst these changes, a new decision from the U.S. Court of Appeals for the Third Circuit is a good reminder that AKS compliance issues do not automatically translate into FCA violations. In United States ex rel. Greenfield v. Medco Health Sols., Inc., --- F.3d ‑‑‑‑, 2018 WL 473158, at *1 (3d Cir. Jan. 19, 2018), the court held that an FCA claim premised on an AKS violation must show that a particular patient was exposed to an illegal recommendation or referral and that a claim for payment for care for that patient was submitted to the government. Medco concerned Accredo Health Group, Inc., a specialty pharmacy servicing patients with hemophilia. Accredo supported hemophilia charities, two of which allegedly recommended Accredo as a preferred provider through communications to their members. The relator alleged that this amounted to an AKS violation, which gave rise to an FCA claim because Accredo had certified compliance with the AKS when submitting its reimbursement claims to government payors. Accredo successfully argued to the trial court that the relator’s claim failed because he could not show any evidence that any beneficiaries of federal programs chose Accredo because of its alleged improper payments to the charities. On appeal, the relator argued that this amounted to a requirement that he show each patient subjectively sought Accredo’s care because of Accredo’s charitable donations. The court in Medco set out to identify “what ‘link’ is sufficient to connect an alleged kickback scheme to a subsequent claim for reimbursement: a direct causal link, no link at all, or something in between.” The United States, as amicus curiae in support of neither party, urged the court to hold that no proof of a patient’s subjective intent to utilize Accredo because of the charities’ recommendation was required to establish an FCA violation. The court agreed, holding that proof of an FCA violation required evidence that at least one of Accredo’s claims sought reimbursement for care provided in violation of the AKS, but that a patient’s subjective reason for choosing Accredo need not be proven. Nevertheless, the referral or recommendation that violated the AKS must be the referral or recommendation that resulted in the false claim. The court held the relator had failed to show that any of Accredo’s 24 federally insured patients were exposed to the recommendation of the hemophilia charities or that they were even members of the charities. The court explained that “[a] kickback does not morph into a false claim unless a particular patient is exposed to an illegal recommendation or referral and a provider submits a claim for reimbursement pertaining to that patient.” The court rejected the relator’s request that the court infer the patients were members of the charities based on the relator’s assertion that “[e]ssentially all hemophelics” in the geographic area Accredo served were members of the charities to which Accredo donated. This inference was not enough because it was impossible to rule out the chance that none of the patients was a member and that none was exposed to the charities’ recommendation. Thus, the relator’s evidence failed to “link Accredo’s alleged kickback scheme to any particular claim” and so Accredo did not face FCA liability. The court pointed out several issues it did not address in its opinion. It expressed no view as to whether Accredo’s relationship with the charities was an AKS violation in the first place. Nor did the court reach the issues of whether the relator could satisfy the FCA’s materiality requirement, even if he had shown a link between the patients exposed to the charities’ recommendation and Accredo’s claims. And although not addressed by the court, the low number of federally insured patients at issue—24—means the court did not have an opportunity to address claims against a provider who services a large number of federally insured patients. Medco does not explain what evidence would be sufficient to show at least one of a large number of patients were exposed to an improper referral or recommendation. Still, the Medco decision is a useful reminder that the AKS and FCA have separate elements, and an AKS violation does not automatically translate to FCA liability.  Organizations in the healthcare space--particularly charities--should take heed.

In recent weeks, the United States Department of Justice (“DOJ”) issued two memoranda that might change the calculus of False Claims Act (“FCA”) cases.  The memoranda at a minimum provide organizations with new—or at least invigorated—defenses to qui tam actions and civil enforcement matters. First, on January 10, Michael Granston, Director of DOJ’s Civil Frauds section, issued a memorandum encouraging DOJ trial attorneys to consider dismissing unmeritorious qui tam cases (even over the objection of the relator).  The DOJ’s authority to dismiss FCA cases has long been built directly into the governing statute, 31 U.S.C. § 3730(c)(2)(A), which provides that: The Government may dismiss the action notwithstanding the objections of the person initiating the action if the person has been notified by the Government of the filing of the motion and the court has provided the person with an opportunity for a hearing on the motion. In practice, DOJ trial attorneys rarely use this power, preferring to allow qui tam cases they declined to intervene in to continue being prosecuted by the relator.  The Granston Memo encourages a shift in practice by suggesting that DOJ attorneys should dismiss qui tam cases that lack substantial merit.  Meritless qui tam cases drain limited government resources and may “generate adverse decisions that may affect the government’s ability to enforce the FCA.”  To aid in determining whether a DOJ attorney should seek dismissal of a declined qui tam action, the Granston Memo sets forth seven factors, including curbing parasitic qui tams and preserving government resources. Second, on January 25, the Associate Attorney General (“AAG”) issued a memorandum prohibiting reliance on government agency “guidance documents” as a basis for liability in DOJ affirmative civil enforcement matters—including FCA cases.  Such “guidance documents” include all non-statutory or regulatory documents that purport to advise the public of legal rights or obligations, as are commonly issued by agencies like the US Environmental Protection Agency and the Department of Health and Human Services.  The memo advises DOJ litigators that because “[g]uidance documents cannot create binding requirements that do not already exist by statute or regulation . . . [DOJ] litigators may not use noncompliance with guidance documents as a basis for proving violations of applicable law.”  The AAG's memo acknowledges that sub-regulatory guidance serves a valuable function, and does not likely presage a government-wide change in agency’s use of such documents.  But FCA matters—qui tam or otherwise—that are built on such sub-regulatory guidance are on shakier ground. These memoranda create interesting implications for FCA cases.  First, the AAG’s memo narrows potential FCA liability by excluding a wide range of agency documents from being the basis of FCA violations.  The AAG’s memo also raises interesting questions about what agency materials might be evidence of “materiality,” particularly after the Supreme Court’s recent Escobar decision.  Second, although the authority of the DOJ to dismiss qui tam actions has not changed, the government may be newly receptive to arguments for the dismissal of plainly deficient qui tam cases.  The memo thus presents an opportunity for legal counsel to affirmatively seek dismissal of a weak FCA case—a move that could potentially save the accused violator the time and expense of otherwise defending against the case. The two memoranda are available here and here.

If the government does not take action and continues to pay for Medicare/Medicaid claims after it learns of non-compliance related to the claims, is the non-compliance material to the government’s decision to pay?  This is a question being answered in the negative by courts across the country, who have concluded that the government (or a qui tam relator) is not able to proceed under a False Claims Act (FCA) “implied certification” theory if evidence shows that the government did not take action and continued to pay claims after learning of non-compliance with laws associated with those claims.  A Florida Federal Court in United States ex. rel. Ruckh v. Salus Rehabilitation, LLC et. al (Case No. 8:11-cv-1303-T-23TBM), is one of the latest to address this issue and find no FCA violation. Background In 2016, the United States Supreme Court addressed the issue of whether a claim submission without disclosure of a statute or regulation infraction could potentially trigger a FCA violation in Universal Health Services, Inc. v. United States ex rel. Escobar, spawning a new line of cases that have interpreted the new standards the Court set forth for implied certification FCA cases.  Prior to the Escobar decision, the circuit courts across the U.S. were split on the issue.  In these so-called “implied certification” cases, the government alleged that the party submitting a claim to the government impliedly certified that the services were provided in compliance with laws. In Escobar, the Supreme Court analyzed the reach of the FCA in situations in which a party was alleged to have made a misrepresentation in a payment claim to the federal government because the services provided were, in fact, not in compliance with the law.  The Court recognized the implied certification theory, but held, among other things, that under the theory, FCA liability depends on whether the defendant violated a requirement that it knew was material to the government’s decision to pay.  In providing guidance on how to determine “materiality”, the Court noted that, “[t]he materiality standard is demanding.  The False Claims Act is not ‘an all-purpose antifraud statute’ or a vehicle for punishing garden-variety breaches of contract or regulatory violations.”  The Court went on to note: “[I]f the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material” and “if the Government regularly pays a particular type of claim in full despite actual knowledge that certain requirements were violated, and has signaled no change in position, that is strong evidence that the requirements are not material.” Analysis In light of the guidance in Escobar, many courts in analyzing “implied certification” allegations under the FCA, have given significant consideration to evidence about how the government acted following a defendant’s non-compliance disclosure.  Courts will make a fact-intensive inquiry into the post-disclosure conduct of the government in order to determine whether a given violation is material to the governments’ payment decision on the related claims.  If the government refused to make further payment or took other action against the provider after learning of the non-compliance, that refusal may help the government or a relator to establish that compliance with the particular law at issue was material to the government’s decision to pay.  However, if the government continues to pay the claims, and takes no other action, it has proven difficult for the government or a relator to succeed. A recent example of the uphill battle Escobar is presenting for relators and the government in these “implied certification” FCA cases is the Salus case.  On January 11, 2018, a federal court in Florida followed a line of post-Escobar cases, denying an implied certification theory case under the FCA based on evidence that the government continued to pay claims related to the subject matter of the relator’s complaint, even after the government learned about the non-compliance.  In Salus, a nurse relator alleged FCA violations against the owners and operators of 53 specialized nursing facilities based on the nursing facility’s alleged failure to maintain a comprehensive care plan for residents required under Medicaid, as well as defects in paperwork required to support claims to the Medicare program, such as unsigned or undated documents. The judge in Salus vacated a $350 million verdict against Salus Rehabilitation, which had been entered less than a year earlier (on March 1, 2017), because the evidence in the case showed that the government knew about the non-compliance, and did nothing about it. In overturning the prior verdict against the nursing homes, the court stated, “[n]ot only did the relator fail to prove that the governments regarded the disputed practices as material and would have refused to pay, but the relator failed to prove that the defendants submitted claims for payment despite the defendants’ knowing that the governments would refuse to pay the claims if either or both governments had known about the disputed practices. In fact, both governments were—and are—aware of the defendants’ disputed practices, aware of this action, aware of the allegations, aware of the evidence, and aware of the judgements for the relator—but neither government has ceased to pay or even threatened to stop paying the defendants for the services provided to patients throughout Florida continuously since long before this action began in 2011.”  The judge noted that the government had never made any complaint or imposed any administrative sanction on the practices alleged by the relator. The judge further wrote, “federal and state governments regard the disputed practices with leniency or tolerance or indifference, or perhaps with resignation to the colossal difficultly of precise, pervasive, ponderous and permanent record-keeping in the pertinent clinical environment.” The Salus decision is another win for health care providers who have long lived in fear of the enormous penalties under the FCA whenever non-compliance is discovered with the highly complex, technical and ever-changing health care regulations. While each case applying the materiality standard must be analyzed on its particular facts and circumstances at issue, the post-Escobar cases analyzing the materiality standard have provided a welcomed, more consistent approach that providers can look to when defending these cases.

Until very recently, no case existed in which FCA liability arose from a violation of the Health Insurance Portability and Accountability Act (“HIPAA”). But in United States v. America at Home Healthcare and Nursing Services, Ltd., Judge John Robert Blakely of the United States District Court for the Northern District of Illinois, Eastern Division, allowed an FCA claim premised on a HIPAA violation to survive a motion to dismiss. In America at Home Healthcare, plaintiff Amy O’Donnell filed a qui tam action under the FCA against her previous employer, America at Home Healthcare Nursing Service, Ltd. (“AAH”).  As defendant’s name suggests, AAH is a provider of home health services. Among other allegations of wrongdoing, plaintiff claimed that AAH violated the FCA by unlawfully soliciting patients. More specifically, plaintiff alleged that AAH searched medical charts of individuals who were not AAH patients in order to generate a list of persons to target as new home health patients. In June 2017, Judge Blakely dismissed plaintiff’s solicitation claim because plaintiff failed to allege that defendant’s solicitations were unlawful. However, in July 2017, plaintiff amended her complaint, and this time alleged that defendant’s solicitations violated HIPAA. Section 1320d-6-d(a) of HIPAA criminalizes knowingly using, obtaining, or disclosing an individual’s identifiable health information without authorization. According to Judge Blakely, a violation of § 1320d-6-d(a) can result in FCA liability if: (1) defendant knowingly billed the government for unnecessary medical services after obtaining patients’ information unlawfully; and (2) defendant submitted claims and cost reports to the government that impliedly certified compliance with Medicare laws and regulations, but knowingly failed to disclose its HIPAA violations. With respect to the second basis for FCA liability under HIPAA, defendant argued that plaintiff’s “implied certification” theory failed to satisfy the Supreme Court’s materiality standard from Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989, 195 L. Ed. 2d 348 (2016), because HIPAA violations are not material to the government’s decision to pay claims. The FCA defines “material” as having “a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property.” Judge Blakely rejected defendant’s materiality argument. Instead, the court referenced plaintiff’s allegation that HIPAA violations go to the very essence of the bargain between the government and health care providers, because an unlawful solicitation subjects patients to abusive marketing practices. The court further referenced plaintiff’s allegation the government does not knowingly pay claims to providers who violate § 1320d-6(a) of HIPPA. Finally, the court was untroubled by the fact that “no HIPAA-based FCA cases exist.” Instead, Judge Blakely analogized this case to kickback cases, and concluded: “[I]nformation that a home health agency has pilfered protected health data to solicit patients has a good probability of affecting a payment decision. These allegations suffice to keep [plaintiff’s] solicitation theory alive for now.” Judge Blakely’s decision is found at: United States v. America at Home Healthcare and Nursing Services, Ltd., 2018 U.S. Dist. LEXIS 2592 (E.D. Ill. Jan. 8, 2018).

The False Claims Act authorizes civil penalties between $10,781 to $21,563 per false claim, as well as three times the amount of damages which the government sustains (i.e. treble damages). The Eighth Amendment provides that "[e]xcessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted." The Supreme Court of the United States has recognized that a statutory penalty constitutes a "fine" subject to Eighth Amendment review if it constitutes punishment for an offense. Accordingly, the Fourth, Seventh, Eighth, and Ninth Circuit Court of Appeals have determined that the per-claim penalty and treble damages provided for under the FCA are subject to scrutiny under the Excessive Fines Clause of the Eighth Amendment because they have a punitive purpose, at least in part. A punitive sanction violates the Excessive Fines Clause if it is grossly disproportional to the gravity of a defendant's offense. Nonetheless, federal courts undertaking this Eighth Amendment analysis have generally upheld FCA per-claim penalties and treble damages. Proportionality of a punitive sanction is determined by a variety of factors, including the reprehensibility of the defendant's conduct; the relationship between the penalty and the harm to the victim; the sanctions in other cases for comparable misconduct; the possible maximum penalty available under the FCA and other statutes; and the legislative intent for the statute. See United States v. Aleff, 772 F.3d 508, 512 (8th Cir. 2014); United States v. Mackby, 339 F.3d 1013, 1016-18 (9th Cir. 2003). The Supreme Court has noted that the treble damages provision of the statute has a compensatory aspect, in addition to its punitive objectives, because some amount of money beyond actual damages is "necessary to compensate the Government completely for the costs, delays, and inconveniences occasioned by fraudulent claims." Cook Cnty., Ill. v. United States ex rel. Chandler, 538 U.S. 119, 130 (2003). Additionally, the treble damages provision allows the government to recover some measure of the amount it must pay to compensate relators in qui tam actions. See United States ex rel. Drakeford v. Tuomey, 792 F.3d 364, 388 (4th Cir. 2015). In contrast, the per claim penalty is purely punitive. Id. In the context of a FCA jury trial, the jury will generally be charged with determining the measure of the damages to the government and the number of false claims. The Court will then apply the treble multiplier to the damages award and, utilizing the jury’s determination of the number of false claims, determine what amount (between $10,781 to $21,563) to assess for each false claim. In cases involving the submission of hundreds or even thousands of false claims/statements (e.g., Medicare fraud claims), FCA damage awards can be daunting. As a result, Defendants may raise the Excessive Fines Clause as a defense to a massive award. However, with some exceptions, courts have generally upheld these awards, taking into account the above-mentioned factors as well as the general public interest in preventing fraud on the government. In litigation pending in the U.S. District Court for the Eastern District of Washington, United States of America et al v. Washington Closure Hanford LLC, et al, the defendant contractor raised constitutional challenges to the FCA’s penalties and treble damages provisions as an affirmative defense in its answer. The Government moved for summary judgment arguing that this defense was premature because the Court had not yet imposed penalties or treble damages; this constitutional challenge should instead be raised at the judgment phase. The contractor responded that courts can address the merits of such a defense based on the amount of damages sought by the Government, which in this case are in excess of $70 million. While the timing for addressing this Eighth Amendment challenge is typically at the post-trial stage, courts have not clearly addressed whether it may be considered in advance, which may provide a strategic advantage to litigants. Accordingly, the pending motion for summary judgment presents an interesting question for the trial court to resolve which may help provide further guidance for FCA litigants. FCA Now will be monitoring the Court’s ruling and keep you updated with any key developments.

The U.S. Court of Appeals for the Sixth Circuit recently concluded that a contractor should obtain an award of attorney fees for having to defend against an “unreasonable” False Claims Act (“FCA”) suit.  In United States ex. rel. Wall v. Circle C. Constr. LLC, the Government sued a contractor that built warehouses for the U.S. Army. During construction, it was alleged that the contractor’s subcontractor paid two electricians $9,900 less than the wages mandated by the Davis-Bacon Act, a federal law that sets wages on public-works projects. That underpayment rendered false the “compliance statements” that the contractor periodically sent to the Government, and the Government subsequently that the contractor had made a false claim against the United States. In its lawsuit, the Government sought $1.66 million in damages. The Government claimed that the contractor’s allegedly false claim of $9,900 had caused $554,000 in “actual damages,” which it was entitled to treble under the FCA.   The Government argued that the $9,900 underpayment had “tainted” all of the subcontractor’s electrical work and rendered the total value ($554,000) of the performance worthless. During a previous appeal, the Sixth Circuit rejected that argument. It held that the underpayment did not “taint” the total value of the electrical work and reversed a $763,000 judgment for the Government. It remanded for an award of $14,748—less than one percent of the Government’s demand. On remand, the contractor sought $468,704 in attorneys’ fees it had spent defending against the Government’s $1.66 million claim.  The contractor’s demand for attorneys’ fees arose out of the Equal Access to Justice Act, 28 U.S.C. § 2412(d)(1)(D), which states that a court must “award to the [defendant] the fees and other expenses related to defending against the excessive demand” if the Government’s original demand was both (1) “substantially in excess of the judgment finally obtained” and (2) “unreasonable when compared with such a judgment.” The district court denied the contractor’s motion for fees, but the Sixth Circuit reversed, explaining that it would be an “understate[ment]” to say the government’s demand of $1.66 million was “substantially in excess” of the $14,748 judgment. It also found that the demand was “unreasonable compared to the judgment.” In the FCA context, actual damages are “the difference in value between what the government bargained for and what the government received.” Here, the government bargained for buildings and wages; it got the buildings but “not quite all” of the wages. The shortfall—$9,900—was the government’s actual damages. The court found that no reasonable person could accept that the underpayment tainted the entire value of the electrical work because the Government benefitted “every minute of every day” in the form of functioning electrical systems. The Government argued that the contractor was not entitled to fees because its underpayment amounted to “bad faith,” one of the exceptions listed in 28 U.S.C. § 2412(d)(1)(D). The court disagreed and found that the Government failed to show that the underpayment was anything other than “an honest mistake.” The court noted that, unlike many FCA cases, this case did not involve an systematic attempt to defraud the government. Rather, it involved a $9,900 inaccuracy in a $20 million project. The court also noted that the subcontractor’s prices did not clearly state how much it paid the electricians and that both of the contractor’s co-owners testified that they submitted “compliance statements” with the honest belief that they were true. Although the district court found that the contractor was “reckless” in not knowing whether its “compliance statements” were accurate, that standard was less stringent that bad faith. The Government also argued that an attorneys’ fee award would “chill[]” its ability to enforce the FCA. In response, the court observed: “One should hope so. In this case the government made a demand for damages a hundredfold greater than what it was entitled to, and then pressed that demand over nearly a decade of litigation, all based on a theory that as applied here was nearly frivolous.” The court then reversed and remanded for an award of attorneys’ fees to the contractor.

Last month the Eighth Circuit considered and rejected an Eleventh Amendment sovereign immunity defense to a qui tam action under the False Claims Act.  In United States ex rel. Fields v. Bi-State Development Agency, No. 16-3783, 2017 U.S. App. LEXIS 13925 (8th Cir. August 1, 2017), a former employee of Bi-State alleged that the defendant interstate compact entity raised funds and required its employees to volunteer for a county executive’s reelection campaign, in violation of the Hatch Act.  The Government did not intervene.  Bi-State, an entity formed by Illinois and Missouri and ratified by Congress, and which owns and operates public transportation services, argued on summary judgment that it should be immune from suit under the Eleventh Amendment.  The federal district court for the Eastern District of Missouri disagreed, Bi-State brought an interlocutory appeal, and the Eighth Circuit affirmed. The Eighth Circuit had previously considered whether Eleventh Amendment sovereign immunity protected Bi-State from suit, holding in Barket, Levy & Fine, Inc. v. St. Louis Thermal Energy, 945 F.2d 1084 (8th Cir. 1991) that it did not.  An entity asserting an Eleventh Amendment defense must establish it is an arm of the state.  It must show “good reason to believe that the [compacting] [s]tates structured the new agency to enable it to enjoy the special constitutional protection of the [s]tates themselves.” Id. at 1086 (alterations in the original). Bi-State argued that a change in law affecting the first of six factors the Eighth Circuit weighs in analyzing Eleventh Amendment immunity—whether the compacting states characterize the entity as an arm of the state—should lead to a different conclusion than the holding in Barket.  Since Barket, Missouri deleted a statutory section that had provided an exception to sovereign immunity for multistate compact entities.  Because both Illinois law and the language of the compact still weighed in favor of treating Bi-State more as a municipality than as an arm of the state, however, the Eighth Circuit explained the change in Missouri law did not necessitate a different outcome.  The court went on to consider each of the other factors, finding that they pointed in different directions. Instead, the court looked to the “Eleventh Amendment’s twin reasons for being” to decide whether to extend its protections in this case: “respect for dignity of the states as sovereigns,” and “prevention of federal-court judgments that must be paid out of a [s]tate’s treasury.” Fields, 2017 U.S. App. LEXIS at 18.  The Court reasoned that suing an agency that is the creation of multiple states and the federal government did not present the same affront to dignity as suing a state.  Most importantly, though, neither Illinois nor Missouri would be financially obligated to satisfy a judgment against Bi-State.  Bi-State, then, had failed to show good reason to believe Illinois and Missouri structured it to enjoy immunity from suit, and the Eighth Circuit remanded the case for further proceedings.

Under 42 U.S.C. § 1320a-7b(b)(1)(A) it is a felony for a physician to solicit or receive a kickback “in return for referring” a Medicaid or Medicare patient to another medical provider. But as a recent decision by the Eighth Circuit in United States v. Iqbal demonstrates, physicians are not the only ones capable of making illegal referrals under the statute—consultants can, too. Defendant Iqbal was a consultant that managed a group of physicians. He approached a medical provider (“PCP,” a home care agency) with a profit-splitting scheme: he would send physicians’ patients to PCP in exchange for fifty-percent of PCP’s profits for serving the patient. PCP contacted authorities about the scheme and thereafter accepted Iqbal’s proposal while working undercover with authorities. The sting operation resulted, at first, in a March 2011 meeting between Iqbal and PCP. At that meeting Iqbal touted his strong relationship with the group of physicians and his ability to refer their patients to PCP, and reiterated his fifty-fifty profit sharing scheme to which PCP agreed. Iqbal’s physicians later referred two patients to PCP, which PCP served and received Medicaid and Medicare reimbursement. PCP sent Iqbal separate payments in June and August for his fifty-percent share of the profits that PCP made from serving the two patients. Iqbal was charged with three counts of illegal kickbacks: One, for soliciting illegal kickbacks during his March 2011 meeting with PCP; Two, for receiving an illegal kickback in June; and Three, for receiving an illegal kickback in August. All three counts were “in return for referring” patients to PCP under § 1320a-7b(b)(1)(A). Iqbal challenged the sufficiency of the evidence, and conceded that the statutory phrase “in return for referring” meant that one must cause or induce the referral. The two-judge majority willingly assumed as much, declined to interpret the statute any narrower, and found the evidence sufficient to affirm his convictions. Although the majority’s reasoning was not surprising, Judge Kelly in a partial dissent and concurrence took up the task of interpreting the statutory phrase, “in return for referring.” The Eighth Circuit had not previously defined the term. Judge Kelly relied on cases from other circuits in similar contexts to adopt the interpretation “that a person refers an individual for a service only when, as a practical matter, the person exercises decision-making control over the selection of the service provider.” As a result, Judge Kelly utilized a narrower definition than Iqbal and the majority. Under that definition, Judge Kelly found insufficient evidence to affirm Iqbal’s convictions for receiving a kickback for referring the two patients, because the government failed to show that Iqbal exercised decision-making control over the physicians’ referrals. Judge Kelly, however, affirmed Iqbal’s conviction for soliciting a kickback during his March meeting with PCP because Iqbal held himself out to PCP as having the ability to make the referrals, regardless of his actual ability to do so. So physicians, consultants, and everyone in between dealing with Medicaid and Medicare patients should keep in mind that while decision-making control over a referral is likely necessary evidence to prove a “referral” in return for an illegal kickback, solicitations do not require such decision-making control. All that is required is representing that one has the ability to do so.

On June 16, 2017, The Department of Justice (“DOJ”) announced a $53.6 million dollar settlement with Genesis Healthcare Inc. (“Genesis”) over six federal whistleblower lawsuits alleging that subsidiaries of the rehabilitation and transitional care provider violated the False Claims Act (“FCA”). The original qui tam plaintiffs, former employees of companies acquired by Genesis, will receive a combined $9.67 million dollars in recovery. The settlement resolved allegations involving Genesis subsidiaries; Skilled Healthcare Group Inc. (“SKG”) and its subsidiaries, Sun Healthcare Group Inc., SunDance Rehabilitation Agency Inc., and SunDance Rehabilitation Corp. Specifically, the settlement resolved allegations that SKG and its subsidiaries knowingly submitted false claims for Medicare services by “billing for hospice services for patients who were not terminally ill” and “billing inappropriately for physician evaluation management services.” The complaint does not elaborate on the nature of the management services billing violations. Further, SKG and its subsidiaries allegedly submitted false claims to Medicare, TRICARE, and Medicaid by providing therapy to patients longer than medically needed, as well as billing for more therapy than patients actually received. The settlement also resolved allegations that Sun Healthcare Group Inc., SunDance Rehabilitation Agency Inc., and SunDance Rehabilitation Corp. knowingly submitted false claims to Medicare by billing for therapy services in the state of Georgia that were either medically unnecessary or unskilled in nature. Finally, the settlement resolved allegations that Skilled LLC, a subsidiary of SKG, violated the FCA by submitting false claims to the Medicare and Medi-Cal programs for “services that were grossly substandard or worthless and therefore ineligible for payment.” Specifically, the allegations pointed to Skilled LLC failing to meet the requirements for nurse staffing in order to be eligible for government healthcare program reimbursements. The case matter was handled by the DOJ Civil Division’s Commercial Litigation Branch, the Office of the Inspector General, and the U.S. Attorney’s Offices for the Northern District of California, the Northern District of Georgia, the Western District of Missouri, and the District of Nevada. Acting U.S. Attorney Steven W. Myhre for the District of Nevada noted, “Today’s settlement is an example of the U.S. Attorney’s Office’s commitment to holding medical providers accountable. . . .  We are committed to protecting federal health care programs, including Medicare, TRICARE, and Medicaid, which are funded by taxpayer dollars.” The recent settlement falls in line with the DOJ’s increased commitment to combating health care fraud. The DOJ budget request for 2017 included a $70.8 million dollar increase ($320.2 million in total) of funding for health care fraud prevention.

A Federal court in Ohio recently dismissed a qui tam lawsuit brought under the False Claims Act by Kustom Products, Inc. against Hupp & Associates, Inc., a defense contractor, and in so doing provided judicial treatment of the common practice of alleging facts "upon information and belief."  United States ex rel. Kustom Prods. v. Hupp & Assocs., No. 2:15-cv-03101, 2017 U.S. Dist. LEXIS 72814 (S.D. Ohio May 12, 2017), Hupp had six contracts to supply maintenance kits to the U.S. Military for its Family of Medium Tactical Vehicles (“FMTV”).  Under those contracts, Hupp was required to purchase seals for its FMTV kits from one of only two approved suppliers.  Kustom alleged that it had learned “in the course of business” that Hupp was not purchasing its seals from either of those two suppliers, even though Hupp represented to the Military that it had.  2017 U.S. Dist. LEXIS 72814 at *3-4.  Kustom’s complaint made a number of these accusations “upon information and belief.”  Id.  The United States government declined to intervene in the lawsuit.  Id. at *4.  Hupp brought a motion to dismiss Kustom’s complaint in its entirety.  Id. Evaluating the pleading standard under the False Claims Act, the court noted the familiar rule that “the heightened pleading standard set forth in Rule 9(b) applies to complaints alleging violations of the FCA,” and that standard requires that the circumstances constituting fraud or mistake shall be stated with particularity.  Id. at *5 (citations omitted).  In other words, Kustom was required to allege the “who, what, when, where, and how” of the alleged fraud.  Id. at *6.  However, Kustom’s allegations about Hupp’s fraud were lacking much detail, such as, “upon information and belief, Hupp submitted at least one invoice” that fraudulently certified that its products were purchased from approved suppliers.  Id. at *7.  The court found that this bare allegation did not satisfy the heightened 9(b) pleading standard, and noted that, in general, “allegations ‘on information and belief’… are insufficient under Rule 9(b).  Id.  In sum, Kustom’s “speculative allegations that ‘on information and belief’ Hupp has invoiced the government for parts supplied under the contracts fall far short of meeting the Rule 9(b) standard.”  Id. at *8.  The court found that these deficiencies existed with all of Kustom’s claims, and, because they were not pleaded with the particularity required by Rule 9(b), all of Kustom’s claims failed to state a claim upon which relief can be granted. The decision underscores the importance of pleading the particular facts and allegations that give rise to a claim under the False Claims Act. Although not categorically rejecting “upon information and belief” style pleading, the Court expressed significant wariness with such allegations, particularly when the plaintiff fails to plead the source of knowledge or some other reliable indicia of plausibility.

The Centers for Medicare and Medicaid Services (“CMS”) issued new Self-Referral Disclosure Protocol (“SRDP”) forms, and, beginning June 1, 2017, these SRDP forms will be mandatory for those parties submitting voluntary self-disclosures of actual or potential violations of the federal physician self-referral law (the “Stark Law”) through the SRDP. The Patient Protection and Affordable Care Act established the SRDP, giving providers and suppliers that may have received an overpayment as a result of actual or potential violations of the Stark Law the opportunity to facilitate the resolution of these violations with CMS. The SRDP forms are intended to streamline and standardize the SRDP submission process. Parties making disclosures under the SRDP will now be required to submit: (1) the SRDP Disclosure Form, providing information about the disclosing party including the history of abuse, pervasiveness of noncompliance, and steps to prevent future noncompliance; (2) the Physician Information Form(s), providing details of the noncompliant financial relationship(s) between the physician(s) and the disclosing party; (3) the Financial Analysis Worksheet, quantifying the overpayment; and (4) a certification signed by the disclosing party stating that the information provided is truthful and based on a good faith effort to bring the matter to the attention of CMS. Submissions to the SRDP involving solely a failure by a physician-owned hospital to disclose physician ownership on any public website or in any public advertisement must continue to follow special instructions from CMS available on the SRDP website. Although this is the first time CMS has mandated prescribed forms, much of the information now required for SRDP submissions is not significantly different from information previously required for such submissions. One of the differences is the new requirement that the disclosing party disclose the pervasiveness of Stark violations, illustrating how common the disclosed noncompliance was in comparison to similar relationships between the disclosing party and physicians. Some hope the specific forms will allow for faster resolutions of actual or potential Stark Law violations, but that remains to be seen.

On Monday, April 24, the U.S. Department of Justice announced that Energy & Process Corp. agreed to pay $4.6 million to settle False Claims Act allegations concerning the construction of a large nuclear waste treatment facility in South Carolina. The allegations came to light as part of a whistleblower action brought by a former employee of a principal E&P subcontractor in late 2013. The federal government intervened last year. The U.S. Department of Energy hired Energy & Process to provide supplies for a nuclear waste treatment facility. When complete, the multibillion dollar facility will transform more than 30 metric tons of surplus weapons-grade plutonium into fuel pellets for use at nuclear power plants. The FCA suit alleged that Energy & Process provided faulty steel reinforcing bars, failed to conduct quality assurance, and falsely certified its products and processes adhered to U.S. Nuclear Regulatory Commission standards. In its complaint in intervention, the federal government noted that if Energy & Process’s deficient efforts had not been discovered, the public would have be exposed “to the serious and long lasting risks associated with radiological contamination.” Energy & Process denied any wrongdoing and in a public statement expressed its desire to end what “has been an ongoing distraction and expense to the company for almost 10 years.” The suit highlights the strict regulatory requirements facing major players in the nuclear energy sector, the stakes of noncompliance, and the slow path to project completion—all of which impose significant costs on nuclear power projects. Though originally slated for completion in 2015, the South Carolina facility is now striving for a 2025 completion date.

The False Claims Act (FCA) allows plaintiffs/relators to bring qui tam actions, in which the government may then elect to intervene.  The FCA also provides that “[t]he Government may settle a [qui tam] action with the defendant notwithstanding the objections of the person initiating the action if the court determines, after a hearing, that the proposed settlement is fair, adequate, and reasonable under all the circumstances.”  31 U.S.C. § 3730(c)(2)(B).  In United States ex rel. Shepard v. Tippett, a federal court in Colorado recently examined the standard for deciding whether a settlement was “fair, adequate, and reasonable” such that it should be approved over the relators’ objections.  2017 U.S. Dist. LEXIS 27083 (D. Colo. Feb. 27, 2017).  The Tenth Circuit had not decided the question, and the Shepard court noted a split among other courts of appeal that had considered the issue. In Shepard, the relators argued that the standards for approving class action settlements were appropriate in the FCA qui tam context.  The inquiry, the relators argued, should involve a review of four factors: (1) whether the proposed settlement was fairly and honestly negotiated; (2) whether serious questions of law and fact exist, placing the ultimate outcome of the litigation in doubt; (3) whether the value of an immediate recovery outweighs the mere possibility of future relief after protracted and expensive litigation; and (4) the judgment of the parties that the settlement is fair and reasonable. Id. at *4 (quoting Rutter & Wilbanks Corp. v. Shell Oil Co., 314 F.3d 1180, 1188 (10th Cir. 2002)). Citing a Ninth Circuit case addressing dismissal of an FCA case, the Government argued for a much more deferential standard. That standard includes a two-part test: “(1) identification of a valid government purpose; and (2) a rational relation between dismissal and accomplishment of the purpose.” Id. at *3 (quoting United States ex rel. Sequoia Orange Co. v. Baird-Neece Packing Com., 151 F.3d 1139, 1145 (9th Cir. 1998)). In reaching its conclusion that the deferential Sequoia Orange standard is appropriate, the Shepard court considered legislative intent behind 1986 amendments to the FCA that created the current famework for government intervention in qui tam actions.  Those amendments allowed a relator to remain involved even after government intervention, thus increasing the relator’s role.  At the same time, though, the amendments gave the government greater control over qui tam actions. Id. at *4 (collecting cases). Noting that the government is the real party in interest, the Shepard court concluded that the government should have at least as much authority to settle a qui tam action as to dismiss it.  Moreover, “hamper[ing] the government’s ability to settle may run afoul of the separation of powers doctrine.” Id. Requiring only a rational relation to a valid governmental interest, then, is the proper standard.  Finding the government had met that standard in this case, the Sherpard court approved the settlement notwithstanding the relators’ objections.

On Tuesday, February 21, 2017, the Supreme Court summarily vacated the judgment in Bishop v. Wells Fargo & Co. and remanded the case to the Second Circuit in light of the Court’s recent decision in Universal Health Servs. v. United States ex rel. Escobar, which recognized the implied certification liability theory in FCA suits. In Bishop, the plaintiffs originally brought FCA claims against Wells Fargo, specifically alleging that that Wachovia Bank and World Savings Bank (both of which later merged into Wells Fargo) engaged in improper accounting practices to disguise the fact that the banks were undercapitalized, which itself was a violation of Federal Reserve rules.  Plaintiffs’ FCA claims were based on the idea that each time the banks borrowed money from the Fed’s Term Auction Facility, they were allegedly falsely certifying to the Fed that they were in sound financial condition. The Second Circuit in Bishop v. Wells Fargo & Co., 823 F.3d 35 (2d Cir. 2016) affirmed a district court ruling dismissing the FCA claims, holding that even if the allegations concerning fraudulent accounting practices were true, the plaintiffs could not tie the fraud to accusations of actionable implied false claims submitted to the government for payment.  Because the banking laws did not expressly condition Fed loans on compliance, it was irrelevant whether knowing the true capitalization of the banks would have cause the Fed to change its lending terms. After the Second Circuit’s Bishop decision, however, the Supreme Court announced its holding in Universal Health Servs. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), which upheld the theory of implied certification liability under the FCA, where the alleged misrepresentation to the government is “material” to the government’s payment decision. Following Escobar, the plaintiffs in Bishop asked the Supreme Court to revive their suit, citing the Court’s subsequent affirmation of the implied certification theory of FCA liability and arguing that Escobar abrogated longstanding Second Circuit precedent which had rejected classic “implied certification” liability. The Court’s summary disposition illustrates the ongoing importance of Escobar to the viability FCA suits brought in appellate circuits which previously did not recognize the implied certification theory.  Moreover, financial institutions will need to closely monitor subsequent developments in Bishop given the implications of implied certification liability rooted in noncompliance with banking regulations. The Supreme Court’s summary disposition in Bishop can be found Here. Dorsey’s FCA Now blog has previously provided insights and updates on Escobar that can be found at the following links: https://www.dorseyfca.com/district-court-grants-motion-to-dismiss-relators-claims-in-one-of-the-first-post-escobar-decisions/ https://www.dorseyfca.com/implied-certification-escobar-and-the-impact-on-healthcare-providers/ https://www.dorseyfca.com/supreme-court-upholds-implied-certification-theory-of-liability-imposes-limitations-on-its-reach/

The U.S. District Court for the Southern District of Texas has dismissed an FCA retaliation claim brought by a nurse who claimed to have blown the whistle on misuse of funds at a hospital that received significant federal revenue. In Endicott v. Oakbend Medical Center, the nurse alleged she was fired after she complained that several hospital executives were using hospital employee time to enrich the executives’ private business.  She alleged the hospital and executives “knowingly used Medicaid and Medicare funds that were supposed to be used to pay vendors, physicians, and fund employee salaries” to advance the private business’s interests.  She claimed illegal retaliation under the FCA, asserting she was fired for objecting to the alleged activity. The FCA bars an employer from retaliating against an employee who engages in lawful acts in furtherance of an FCA lawsuit or other efforts to stop FCA violations. But the employee’s acts must be aimed at matters that could reasonably lead to a viable FCA claim.  For an employee’s internal complaints to be protected, they must concern false or fraudulent claims for payment submitted to the federal government.  The employee must allege that she believes in good faith, and a reasonable employee in similar circumstances might believe, that the employer is defrauding the government.  Complaining about an employer’s internal misconduct unrelated to false claims is not enough.  Nor is it sufficient to allege a non-governmental third party was the victim of fraud. The court rejected the premise of the nurse’s FCA claim—the hospital’s receipt of “substantial revenue” from Medicare and Medicaid. The nurse alleged the hospital improperly used this revenue to pay employees who were simultaneously working for the executives’ business.  But she failed to assert that the hospital submitted false claims for payment to the federal government.  The hospital’s alleged use of legitimately obtained funds for improper purposes did not create FCA liability.  The nurse’s subjective belief that the hospital’s activity constituted fraud on the government was thus insufficient to state a claim for retaliation. The court’s decision reaffirms that hospitals may face a host of consequences for misusing legitimately obtained federal revenue, but FCA liability is not typically one of them.

In United States ex rel. Keen v. Teva Pharmaceuticals USA, Inc., relator Janice Keen sued her former employer—the pharmaceutical company Teva—for violations of the FCA.  According to Ms. Keen, Teva trained its sales force to misleadingly promote and sell a medicine used to treat muscle spasms.  Ms. Keen alleged that Teva’s deceptive practices caused physicians to prescribe the medicine in situations for which it was not approved, with the effect that pharmacies submitted false claims to government programs like Medicare and Medicaid. Ms. Keen’s brought her FCA claims  pursuant to 31 U.S.C. § 3729(a)(1)(A) and (B). Those provisions provide, in part, that anyone who “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval” by the United States government, or “knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim,” is liable to the United States government for civil penalties and treble damages. Teva moved to dismiss Ms. Keen’s complaint under Fed. R. Civ. P. 12(b)(6) for failure to state a claim. Among other things, Teva argued that Ms. Keen failed to connect any of her deceptive marketing theories to actual submissions of false claims. On January 4, 2017, Judge Jorge L. Alonso agreed with Teva and dismissed Ms. Keen’s complaint in its entirety. Important to the court’s ruling were the pleading standards of Rules 8(a) and 9(b).  Judge Alonso emphasized that not only must a complaint be plausible, but any claims asserted under the False Claims Act must also comply with Federal Rule of Civil Procedure 9(b), which requires the pleading party to state with particularity the circumstances constituting fraud.  Particularity means information like the identity of the person who made the misrepresentation, the time, place and content of the misrepresentation, and the method by which the misrepresentation was communicated, among other things. In Ms. Keen’s case, the absence of allegations specifically linking the allegedly misleading promotional materials or sales presentations to the actual submission of false claims to the government was fatal to her claim. Her complaint focused on Teva’s allegedly deceptive marketing effort, but failed to allege that a particular pharmacy submitted a false claim for payment to a government payor.  Without these allegations, the court concluded that Ms. Keen “failed to state a plausible, non-speculative claim with particularity.” Judge Alonso’s opinion and order serves as a reminder that the FCA is not a vehicle for addressing garden-variety breaches of contract or regulatory infractions. Instead, a whistleblower must go farther and describe with particularity how false claims were submitted to the government such that a violation of the FCA is plausible from the face of the complaint. The case is United States ex rel. Keen v. Teva Pharmaceuticals USA, Inc., 2017 U.S. Dist. LEXIS 518 (N.D. Ill. Jan. 4, 2017).

Affirming an earlier order handed down by the United States District Court for the District of Massachusetts, the First Circuit recently denied Plaintiff D’Agostino leave to amend his complaint, finding the proposed claims were futile. D’Agostino, et al. v. EV3, Inc. et al., 2016 WL 7422943 (1st Cir. Dec. 23, 2016).  D’Agostino’s complaint alleges False Claims Act (“FCA”) violations related to the Onyx and Axium medical devices, which are used in embolization procedures. D’Agostino alleged that the defendants made false statements during the FDA approval process for the devices, including disclaiming uses of the devices they later pursued, misstating the training that would be provided to physicians using the device, and omitting relevant information about the devices’ safety. To link the alleged false statements to a claim for payment, D’Agostino relied on a theory of fraud upon the FDA, arguing that these statements constituted false claims because they could have influenced the FDA’s decision to approve the devices, and but for the FDA approval, CMS would not have reimbursed physicians for the use of these devices. The First Circuit presented numerous reasons for rejecting D’Agostino’s request for leave to amend. Some of those reasons rest on basic legal principles, such as the lack of sufficient allegations to satisfy federal pleading requirements under Rule 9(b) and 12(b)(6).  The design defect claim, which argued that improvements to the design of Axium demonstrate that previous versions of the device were defective, was similarly and succinctly dispatched as nonviable.  The court remarked that if this standard were applied “most every car sold to the government would be per se defective.” In less charted territory, the court also rejected D’Agostino’s fraud on the FDA theory of liability. The court noted that this theory would require D’Agostino to show that the allegedly false statements actually caused the FDA to grant approval it otherwise would not have granted—a mere showing that the statements could have influenced the FDA’s decision would be insufficient.  D’Agostino attempted to salvage his argument by relying on the FCA’s materiality standard, which only requires plaintiffs to show that a statement has “a natural tendency to influence, or [is] capable of influencing, the payment or receipt of money or property.”  In addition to finding that this argument misconstrued the FCA’s “demanding” standard of materiality, the court found that this approach improperly conflated the FCA’s materiality and causation requirements. The court’s analysis also considered that allowing the fraud on the FDA theory to proceed would effectively permit a jury to overrule the FDA’s approval of medical devices. Although the FDA has the authority to temporarily or permanently revoke its prior approval of a medical device, it has not done so for either Onyx or Axium in the six years since D’Agostino’s complaint has been made public.  The court found this to be persuasive evidence that the alleged false statements were not material to the FDA’s decision to approve the devices. Although the court rejected D’Agostino’s use of the fraud on the FDA theory of liability in this case, the decision acknowledges that this theory may support viable FCA claims in instances where the FDA withdraws its approval of a device after discovering fraud.

On January 6, 2017, two new safe harbors to the federal anti-kickback statute (the “AKS”) will become effective pursuant to a final rule published by the United States Department of Health and Human Services Office of the Inspector General (the “OIG”) on December 7, 2016. The final rule also codifies safe harbors for certain AKS exceptions and makes a technical correction to the existing safe harbor for referral services.  The OIG is authorized to promulgate safe harbors to protect various business arrangements from criminal prosecution under the AKS even though the arrangements potentially may be capable of inducing referrals of federal health care program business.  The final rule as published in the Federal Register is available here. New Safe Harbors Created The two new safe harbors share a focus on making medical-related transportation more affordable. The first new safe harbor protects reductions or waivers of a federal health care program beneficiary’s obligation to pay copayment, coinsurance or deductible (“cost-sharing”) amounts for emergency ambulance services provided by a state-, municipality- or tribal-owned ambulance supplier and paid for under a fee-for-service payment system if specified requirements are satisfied (e.g., the reduction or waiver must be offered on a uniform basis to all residents, tribal members or transported individuals). See 42 C.F.R. § 1001.952(k)(4).  The second new safe harbor protects free or discounted local transportation provided by an “eligible entity” (i.e., any individual or entity, except for individuals or entities that primarily supply health care items) to federal health care beneficiaries in the form of a “shuttle service” if certain conditions are met. See 42 C.F.R. § 1001.952(bb). AKS Exceptions Codified as Safe Harbors The final rule also protects certain pharmacy reductions or waivers of cost-sharing amounts (see 42 C.F.R. § 1001.952(k)(3)), remuneration between a federally qualified health center (“FQHC”) and a Medicare Advantage (“MA”) organization and (see 42 C.F.R. § 1001.952(z)), and discounts by manufacturers on drugs furnished to beneficiaries under the Medicare Coverage Gap Discount Program (see 42 C.F.R. § 1001.952(aa)). Focus on Safe Harbor for Pharmacy Cost-Sharing Waivers While all of the safe harbors are noteworthy, some additional commentary on the scope and requirements of the safe harbor for pharmacy cost-sharing waivers is warranted. First, the scope of the final rule’s pharmacy cost-sharing waiver safe harbor includes both the Medicare Part D program and the Medicaid program, whereas the similar AKS statutory exception covers only Medicare Part D. Second, the OIG clarified in its comments to the final rule that the safe harbor requirement that the reduction or waiver not be part of an “advertisement or solicitation” would be violated by a pharmacy posting information on its Web site regarding the reduction or wavier, but generally would not be violated by responding to an inquiry from a particular patient in person. Third, with respect to the safe harbor requirement that the reduction or waiver not be “routine,” the OIG stated in its comments that what is “routine” depends on the facts and circumstances of a particular case but that giving a reduction or waiver could be common enough without being automatic and still be routine. Fourth, the OIG declined to specify any particular method of determining whether a beneficiary has a “financial need,” permitting pharmacies flexibility, by way of examples, to use a multiple of the poverty guidelines or to use a combination of the poverty guidelines plus family medical expenses. The key to satisfying the requirement is that the pharmacy must apply a reasonable determination method of financial need uniformly. And while not requiring a written policy describing the pharmacy’s determination method, the OIG did say that having such a written policy, along with evidence that the policy was followed, would be “useful” in asserting the safe harbor’s protection. Fifth, if a patient is not in financial need then the pharmacy must make “reasonable collection efforts” before waiving the cost-sharing amount. The OIG recognized in its comments that the amount of the copayment or the historical inability to collect from a particular patient might be factors in a pharmacy’s decision regarding what collection efforts to take. However, a preemptive decision by a pharmacy not to request payment from, or not to pursue any collection efforts regarding, a particular patient would not satisfy this requirement. Parties intending to fit within a particular safe harbor are advised to review all of the applicable requirements. In addition, as illustrated by the discussion of the safe harbor for pharmacy cost-sharing waivers above, reviewing the OIG’s responses to comments in the final rule can help interpret the regulatory language.

The qui tam provisions of the False Claims Act allow private citizens to file FCA claims on behalf of the government.  The government may elect to intervene in the action—or it may not.  The United States District Court for the Western District of Virginia held earlier this month that when the government does not intervene, it is a party in interest, but not a party to the qui tam suit—a distinction of significance for purposes of collateral estoppel.  See United States v. Whyte, No. 4:12-cr-21-2, 2016 U.S. Dist. LEXIS 172560 (W.D. Va. Dec. 16, 2016). The federal government indicted William R. Whyte and Armet Armored Vehicles, Inc. in 2012 on three counts of major fraud against the United States, six counts of wire fraud, and three counts of false, fictitious, and fraudulent claims.  Mr. Whyte is the owner and CEO of Armet, a manufacturer and supplier of armored vehicles. Id.  The indictment alleges that Mr. Whyte and Armet contracted with the government to manufacture and supply vehicles for use in Iraq, but the vehicles were delivered late and did not conform to contract specifications. Mr. Whyte avoided prosecution for a few years by fleeing to Canada, but he was extradited in September 2016.  In the meantime, Armet’s former president filed a qui tam action against Mr. Whyte and Armet based on the same conduct underlying the government’s indictment.   The government chose not to intervene.  In Mr. Whyte’s absence, that case was tried to a jury, which returned a verdict in favor of Mr. Whyte and Armet. When Mr. Whyte returned to the United States this fall, he moved to dismiss the indictment against him on grounds of collateral estoppel. The court denied Mr. Whyte’s motion, reasoning that although the government was a party in interest to the qui tam action, it was not technically a "party" for purposes of a collateral-estoppel analysis. Because it did not intervene, the government could not “issue subpoenas, conduct depositions, propound discovery, call witnesses, or cross-examine the defendant’s witnesses”—that is, it could not exercise the degree of “practical control over the litigation [such] that it would be fair to bind it to the prior ruling [in the qui tam action].” The court emphasized that its holding recognizes a policy decision behind the framework of the FCA: it is the government’s choice whether to intervene in a civil qui tam action or pursue criminal charges, and the government should not be forced to be a party to a qui tam action.

The Supreme Court held yesterday that a violation of the False Claims Act’s seal provision does not mandate dismissal of a relator’s complaint.  Justice Kennedy authored the Court’s opinion in the unanimous 8-0 decision.  State Farm was accused of defrauding the government by falsely classifying wind damage caused by Hurricane Katrina as flood damage, which would allow State Farm’s costs to be covered by the National Flood Insurance Program.  A relator, Rigsby, filed a False Claims Act suit under seal—where only the federal government and Rigsby would know of the suit.  Rigsby then allegedly violated the seal when her attorney sent evidence about the under-seal case to news organizations.  State Farm believed that this violation should result in dismissal of Rigsby’s complaint.  Today, the Supreme Court disagreed. Although dismissal was not appropriate here, the Court noted that dismissal might be appropriate in some instances, but it needn’t be mandatory.  The Court left it up to later cases to nail down the exact standards to apply when evaluating whether or not to dismiss a case for violation of the FCA’s seal provision, noting that “the factors articulated in United States ex rel. Lugan v. Hughes Aircraft Co. appear to be appropriate….”  Slip op. p. 10.   The Court explained that a violation of the seal provision in the present case might justify the use of, “[r]emedial tools like monetary penalties or attorney discipline….” Id.  However, because State Farm “did not request any sanction other than dismissal,” they did not preserve “the question whether a lesser sanction is warranted….”  Id.  As such, the Fifth Circuit’s judgment, that State Farm was not entitled to dismissal, was affirmed.       The Court’s opinion is available here:  https://www.supremecourt.gov/opinions/16pdf/15-513_43j7.pdf

This month the Supreme Court heard oral argument in State Farm Fire & Casualty Co. v. United States ex rel. Rigsby, a case centered on allegations dating back to Hurricane Katrina.  The Fifth Circuit had previously upheld a jury verdict finding State Farm liable for $758,000 in damages based on a claim that State Farm defrauded the government.  Whistleblowers, including respondent Cori Rigsby, alleged that State Farm falsely classified wind damage caused by Hurricane Katrina as flood damage, which would allow State Farm’s costs to be covered by the National Flood Insurance Program. The issue before the Supreme Court is what standard governs the decision whether to dismiss a relator’s claim for violation of the False Claims Act’s seal requirement. Rigsby operated as a relator in this case, bringing a public lawsuit in the name of the federal government.  The False Claims Act mandates that a whistleblower suit be filed under seal so that only the relator and the government know about it.  This allows the government to consider how to approach the lawsuit without the alleged bad-actor learning of the suit.  The False Claims Act does not contain any specific guidance for how to deal with a situation where the relator has violated this seal requirement.  State Farm alleges that the relator’s attorney sent evidence about the case to news organizations while the case was under seal.  State Farm would like the claim dismissed as a result.  In ruling against State Farm, the Fifth Circuit concluded that the strict dismissal rule employed by some courts of appeal goes against the legislative intent behind the seal requirement, and that the balancing test used in other circuits is more appropriate. Although oral argument did not shed a great deal of light on how this case will turn out, several justices pushed State Farm’s counsel, Kathleen Sullivan, on the prudence of dismissing a case even over a very minor disclosure. When the relator’s attorneys argued, Justice Breyer addressed a concern about simply excusing a violation as “too light a sanction.” It is likely that the justices have already voted on a preliminary outcome, but we will not be privy to any final result for a number of months. SCOTUSblog has assembled the filings here: http://www.scotusblog.com/case-files/cases/state-farm-fire-and-casualty-co-v-united-states/?wpmp_switcher=desktop

The United States Justice Department (DOJ) announced this week that Omnicare, Inc. (Omnicare), the largest nursing home pharmacy in the United States, will pay approximately $28 million dollars to resolve charges that it received kickbacks from Abbott Laboratories (Abbott) to promote Abbott’s anti-epileptic drug, Depakote, to nursing home patients. According to the press release, Omnicare, whose consultant pharmacists review nursing home resident’s medical charts and make recommendations to the resident’s physicians about what drugs should be prescribed to residents, received kickbacks disguised at “grants” and “educational funding” from Abbott in exchange for increasing the utilization of Depakote in nursing homes. Omnicare was acquired by CVS Health Corporation in 2015; according to the DOJ press release, the conduct addressed in the settlement concluded around 2009. This settlement comes after a 2012 resolution where Abbott agreed to pay $1.5 billion dollars to resolve, among other things, violations of the False Claims Act for paying alleged kickbacks to nursing home pharmacies including Omnicare and PharMerica Corp. In 2015, PharMerica entered into a settlement of $9.25 million dollars to resolve claims that it received kickbacks from Abbott. In the DOJ press release, U.S. Attorney John P. Fishwick, from the Western District of Virginia, is quoted as saying “This settlement ensures that some of the most vulnerable amongst us, those suffering from dementia, are provided with the level of care they deserve. Families and loved ones who make the difficult decision to place those they care about into a nursing home must do so with the confidence that medical decisions are being made with the interests of the patient in mind, not big drug companies.” The $28 million dollar Omnicare settlement will go toward government health insurance programs and state Medicaid programs. The settlement also resolves two whistleblower lawsuits filed in the Western District of Virginia by former Abbott employees; one of those whistleblowers will receive approximately $3 million of the settlement amount. A copy of the DOJ Press Release is available here.