Monday, April 1, 2019

Challenging the Relator's Standing to Bring a Qui Tam Can Open the Door to Jurisdictional Discovery

Dear Readers:

Is a relator’s release of claims valid and enforceable if she or he executed it prior to filing a False Claims Act qui tam against the same defendants whom the relator released? There is an “emerging agreement” among the circuits that a relator’s pre-filing release of claims is effective in non-intervened cases. United States ex rel. Class v. Bayada Home Health Care, Inc., 2018 U.S. Dist. LEXIS 162962, 2018 WL 4566157 (E.D. Pa. 2018). In fact, a relator’s pre-filing release of claims will deprive a court of subject matter jurisdiction over a relator’s qui tam against those same defendants provided that (1) “the release can be fairly interpreted to encompass qui tam claims; and (2) public policy does not otherwise outweigh the enforcement of that release.” Id. Of course, “public policy” is really a euphemism for whether a defendant seeking to enforce a release of claims sufficiently informed the Government of the fraudulent conduct at issue prior to the relator filing a qui tam.

So, how can you determine if the qui tam defendant seeking to enforce a release sufficiently informed the Government of the misconduct subsequently alleged in the relator’s qui tam and thereby satisfied “public policy”? In United States and State of Delaware ex rel. Sherman v. Christiana Care Health Services, Inc., et al., 2019 U.S. Dist. LEXIS 49804, 2019 WL 1349523 (D. Del., March 26, 2019), the Court surveyed the law on “pre-filing” releases and answered this question. The Court found that a relator may conduct jurisdictional discovery of the sufficiency of defendants’ disclosure to Government in light of what is alleged in the relator’s qui tam.

In Christiana, Defendants moved pursuant to Fed. R. Civ. P. 12(b)(1) to dismiss the relator’s non-intervened qui tam. Defendants argued that since the Relator had executed a release of claims in favor of the Defendants prior to filing his qui tam, the Relator did not have standing to bring his qui tam and the Court was without subject matter jurisdiction. In support of their motion and to satisfy the “public policy prong,” Defendants attached the Relator’s release and their disclosures to HHS-OIG. [Though not referenced in the Court's opinion, these “disclosures” consisted of “compliance disclosure logs submitted to the Government pursuant to a Corporate Integrity Agreement.”] Disclosures to HHS-OIG, the Court explained, are “sufficient” to satisfy public policy if they are “truthful and not misleading and alert the government that potential fraud has been alleged.”

Prior to responding to Defendants’ motion, the Relator moved for jurisdictional discovery as to the sufficiency of defendants’ disclosure. The Court found that the Defendants’ 12(b)(1) motion challenging Relator’s standing raised “factual” issues as to whether the Court had subject matter jurisdiction. Rule 26, Fed. R. Civ. P., the Court noted, permits jurisdictional discovery to “ascertain the facts bearing on such issues.”  In turn, the Third Circuit “allows” a plaintiff to conduct jurisdictional discovery unless a plaintiff’s claim is “clearly frivolous.” Such discovery is “warranted,” the Court stated, where a party can “at minimum, state a non-frivolous basis for subject matter jurisdiction and do so with reasonable particularity.”

Christiana found that the Relator alleged a non-frivolous basis for subject matter jurisdiction in his qui tam and permitted the Relator to conduct jurisdictional discovery.  The Court observed that the Relator’s complaint had alleged “concrete and specific instances of fraud,” including “initial reports to the Defendants, conduct of the internal investigation by the Defendants into those reports and the failure of the Defendants to disclose the results of those investigations to the government.” Additionally, the Relator pointed to the small size of the Defendants’ alleged disclosures (supposedly only 500 words) as not being sufficient to fully disclose Defendants’ alleged fraud. The Court noted further that the Government took 18 months to investigate the allegations before deciding not to intervene. Though such a time period does not indicate that the Defendants' disclosures were insufficient, “it counsels in favor of permitting Relator to engage in jurisdictional discovery that could aid in determining whether or not the disclosures were truthful and not misleading.” The Court permitted the Relator jurisdictional discovery on the “limited issue of the facts related to Relator’s allegations that were known to the defendants at the time they submitted the disclosures to HHS-OIG.”

From a defendant’s perspective, Christiana is somewhat disturbing for a number of reasons. First, the Relator was the Defendants’ former compliance officer who signed a severance agreement, apparently years before. Second, Defendants claimed that they disclosed the conduct at issue years before in compliance logs –- and now the Relator gets discovery in order to evaluate the sufficiency of that disclosure? Where is the Government? HHS-OIG apparently did not have a problem with it. The Government should step up and say so. Third, the fact that the Government took 18 months to “investigate” the Relator’s qui tam complaint means very little and presumes much. The Government is slow and in FCA cases is often very deliberate in its decision making. Moreover, while it may have taken 18 months to decline, that certainly does not mean it was “investigating” the entire time. With courts increasingly accepting "pre-filing" releases, I predict we will see more disputes like that found in Christiana in the future.

A. Brian Albritton
March 31, 2019

Tuesday, February 26, 2019

A Case to Keep In Your Pocket: Two Dismissal Rule Applies to Identical Qui Tam Cases Brought by Different Relators

Dear Readers:

I came across a small case to keep in your pocket as it might be needed one day: Arizona Medical Billing, Inc. v. FSIX LLC, 2019 U.S. Dist. Lexis 19164 (February 6, 2019). This case addresses the frequent issue of who is a party in a non-intervened qui tam: the government, relator, or both. This issue is addressed in the context of applying Fed. R. Civ. P. 41(a)(1). Rule 41(a)(a) governs voluntary dismissals of cases and provides for what is commonly referred to as the “two dismissal rule.” According to Rule 41(a)(1), an action that has been voluntarily dismissed without a court order or by filing a stipulation signed by the parties is presumed to be without prejudice unless it states otherwise “but a voluntary dismissal of a second action operates as a dismissal on the merits if the plaintiff has previously dismissed an action involving the same claims.” 

In Arizona Medical, the Court decided whether the two dismissal rule applies to two different relators who brought “identical” qui tams against the same defendants and then voluntarily dismissed each. The Court held that Rule 41(a)(1) applied and barred the second relator from reviving its previously dismissed qui tam.

Here are the facts of the case: Relator #1 brought a qui tam against FSIX LLC and three individuals alleging that these defendants had violated the False Claims Act due to their alleged violations of Medicare’s mileage reimbursement policies. A second Relator subsequently filed a separate qui tam suit against these same defendants along with one other individual defendant and made similar allegations against them. The defendants in Relator #2’s qui tam moved to dismiss on the grounds that #2's suit violated the “first to file” rule due to Relator #1’s pending qui tam. Relator #2 stipulated to the motion to dismiss. Interpreting the stipulation as a voluntary dismissal pursuant to Fed. R. Civ. P. 41(a), the Court in Relator #2’s case dismissed that qui tam without prejudice. Months later, the defendants in Relator #1’s qui tam case moved to dismiss and Relator #1 voluntarily dismissed its case. The Court “granted [Relator #1’s] notice of voluntary dismissal and dismissed the claims without prejudice.” With the first qui tam gone, Relator #2 filed a new qui tam that was identical to the one it had previously filed and dismissed. The defendants moved to dismiss Relator #2’s new qui tam on the grounds that a “common plaintiff, the United States of America, has filed two proper lawsuits . . . against the Defendants alleging identical claims” and thus should be dismissed pursuant to Rule 41(a).

In dismissing Relator #2’s new qui tam, the Court found that the two dismissal rule applied because “[i]t is undisputed that a common plaintiff, the United States of America was the primary plaintiff” in these two qui tams that “alleged identical claims.” The Court noted further that pursuant to 31 USC 3730, the relators in both cases could not have dismissed their actions without the “explicit consent of the Government as the primary plaintiff.” The Court rejected Relator #2’s argument that Rule 41 did not apply because the “relators in each case were different.” The Court found that Relator #2’s second dismissal “operated as an adjudication on the merits” because the claims in both cases were “identical.”

Arizona Medical illustrates that for the purpose of Rule 41(a), the United States is a party to a qui tam even if it has declined to intervene. In addition, while separate dismissals by relators bringing identical actions is uncommon, it does occur on occasion and Defense counsel now have a new case to defend against these serial actions.

A. Brian Albritton
February 26, 2019

Wednesday, January 23, 2019

Partially Intervened Qui Tam Cases Cannot Have Two Masters: Court Bars Relators From Proceeding With Their Non-intervened Claims

Dear Readers,

I commend to you a remarkable case, U.S. ex rel. Wride v. Stevens-Henager College, Inc., 2019 U.S. Dist. LEXIS 6783, 2019 WL 186663 (D. Utah 2019), which addresses the question of whether a qui tam in which the government has partially intervened has “two masters,” the government and the relator, each controlling their own sphere of the litigation, or just one. The District Court held that only one master — the government — can conduct the litigation in a partially intervened qui tam and relator cannot proceed with its own non-intervened claims or amend to bring new claims. The Court specifically found that where the government has intervened in a qui tam “action,” including where the government has intervened in only some but not all of the relators’ qui tam claims, the False Claims Act (FCA) provides that the government alone has the “primary responsibility for conducting the action” and the relators do not have the right to “amend his or her complaint to add defendants and claims to the government’s action.”

In Wride, two relators filed a FCA qui tam against a for-profit school and its successor (herein “for profit schools”). The government intervened in some but not all of their claims against the for-profit schools and filed its own complaint in intervention, which it later amended. Subsequently, relators filed amended complaints (four in all) adding new claims and new defendants. The Court observed that the complaint against the for-profit schools had “two masters,” the government and the relators. Additionally, relators had also been pursuing its separate claims against the for-profit schools and other defendants. The defendants moved to dismiss, and in the process of considering that motion, the Court asked the parties to brief whether the FCA permitted the relators to independently pursue claims against the defendants after the government elected to intervene in the lawsuit. Finding that the relator cannot maintain a separate complaint against the defendant, the Court struck all of the relators’ post-intervention complaints.

The Court observed that nothing in the FCA or its legislative history suggests that “a relator can maintain the non-intervened portion of an [qui tam] action. In fact, the plain language of the statute suggests otherwise.” The FCA, the Court concluded, “is clear that the Government either ‘elect[s] to intervene and proceed with the action,’ sec. 3730(b)(2), or it ‘declines to take over the action,’ sec. 3730(b)(4)(B). There is no in-between.”
The government contended that 31 USC 3730(b)(1) “allows a realtor to maintain the non-intervened portion of the action in the name of the United States.” (Emphasis added.) The references to “the action” here and in other parts of the FCA, the government argued, mean “cause of action” as opposed to “civil action.” The Court rejected that argument and conducted a plain language analysis of the FCA references to “action.” The Court found that the FCA’s text and “its structure” undermine the government’s interpretation because the FCA “unambiguously uses ‘action’ to mean ‘civil action.’”

The government’s chief argument was that Congress’ silence in the FCA as to whether a relator may prosecute the non-intervened portion of an action “suggests that the relator retains a right to do so.” In support of its argument, the government cited 31 USC 3731(c) which in discussing government intervention provides “the Government may file its own complaint or amend the complaint of [the relator] to clarify or add detail to the claims in which the Government is intervening and to add any additional claims. . . .” The Court did not read the provision to permit the relator the right to proceed with claims of its own once the government intervenes. Congress, the Court asserted, “would not have given relators the primary responsibility for prosecuting the non-intervened claims in such a cryptic fashion. . . .[its] silence as to the relator’s right to prosecute non-intervened claims leads to the conclusion that no such right exists.”

Analyzing the portion of the FCA that deals with awards to relators, 31 USC 3730(d), the Court found that “[n]either the statute nor the legislative history suggests that a relator can pursue claims that are separate from the Government’s to recover an increased award” which “undermines the idea that the relators can pursue non-intervened claims.” Key to the Court’s conclusion was that the FCA provides only limited rights to the relator to “continue as a party to the [intervened] action” which the Court distinguished from the government’s right to “conduct the action” when it intervened. Once the government intervenes, the relator has only limited rights and according to the FCA, the Court can limit the relator’s “participation” in the intervened case. In sum, once the government intervened in the qui tam, its complaint “superseded the relators’ complaint and became the operative pleading. The relators then lost the right to add defendants and claims to the action” and “any pleading filed by the relators” thereafter “lacked legal effect.”

This interesting case and the Court’s exhaustive analysis sheds light on an area of FCA litigation that has long needed closer review:  just who controls FCA claims and what is the role of the relator? The FCA appears to provide that a relator’s qui tam must be moored to his or her original disclosure statement. Section 3730(b)(2) requires that at the beginning of the case, the relator “serve” the government with a “written disclosure of substantially all material evidence and information the person possesses.” Presumably when his or her claim is filed, the relator is blowing the whistle on that alleged misconduct about which she or he has knowledge and is presenting their knowledge to government for its investigation.

When relators start bringing in new parties, asserting new theories and new claims beyond the scope of their disclosures, however, then relators are transforming the qui tam provision into an independent vehiclelike a search warrantthat they can use to search for and assert new claims and add new parties about which they may know little or nothing. That is what occurred in Wride. Relators essentially used their “right” to bring a qui tam to independently bring new claims that were unmoored from their original disclosure statement to the government and without first submitting their new claims under seal to the government. When the government argued that relators’ new complaints simply “added detail to the fraudulent schemes already described and thus did not have to filed under seal,” the Court described that argument as “at best, a misstatement.” Indeed, ruling on alternative basis, the Court struck the relators’ fourth amended complaint as a sanction for the relators’ failure to first file it under seal in violation of 31 USC 3730(b)(2).

Unfortunately, I give the Court’s decision in Wride a 50/50 chance of surviving. My prognosis does not result from the decision running afoul of any case law already out there, but simply because it violates that most powerful rule, “this is the way we’ve always done things.”

A. Brian Albritton
January 23, 2019

Tuesday, December 25, 2018

U.S. Department of Justice 2018 False Claims Act Statistics -- not a banner year for DOJ or Relators

Dear Readers:

Happy holidays and best wishes to you for 2019.

Just in time for Christmas, the Civil Division of the U.S. Department of Justice ("DOJ") released its
2018 annual statistics for False Claims Act ("FCA") filings and cases for fiscal year 2018 (10/1/17 - 9/30/18). The DOJ's press release highlights DOJ settlements and recoveries, and I will not repeat them here. Rather, as I have done for the last several years, I wish to focus on a few of the highlights revealed by the statistics.

2018 was not a banner year for DOJ and FCA cases. DOJ "obtained" $2.8 billion "in settlements and judgments" from civil cases involving fraud and false claims against the government, and of that amount, over $2.1 billion resulted from qui tams. That’s the lowest amount “obtained” since 2009, when DOJ “only” recovered $2.4 billion.

2018 was also not a banner year for qui tam relators who recovered “only” $301 million in relator share awards, down 37% from last year. This was the lowest amount recovered by relators in any single year since 2009.

767 FCA cases were filed in 2018, down from 825 in 2017 and the second lowest year for FCA filings since 2011. Last year, DOJ filed 122 "non-qui tam" or direct-filed cases and qui tams accounted for 645 matters.  DOJ does not say in which of the 645 cases it has intervened, declined, or is still “investigating.” Note: DOJ apparently revised 2017’s statistics: last year it published statistics showing 125/674 direct filed and qui tam matters and this year’s statistics now show 145/680 direct filed and qui tam matters for 2017. 

Healthcare related cases continue to predominate (almost 69%) all FCA cases filed: 506 healthcare FCA cases filed and $2.5 billion “obtained.” Direct-filed healthcare cases continued to be up at 60, tied with 2008, for the second most number of direct filed cases in a year since 1987. The record is 70 in 2016. Recoveries in direct filed FCA cases were up dramatically to $568 million, up from $32 million in 2017 and the third best year since 1987. A large portion of the healthcare FCA recoveries (almost 59%) is attributable to five cases: $625 million paid by AmerisourceBergen Corp., $210 million paid by United Therapeutics Corp., $270 million by HealthCare Partners Holdings LLC, $216 million from Health Management Associates, and $84.5 million by William Beaumont Hospital.

The "other" category of FCA cases accounted for almost 28% of all FCA cases filed in 2018.  That is down from 225 last year and is the lowest overall since 2010 when 211 cases were filed.  The big news here is that recoveries were only $259 million, a dramatic drop from the $106 billion last year and the lowest since 2010.  Relator shares, not surprisingly, dropped as well: $14.9 million, which is down 78% from the prior year and is the worst year for relators in this category since 2008.

Department of Defense FCA cases continued to be small: 47 or 6% of all FCA cases, and they accounted for $107 million recovered.

A few observations about 2018:

  • Relator generated qui tams continue to hold strong in healthcare where 446 qui tams were filed. 2018 was the fifth best year since 2010. Relator recoveries in declined healthcare cases dropped from $445 million in 2017 to $80 million in 2018, with relator share awards in declined cases falling as well: $123 million in 2017 to $22 million in 2018. The $266 million in relator share awards in healthcare cases overall was the lowest since 2010.
  • The relator share awards in the “other” category (non HHS, non DOD) fell dramatically from $77 million in 2017 to $20.7 million in 2018.  That is the lowest amount collected in this category since 2008.  
  • Of the $2.8 billion “obtained,” DOJ does not tell us how much it actually recovered in cash as opposed to "judgments” in 2018 or any other year.  For example, DOJ cites as an example a “judgment totaling more than $114 million” that it obtained against three individuals that allegedly paid kickbacks to two labs.  However, the title of its press release proclaims that it “recovered” $2.8 billion. 
  • DOJ’s press release heralded its commitment to “holding individuals accountable” in FCA cases.  Several examples are cited, including DOJ’s FCA settlement with Lance Armstrong who agreed to pay $5 million.  Given where the government started in that case with its demands, however, that settlement effectively was a win for Armstrong. With the new revisions to the Yates policy, it will be interesting to see how that affects DOJ’s efforts to hold individuals accountable going forward.

Overall, a good year for DOJ direct filed cases against healthcare defendants, and a bit of a decline in all other areas. 

Finally, a plea to DOJ and U.S. Attorneys:  when are you going to release the FCA statistics for each individual U.S. Attorney Office? And, why not provide a breakdown of all FCA settlements and judgments “obtained” for each district?

A. Brian Albritton
December 26, 2018

Tuesday, December 18, 2018

Maybe That Wasn’t Such a Good Idea After All – DOJ takes a “common sense” approach in applying Yates Policy in civil cases

Dear Readers:

In June 2016, I reported how the U.S. Department of Justice (DOJ) planned on implementing its Yates policy of stressing the accountability of corporate executives and employees in False Claims Act (FCA) cases. In FCA investigations of corporate wrongdoing, DOJ’s Yates policy instructed its attorneys to “focus on both the company and individuals who may be responsible for bad conduct” and, charged its attorneys in any investigation of corporate misconduct to proceed “in tandem” with an inquiry into individual misconduct. Indeed, DOJ stated that settlements of FCA claims with corporations will not end DOJ’s “inquiry into whether and which individuals will be pursued.” DOJ went so far as to claim that it was “threshold requirement” for any corporate defendant seeking “credit” for its “cooperation” in settling a FCA case to “disclose all facts related to individuals involved in the wrongdoing.” (emphasis added).

As with many of its initiatives, DOJ’s Yates policy sounded good in theory: pursue every avenue of corporate and individual civil liability. I predicted, however, that as a result of the new focus on individual accountability, “FCA investigations and cases are likely to become more complicated.” In fact, I wondered if “DOJ and U.S. Attorneys will follow through in promoting this policy of individual accountability given that FCA investigations and cases often move quite slowly and this policy will require more time and substantial resources to enforce.” And, I was right.

Two years later, Deputy Attorney General Rod Rosenstein (“Rosenstein”) announced “common sense reforms” in applying the Yates policy stressing individual accountability in civil cases. “Civil cases,” Rosenstein pointed out, “are different” than criminal cases.  The “primary goal of civil affirmative cases,” such as FCA cases, are to “recover money,” and as a result DOJ needs to use its resources “efficiently.” To that end, Rosenstein observed that the “all or nothing approach to [awarding] cooperation” for civil cases was “counterproductive.” “[O]ur attorneys,” Rosenstein explained, “need flexibility to accept settlements that remedy the harm and deter future violations, so they can move on to other important cases.” In a seldom seen acknowledgement by DOJ of how things should work in the real world, Rosenstein noted that “[o]ur civil litigators simply cannot take the time to pursue civil cases against every individual employee who may be liable for misconduct and we cannot afford to delay corporate resolutions because a bureaucratic rule suggests that companies need to continue investigating until they identify all involved employees and reach an agreement with the government about their roles.”

So what does this mean? In part, the revised Yates policy is intended to restore “some of the discretion that [DOJ] civil attorneys traditionally exercised” though with “supervisory review,” of course. Also, in part, it means that companies no longer need to cooperate to the Nth degree in order to obtain any credit for their cooperation. To be sure, the gold standard for obtaining “maximum credit” remains that a corporate defendant must “identify every individual . . . substantially involved in or responsible for the misconduct.” But, whereas that was the requirement for a corporate defendant to receive any credit under the previous Yates policy, now DOJ counsel may award some credit as long as a “company honestly did meaningfully assist the government’s investigation.” Of course, the other extreme from the gold standard for which no credit will be awarded are companies who seek to “conceal wrongdoing by senior officials” or who fail to “act in good faith.” 

Rosenstein provided an example of how this new policy might be applied in an FCA case. A defendant who made a “voluntary disclosure” to DOJ and provided “valuable assistance” is entitled to “some credit even if the company is unwilling to stipulate about which non-managerial employees are culpable or . . . to identify every individual who might face civil liability in theory, but in reality would not be sued personally.”

Again, in an uncharacteristic admission as to how things really work at U.S. Attorney’s offices, Rosenstein acknowledged that the “civil policy was not strictly enforced in many cases” and that as a result he prefers “realistic internal guidance.”

Finally, DOJ’s new pragmatism endorses considering “an individual’s ability to pay in deciding whether to pursue a civil judgment.” DOJ does not want its “attorneys to spend time pursuing civil litigation that is unlikely to yield any benefit; not while other worthy cases are competing for [its] attention.” Translating this for the defendant, being broke really can be a benefit when the government is trying to determine whether to pursue FCA liability against your individual client.

Rosenstein is to be commended for this change which takes into account -- for once – the “practical implications of [DOJ] policies” and whether a policy actually “inhibit[s]” or promotes DOJ’s goals.  His enthusiasm for such a change of policy, I suspect, comes from serving as a U.S. Attorney in a medium sized district (Maryland) over many years.  DOJ priorities, mandates, and initiatives frequently enjoin U.S. Attorneys to investigate every last detail or person who could possibly be responsible, even on the civil side.  Being 100% faithful to the letter and spirit of such mandates, as I am sure Rosenstein experienced, is frequently an impossible task, if your goal is to keep pace with the pressing number of cases, criminal and civil, that continually come before a U.S. Attorney.  “Common sense” policies that restore discretion to line assistants and that promote realistic goals in FCA cases are long overdue.

A. Brian Albritton
December 18, 2018

Sunday, April 29, 2018

Deducting False Claims Act Damages

Dear Readers:

Among the nuggets contained in the recent Tax Bill passed by Congress is a provision that will have a tremendous impact on how damages in False Claims Act ("FCA") settlements must be characterized in the settlement documents if a defendant seeks to deduct any portion of its payment on its taxes.

As many of you have experienced, FCA settlements usually just list a settlement amount for the defendant to pay and normally do not attribute which portion constitutes damages and penalties. In fact, among the many provisions that the government insists on including in an FCA settlement, the government usually includes a provision stating that "nothing" in the FCA settlement "constitutes an agreement by the United States concerning the characterization of the Settlement Amount for purposes of the Internal Revenue laws, Title 26 of the United States Code." Stated simply, the government previously did not comment on whether the defendant could deduct any portion of an FCA settlement. To deduct the damages or restitution portion of an FCA settlement was something worked out between a defendant and its accountant.

As my colleague and friend Bob Warchola recently brought to my attention, the Tax Act changed the rules for deducting the damages portion of any FCA settlement by amending 26 U.S.C. § 162 which governs deductions of trade and business expenses.  

Previously, Section 162 of Title 26 prohibited the deduction "of any fine or similar penalty paid to a government for the violation of any law.” The Tax Act, however, expanded that prohibition, and it now generally prohibits "a taxpayer from deducting any amount paid or incurred (whether by suit, agreement, or otherwise) to, or at the direction of, a government or governmental entity in relation to the violation of any law or the investigation or inquiry by such government or entity in to the potential violation of any law."  With this general prohibition as a backdrop, Congress then carved out an exception for deducting restitution, so long as the taxpayer establishes that the amount at issue (1) "constitutes restitution . . . for damage or harm which was or may be caused by the violation of any law or the potential violation of any law, or . . . is paid to come into compliance with any law which was violated or otherwise involved in the investigation or inquiry . . . "; and (2) "is identified as restitution or as an amount paid to come into compliance with such law, as the case may be, in the court order or settlement agreement."(emphasis added). In addition, the revisions to Section 162 specifically prohibit a defendant from deducting "any amount [paid] as reimbursement to the government or entity for the costs of any investigation or litigation." Finally, the Tax Act imposed a requirement on the affected government agency to report to the IRS the settlement (or judgment) and to specify what portion of it is restitution or the costs to come into compliance with the law at issue in the settlement.

Latham & Watkins and Fried Frank have both done a helpful analysis of these changes arising from the Tax Bill which I commend to you as required reading if you are thinking about settling an FCA case.

A. Brian Albritton
April 29, 2018

Monday, January 29, 2018

Discerning the True Meaning of Escobar: the remarkable case of US ex rel Ruckh v. Salus Rehabilitation

Dear Readers:

I strongly commend to you the recent case, US and State of Florida ex re Ruckh v. Salus Rehabilitation, LLC, et al, 2018 WL 375720 (1/11/2018, M.D. Fla). Applying the Supreme Court’s decision in Universal Health Services, Inc. v. Escobar, 136 S. Ct. 1989 (2016), the Court overturned a $347 million False Claims Act (FCA) trial judgment entered in favor of the Relator after a month long jury trial. The Court granted the Defendants’ motion for judgment as a matter of law and for a new trial on the grounds that the Relator failed to prove that (1) the government regarded the alleged violations of Medicaid and Medicare by a group of 53 nursing homes as material such that they would have refused to pay the Medicaid claims at issue; and that (2) the defendants submitted the Medicaid claims at issue knowing that the government would refuse to pay them if they had known about them. 

Ruckh does so much more than apply a simplistic Escobar analysis of whether the government would have objected to this or that individual billing practice or paperwork errors--what I would call a retail analysis of disputed practices. Rather, acknowledging the punitive nature of the FCA’s treble damages and penalties, the Court evaluates the materiality of defendants’ disputed practices in light of “common sense” and the impact of an FCA judgment would have on the delivery of nursing home care to a large, vulnerable population. For the Court, the “controlling question” is essentially whether the government would effectively shut down 53 nursing homes on the basis of what appears to be paperwork errors–-what the court calls “traps, zaps and zingers”--about which the government “has permitted . . . to remain in place for years without complaint or inquiry.”

I won’t try to capture all of the Court’s discussion, but here are a few highlights:

  • The Court appeared to appreciate the complexity and burden of Medicare and Medicaid regulations:  “Federal and state government’s regard the disputed practices with leniency or tolerance or indifference or perhaps with resignation to the colossal difficulty of precise, pervasive, ponderous, and permanent record-keeping in the pertinent clinical environment.” The evidence at trial showed that “Medicaid and Medicare consistently paid in the mine run of cases despite Medicare’s routine audits and Medicaid’s knowledge of billing documentation deficiencies.” 
  • The Court explained Escobar’s meaning as follows:  Escobar rejects a system of government traps, zaps, and zingers that permits the government to retain the benefit of a substantially conforming good or service but to recover the price entirely--multiplied by three--become of some immaterial contract or regulatory noncompliance.  A principal mechanism to ensure fairness and to avoid traps, zaps, and zingers is a rigorous standard of materiality and scienter. 
  • The Court openly questioned whether the FCA’s “punitive” treble damages and $11,000 fines can be “lawfully imposed on a supplier who delivers substantially compliant goods or services that are received and accepted by the government with knowledge of, or the indifference toward, some material, formalistic, or technical non-compliance.”
  • Acknowledging that the defendants “used qualified providers who ably provided services in accord with orders issued by qualified professional but who, for example, could not--years later--identify a ‘comprehensive care plan’ for each patient,” the Court found that  “[c]ommon sense falls far, far short of depicting that . . . a reasonable purchaser would abruptly refuse to pay those providing continuing and sustaining health care to a mass of highly vulnerable and mostly elderly and frail patients.” 
The Court’s key point is that evaluating the materiality of a disputed act or practice must take into account a far broader context and circumstance than simply whether the government would object to this or that individual disputed practice. Escobar, the Court instructed, “demands proof of materiality in the circumstances as they are at the time for which the proof is offered and in the place, in the industry, and in the other regnant circumstances that attend the moment for which materiality is offered.” In the case of the defendants 53 nursing homes, the Court explained:

In other words, the controlling question is not whether on a small scale — a patient or a few patients or a facility or even a few facilities or one physician, on therapy, or one pharmaceutical — but whether on a large scale, on the sale of a major statewide provider of a scarce health care resource in a large and potent state, the federal [or state] government would refuse to pay the provider because of a dispute about the method or accuracy of payment after the government has permitted a practice to remain in place for years without complaint or inquiry. . . . . If a non-compliance is found quickly and remains small, the government might likely demand perfect performance and full accounting. If compliance is larger and lingers longer and the repayment times three becomes a burden that threatens the vitality of the vendor and threatens the public interest, the government might not demand repayment times three.
In my view, Ruckh is a far more important and far reaching application of Escobar than U.S.ex rel Harman v. Trinity Indus., Inc., 872 F.3d 645 (5th Cir. 2017). 

A. Brian Albritton
January 29, 2018

Monday, January 1, 2018

Highlights of U.S. Department of Justice 2017 False Claims Act Satistics

Dear Readers:

Happy New Year. 

As we come to the close of 2017, the Civil Division of the U.S. Department of Justice ("DOJ") recently issued its 2017 annual statistics for False Claims Act ("FCA") cases filed and settled in fiscal year 2017 (10/1/16 - 9/30/17). The DOJ's press release highlights many of the Department's achievements (which I will not repeat here). I wanted to take a few moments to focus further on what DOJ's statistics reveal.

The DOJ publishes yearly statistics for FCA cases (i) overall ("the overview"); (ii) Department of Defense related cases; (iii) Department of Health and Human Services (healthcare) related cases; and (iv) all "other" FCA cases. DOJ "obtained"  --that does not mean collected -- $3.7 billion in "in settlements and judgments from civil cases involving fraud and false claims against the government." DOJ does not say how much it actually netted in cash as opposed to "judgments."  

As shown in its "overall" statistics, 799 False Claim Act cases were filed in 2017: roughly 50 cases less than last year but more than 2015. Generally, though, the total number of cases filed has been generally consistent for several years. In 2017, DOJ filed 125 "non-qui tam" or direct-filed cases and qui tams accounted for 674 matters. Of these 674 cases, DOJ does not say in which it has intervened, declined, or is still considering what to do nor does it tell us in which districts they were filed.  

Healthcare/HHS cases predominated in 2017: 544 cases, almost 68% of all FCA cases filed, and most of these were qui tams. 491 or almost 61% of all FCA cases were health care qui tams. In direct-filed healthcare cases, this was DOJ's third highest number of cases filed ever, and for qui tams, it was the second best year --surpassed only by 2016's 503 qui tams filed.

As it has for many years, the "other" category of FCA cases continues to have the second most number of FCA cases: 208 or 26%, and of these, 155 were qui tams, which is the lowest number of "other" qui tams filed since 2010.

Department of Defense ("DOD") related filings continued to be small: 47 or 5.8% of all FCA cases. Of note: relators filed only 28 DOD related qui tams, which is the smallest number since 1988. DOJ direct-filed 19 DOD-FCA cases, which is the most since 2011  --up from 9 in 2016 and 7 in 2015.

Of course, we have no idea if any of these newly filed cases were resolved or dismissed, as DOJ purportedly says it may do for qui tam cases lacking merit.

Turning to the settlement/judgments DOJ collected in 2017, a few observations:
  • Nearly $428 million was collected in FCA cases where DOJ declined to intervene. That is the second highest amount collected in declined cases since stats were kept. 2015's $512 million in declined case settlements is the best year.  Relators collected $43.593 million in relator share awards in these 2017 declined cases -- the third best year ever.
  • Not surprisingly, a large portion of relators' success in declined cases was driven by healthcare settlements. Relators  collected $380 million in HHS/healthcare declined cases in 2017 and collected $32.5 in relator share awards  -- the second best year ever in both of these categories.  
  • As with declined healthcare cases, relators had a successful year in declined cases in the "other" category, obtaining $45 million in settlements and $10.9 million in relator share awards: the third best year ever.
  • These stats continue to bear out what many defense attorneys have been experiencing for some time: relators increasingly are willing to aggressively pursue cases when the government has declined to intervene.  
  • The $265.5 million DOJ collected in overall direct-filed cases was the lowest amount it collected since 2013 and the third lowest year since 2004. Clearly, the reason for this is that DOJ collected only $32.6 million in direct-filed HHS/healthcare cases  -- down from $97.5 million in 2016. DOJ has not had such a poor collections year in this category since 1993.
  • Overall,it should be no surprise that qui tam filings are strong overall and in healthcare cases. DOJ paid $349 million to relators in intervened cases overall last year, of which $250 million was paid in intervened healthcare cases.
DOJ stats continue to show that to generate False Claims Act cases the Department continues to rely heavily on relators and that huge awards in qui tams and declined cases continue to serve as as a powerful incentive to relators and their counsel to file FCA claims.  Since 1987, DOJ has paid relators $6.584 billion in relator share awards.

A. Brian Albritton
January 1, 2018

Sunday, July 23, 2017

Court Refuses to Permit Government to File Statement of Interest or Amicus in Non-Intervened False Claims Act Cases

Counsel who regularly defend False Claims Act (FCA) cases often encounter “statements of interest” filed by the government in non-intervened FCA cases. Though not a party to the case since it has declined to intervene, the government files these advisory pleadings to argue its interpretation or position on some issue of the False Claims Act, frequently to the detriment of the defendant’s position.

For example, in US ex rel Nevyas v. Allergan, Inc., Dkt 66, Case No. 2:09-CV-432 (E.D. Pa), we see a typical example of a government statement of interest. In Allergan, the defendant moved to dismiss the relator’s second amended complaint in a non-intervened FCA case, and challenged the relator’s claim that it violated the Anti-Kickback Statute, 42 USC §1320a-7b(b) (AKS). Presumably, the relator’s response to the motion to dismiss was not adequate in the eyes of the government because the government filed its statement of interest to address “an argument” raised in the defendant’s motion to dismiss with which it disagreed. Claiming it “has a keen interest in the interpretation of [the FCA and the AKS],” the government submitted its statement of interest to “refute [Defendant’s] argument that the Court should narrowly construe the AKS.”
For its authority as a non-party to submit a brief, the government in Allergan relied on 28 USC § 517 and the fact that it “remains a real party in interest in this matter.” Section 517 does not reference statements of interest or filing briefs on behalf of the United States; rather, it only provides:

The Solicitor General, or any officer of the Department of Justice, may be sent by the Attorney General to any State or district in the United States to attend to the interests of the United States in a suit pending in a court of the United States, or in a court of a State, or to attend to any other interest of the United States.
As in Allergan, district courts rarely refuse the government permission to file statements of interest in FCA cases.
One court in the Middle District of Florida apparently has had enough of these statements of interest. In the last few months, the Court issued two orders refusing the government’s request to file statements of interest. The Court’s opinion in US ex rel Ruckh v. SalusRehabilitation, 2017 WL 1495862 (M.D. Fla. 4/26/2107) is most instructive. In that non-intervened case, after “years of discovery” the relator prevailed after a six week trial and obtained a “spectacular result.” After the defendants moved for judgment as a matter of law and the relator filed its opposition, the government sought to file a statement of interest. Calling it a “euphemism for an advocate’s brief,” the Court refused. It explained its reasons as follows:
·      Section 517 “says nothing” about a statement of interest in a qui tam or otherwise and “nothing about Section 517 supports an intent to create in the Solicitor General the right to appear and submit argument in any case in which the United States articulates a generic interest in the ‘development’ and the ‘correct application’ of the law.”
·  “The clarity with which Congress establishes elsewhere the right to participate in an action belies the assumption that Congress conceals in an organizational chapter the purported right to submit a ‘statement of interest’ and to intervene-in-fact without formally intervening in accord with the False Claims Act.”
·   The government’s request “fails to identify an interest inadequately protected by the relator.”
·        As to the government’s argument that it asserts a “specific interest in . . . the development of law applicable to complex FCA cases,” the Court noted that the government “presumedly maintains an enlivened interest in the development of all federal law, and little if anything, distinguishes this action from all the others . . . . .  Understanding a party’s interest in money requires no additional briefing.”
·     Section 517 appears “inapplicable” in an FCA case since the government declined to intervene.  Section 3730(c)(3) of the FCA “specifically limits the [government’s] participation” and . . . . . invoking Section 517 to proffer argument about the interpretation of the False Claims Act impermissibly circumvents the narrow role prescribed in Section 3730(c)(3).”
Relying on its decision in Ruckh, the Court rejected the government’s attempt to file a statement of interest in response to several of the defendants’ motion to dismiss arguments in another case: US ex rel McFarland v. Florida PharmacySolutions, Dkt 310, Case No.8:15-cv-178-T-23 (M.D. Fla.). The Court’s Order also rejected the government’s alternative argument that it be permitted to file an amicus curiae brief. Noting that the government remains the “remain party in interest” in a qui tam case, the Court denied the government’s request “[b]ecause a party may not gratuitously compound the papers by submitting an amicus curiae  brief.”
Hopefully, the Court’s opinions in Ruckh and McFarland will prompt other courts to more carefully consider whether additional briefing by the government in non-intervened cases is in fact warranted and necessary. 

A. Brian Albritton
July 23, 2017

Thursday, June 15, 2017

Specialty Insurance for False Claims Act Investigations: Coverage Gaps Leave Healthcare Providers Exposed and Vulnerable

Healthcare providers continue to remain at the greatest risk of having to defend against False Claims Act (FCA) investigations, particularly those alleging billing errors and overpayments. See 2016 DOJ FCA Statistics. Not surprisingly, healthcare providers increasingly look for insurance products to help manage that risk.

Healthcare providers have discovered that they generally cannot rely on their standard Errors and Omissions (E&O) policies to manage the risk of FCA suits. See e.g., Jenkins v. St. Paul Fire & Marine Ins. Co., 248 F.3d 1164 (8th Cir. 2001) (unpublished decision); MSO Washington, Inc. v. RSUI Group, Inc., No. C12-6090 RJB, 2013 U.S. Dist. LEXIS 65957 (W.D. Wash. May 8, 2013).  Standard E&O policies most often are limited to claims for damages arising out of the rendering of, or failure to render “professional services.” And, FCA claims alleging the overbilling of a federal healthcare agency (i.e. a billing error) are generally deemed not to arise out of a healthcare provider’s “professional services” and thus are not covered. See HorizonWest, Inc. v. St. Paul Fire & Marine Insurance Co., 214 F. Supp. 2d 1074 (E.D. Cal. 2002), aff’d, 45 F. App’x 752 (9th Cir. 2002).

To fill this coverage gap in the standard E&O policy, some insurance carriers now offer specialty healthcare errors and omissions coverage.  These policies purport to cover defense costs, penalties, and other losses due to investigations into healthcare billing errors. Though a positive development, these insurance products can have potential limitations that healthcare providers should analyze closely in deciding what insurance to purchase. 
Some of these limitations were on prominent display in the case of My Left Foot Children’s Therapy, LLC v. Certain Underwriters at Lloyd’s London, 207 F. Supp.3d 1168 (D. Nevada 2016). In that case, Underwriters issued an E&O insurance policy to a provider of physical, occupational, and speech therapy for children (hereinafter “Children’s”). Underwriters agreed in their policy to defend Children’s against any claim or suit arising from “any act, error or omission in the rendering of, or failure to render Professional Services . . . to others by any Insured person.” The Policy defined professional services as “pediatric physical, occupational, aquatic and speech therapy Services.”

In addition to E&O coverage, Children’s also purchased specialty healthcare coverage in the form of a “billing errors endorsement” (the “Endorsement”).  The Endorsement provided up to $25,000 of coverage for “any billing error proceeding made against an Insured” during the one year Endorsement Period beginning April 15, 2015. 

On June 30, 2015, Children’s received notice of a qui tam action filed against it alleging that it violated the FCA by allegedly billing Medicaid for therapy services that were not medically necessary.  Children’s timely submitted a claim to Underwriters seeking coverage for the costs to defend the action and indemnification for potential damages. 
Underwriters denied E&O coverage, but agreed, subject to a reservation of rights, to provide Children’s a defense under the Endorsement. Given that $25,000 would not begin to cover the cost of defending the FCA suit, Children’s filed a declaratory judgment action challenging Underwriters’ denial of coverage. Children’s argued that the Endorsement provided coverage, that such coverage was not subject to a $25,000 limit, and that Children’s was entitled to $2,000,000 of coverage.

Underwriters countered that the FCA action did not trigger coverage under the Endorsement because the qui tam had been filed on October 28, 2014, and thus was pending prior to the Endorsement’s April 15, 2015 initial effective date.

The Court found that the Endorsement did provide Children’s coverage against the qui tam. Qui tam lawsuits under the FCA, the Court observed, have a “unique procedural status” and often remain under seal for months after being filed. Id. at 1173. The Court explained that, “it is commonly understood that a qui tam suit under the FCA becomes active once the defendant has notice of the lawsuit and that notice most often occurs at the time of service.”  Id. (citing 31 U.S.C.3730(b)(3)). Thus, in determining whether the action was pending on or prior to the initial effective date of the Endorsement, the Court utilized the date the qui tam became active, i.e., the date that Children’s received notice of it, not the date when the relator first filed it under seal. Because Children’s did not learn of the qui tam until June 30, 2015, the Court found that it fell with the coverage period of the Endorsement. The Court noted further that it was “not subject to dispute” that the qui tam qualified as a dispute over “billing errors” which was also within the scope of the Endorsement. Id. at 1173. 

Though it found coverage, the Court also found that coverage was limited based on the Endorsement’s clear language that “a sub-limit of liability of $25,000 . . . applies to any billing error proceeding.” Thus, Underwriters were required to provide Children’s with a maximum of $25,000 in coverage, leaving Children’s to go out of pocket for the remainder of what will likely be a very costly defense and settlement. 

My Left Foot demonstrates the limitations with some specialty healthcare policies, and it presents three takeaways for any healthcare provider concerned with managing the risk associated with a FCA investigation. First, a healthcare provider concerned with such risks should examine its existing E&O policy, paying particular attention to how the company’s professional services are described in the policy declarations and how the policy defines “professional services,” in order to determine whether that definition would encompass allegations of billing errors. If the policy language does not encompass such allegations, the provider may wish to purchase additional coverage, such as a billing errors endorsement.  Second, if a healthcare provider currently has specialty healthcare coverage purporting to cover FCA claims, the provider should review any sublimits contained therein and assess whether they are sufficient to indemnify the insured for the cost to defend and settle an FCA suit. Third, if a provider has to make a claim under such a policy, it should bear in mind that in determining whether a FCA action arose during the policy period of a professional liability policy (and thereby triggered coverage), courts are likely to use the date that the provider received notice of the qui tam action as opposed to the date the action was filed under seal.  

Author:  Nathan Huff
Editor:  A. Brian Albritton
June 15, 2017