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

Thursday, June 1, 2017

What Have You Done For Me Today: Government Prevents Relator from Intervening in False Claims Act Case That Was Based in Part on Relator's Prior Qui Tam

Can an unsuccessful qui tam False Claim Act (FCA) relator intervene in lawsuit later filed by the United States if the claims in the United States’ lawsuit mirror the allegations first made by the relator? The Ninth Circuit Court of Appeals recently addressed this issue and said no, rejecting a relator’s attempt to salvage an FCA recovery after the district court had previously dismissed his qui tam claims. See U.S. v. Sprint Comm. (Prather), --- F.3d ---, 2017 WL 1526316 (9th Cir. Apr. 28, 2017).    

In 2009, relator John Prather filed a qui tam FCA lawsuit alleging that Sprint (and others) overcharged the United States for wiretapping services. United States ex rel. Prather v. ATT, et al., Case No. 09-cv-02457 (N.D. Ca.), ECF No. 1. The Government declined to intervene (Id. at ECF No. 15), and the district court ultimately dismissed relator’s claim, finding that he based his lawsuit on publicly disclosed information and did not qualify as an original source.  Id. at ECF No. 159.

Relator appealed and in 2014, while that appeal was pending, the United States filed its own FCA lawsuit against Sprint. United States v. Sprint Comm., Case No. 14-cv-02457 (N.D. Ca.), ECF No. 1. Like the relator, the United States alleged that Sprint had overcharged the United States for wiretapping services. To his chagrin, the relator learned that the Assistant U.S. Attorney that filed the claim on behalf of the United States was actively involved in the investigation of his underlying action and the United States’ decision not to intervene in his qui tam case. Id. at ECF No. 191.
Relator then moved to intervene in the United States’ new FCA lawsuit, arguing that it amounted to an “alternate remedy” that the United States sought in lieu of intervening in his own lawsuit. Under this theory, relator argued that he should recover between 15% - 25% of the United States’ recovery—the same amount he could have recovered had the United States intervened in his qui tam. See 31 U.S.C. § 3730(c)(5) (granting a relator the right to share in the recovery if the United States elects to pursue its claim through any “alternate remedy”). The district court denied relator’s motion to intervene because his own FCA lawsuit had already been dismissed.
On appeal, the Ninth Circuit zeroed in on whether the relator had the “significantly protectable interest” required to intervene under Rule 26. U.S. v. Sprint Comm. (Prather), --- F.3d ---, 2017 WL 1526316 (9th Cir. Apr. 28, 2017). To make this call, the Court set out to determine whether the relator could have recovered had the United States intervened in his qui tam lawsuit. Id. at **4-5.  If he could have recovered, then he had a protectable interest warranting intervention. Id. If he could not have recovered, the district court’s decision to deny intervention was correct. Id.
Ultimately, the Ninth Circuit found that the relator could not have recovered in his qui tam lawsuit even if the United States had intervened. Id. at *7. Relying in large part on Rockwell Int’l Corp. v.  United States, 549 U.S. 457 (2007), the court held that the pre-2010 public disclosure bar jurisdictionally barred by the relator's claim. Id. at *6. Under Rockwell, even if the United States had intervened in relator's lawsuit, that would not have cured the jurisdictional defect, and relator’s lawsuit “would have become an action brought by the Attorney General.” Id. Because the Ninth Circuit held that the relator could not have recovered even if the United States had intervened, he had no protectable financial interest in the United States’ subsequent suit that would warrant intervention.  

In any future case where the defense can plausibly raise the public disclosure bar, Prather will empower the Government to wait and see how the public disclosure defense plays out before intervening. If the public disclosure bar applies, the Government can simply await dismissal and then file a new lawsuit with the same allegations. And the Government can do so safe in the knowledge that the new lawsuit will not be deemed an “alternate remedy” under the FCA, potentially entitling the relator to a portion of the recovery. Although Prather ultimately may have little impact to the FCA defense bar, it will certainly create issues for relators and the Government to consider when the Government weighs its intervention options.

Author:  Scott Terry
Editor:  A. Brian Albritton
June 1, 2017 

Tuesday, May 2, 2017

Middle District of Florida Employs Unique Provisions for False Claims Act Settlements with Compounding Pharmacies

During the last three years, the U.S. Attorney for the Middle District of Florida ("the District") settled a number of False Claims Act investigations relating to "compounding pharmacies" that sold and marketed compounded pain cream medications that were reimbursed by Tricare. See here and here. The allegations against these pharmacies and their owners were very similar: compounding pharmacy paid kickbacks of one kind or another to marketers and/or physicians to generate prescriptions for compounded pain cream medications that were, in turn, filled by the same pharmacy who profited handsomely due to Tricare's very high rate of reimbursement. The District announced in October 2016 that it had "recovered almost $70 million" from these FCA settlements.

The FCA settlements for WELLHealth, Topical Specialists, and North Beaches compound pharmacies included settlement provisions that are rarely, if ever, seen. In these settlements, the District agreed to accept payment over five years of "50% of net profits" from each of these pharmacies. Normally, the Government only permits an FCA defendant three years to pay its settlement obligations. Additionally, I have never seen an FCA settlement where the Government agreed to accept a defendant's pledge of future net profits to pay off an FCA settlement obligation.

For example, the District's FCA settlement agreement with WELLHealth pharmacy of Jacksonville also provided:
  • No admission of liability;
  • Payment of approximately $1.9 million at the time of settlement;
  • Payment of proceeds from the liquidation by WELLHealth's shareholders of their interest in another pharmacy; 
  • Payment of proceeds from a future sale of a property owned by a third party after paying off the initial investment of the investors who purchased the property;
  • Payment of net proceeds from the future sale of a second property; 
  • Payment of 50% of the pharmacy's net profits over the next five years; and 
  • In the event the defendant defaults on the settlement, the Government has options (1) to enter a consent judgment in the amount of $28 million, which includes treble damages; and (2) to exclude the pharmacy and its current or former owners, officers or directors during the covered conduct period from participating in all federal health care programs.
To obtain this ability to pay settlement, WELLHealth not only had to provide financials so that the Government could evaluate its ability to pay but also had to swear to and warrant the accuracy of its financial statements. Additionally, WELLHealth promised to provide yearly balance sheets for the business, so the Government could evaluate the pharmacy's net profit calculation.

From the perspective of FCA defendants, such ability to pay settlements as these are a combination of good news and bad news. Good news because such settlements permit longer repayment periods, the ability to sell properties in the future, and the ability to apply a portion of future profits to pay off settlement obligations. Bad news because the financial obligations and the disastrous exposure from a consent judgment resulting from a default extend years into the future. Notwithstanding the mixed message, such settlements show that the Government is sometimes willing to go outside its comfort zone of "this is the way we always do it" in order to secure an FCA settlement.

A. Brian Albritton
May 2, 2017

Wednesday, March 29, 2017

Fifth Circuit Applies Escobar’s “Demanding” Materiality Standard: Abbott v. BP Exploration and Production

The Fifth Circuit recently provided insight into how to apply the Supreme Court’s Escobar materiality standard in False Claims Act (FCA) cases based on a defendant’s alleged false certification of compliance with underlying regulations. Abbott v. BP Exploration and Production, Inc., 2017 WL 992506 (5th Cir. March 14, 2017).

BP, the defendant in Abbott, built and maintained the Atlantis Platform, a semi-submersible oil production facility in the Gulf of Mexico. The Relator worked for BP in Atlantis’s administrative offices. During his employment, Relator grew suspicious that BP had falsely certified compliance with certain safety regulations, and had, therefore, submitted false claims. Relator filed a qui tam complaint against BP and sought over $200 billion in FCA damages. The government declined to intervene.

Prompted by Relator’s FCA complaint, the U.S. Department of the Interior (DOI) launched an investigation into BP’s management of Atlantis. That investigation coincided with the high-profile explosion at BP’s Deepwater Horizon, a similar oil production facility, generating negative press and attention for BP. Nevertheless, the DOI's investigation cleared BP of any wrongdoing in connection with Atlantis, and its detailed report called Relator’s claims “unfounded” and “without merit.”

Despite the DOI’s findings, Relator persisted with his FCA lawsuit. Ultimately, in a scathing 10-page order, the District Court granted BP summary judgment on all counts, calling BP’s alleged errors “paperwork wrinkles,” which could not have influenced the government’s decision to pay. See U.S. ex rel. Abbott v. BP Exploration and Production, Inc.Case No. 4:09-CV-01193 (S.D. Tx. 8/21/14)(ECF 431).

In affirming the District Court's decision, the Fifth Circuit honed in on the materiality issue and the Supreme Court’s Universal Health Servs., Inc. v. Escobar, 136 S. Ct. 1989 (2016) decision. Focusing on the “demanding” materiality standard, the Court highlighted one of Escobar’s central points: a governmental designation of compliance as a condition of payment does not alone prove materiality. Instead, courts must consider evidence to determine whether the government's payment of a claim truly hinges on a contractor's regulatory compliance, such as whether the government paid the claim with knowledge of the regulatory violation. Escobar, the Court noted, "debunked the notion that a Governmental designation of compliance as a condition of payment by itself is sufficient to prove materiality."

Although the Government apparently did not know of BP's alleged regulatory violations when it paid BP’s claims, the DOI’s subsequent report suggested to the Fifth Circuit that compliance with the referenced regulations was not material to the government’s decision to pay. As the Court observed: "As recognized in Escobar, when the DOI decided to allow the Atlantis to continue drilling after a substantial investigation into Plaintiffs' allegations, that decision represents 'strong evidence' that the requirements in those regulations are not material." Having nothing to rebut these "strong facts," the Court affirmed summary judgment for BP.

FCA defendants can use Abbott to defend against allegations that they falsely certified compliance with Government regulations. To show that their alleged noncompliance was not material to the Government's decision to pay claims, a defendant could highlight any post-payment evidence suggesting that the Government would not have deemed the alleged regulatory violations material. For example, a defendant could cite to government audit reports that approved the payment on claims with the same alleged deficiency, or to post-payment correspondence establishing the government’s knowledge of the alleged regulatory issue. The facts and types of evidence will vary, but Abbott’s reliance on post-payment materiality evidence could apply broadly as courts continue to craft materiality case law in Escobar’s wake.

Author: Scott Terry
Editor: A. Brian Albritton

March 29, 2017 

Tuesday, December 20, 2016

Sixth Circuit Interprets 2009 Reverse False Claims Amended Provision: What Does It Mean to Knowingly Avoid Paying an Obligation to the United States?

Dear Readers:

I recommend to you the Sixth Circuit’s recent case addressing the application of the reverse-false-claim provision, 31 U.S.C. § 3729(a)(1)(G), of the False Claims Act: US ex rel. Harper v. Muskingum Watershed Conservancy District, --F.3d--, 2016 WL 6832974 (6th Cir. 2016).

According to Harper, prior to the 2009 amendment of the False Claims Act (“FCA”) by the Fraud Enforcement Recovery Act, the FCA’s reverse-false claim provision essentially imposed liability “only [on] those defendants who knowingly perpetrated a fraud against the government.” See 31 U.S.C. § 3729(a)(7)(2006) (“knowingly mak[e], us[e], or caus[e] to be made or use a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the government”). As a result of the 2009 amendment, the FCA omitted the requirement that a defendant make, use, or cause to be made or used, a false record or statement from the reverse-false-claims provision. Now, the reverse-false-claims provision provides for FCA liability against anyone who “knowingly conceals and knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government.” 31 U.S.C. § 3729(a)(1)(G). As there has been “little established case law” interpreting this amended provision, Harper provides an instructive and helpful analysis of the 2009 reverse-false-claim provision.
In Harper, the relators brought a qui tam against the Muskingum Watershed Conservancy District (“the District”) alleging, in part, that the District had violated the reverse-false-claims provision of the FCA. According to relators, the District violated deed restrictions on lands it had received from the federal government and, as a result, had an obligation to return the lands to the federal government and had failed to do so. The land grant from the federal government was subject to a proviso that the land revert and revest to the United States in the event that the District ceased using the lands for recreation,conservation, and reservoir development, or if the District alienated or attempted to alienate the lands. The District had negotiated easements with private firms permitting them the right to develop subsurface oil and gas reserves (i.e., conduct fracking) on these lands. Opposing the District’s plans to allow fracking, two relators brought a qui tam alleging that the District’s efforts to lease fracking rights represented an attempt to alienate the land that triggered the reverter clause in the deed. According to Relators, the District should have returned the lands to the federal government and was improperly in possession of them. The United States declined to intervene.

Observing that “none of our sister circuits” had applied the 2009 reverse-false-claims act provision, Harper explained that the provision’s “new scienter requirement . . . should be interpreted to apply to both the existence of a relevant obligation [to the government] and the defendant’s own avoidance of that obligation.” To show that “Smith knowingly avoided an obligation to the United States,” the Court instructed, means that “Smith knew he had an obligation to the United States and knew that he was avoiding it.” The Court went on “unless the circumstance of a case shows the defendant knows of or ‘acts in deliberate ignorance’ or ‘reckless disregard’ of, the fact that he is involved in conduct that violates the legal obligation to the United States, defendant cannot be held liable under the FCA.” Any other interpretation, Harper stated, “would make the FCA’s punitive damages and penalties interchangeable with remedies for ordinary breaches of contract or property law obligations.”
Affirming the District Court’s dismissal of the relators’ claim, Harper held that the relators failed to “state facts from which [the District’s] awareness of the alleged FCA violations may be inferred even under the more liberal pleadings standard set forth in Federal Rules of Civil Procedure 8(a). The relators had “not pleaded facts” showing that the District knew that its easements violated an obligation to the United States. The relators argued that “a defendant acts knowingly when [it] has notice of a legal obligation to the government, even if the defendant believes that the obligation does not apply under the circumstances.” The FCA, observed Harper, “is aimed at stopping fraud against the United States and does not create a ‘vehicle to police technical compliance with federal obligations.’” “[E]stablishing knowledge under FCA provisions that use knowledge as scienter requires plaintiffs to prove the defendant knows that he violated an obligation, not simply that he mistakenly interpreted a legal obligation.”

According to Harper, relators failed to meet their burden because neither their Complaint nor their proposed Amended Complaint showed how the District would have known that the fracking leases violated the deed restrictions or how the District acted in deliberate ignorance or reckless disregard of that fact. “In the absence of such facts,” the Court pointed out, “the relators failed to show anything more than a possibility that [the District] acted unlawfully.” “It is not enough,” stated Harper, “for the relators’ Complaint simply to infer the mere possibility of misconduct.” 

The Court acknowledged that relators had pled that the District knew about the deed restrictions, and that “such an inference would be consistent with the theoretical possibility that [the District] in fact believed that the restrictions forbade it from executing the oil and gas leases.” Yet, Rule 8’s plausibility standard, the Court noted, “asks for more than a sheer possibility that a defendant has acted unlawfully.” The relators’ claim, the Court explained, could only succeed “if the Court makes inference upon inferences to provide the facts missing from the Complaint.” Rule 8, however, “does not obligate the Court to engage in such speculation,” and as a result, the claim was properly dismissed.

Harper also sustained the District Court’s finding that the relators’ proposed amendment to correct these deficiencies was futile. In the face of the relators’ argument that they should have had another opportunity to cure the deficiencies pointed out by the District Court’s opinion, Harper noted that “relators are not entitled to an advisory opinion from the District Court informing them of the deficiencies of the Complaint and then an opportunity to cure those deficiencies.”

Overall, Harper is a very helpful case for defendants facing reverse-false-claim allegations. Essentially, the Court is saying that given the severity of the False Claims Act penalties and damages provisions, relators must show and plead that a defendant is not only aware of an obligation in the United States, but also that the defendant knows that it is violating that obligation. At least for a technical legal obligation, the Court will not infer that the defendant knew or was deliberately ignorant that its conduct violated a legal obligation to the federal government. Rather, a relator must plead some facts to show a defendant knows it is violating  such an obligation.

A. Brian Albritton
December 20, 2016

Wednesday, December 14, 2016

U.S. Department of Justice 2016 False Claims Act Statistics: Another Banner Year for DOJ and Back-to-Normal for Relators in Declined Cases

The Civil Division of the U.S. Department of Justice (DOJ) late today announced its False Claims Act recovery statistics and highlights for fiscal year 2016.  Here is DOJ's press release, its cumulative statistics for 1987 through 2016, and DOJ's "Fact Sheet" Memo summarizing and extolling the significant False Claims Act settlements and judgments of the Obama administration for 2009 - 2016.

2016 was another banner year for the False Claims Act enforcement:  the third best ever with $4.7 billion in total FCA settlements/judgments.  A few observations regarding the DOJ's 2016 statistics:

  • 2016 was DOJ's best year ever for recoveries in non-qui tam FCA cases, i.e. cases in which there was no relator and were direct-filed by DOJ.  In 2016, DOJ recovered $1.856 billion, more than double last year's recovery in DOJ initiated cases, and about10% better than its best previous year in 2014.
  • Relator settlements/judgments and relator awards in those FCA cases where the government declined to intervene were down dramatically from last year's "best ever" recovery.  In 2015, relators recovered $1.174 billion in government declined cases. By contrast, in 2016, relators recovered almost $105 million in declined qui tam, down 91%. In turn, relator share awards in declined cases fell from $336 million in 2015 to $28 millon in 2016, a 92% decrease.
  • In 2016 relator share awards for all cases, both intervened and declined cases combined, were down nearly 23%, from $667 million in 2015 to $519 million in 2016.
  • FCA "new matters" were up in 2016 for both DOJ direct filed cases and qui tams. Relators filed 702 new qui tams, up from 639 in 2015: almost a 10% increase. 
  • DOJ direct-filed claims rose from 110 in 2015 to 143 in 2016, almost 23%.  This was the third best year for direct-filed cases since 1997: DOJ filed 144 and 161 direct-file cases in 2012 and 2008 respectively.
  • Healthcare related FCA cases continue to lead the way in categories of FCA cases and recoveries: 
    • Out of the $4.7 billion total FCA settlements and judgments, $2.597 billion was attributable to health care related cases, almost 55%.
    • DOJ reports that 2016 is the 7th consecutive year that civil healthcare fraud recoveries exceeded $2 billion.
    • Of the 702 qui tams filed, 501 or 71% were healthcare related.  
    • Recoveries from health care qui tams account for $2.427 billion or 93% of the $2.597 billion in health care settlements/recoveries.
    • Relators were awarded $450 million in relator share awards in healthcare cases, up roughly 14% from the year before.
    • As outlined in DOJ's press release, a large portion of the overall healthcare related settlements came from a handful of big settlements: $784.6 million paid by Wyeth and Pfizer; $390 millon paid by Novartis; $244.2 million paid by Tenet Healthcare Corp., $260 million paid by Millennium Health; and $125 million paid by RehabCare Group/Kindred Healthcare.
  • Department of Defense (DOD) related FCA cases, both direct-filed and qui tams, continued their longtime trend downward. Relators filed 31 DOD related qui tams, the lowest number since since1989. Last year, DOJ set the record for the lowest number of direct-filed DOD related FCA cases: only 7 filed. This year, DOJ filed 8.
  • In FCA cases excluding health care and DOD, DOJ had its second best year of recoveries: $2.041 billion. The overall best year in this category was 2014 when DOJ recovered $3.3 billion.
    • The largest portion of recoveries in this category, $1.698 billion, is attributed to DOJ direct-file cases. Recoveries from qui tams, both intervened and declined cases, was $343 million --down nearly 64% from $936 million recovered from these qui tams in 2015.
    • FCA cases relating to housing and mortgage fraud accounted for $1.6 billion in recoveries, with two large settlements standing out: a $1.2 billion settlement with Wells Fargo and a $113 million settlement with Freedom Mortgage.
A. Brian Albritton
December 14, 2016