Wednesday, March 19, 2014

Limiting Discovery and Preventing Claim Smuggling in False Claims Act Cases

Dear Readers:

Joining the growing number of courts that limit or phase discovery in False Claims Act cases ("FCA"), the Southern District of Mississippi recently rejected attempts by the relators to obtain "unfettered discovery" so that they may search for new claims beyond the single claim for which they were an original source and on which they won at trial. See United States ex rel. Rigsby v. State Farm Fire and Casualty Co., 2014 WL 691500 (S.D. Miss., Feb. 21, 2014).

In Rigsby, two relators sued State Farm alleging that it engaged in a massive scheme to defraud the National Flood Insurance Program ("NFIP") in its administration of flood claims arising from Hurricane Katrina and they filed a list of 18 properties in which they asserted that State Farm had defrauded the NFIP. When initially considering case, the Court found that only one of the properties, the "McIntosh claim," was the sole "instance of State Farm's having submitted an allegedly false claim of which either relator had first hand knowledge." Having first hand knowledge of a single claim, the Court initially permitted the relators to obtain discovery about and proceed to trial on the McIntosh claim. The Court reserved ruling on whether to permit the relators to expand their suit and obtain additional discovery until after the trial of the McIntosh claim, stating it would "consider [then] whether additional discovery and further proceedings are warranted." The jury found that State Farm had presented a false claim for payment to the NFIP in connection with its processing of the McIntosh flood claim. Relators then asked the court to "initiate expanded discovery into claims on other properties insured by State Farm."

The Court refused to permit the relators additional discovery in order to expand their claims into areas where they did not have knowledge and when it was unclear whether other claims really existed. Relying on the 5th Circuit's decision in US ex rel. Grubbs v. Kanneganti, 565 F.3d 180 (5th Cir. 2009), the Court noted that satisfying Rule 9(b) with "sufficient detail" and defeating a motion to dismiss permits a relator access to the discovery process, but discovery should be "targeted" only to "the claims alleged, avoiding a search for new claims." Applying Grubbs, the Court observed: "Armed with knowledge of a purported scheme and evidence related to the single Mcintosh claim, Relators seek far-reaching, unfettered discovery in order to search for new claims beyond the Mcintosh claim, the only false claim which they have firsthand knowledge. Grubbs states that even if a complaint survives a Rule 9(b) challenge, discovery should be tailored to the claims alleged, so as to avoid a search for new claims. To allow expanded discovery in the fashion Relators seek would permit improper smuggling of additional claims beyond the single claim to which Relators have personal knowledge."

In short, the Court showed that simply satisfying Rule 9(b) as to one claim does not open the door for relators to go in search of other claims to which they do not have personal knowledge, even if they have broadly described a scheme to defraud for which they have only one example. Since "Relators have not pleaded sufficient details regarding any other claims to survive a Rule 9(b) challenge . . . . . discovery would necessarily be overly broad because the Amended Complaint lacks enough detail to permit the Court to craft reasonable discovery parameters."

A. Brian Albritton
March 19, 2014

Monday, March 3, 2014

The False Claims Act Is Not a Remedy for Technical Regulatory Violations

Dear Readers:

I recently came across another interesting example of a court refusing to permit the False Claims Act ("FCA") to be used as remedy for a technical regulatory violation that was unrelated to a claim for payment submitted to the government: US ex rel. Rostholder et al. v. Omnicare International, et al., (4th Cir., February 21, 2014).

In Omnicare, the 4th Circuit sustained the lower court's dismissal of False Claims Act claims due to the complaint's failure "to allege that the defendants made a false statement or acted with the necessary scienter." The Relator had alleged that the defendant, a drug manufacturer, violated a series of Food and Drug Administration ("FDA") safety regulations relating to the packaging of penicillin together with other drugs, the result of which caused the drugs to be "adulterated." Since federal law prohibits adulterated drugs from being sold in interstate commerce, Relator alleged that such mispacked drugs were no longer eligible for reimbursement by Medicare or Medicaid. For a drug to be eligible for reimbursement by Medicare and Medicaid, the FDA must have "approved [it]for safety and effectiveness" when it was submitted as a new drug.

Essentially, the Court found that the Relator did not state an FCA claim because complying with FDA safety regulations for a previously approved drug is not an express condition of reimbursement by Medicare or Medicaid. That is, defendants did not have to expressly certify compliance with the FDA in order to obtain payment for such a mispacked drug under Medicare and Medicaid. As a result, Relator was unable to identify "any false statement or other fraudulent misrepresentation that Omnicare made to the government," i.e., there was no "false claim" for payment under the FCA. The Court explained: "FCA liability based on a false certification to the government will lie only if compliance with the statues or regulations was a prerequisite to gaining a benefit, and the defendant affirmatively certified such compliance."

The Court observed that the FCA was not meant as a mechanism to promote "regulatory compliance," especially when in the case of the FDA, the government had established a "very remedial process" to enforce FDA regulations. The FDA's "significant remedial powers . . . buttresses our conclusion that Congress did not intend that the FCA be used as regulatory-compliance mechanism in the absence of a false statement or fraudulent conducted directed at the government."

Interestingly, the Court went further and found not only had the Relator not alleged a false statement or fraudulent conduct, but it also found as a matter of law that the Relator had not "plausibly" alleged that Omnicare knowingly submitted a false claim to the government. Since the Medicare and Medicaid statutes did not expressly prohibit reimbursement for "drugs packed in violation" of federal law, the Court essentially found that Omnicare could not have known that it was submitting a false claim.

While a welcome result, the Court made an easy call here. There is simply no connection between a claim for reimbursement under Medicare Part D and these technical FDA violations.

A. Brian Albritton
March 3, 2014

Wednesday, February 5, 2014

State Courts have Concurrent Jurisdiction Over False Claims Act Retaliation Claims

Perhaps everyone knows this, but I didn't: a relator may bring a False Claims Act (FCA) retaliation claim in state court.  

Recently, in Driscoll v. Superior Court of Madera County, 2014 WL 333411 (January 30, 2014, Cal. App. 5 Dist.), the Court addressed whether state courts have concurrent jurisdiction over FCA retaliation claims, 31 U.S.C. 3730(h), and the Court found that they do. Regardless of whether concurrent jurisdiction exists, you normally would not expect to see FCA retaliation claims in state court because you would expect a defendant to remove a FCA retaliation claim to federal court under federal question jurisdiction, 28 U.S.C 1331. In Driscoll, however, the defendant brought the FCA retaliation claim against the plaintiffs as a cross claim. The plaintiffs moved to dismiss the FCA retaliation claim brought against them on the grounds that the California state court did not have subject matter jurisdiction, and though they won in the trial court, the appellate court found that the state court had jurisdiction and could proceed with the defendant's FCA retaliation claim. In so ruling, the California 5th District Court of Appeals acknowledged that section 3730(h)(2) provides that "an action under this subsection may be brought in the appropriate district court of the United States" and that section 31 U.S.C. 3732(a) provides further that "Any action under section 3730 may be brought in any judicial district . . . " Yet, the Court noted that the FCA does not "contain an explicit statutory directive ousting state court jurisdiction" and the "FCA's jurisdiction provision does not mention state courts or their jurisdiction." Consequently, asserted the Court, "we presume state courts share concurrent jurisdiction over FCA claims." The Court explained further that in retaliation claims the federal government is not a party nor are such claims brought in the name of the United States. Rather, "retaliation claims are personal to the individual."

Another FCA fun fact.

A. Brian Albritton
February 5, 2014

Monday, January 6, 2014

DOJ Announces $3.8 Billion in False Claim Act Recoveries for FY 2013

The US Department of Justice recently announced another historic year in FY 2013 for False Claims Act (FCA) recoveries and judgments: a total of $3.8 billion, falling short of 2012's nearly $5 billion in FCA recoveries. Among the highlights featured in the DOJ's press release are:
  • Heath care fraud continued to constitute the largest portion of FCA recoveries: $2.6 billion, not including $443 million in recoveries by state Medicaid programs.
  • Of the $2.6 billion in health care related fraud recoveries, $1.8 billion resulted from claims relating to drug and medical devices. 
    • Abbott Labs alone paid $1.5 billion to resolve allegations that it illegally promoted the drug Depakote. $575 million of that amount related to FCA claims.
    • Amgen paid $762 million to settle allegations that it illegally promoted the drug Aranesp. $598.5 million of that related to FCA claims.
  • Procurement fraud, relating primarily to defense contracts, accounted for $890 million recovered.
    • The largest component of the procurement fraud recoveries arose from the $664 million judgment that USDOJ obtained against United Technologies Corp. "based on allegations of false claims and corruption involving government contracts."
  • Qui tam suits "soared" to 752, an increase of 100 from FY 2012, and 74% increase over 2009, when 433 qui tam suits were filed.
  • Of the total $3.8 billion in FCA recoveries, $2.9 billion or 76% arose from qui tam filings, and of that amount, Relators or what the DOJ refers to as "courageous individuals who exposed fraud" recovered $345 million.
  • Last year also saw one of the largest FCA recoveries against a single individual/physician: $26.3 million against a dermatologist, Steven J. Wasserman, M.D., relating to illegal kickbacks.
A. Brian Albritton
January 6, 2014

Wednesday, January 1, 2014

False Claims Act and Excessive Fines Clause: 4th Circuit Upholds Relator's Decision to Accept Smaller Judgment to Avoid Unconstitutional Result

Just recently, the U.S. Circuit Court of Appeals for the Fourth Circuit addressed whether the penalties assessed against a defendant under the False Claims Act ("FCA") can ever violate the 8th Amendment's protection against "excessive fines" in the appeal, United States ex rel Kurt Bunk & Daniel Heuser v. Birkart Globistics GmbH & Co et al., Case No. 12-1369 (4th Cir. 12/19/2013), a case about which I previously blogged. The 4th Circuit overturned the District Court's decision which had  found the $50 million in penalties to be an excessive fine in light of the government's lack of damages. Essentially, the 4th Circuit avoided the constitutional issue by agreeing to the Relator's offer to accept $24 million in penalties in lieu of the entire $50 million that the District Court believed the FCA required to be imposed on the defendant. A few observations about the decision:
  • This FCA case concerned defendant contractors who moved the furnishings of U.S. military service personnel overseas to Europe and whether they colluded with subcontractors, resulting in the defendants charging inflated moving prices to the military. The Court began its opinion by observing, "An army may march on its stomach, but when a fighting force is deployed to a foreign front, familiar furnishings also serve to fuel the foray." These personnel whose goods were being transported were going to "encamp" in Europe. Once the Court characterizes these military personnel as "fighting forces deployed to a foreign front," you know for certain that the defendants will be losing and the court will fudge the constitutional issue.
  • One of the Relators, Bunk, who actually prevailed in this action never pled or proved any monetary damages caused by the defendants. The defendants sought to challenge Bunk's standing to bring this action in the absence of any damages, but the 4th Circuit found Bunk had standing.
  • Other settling defendants had already paid the government $14 million, which the District Court found "was far in excess of the presumptive damages" which were $895,000. The defendant had already paid that as restitution in a parallel criminal case.
  • The 4th Circuit affirmed that penalties were to be imposed on the basis of the false certifications contained in a defendant's claims for payments submitted to the government and that each certification qualified as a false claim giving rise to a penalty. Unfortunately for this defendant, there were 9,136 false claims or bills, and that amount multiplied by the minimal $5,500 penalty came to just shy of $50 million.
  • The Court acknowledged that the "perceived tension between the FCA and the Excessive Fines Clause of the 8th Amendment . . . is a monster of our own creation." To its credit, the Court candidly stated that "the FCA as enacted could arguably have been construed as authorizing a total civil penalty not to exceed $11,000." But, the Court observed further that it was following precedent -- bereft of any "our hands are tied" complaints -- in concluding that "FCA liability . . . attaches to the claim for payment."
  • The Court avoided a finding that the $50 million in penalties qualified as an excessive fine because the Relator agreed to accept only $24 million. The Relator's "voluntary remittitur," the Court observed, was "just the sort of arrow that a plaintiff is presumed to possess within his quiver" and that a plaintiff's discretion to take a "lesser judgment . . . is virtually unbounded." Here again, the Court relied on a prior FCA case, U.S. v. Mackby, 339 F.3d 1013 (9th Cir. 2003), in permitting this remittitur.
  • Essentially, the Court states that a District Court "must permit the government or its assignee [the Relator] the freedom to navigate its FCA claims through the uncertain waters of the Eighth Amendment."
  • As for the $24 million, the Court upheld the constitutionality of that amount by apparently disregarding the lack of evidence of any harm and finding that the "notion [that the government suffered no injury] seemingly inconsistent with [defendant's] apparent profit motive in making the statements at issue." The Court went on that "there is no doubt" -- even though the Court cites no evidence otherwise -- that "the government has suffered significant opportunity costs from being deprived of the use of those funds for more than a decade."  
  • Finally, as mentioned above, the $24 million was not viewed as violating the Excessive Fines clause because it was not "grossly disproportionate" to the crime against the military. "The prevalence of defense contractor scams . . . shakes the public's faith in the government's competence and may encourage others similarly situated to act in a like fashion."
In short, given that the victim was the military, there was no way the Court was going find the FCA's penalties to be unconstitutional or use this decision as a vehicle to curb the FCA's excesses. Moreover, there is just something vaguely unsettling about hinging a court's determination of this statute's constitutionality not on its application and consequences, but on what the government and Relator will accept.

A. Brian Albritton
January 1, 2014

Tuesday, December 17, 2013

Refusing to Extend the Seal: Court Refuses Requests to Extend Seal of Qui Tams for Informal Discovery or Settlement Negotiations

Section 3730(2), Title 31, of the False Claims Act ("FCA") provides that when a qui tam relator files an FCA complaint under seal, the case may remain under seal for "at least 60 days" while the government investigates and decides on whether or not to intervene. It is the rare case that remains under seal only 60 days, however, and in some cases, the government keeps the qui tam under seal for years, even over the objection of the relator. For example, one case in the Middle District of Florida, the Wasserman case, was filed under seal in 2004, but the government did not unseal it until 2010.

Ben Vernia at False Claims Counsel blog recently wrote about one federal district court judge in South Carolina who has given notice that the court will no longer agree to these automatic extensions of the seal for qui tams. In a recent "standing order," U.S. District Court Judge Joseph Anderson, Jr. observed that in "recent years, this court has extended the seal period, at the request of the government, on eight occasions in two actions," only to be informed by the government after all that time that it was not going to intervene in those cases.

Judge Anderson noted that the 4th Circuit observed that there are four reasons why Congress adopted the sixty-day seal period: "(1) to permit the United States to determine whether it already was investigating the fraud allegations (either criminally or civilly); (2) to permit the United States to investigate the allegations to decide whether to intervene; (3) to prevent an alleged fraudster from being tipped off about an investigation; and, (4) to protect the reputation of a defendant in that the defendant is named in a fraud action brought in the name of the United States, but the United States has not yet decided whether to intervene." Am. Civil Liberties Union v. Holder, 673 F.3d 245, 250 (4th Cir. 2011). Judge Anderson, however, noted that "none of the foregoing reasons for extending the seal period involve discovery of documents from the putative defendant or settlement negotiations." In turn, the Court observed further that the FCA's legislative history provides that "with the vast majority of cases, 60 days is an adequate amount of time to allow Government coordination, review and decision."

In light of these considerations, Judge Anderson stated that in deciding whether "good cause" exists to continue the seal after 60 days, "henceforth, the court will no longer consider informal discovery and/or settlement negotiations as sufficient grounds for extending the seal period."

If widely adopted, Judge Anderson's position would radically change FCA practice both for relators and qui tam defendants.

A. Brian Albritton
December 16, 2013

Monday, December 16, 2013

Employment Arbitration Rulings, Qui Tam Retaliation Claims, and Collateral Estoppel

I recently came across an interesting case that further illustrates the perils to False Claim Act relators who split their employment and FCA retaliation claims. In the unpublished case of Kalyanaram v. New York Institute of Technology, 2013 WL 6482578 (2nd Cir., December 11, 2013), the Court dismissed the relator's retaliation claim against his employer on the grounds that it was barred by the doctrine of collateral estoppel. Collateral estoppel is the common law rule that prevents a party from re-litigating an issue or fact that has previously been decided, even if that issue or fact was decided in a different case, as long as there was "full and fair opportunity" to litigate the issue in the prior proceeding.  

In Kalyanaram, the relator's employer, a technical school, fired the relator, a teacher, on the grounds that he was engaging in professional misconduct. The relator contested his firing in an arbitration proceeding pursuant to a collective bargaining agreement. While that case was pending, the relator also filed a qui tam against his employer alleging that the school submitted false financial aid information so that its students would get federal and state financial aid and that the school retaliated against him for complaining about it.

The relator argued in his employment arbitration that the school retaliated against him for his complaints about the school's alleged deceptive and fraudulent practices. The relator, however, did not allege in the arbitration that the school retaliated against him because he had been either a qui tam whistleblower or had filed a False Claims Act suit. The arbitrator rejected his retaliation claims, such as they were, and found that the relator had engaged in professional misconduct by authoring pseudonymous emails "in order to convey unsubstantiated and potentially scurrilous innuendos and accusations to the detriment" of his employer. When the federal court that was hearing the relator's qui tam heard about the relator's adverse arbitration decision, the Court on its own motion ordered briefing on whether the relator's retaliation claim was barred by collateral estoppel and ultimately dismissed the retaliation claim on that ground.

The Second Circuit upheld the District Court's dismissal of the relator's retaliation claim. The Court observed that "collateral estoppel turns not on whether a prior adjudication found that an employer had a reasonable basis to discipline an employee, but on whether an employee raised a claim that behind the veil of reasonableness lay an impermissible motivating factor." Though the relator did not ever raise that he had filed a qui tam suit in the arbitration, given the relator's complaints about retaliation in that forum, the Court found that the arbitrator "actually and necessarily decided . . . that [the school] had not disciplined [the relator] in retaliation for his critiques of the school's fraudulent practices." Stated more simply, once the arbitrator found that there was a legitimate basis for discharging the relator and that the employer's reason for firing the relator was not a pretext for some other impermissible reason, that arbitration decision served to estopp and prevent the relator from claiming in the qui tam proceeding that he had been retaliated against by his employer for a different reason.

The relator complained in his appeal that he "never had a full and fair opportunity to present a compete picture of his whistleblower activities," but the Court found "he had only himself to blame." Essentially, the relator chose not to tell his arbitrator about the qui tam, even though the federal court permitted him to reveal it to the arbitrator and to "respond to any questions" about in it in that proceeding.

Of course, this case also appears as an application of that sometime informal rule of procedure known as the "bad man rule." That informal rule of procedure is normally found only in criminal cases, and frequently appears as the "real reason" for many otherwise unexplained court rulings. Though it did not explicitly reference the bad man rule, the Second Circuit did observe that the relator "repeatedly lied under oath," "presented an elaborate, fabricated defense," and "clung to this strategy through almost a year." In short, he was a "very bad man" who lied to the arbitrator and the Court and got what he deserved.

A. Brian Albritton
December 16, 2013

Wednesday, December 4, 2013

Stark Law Violations and the False Claims Act: US ex rel Baklid-Kunz v. Halifax Hospital Medical Center

In the ongoing qui tam case, US ex rel Baklid-Kunz v. Halifax Hospital Medical Center, case no. 6:09-cv-1002-Orl-31 (M.D. Fla.), which I have previously featured, the Court recently granted the Government's Motion for Partial Summary Judgment and found that the hospital's compensation arrangement with several oncologists that it employed violated the Stark Law. As there was a "factual issue" regarding whether the Hospital "knowingly" submitted claims for payment from Medicare or Medicaid arising from these Stark violations, the Court did not find --yet-- that the Hospital violated the False Claims Act. False Claims Act liability based on these Stark Law violations, however, remains a real possibility: if the Court or jury later determines that Halifax "knowingly" submitted claims for payment arising from Stark violations, then it could be subject to hundreds of millions of dollars in treble damages and penalties arising under the False Claims Act.

Halifax Hospital and a recent ruling in another Middle District of Florida case, US ex rel Schubert v. All Children's Health System, Inc., case no. 8:11-cv-01687-T-27, involving a Stark Law violation serving as the basis for a False Claims Act violation, demonstrate the incredible breath of the Stark Law, how easy it can be for hospitals to run afoul of it in compensating physicians, the incredible damage exposure to hospitals, and why such claims are especially attractive to relators seeking to bring False Claims Act cases. For example, the relator in Halifax Hospital is reported to be the hospital's former compliance officer.

The Stark Law, 42 USC 1395nn(a), prohibits physicians from referring Medicare/Medicaid patients to a whole host of business entities or "services," including hospitals, clinical labs, durable medical equipment providers, in which the physician or an immediate family member has a financial interest. In turn, hospitals are prohibited from submitting any claim for payment to Medicare or Medicaid that were furnished as a result of a prohibited referral. For example, if a physician has a "financial relationship" with a hospital that violates Stark and refers Medicare patients to the hospital, the hospital may not bill for any services rendered arising from that referral, regardless of whether the patient needed those services, was otherwise entitled to them, or what the services cost. Now, the reference to "financial relationship" does not refer only to some kind of under the table payment or kickback. Rather, the statute interprets "financial relationship" broadly to include "any arrangement involving remuneration between a physician (or an immediate family member of such physician) and an entity" and includes "any remuneration, directly or indirectly, overtly or covertly, in cash or in kind." 42 USC 1395nn(h)(1)(B).

According to the Court, Halifax Hospital ran afoul of Stark Law by employing six oncologists at the hospital for five years and paying them an "incentive bonus" which turned out to violate Stark Law. The Stark Law permits hospitals and other entities to employ physicians and others who might refer Medicare patients to them provided that a "bona fide employment relationship" exists. Whether an employment relationship is bona fide or not depends in large part on whether the entity, such as a hospital, pays the physician "consistent with the fair market value of the services," without regard to the "volume or value of any referrals made by the physicians, as reflected in a "commercially reasonable agreement." 42 USC 1395nn(e)(2). Basically, Halifax Hospital's incentive bonus for its oncologists turned out to be too generous and thus did not satisfy the bona fide employment exception. As a result, Halifax Hospital was prohibited by Stark from submitting Medicare claims for its services that were furnished pursuant to referrals from these ineligible oncologists employed by the hospital.

As a result of Halifax's violations, the Government sought reimbursement of $27,102,000 in Medicare payments generated as a result of these improper referrals. The Hospital did not have any way of lowering this damage figure. By that, I mean the Hospital cannot claim that the referrals were really warranted regardless of the improper bonus; that the bonus payment was immaterial to whether the referral for services was appropriately made; that services were really provided or needed; or that damages were the difference in value between normal referrals that comply with Stark and referrals allegedly made as a result of Stark violations. No, the result is particularly harsh because the services provided were simply not eligible for payment based solely on the ineligible referral source.

The Court found that Stark Law violations can give rise to False Claim Act liability if a hospital or other provider who accepted the illegal referral "falsely certified compliance with the Stark Law" in connection with submitting a claim to a federally funded insurance program such as Medicare. If, as the Government contends in Halifax Hospital, the Hospital is found to have violated the False Claims Act by submitting claims for payment arising from Stark Law violations, then the $27 million damage will be trebled and the hospital would additionally be subject to fines of $5,500 to $11,000 for each separate billing or claim submitted to Medicare. Damages could easily exceed $100 million. One press report stated that the Government was seeking damages in excess of $750 million. 

A. Brian Albritton
December 4, 2013

Sunday, November 17, 2013

Court Affirms Dismissal of Qui Tam and Disqualification of Relators' Counsel Due to Relator's Violation of Attorney Ethics Rule

The Second Circuit Court of Appeals has upheld a dismissal of a qui tam suit against Quest Diagnostics that was filed by three relators, one of which was the defendant's former general counsel. Fair Lab. Practices Assocs. v. Quest Diagnostics Inc., 2d Cir., No. 11-1565-cv, 10/25/13. Joan Rodgers of the ABA/BNA Lawyer's Manual on Professional Conduct recently wrote an article about the Court's opinion: Company’s Former General Counsel Ruined Qui Tam Action by Telling Ex-Client’s Secrets. I commend it to you.

Essentially, the Court affirmed the District Court's dismissal of the qui tam based on a court's "inherent power" to manage its own affairs. Specifically, the Court ruled that the False Claims Act does not preempt state ethical rules governing the practice of law. In that instance, the Court found that the relator and defendant's former counsel had violated New York Rule 1.9(c) which prohibits a lawyer from revealing the confidences of a client or using the confidences or secrets of a client to the disadvantage of a client -- a rule similar to that found in most state bar rules. The Court found that the relator had used and revealed confidential information which he had obtained in his capacity as counsel for the defendant. As a result, the Court affirmed the District Court's remedy of not only dismissing the qui tam suit, but also disqualifying the other relators and their counsel who together with Quest's former counsel had brought the qui tam.

What is in unusual about this case is that a court, based on its "inherent powers," dismissed a case based on a relator's violation of law, i.e., a rule governing the practice of law, as opposed to a violation of the False Claims Act's procedures. The Court presents its decision as just a balancing test of "varying federal interests" in deciding on whether to apply the state bar rule and affirm the matter's dismissal. That too is unusual because defendants in qui tam cases frequently allege that the relator has violated the law in bringing a qui tam claim. Indeed, relators are commonly accused of stealing records, of participating in the fraud on which they base their qui tam, and in some instances, of even perpetrating or being the mastermind of the fraud in which they accuse a corporate defendant of engaging. Such misconduct by the relator, however, normally only serves as a basis to reduce a qui tam award. See 31 USC 3730(d)(3)("if the court finds that the action was brought by a person who planned and initiated the violation . . . upon which the action was brought, then the court may . . . reduce the share of the proceeds of the action which the person would otherwise receive"). Indeed, the False Claims Act only bars a relator from bringing a qui tam or receiving a recovery if the relator is convicted of the criminal conduct relating to the claim brought in the relator's complaint. See 31 USC 3730(d)(3); see also Order Dismissing Relator in USA ex rel Schroeder v. CH2M Hill et al, E.D. WA., No. CV-09-5038-LRS. In short, the Second Circuit does not really explain why this violation of law concerning a lawyer's duty not to disclose client confidences warrants dismissal of a qui tam when compared with other violations of law by relators.

A. Brian Albritton
November 17, 2013

Sunday, November 10, 2013

Qui Tam Relators Objecting to Government Ability to Pay Settlements in False Claims Act Cases

Relators are increasingly objecting to "ability to pay" settlements negotiated by the government with defendants in qui tam cases, and in so doing, accuse the government of treating them unfairly and of sending a message of lax False Claims Act enforcement.  In an "ability to pay" settlement, the government permits the defendant to pay less than the amount of the False Claims Act loss due to the defendant's lack of financial resources. The False Claims Act provides for treble damages and a penalty of between $5,500 to $11,000 for each false claim. In many such cases, False Claim Act damages are nothing short of ruinous and can easily bankrupt a defendant. See e.g., Crowell and Moring table listing FCA settlements for 2000 - 2013.

In the Wellcare case, for example, a relator's counsel described the $137.5 million dollar qui tam civil settlement that was based on the company's limited ability to pay as "grossly inadequate," and claimed that his call for increased damages was only intended to "deter any effort by companies such as Wellcare to take advantage of the health care system or the people who should be served by this system."

Another recent case illustrates how bitter the relationship between relators and the government can become when the government settles for less than what relators believe they deserve. In United States ex rel Stone v. Hospice of the Comforter, 6:11-Cv-1498-Orl-22DAB, M.D. Fla., the government recently settled a case on ability to pay grounds over the objection of the relator. In that case, the government settled with the defendant for $3 million payable over five years and required that the defendant be subject to a Corporate Integrity Agreement. Payments accelerated in the event the company was sold. See settlement agreement, relator's objections, the government's brief.

The relator refused to sign the settlement agreement which he described as a "travesty." In his objections, the relator complained bitterly that damages caused by the defendant exceeded $30 million, that the government was "shoving" the defendant through a "loophole," and that the defendant was attempting to "pull the wool over everyone's eyes." "The proposed settlement," the relator argued, "will result in champagne corks popping" at the defendant's "receiving a 15% slap on the wrist amortized luxuriously over 5 years."

Relators have some recourse to the court when they object to the government's settlement of a qui tam that they filed. The False Claims Act provides that the government may settle an action with the defendant over the relator's objections "if the court determines, after a hearing, that the proposed settlement is fair, adequate, and reasonable under all the circumstances." 31 U.S.C. 3730(c)(2)(B). The circuit courts, however, have not passed on the standard to be applied to determine whether a settlement of a False Claims Act qui tam case is fair, adequate, and reasonable. As the District Court observed in Hospice of the Comforter, only a handful of district courts have addressed the question on the standard to be used, and they "are aligned on opposite sides of a fault line over whether the government is entitled to any deference when it intervenes in a False Claims action and reached a settlement with the defendant." The Court explained that the "majority of courts seem to afford the government little, if any, deference" because they apply the standard used in evaluating and approving class action settlements. See Federal Rule of civil Procedure 23(e).  

Contrary to the class action standard, the government in Hospice of the Comforter argued that the Court should apply a "highly deferential standard" whereby the government's settlement will be affirmed as long as it can "articulate a legitimate government purpose that is rationally related to the proposed settlement." The government contended further that "standards governing class actions  . . . are inapplicable to qui tam actions. In class action litigation, the named plaintiff represents the interests of absent class members who have independent claims against the defendant. In FCA qui tam litigation, the relators has suffered no independent harm [and] . . . . . is merely advancing a claim on behalf of the United States for harm to the United States."  

In the end, the District Court in Hospice of the Comforter did not adopt a standard, but overruled the relator's objections on the grounds that that the settlement satisfied both standards. See Court's Order Overruling Objections.

It is said that the government loves its relators, and the relationship between them becomes quite close when an investigation commences as a result of a qui tam filing and the government intervenes. Yet, when the government settles a case on the basis of the defendant's ability to pay, the relator-government relationship often sours and relators may come to accuse the government of selling out and sending defendants the "wrong signal." With a bit of editorial license, it appears that William Congreve's maxim applies here: "Heav'n hath no rage like love to hatred turn'd, Nor Hell a fury, like a [relator] scorn'd." 

November 11, 2013
A. Brian Albritton