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

Tuesday, December 6, 2016

Supreme Court Finds That Courts Have Discretion to Fashion Remedy for Violations of False Claims Act Seal Provision: State Farm Fire & Casualty Co. v. U.S. ex rel. Rigsby

Dear Readers:

The Supreme Court today handed down its unanimous decision in State Farm Fire & Casualty Co. v. U.S. ex rel Rigsby et al, and affirmed the 5th Circuit's ruling that a relator's violation of the False Claims Act's "seal" provision, 33 U.S.C. § 3730(b)(2), does not require dismissal of the relator's qui tam complaint. I assume this ruling was widely anticipated since, as the Court pointed out, there is nothing in the False Claims Act's "text and structure" that requires dismissal of a relator's qui tam in the event a relator violates the seal. As to what sanction, including dismissal, may be appropriate for a violation of the seal, the Supreme Court left that to the "sound discretion of the district court." 

For those seeking further details about the Rigsby decision, I commend to you Ronald Mann's analysis of the Court's opinion found on SCOTUSblog: Opinion analysis: Justices reject automatic dismissal for seal violations in False Claims Act cases.

A. Brian Albritton

December 6, 2016

Thursday, December 1, 2016

Fifth Circuit Refuses to Take the “One Purpose” Test of the Anti-Kickback Statute to Its Logical Extreme: United States ex rel Ruscher v. Omnicare, Inc.

Dear Readers:

As you have probably experienced, False Claims Act (“FCA”) cases based on alleged violations of the Anti-Kickback Statute, 42 U.S.C. § 1320a-7b(b), have risen sharply in the last few years. Simply stated, the Anti-Kickback Statute (“AKS”) makes it a crime to knowingly and willfully offer, pay, solicit, or receive any remuneration directly or indirectly to induce or reward referrals of items or services reimbursable by a Federal health care program, such as Medicare or Medicaid. The AKS has been broadly enforced primarily, in my view, due to the application of the “one purpose” test: that is, to prove that a contract or transaction between health care providers violates the AKS, a relator or the government need only show that “one purpose” of the remuneration involved in the transaction was for the purpose of inducing referrals. See Robert G. Homchick, “Federal Anti-Kickback Statute Primer.” Not surprisingly with a lower standard of proof to prove a “false claim,” enforcement of the AKS through the False Claims Act has expanded its reach into areas that would have been unthinkable years ago when most of the AKS enforcement was on the criminal side. In fact, one commercial blog claims that “Anti-Kickback Statute violations — as well as violations of the Stark Law — now make up most False Claims Act cases.” Becker’s Hospital Review, “20 things to know about the Anti-Kickback Statute,” September 5, 2014.

Amidst these ever growing AKS cases, I came across a remarkable case, United States ex rel Ruscher v. Omnicare, Inc., et al., 2016 WL 6407128, __ Fed. Appx.__ (5th Cir., 10/28/2016), that applied a common sense analysis to this “one purpose” test and refused to extend it to a logical extreme.  Ruscher refused to find an AKS violation simply because one of the parties to a contract designed to provide legitimate pharmacy services “merely hoped” or expected referrals as a benefit or by-product of that contract. 

Here are some of the key facts: Defendant Omnicare provided pharmacy services to skilled nursing facilities (“SNFs”) and their residents. Omnicare routinely entered into Preferred Provided Agreements with the SNFs, which designated Omnicare as the SNFs’ preferred provider of pharmacy services and set forth, among other things, pricing, payment terms, and billing mechanisms. These SNFs provided medical, nursing, and therapy services to residents who usually had their pharmacy drug costs reimbursed by Medicare Part A, Medicare Part D, or Medicaid. Part A benefits last for 100 days. When providing pharmacy benefits to residents covered by Part A, Omnicare billed the SNF for prescription costs. Medicate, in turn paid the SNFs a per diem amount for each Part A resident’s care, including pharmacy services. After a resident’s Part A benefits expired, any pharmacy services provided to residents by Omnicare were reimbursed by the patient’s Medicare Part D and/or Medicaid coverage. 

Omnicare’s billing and collections from these SNFs sometimes resulted in some confusion as to whether Omnicare had properly billed and been paid for the services it provided. This confusion gave rise to billing disputes with the SNFs that sometimes took years to resolve.  The relator in Ruscher worked in Omnicare’s Collections Department for a time, collecting past-due accounts from SNFs. She became suspicious of Omnicare’s contract negotiations with these SNF clients over past due accounts receivables, and as a result, filed a False Claims Act qui tam against Omnicare and several other defendants in the Southern District of Texas. Among other things, the relator alleged that Omnicare violated the FCA by purportedly making and causing SNFs to make false claims on the SNFs’ cost reports for Medicare and Medicaid reimbursement that allegedly resulted from kickbacks in violation of the AKS. After pending for several years, the Court granted summary judgment in favor of Omnicare, and the Fifth Circuit affirmed that summary judgment. Among other things, the relator primarily contended that Omnicare paid unlawful kickbacks to the SNFs both by not collecting Part A debt that was allegedly owed it and by offering prompt-payment discounts to induce the SNFs to refer patients to Omnicare who were covered under Medicare Part D and Medicaid. Stated simply, the relator alleged that Omnicare was not collecting all that it was due from the SNFs or offering the SNFs favorable payment terms so that the SNFs in turn would have a favorable opinion of Omnicare, continue to contract with it, and continue to refer the SNF residents whose pharmacy services were reimbursed by Medicare Part D and Medicaid.

The Fifth Circuit acknowledged that the AKS “criminalizes the payment of any funds or benefits designed to encourage an individual to refer another party to a Medicare provider for services to be paid for by the Medicare program" and that the relator needed to only show that “one purpose of the remuneration was to induce such referrals.” Yet, the Court found the Omnicare did not violate the AKS: “there is no AKS violation . . . where the defendant merely hopes or expects referrals from benefits that were designed wholly for other purposes.” Among the reasons cited by Ruscher to support its finding were:

  • OIG – HHS had previously stated that prompt payment discounts were not included among the designated HHS “Safe Harbors” because “by definition, preferred payment discounts are designed to induce prompt payment and thus do not appear to violate” the AKS.
  • Relator’s evidence primarily showed Omnicare was trying to collect verifiable debt and settle billing disputes without unnecessarily aggravating its SNF clients in the midst of ongoing or anticipated contract negotiations.
  • At best, the evidence showed that Omnicare did not want unresolved settlement negotiations to negatively impact its contract negotiations with SNF clients and was avoiding confrontational collection practices that might discourage SNFs from continuing to do business with Omnicare.
  • None of the evidence showed that Omnicare designed its settlement negotiations and debt collection practices to induce SNF clients to continue making Medicare and Medicaid referrals to Omnicare.
  • SNFs were not told they were getting special benefits from Omnicare settlement negotiations and debt collection practices let alone that any such benefits were tied to Medicare and Medicaid referrals.  The Court noted that “if purported benefits were designed to encourage SNFs to refer Medicare and Medicaid patients, one might expect to find evidence showing that the SNFs at least knew about those benefits.”
  • While Omnicare “may have hoped for Medicare and Medicaid referrals, absent any evidence that Omnicare designed its settlement negotiations and debt collection practices to induce such referrals, relator cannot show an AKS violation.”
  • Omnicare’s prompt payment discount offers to SNFs did not violate the AKS because there was no evidence they were designed to induce referrals.  The relator showing that they were offered in contract negotiations and included in new contracts was not enough in and of itself to show an illegitimate motive for the purpose of inducing referrals rather than the legitimate purpose of inducing payments.  

In short, the Court found that Omnicare’s legitimate billing and collections practices with its SNF clients did not run afoul of the AKS simply because a byproduct of its contracts and its collections practices was to promote continued good will with the SNFs and, in turn, their referrals. The Court distinguished such an agreement from other agreements that are designed, at least in part, to induce referrals. 

Perhaps the most remarkable result is that the 5th Circuit affirmed summary judgment for Omnicare and did not find this question of Omnicare’s motive or intent to be a jury question. In affirming summary judgment, the Ruscher Court relied on a criminal case, U.S. v. McClatchey, 217 F.3d 823, 834 (10th Cir. 2000), which addressed the AKS in the context of ruling on a jury instruction. According to McClatchey, determinations as to a defendant’s motive in AKS cases are jury determinations. In a footnote, the Court observed that “it may be difficult for a jury to distinguish between a motivating factor and a collateral hope or expectation. Making such difficult determinations, however, is the very role to which our system of justice assigns to the finder of fact.”  

Unfortunately, the 5th Circuit decided not to publish Ruscher. Nor did the Court provide any guidance as to how better to distinguish between agreements for which one purpose is the inducement of referrals and legitimate agreements wherein one of the parties hopes that referrals result from the agreement.  Nevertheless, it is a good first step, and hopefully one that other courts will expand upon and bring some common sense limitations to the application of the AKS. 

A. Brian Albritton
December 1, 2016 

Monday, August 22, 2016

The Eleventh Circuit Reminds Us Again That It Meant What It Said in Clausen: Margaret Jallali v. Sun Healthcare Group.

Dear Readers:

Defense practitioners in the Eleventh Circuit should take a look at the Circuit's recent unpublished opinion which reaffirmed the Circuit's "binding precedent" that "each element of an False Claims Act (FCA) claim must meet the pleading standard of Rule 9(b)"; Margaret Jallali v. Sun Healthcare Group, et al., 2016 WL 3564248 (11th Cir. July 1, 2016). Only three pages long, Jallali affirmed the lengthy decision by Southern District of Florida Judge Kathleen Williams --the author of U.S. ex rel Keeler v. Eisai-- who dismissed the Relator's FCA claims due to her failure to satisfy Rule 9(b): U.S. ex rel Jallali v. Sun Healthcare Group, et al., 2015 WL 10687577 (S.D. Fla. 9/17/2015). Judge Williams' opinion is definitely worth the read as well. 

To fully appreciate Jallali's holding that a relator must satisfy Rule 9(b)'s requirement to plead with particularity as to each element of his or her FCA claim, the reader should review Judge Williams' dismissalAs described in District Court's opinion, the Relator focused primarily on the defendants' "allegedly deceptive record keeping, alteration of charts, and falsified physician approvals." Apparently, the Relator provided a lot of detail about the defendants' allegedly fraudulent scheme both in her complaint and at a hearing the District Court held on the motion to dismiss. 

Notwithstanding detailed allegations of the defendants' fraud, Judge Williams observed that "Relator appears to conflate the internal processes of maintaining patient records with the separate act of billing the government." It is not enough, the Court explained, for Relator to describe a false scheme allegedly committed by the defendants. As "recognized" by the Eleventh Circuit in Corsello v. Lincare, Inc. 428 F.3d 1008, 1014 (11th Cir. 2005), Judge Williams pointed out that "a relator's pleading is insufficient if he 'provided the who, what, where, when, and how of improper practices, but he failed to allege the who, what, where, when, and how of fraudulent submissions to the government.'" In short, Rule 9(b) required the Relator to "link" the fraudulent activities she alleged "to claims submitted" by the defendants or to "specific facts of who, what, where, when, and how the claims were submitted."

  • Each element of an FCA clam must meet Rule 9(b);
  • The Court "disregard[s] conclusory statements regarding a defendant's allegedly fraudulent submissions to the Government and require[d] a factual basis for the conclusory statement";
  • The Court would not accept Relator's claim of personal knowledge of billing fraud when Relator only alleged she had "a reliable indication that claims were fraudulently submitted to Medicare for payment";
  • The Relator failed to allege the "who, what, where, when, and how" of any specific false claim for payment; and
  • That although the Relator provided "voluminous documents and allegations regarding improper internal practices," . . . "nowhere in the blur of facts and documents . . . can one find any allegation, stated with particularity, of a false claim actually being submitted to the government."
In sum, Jallali reminds defense counsel and, most importantly, district courts in the Eleventh Circuit that Rule 9(b) applies to every element of an FCA claim; it is simply not enough for a relator to provide "indications" or make "assumptions" that the defendant submitted false claims to the government.

A. Brian Albritton
August 22, 2016

Friday, June 17, 2016

The Supreme Court Resets How False Claims Act Liability Should Be Determined for False Certification Claims: Universal Health Services Inc. v. United States ex rel. Escobar

Dear Readers:

Yesterday the Supreme Court issued its long-awaited opinion in the False Claims Act case, Universal Health Services, Inc., v. United States ex rel. Julio Escobar and Carmen Correa, 579 U.S. __ (2016), often referred to as the "Escobar case." The Court's unanimous opinion resets how False Claims Act ("FCA") liability is determined for legally false claims, i.e., those claims based on false certifications, express or implied, made by a provider or contractor in conjunction with submitting claims for payment to the Government. Essentially, Escobar seeks to anchor the FCA's prohibition against "false or fraudulent" claims in the common law definition of fraud. Common law fraud encompasses either affirmative misrepresentations or misleading omissions. For fraud to occur, however, the Court stressed that misrepresentations or omissions relating to a statutory, regulatory, or contractual requirement must be material to the Government's payment decision. At the same time, the Supreme Court "clarified" that materiality is a "rigorous" requirement, and determining what is or is not material does not "depend on what label the Government attaches to a requirement."  

The Supreme Court initially affirmed that FCA liability can be based on an "implied false certification" based on dramatic facts relating to counseling and medical treatment provided by a mental health care facility to a teenage patient which led to her death. In Escobar, the facility represented in its claims to Medicaid that it had provided specified therapies and other types of treatment to the beneficiary. In reality, the facility had not provided the therapies and treatment it billed for because many of its personnel were neither licensed or qualified to provide these services and in fact had misrepresented their qualifications and licensing status to the government to obtain provider numbers that permitted them to submit claims to Medicaid. The Court found that the facility's Medicaid claims "do more than merely demand payment."  Rather, the claims were "actionable misrepresentations" because they contained "half truths" while "omitting critical qualifying information." Escobar held that the implied certification theory could be a basis for FCA liability "at least where two conditions are satisfied: first, the claim does not merely request payment, but also makes specific representations about the goods or services provided; and second, the defendant's failure to disclose noncompliance with material statutory, regulatory or contractual requirements makes those representations misleading half-truths."

In the second half of its opinion, the Supreme Court addressed whether FCA liability can be based only where a defendant fails to disclose that it has violated an "expressly designated condition of payment." Escobar essentially rejected the express condition of payment/condition of participation dichotomy developed by the appellate courts in false certification cases, finding instead that FCA liability arises only if the defendant fails to disclose in submitting a claim that it has violated a material condition of payment. And then it threw a curve ball: "statutory, regulatory, and contractual requirements are not automatically material, even if they are labeled conditions of payment." In fact, the Court noted that if FCA liability depended only on violating express conditions of payment,"[t]he Government might respond by designating every legal requirement an express condition of payment. But billing parties are often subject to thousands of complex statutory and regulatory provisions. Facing [FCA] liability for violating any of them would hardly help would-be-defendants anticipate and prioritize compliance obligations."  

The FCA's "materiality standard," the Supreme Court pointed out, is "demanding." The Court explained further: "[t]he [FCA] is not an all-purpose anti-fraud statute or a vehicle for punishing garden-variety breaches of contract or regulatory violations. A misrepresentation cannot be deemed material merely because the Government designates compliance with a particular statutory regulatory, or contractual requirement as a condition of payment. Nor is it sufficient for finding of materiality that the Government would have the option to decline to pay if it knew of the defendant's noncompliance. Materiality . . . cannot be found where noncompliance is minor or insubstantial." (internal quotes/citations omitted).

Noting that the FCA's definition of materiality "descends from common-law antecedents," the Supreme Court then looked to common-law characterization of materiality to define it. Citing Williston on Contracts, Escobar explained that "[u]nder any understanding of the concept, materiality looks[s] to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation." Looking to the Restatements on Torts and Contracts, the Court identified two key criteria for determining materiality: "(1) if a reasonable man would attach importance to [it] in determining his choice of action in the transaction; or (2) if the defendant knew or had reason to know that the recipient of the representation attaches importance to the specific matter in determining his choice of action, even though a reasonable man would not." (internal quotes/citations omitted). 

In a footnote, Escobar rejected the appellant's assertion that "materiality is too fact intensive for courts to dismiss [FCA] cases on a motion to dismiss or summary judgment." The Court explained further that "[FCA] plaintiffs must also plead their claims with plausibility and particularity under Federal Rules of Civil Procedure 8 and 9(b) by, for instance, pleading facts to support allegations of materiality."

The Court's opinion ended with a reminder that the FCA "is not a means of imposing treble damages and other penalties for insignificant regulatory or contractual violations.  This case centers on allegations of fraud, not medial malpractice."

Overall, Escobar contains something for relators, defendants, and the government. By rooting FCA liability to the common law definition of fraud, the Supreme Court seeks to apply the FCA to serious frauds and effectively prevent it being used as a weapon to police technical violations and contractual disputes. Having given broad guidance and repeated injunctions as to the "rigorous" standard for materiality, it is up to the courts below to further expand and apply these principles.

A. Brian Albritton
June 17, 2016

Wednesday, June 15, 2016

DOJ Announces New Policy Regarding Individal Accountability and Corporate Cooperation for False Claim Act Cases

Dear Readers:

Acting Associate Attorney General Bill Baer spoke at the ABA's 11th National Institute on Civil False Claims Act and Qui Tam Enforcement last week in Washington, D.C. AAG Baer addressed how the U.S. Department of Justice (DOJ) will focus on individual accountability in civil False Claims Act (FCA) cases and in light of that focus, what steps corporations must undertake to earn "cooperation credit" in settling FCA cases. These new DOJ policies announced by AAG Baer are very important for practitioners in qui tam/FCA cases and will certainly impact how corporate defendants investigate, report, and settle FCA cases.

DOJ published AAG Baer's remarks, which are found here. I highlight below those portions of his remarks that I found to be most interesting.

First, AAG Baer addressed how the DOJ policy of holding individuals accountable for corporate misdeeds, announced in the Yates memo, would be "implemented" in FCA cases. He stated:
  • DOJ is committed "to the notion that individual accountability applies with equal force and logic to the department's civil enforcement."
  • In applying the Yates memo, DOJ starts "by asking department attorneys to make sure they are examining the potential liability of individual actors at the outset of an investigation into corporate wrongdoing" and it is "department policy to pursue civilly those individuals who are responsible [for FCA violations] and hold them accountable in addition to pursuing our civil case against the organization."
FCA practitioners will see a concrete difference in FCA government investigations and intervened cases because
  • "At the very outset of any FCA investigation into a corporate scheme, [DOJ] attorneys are instructed to focus on both the company and individuals who may be responsible for bad conduct . . . . Our inquiry into individual misconduct now proceeds in tandem with the underlying corporate investigation."
In a "departure from past practice," FCA settlements and releases will no longer automatically include a release of corporate executives and employees: that is, DOJ will investigate companies and their executives together, but DOJ will not necessarily "negotiate[] outcomes" for these defendants at the same time. Rather, DOJ will "often" settle FCA claims with companies first. But, the fact that it does so will not end DOJ's "inquiry into whether and which individuals will be pursued."  In fact, whereas in the past DOJ's FCA settlements released both the corporation and its executives, it may not do so in the future:  "you should not assume we will be amenable to releasing individuals from [FCA] liability when we settle with the organization."

If individual liability is not resolved together in a corporate settlement, DOJ expects its lawyers "to have a plan for how to proceed in the investigation with respect to those responsible" individuals. While "recognizing" that "claims against individuals may not always be appropriate," DOJ will now require its attorneys to affirmatively "memorialize" any recommendation not to pursue an individual. Overall, AAG Baer noted that "we are disciplining ourselves to assess individual responsibility at the beginning of and throughout our FCA investigations."

Second, AAG Baer addressed how DOJ's new emphasis on civil accountability for corporate executives implicates companies seeking cooperation credit in FCA cases. As an initial matter, the AAG announced a "threshold requirement" whereby DOJ will not credit any company with cooperation in a settlement unless the corporation "disclose[s] all facts related to individuals involved in the wrongdoing."  He elaborated: 
  • "[U]nderstanding who did what is a necessary component" for DOJ to determine the nature and extent of any FCA violation. Essentially, a company seeking credit in an FCA settlement for its cooperation cannot withhold "critical" information that identifies those who should be held responsible.
  • A corporation demonstrates its commitment to "transparency" and cooperation by "disclosing the facts, including telling us what you know about who did what."
Cooperation, AAG Baer explained, "is not demonstrated by doing what the law requires" such as "compliance with subpoenas or other lawful demands." Rather, "genuine cooperation" involves a "focused presentation of relevant information demonstrating the actual conduct that is the subject of the investigation" and "stretches beyond the precise information that may have been requested by the government." The AAG provided the following examples of "full cooperation:" (i) a company's acknowledgement of responsibility, including in some instances "detailed and complete admissions;" (ii) remediation efforts; (iii) whether a company "reports information that might otherwise not have been discovered in the ordinary course of an investigation or that saves the government time and resources;" (iv) making available "current or former officers and employees for meetings, interviews, depositions;" and (v) disclosing facts gathered in an internal investigation.  

Internal investigations, the AAG went on, must be "tailored to the scope of wrongdoing" and cooperating companies must "make their best efforts to determine all the facts with the goal of identifying the individuals involved." That said, AAG Baer stated that companies do not need to wait until they have finished their internal investigations to self report. Rather, "timing . . . is of the essence," and companies "should come in as early as possible" even if they don't "quite have all the facts yet."

As for the attorney-client privilege, AAG Baer "emphasized" that "nothing in the individual accountability policy" requires the privilege to be waived.

As the reward for satisfying this "threshold requirement" and cooperating with the government's investigation, AAG Baer stated that "the department will use its significant enforcement discretion in FCA matters to recognize that cooperation." There is "no magic formula" or "equation," he explained, as to how much credit a cooperator might receive. Having eschewed any formula for earning cooperation, AAG Baer nevertheless analogized the "downward departures" for cooperation given by the government in federal guideline sentences to how DOJ should accord cooperation in FCA matters. Overall, he said, DOJ is "committed to taking into account the disclosures and other cooperation provided by defendants and to resolve matters for less than the matters would otherwise have settled for based on the applicable law and facts."

DOJ's new policy on individual accountability represents a significant change in FCA cases. Corporations -not individuals- have been the primary focus of most FCA cases in the past. There have been lots of exceptions, of course, especially for physicians accused of submitting false claims to Medicare or Medicaid. Yet, the past emphasis on corporations reflects the reality that it is largely corporations that contract with the government, submit false claims, and who most directly profit from them. The emphasis on corporate liability further reflects the fact that corporate entities are where the money is. Corporations, such as Big Pharma, defense contractors, and hospitals, have the resources to pay large FCA settlements.

Focusing on individual accountability likely will have a profound impact on government FCA investigations, interventions, and settlements. I anticipate that corporate internal investigations will be more involved and complicated. Individuals will lawyer up more quickly, be more concerned about their own exposure, and as a result may be less forthcoming with their employers. FCA investigations and cases are likely to become more complicated if only because cases are likely to have more parties: a corporation and its executives. As for settlements, they too will become more complicated. In Medicare cases, for example, there will be an increased focus on possibly excluding named individual defendants. Also, if individuals are named as subjects of an investigation, I would think that increases the possibility that they will turn against their employers more readily in order to earn cooperation. And, of course, what if a corporate employer refuses to indemnify the executive and/or employee?  

Finally, it will be interesting to see 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.

A. Brian Albritton
June 15, 2016

Monday, May 2, 2016

The Government Should Dismiss Meritless Qui Tam Suits - The Case of US ex rel Thomas v. Black and Veatch Special Projects Corp.

Dear Readers:

Last week the 10th Circuit affirmed the District Court's grant of summary judgment in favor of the defendant in US ex rel Thomas v. Black and Veatch Special Projects Corp., 2016 WL 1612857 (10th Cir.). I previously covered the District Court's decision.

Black and Veatch is a great case that addresses whether and when a defendant's "false certification" of its compliance with a government contract is material to the government's decision to pay on that contract. As the Court explained, "liability [under the False Claims Act (FCA)] does not arise merely because a false statement is included in the claim; rather, the false statement must be material to the government's decision to pay out moneys to the claimant." Here, the Court essentially found that the false certification regarding minor breaches of the contract was not material to the government's decision to continue paying on the contract because the government continued to pay defendant on the contract long after the government knew of and defendant self-reported the violations.

Defendant Black and Veatch was a large construction firm that contracted with the United States Agency for International Development (USAID) to build a huge electrical plant in Afghanistan. The Relators discovered (and the construction firm also self-reported) that some of the employment records for a handful of the defendant's employees had been fraudulently tampered with so that the employees could get visas and work permits in Afghanistan. Such violations, Relators alleged, constituted a "material" violation of the contract and resulted in a false certification to the government that went to the heart of the defendant's government contract.

Looking at the contract as whole and the impact these minor violations had on its performance, the Court found that these violations did not undermine the contract's purpose and that the defendant substantially performed all of its contractual duties and obligations. More importantly, the Court found that these violations were not material because the USAID continued to pay the defendant on the contract long after government officials learned of the defendant's violations and the results of defendant's internal investigation. 

I said it when I reviewed the District Court case but it's worth repeating: the real significance of this case is the government's failure to exercise its authority under the FCA to dismiss the Relators' suit pursuant to 31 U.S.C. 3730(c)(2)(a). What possible justification was there for allowing it to continue?  If the government as the "real party in interest" didn't have a problem with the defendant, why let Relators, acting in the government's name and collecting money for the government, proceed with this matter? Why force a defendant to defend a case like this? 

Apparently, the government never exercises its power to dismiss meritless qui tam cases. I know of only one case where the government dismissed a claim under 3730(c)(2)(a): US ex rel Roach v. Obama, 2014 WL 7240520 (D. DC). In that case, the relator alleged that Barack Obama was not eligible to hold the office of President and that transactions engaged by him as President violated the FCA. Is Roach the bar for when the government will exercise its power to dismiss meritless qui tam suits -- that they have to be brought by a birther? It sure seems like it.

A. Brian Albritton
May 2, 2016