Monday, November 26, 2012

Government May Not Issue Civil Investigative Demand After Underlying False Claims Act Case Dismissed With Leave to Amend

Ben Vernia at False Claims Counsel blog has highlighted a recent False Claims Act case involving a matter of first impression: whether a District Court may quash a Government’s Civil Investigative Demand (CID) that was issued after the underlying case was dismissed without prejudice. United States v. Kernan Hospital, 2012 WL 5879133 (November 20, 2012, D. Md).   

“[B]efore commencing a civil proceeding” pursuant to the False Claims Act, section 3733 of the False Claims Act (31 U.S.C. 3733(a)(1)) permits the Attorney General or his designee to issue a CID to a person and/or entity “who may be in possession of information relevant to a false claims investigation.” The CID may compel the recipient to “produce information that is in the form of documents, answers to interrogatories, or oral testimony.” The question before the Kernan Hospital Court was whether the Court's previous dismissal of a False Claims Act case, though without prejudice to the Government to file an amended complaint, puts the Government “in the same position as though [a] suit had not been filed” -- as if it had not commenced a civil proceeding. 

For three years prior to filing suit, the Government investigated Kernan Hospital for allegedly violating the False Claim Act as well as committing other common law torts. As part of its investigation, the Government obtained thousands of pages of documents from Kernan pursuant to a subpoena issued by the Office of Inspector General and, pursuant to a CID, testimony from Kernan Hospital’s Director of Health Information Management. After filing suit, Kernan Hospital moved to dismiss due to the Government’s failure to plead fraud with particularity pursuant to Fed. R. Civ. P. 9(b) and the Court agreed, dismissing the case, though with leave for the Government to amend to restate its claims. After its suit was dismissed, the Government issued another CID requesting additional documents from Kernan.

The Court found that section 3733 did not permit the Government to serve a CID after the False Claims Act case has been filed, even though it was later dismissed with leave to amend. The Court observed that “the civil investigative demand is a prefiling investigative tool that Congress created to aid the Government in deciding whether to file suit in the first place.”  Additionally, the Court rejected the Government’s argument that quashing its most recent CID “would prevent it from obtaining the information it needs to cure pleading deficiencies.” Essentially, the Court found that the Government had a complete and thorough opportunity to investigate the case before it filed suit, and that the Government had taken “full advantage” of its powers to investigate pre-suit. Hence, while the Government may amend its complaint, the Court noted that “this opportunity does not grant the Government the right to rehash the prefiling investigation that it conducted for over three years.”

A. Brian Albritton 
November 26, 2012

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