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

Dear Readers:

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

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

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

• The Court appeared to appreciate the complexity and burden of Medicare and Medicaid regulations:  “Federal and state government’s regard the disputed practices with leniency or tolerance or indifference or perhaps with resignation to the colossal difficulty of precise, pervasive, ponderous, and permanent record-keeping in the pertinent clinical environment.” The evidence at trial showed that “Medicaid and Medicare consistently paid in the mine run of cases despite Medicare’s routine audits and Medicaid’s knowledge of billing documentation deficiencies.” 

• The Court explained Escobar’s meaning as follows:  Escobar rejects a system of government traps, zaps, and zingers that permits the government to retain the benefit of a substantially conforming good or service but to recover the price entirely--multiplied by three--become of some immaterial contract or regulatory noncompliance.  A principal mechanism to ensure fairness and to avoid traps, zaps, and zingers is a rigorous standard of materiality and scienter. 

• The Court openly questioned whether the FCA’s “punitive” treble damages and $11,000 fines can be “lawfully imposed on a supplier who delivers substantially compliant goods or services that are received and accepted by the government with knowledge of, or the indifference toward, some material, formalistic, or technical non-compliance.”

• Acknowledging that the defendants “used qualified providers who ably provided services in accord with orders issued by qualified professional but who, for example, could not--years later--identify a ‘comprehensive care plan’ for each patient,” the Court found that  “[c]ommon sense falls far, far short of depicting that . . . a reasonable purchaser would abruptly refuse to pay those providing continuing and sustaining health care to a mass of highly vulnerable and mostly elderly and frail patients.” 

The Court’s key point is that evaluating the materiality of a disputed act or practice must take into account a far broader context and circumstance than simply whether the government would object to this or that individual disputed practice. Escobar, the Court instructed, “demands proof of materiality in the circumstances as they are at the time for which the proof is offered and in the place, in the industry, and in the other regnant circumstances that attend the moment for which materiality is offered.” In the case of the defendants 53 nursing homes, the Court explained:

In other words, the controlling question is not whether on a small scale — a patient or a few patients or a facility or even a few facilities or one physician, on therapy, or one pharmaceutical — but whether on a large scale, on the sale of a major statewide provider of a scarce health care resource in a large and potent state, the federal [or state] government would refuse to pay the provider because of a dispute about the method or accuracy of payment after the government has permitted a practice to remain in place for years without complaint or inquiry. . . . . If a non-compliance is found quickly and remains small, the government might likely demand perfect performance and full accounting. If compliance is larger and lingers longer and the repayment times three becomes a burden that threatens the vitality of the vendor and threatens the public interest, the government might not demand repayment times three.

In my view, Ruckh is a far more important and far reaching application of Escobar than U.S.ex rel Harman v. Trinity Indus., Inc., 872 F.3d 645 (5th Cir. 2017). 

A. Brian Albritton
January 29, 2018

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 

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

Violation of Government Contract Does Not Give Rise to False Claim Where Government Knows of Violation and Continues to Pay Claims

Dear Readers:

I commend to you the recent False Claims Act case of U.S. ex rel Thomas v. Black and Veatch Special Projects Corp., 2015 WL 3570661 (D. Kan. June 5, 2015). The Court granted summary judgment in favor of the defendant, a government contractor, who contracted with the United States Agency for International Development ("USAID") to provide services and support for power projects in Kandahar, Afghanistan. In a common sense ruling, the Court found that defendant did not falsely certify its compliance with the provisions of the USAID contract because USAID continued to make numerous contract payments to the defendant even after it both learned of the defendant's failure to comply with one of the contract's provisions and was served with a copy of the qui tam complaint together with relators' disclosure of material evidence.

The USAID contract provided for defendant to submit invoices every two weeks to the USAID, which in turn, reviewed and evaluated whether the work was satisfactory, and if it was, authorized periodic payments to the defendant. All work remained subject to USAID's final inspection and acceptance, and the USAID contracting officer was permitted to reduce or suspend payments if he found substantial evidence that the defendant failed to comply with any material requirement of the contract.

Among its many provisions, the USAID contract required the defendant to comply with Afghan law and to obtain work visas and permits for all foreign citizens working for the defendant on the contract in Afghanistan. The relators, employees of the defendant, discovered that forged documents had been submitted to the Afghan government on behalf of seven of the defendant's employees, and they informed the USAID of their discovery. Subsequently, the defendant conducted its own internal investigation and confirmed to USAID that forged educational documents had been provided on behalf of seven employees to the Afghan government in order to obtain work permits for them.  

In their qui tam complaint, Relators alleged that the defendant submitted legally false claims for payment to USAID by impliedly certifying its compliance with Afghan law in its periodic requests for contract payment. Relators cited to a Federal Acquisition Regulation that required defendant and its personnel to comply with all applicable United States and host country laws. Relators asserted that because defendant fraudulently obtained permits and visas in violation of Afghan law, it failed to comply with a contractual prerequisite of payment and as a result falsely certified its compliance with the contract.  

Granting summary judgment in favor of the defendant, the Court found that the realtors had not provided any facts to show that "USAID may have reduced or refused payments" based on alleged false documents and the violation of Afghan law.  The Court found that compliance with Afghan law "was not material to the government's decision to pay defendant's invoices" because "USAID . . . continued to pay defendant, even though it knew about these allegations and even though . . . it could not determine whether defendant had filed the forged documents."

Remarkably, the Court noted further the government continued to pay the contract even after the relators filed their qui tam suit:  

USAID's conduct after relators filed suit also demonstrates that compliance with Afghan law did not matter to the government's payment decision. Relators commenced this action and provided a copy of the Complaint and a statement of all material facts to the government on August 23, 2011. . . .  . Since then, defendant had submitted at least forty-seven invoices for USAID payment. USAID never demanded that defendant refund any amount paid. Nor has it reduced or withheld payment of any invoice submitted after realtors filed suit. Instead, USAID has accepted and paid for all deliverable components completed by defendant under the contact. . . . . USAID's conduct after relators filed this action demonstrates that defendant's compliance with Afghan work permit and visa requirements did not matter to the government's payment decision. 2015 WL  3570661 *13 (citations omitted).

In short, the Court found that the defendant's compliance with Afghan law provision must not be material to the contract's conditions of payment because USAID continued to make payments on its contract even though it was aware of relators' qui tam suit and the defendant's contractual violation. 

The case illustrates two of the maddening aspects of qui tam litigation. First, the government should have dismissed this case when it was filed on the basis that the agency did not believe the defendant's had violated a material provision of the contract.  Instead, as the government so often does, the relator filed a qui tam suit alleging that the defendant violated some government contractual provision or regulation, the government declined to intervene and of course said nothing and the relator prosecuted the matter in the name of the government --all the while as the government agency in question continued to do business with the defendant in the same manner that is alleged to be a FCA violation in the suit.  Almost assuredly, the U.S. Attorney's Office would have inquired of USAID when relators filed their suit and they should have learned then that USAID did not find the contract violation to be material.  Yet, the government permitted the qui tam to proceed even though the government later permitted the defendant to obtain  statements from the USAID contracting representatives who confirmed that they knew "about the defendant's conduct" but continued to direct that USAID pay defendant's invoices.  

Second, the case offers some hope to defendants who are accused by realtors --but not the government-- of violating some obscure or ambiguous regulation or contractual provision. This case permits the defendant to use the government's knowledge of the alleged violation and its continued payment of claims to show that the so called violation must not be material if the government does nothing in the face of these allegations and continues to pay claims.

Defendant's counsel Kathleen Fisher, Nathan F. Garrett, and Todd P. Graves, (the former U.S. Attorney for Kansas City, Missouri) of the Graves Garrett firm should be commended for their excellent work in securing this decision by the Court.

A. Brian Albritton
July 5, 2015

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

The Sixth Circuit Limits FCA Liability Arising Under Express and Implied Certifications: US ex rel Hobbs v. Medquest Associates

In United States ex rel Hobbs v. Medquest Associates, Inc., 2013 WL 1285590 (6th Cir. April 1, 2013), the Sixth Circuit reversed an $11 million False Claims Act judgment and rejected the Government's attempt to turn a health care provider's breach of its Medicare enrollment agreement into a False Claims Act violation. In so doing, the Sixth Circuit limits False Claims Act liability arising from violations of "express and implied certifications" in Medicare contracts. Rather, the Medquest Court reaffirmed that the "False Claims Act is not a vehicle to police technical compliance with complex federal regulations" and that the statute's "hefty fines and penalties make them an inappropriate tool for ensuring compliance with technical and local program requirements."

In Medquest, the relator and later the Government alleged that Medquest, a diagnostic testing company that operated testing facilities, violated the False Claims Act ("FCA") by (1) "using supervising physicians who had not been approved by the Medicare program and the local Medicare carrier to supervise the range of tests offered" at testing sites; and (2) after acquiring a physician's practice in Charlotte, "fail[ing] to properly re-register the facility to reflect the change [in Medquest's] ownership and to enroll the facility in the Medicare program" and instead "continue to use the former owner's payee ID number." On the "supervising physician" issue, the District Court found that Medquest had expressly certified to Medicare that the "physicians listed in its [enrollment] application [to Medicare] would supervise" diagnostic testing and had implicitly certified that in billing Medicare, the "tests were provided in accordance with applicable Medicare regulations and by physicians approved by Medicare." By using "non-supervising personnel" to monitor diagnostic tests and by billing for such tests, the District Court found that Medquest violated these certifications, thus giving rise to FCA liability. According to the District Court, Medquest's failure to re-register the practice it acquired also constituted a "false certification" which together with Medquest's continued use of the former practice's billing number qualified as an FCA violation as well. The District Court entered summary judgment against Medquest.

Though it expressed "little sympathy" for Medquest, the Sixth Circuit overturned the summary judgments, finding that the regulations underlying the certifications were "not conditions of payment" and did "not mandate the extraordinary remedies of the FCA." Rather, such violations, the Court observed, were "instead addressable by the administrative sanctions available." The Court found that Medquest's Enrollment Application statement that it was "in compliance with supervising-physician requirements" did not "constitute certifications that would support an FCA action." Moreover, the Court noted, "the certification does not contain language conditioning payment with any particular law or regulation." As for Medquest's failure to transfer the practice into its own name and its continued use of the prior physician's billing number, the Court rejected the Government's claim that this represented a "failure to enroll problem," stating that "[t]his case, at most, represents a failure to update enrollment information, which we have held is not a violation of a condition of payment."

The Medquest decision is a powerful antidote to those decisions that seek to characterize every enrollment agreement breach or violation of a Medicare regulation as a violation of an express or implied condition of payment that gives rise to FCA liability. Rather, in the absence of specific contractual or regulatory language making Medicare payments contingent on fulfilling Medicare enrollment or participation conditions, the Sixth Circuit clearly applies a common sense approach, reserving the FCA's "extraordinary penalties" for more egregious regulatory violations.

A. Brian Albritton
April 9, 2013

Using the False Claims Act to Enforce Antidiscrimination Laws Against Local Governments

Relator counsel are continuing to find creative applications for the False Claims Act and to expand its reach. A recent Note by University of Texas law student Ralph C. Mayrell, Blowing the Whistle on Civil Rights: Analysing the False Claims Act as an Alternative Enforcement Method for Civil Rights Laws, 91 Tex. L. Rev. 449 (2012), advocates the use of the False Claims Act (FCA) to enhance the enforcement of antidiscrimination laws against local governments. In this thoughtful Note, the author asserts that the "FCA provides civil rights litigators with another avenue for enforcing antidiscrimination laws," and he sets out to "explain the legal theory through which civil rights litigators can effectively litigate claims against local government discriminators using the FCA." The author explains that civil rights laws frequently limit damages from local governments and require that a litigant be injured by a discriminatory practice in order to obtain standing. The FCA, he notes, is not hampered by such limitations.

It should come as no surprise that the article advocates basing FCA liability against local governments on the certifications of compliance with antidiscrimination laws that are commonly found in federal grants to local governments. As a concrete example, the Note focuses on "Community Oriented Policing Services" (COPS) grants that are given by the U.S. Department of Justice to local governments for the hiring of police officers and the creation of crime prevention programs. As is common with most federal grants, the COPS grants require that the grantee will not deny benefits or employment or discriminate against any person based on "race, color, religion, national original, gender, disability, or age" and make compliance with this condition a basis for termination of the grant or suspending funding. The grantee's failure to adhere to these conditions serves as the basis for the false claim, i.e., the relator alleges that the grantee defrauded the federal government of grant funds when it falsely certified that it was in compliance with the grant's antidiscrimination provision. 

The Note observes that in a "few limited situations, litigators have attempted to use the FCA, with varying degress of success" to enforce civil rights and antidiscrimination laws. The largest settlement to date appears to be a $52 million Fair Housing Act case against a local municipality, but that appears to be the high point thus far in these cases. Still, the author argues that "FCA liability based on violations of antidiscrimination laws gives another tool to litigators both for individually injured plaintiffs as well as groups interested in institutional-change litigation."

Overall, the Note rightfully points out that the FCA may be employed in the fight against discrimination by local governments. At the same time, it also illustates the common complaint by the defense bar that the FCA is becoming an heavy handed enforcement mechanism for compelling compliance with governmental regulations.

A. Brian Albritton
January 3, 2013

United States ex rel Williams v. Renal Care Group: 6th Circuit Refuses to Impose FCA Liability on Company that Took Lawful Advantage of Medicare Loopholes

In a startling reversal of a summary judgment entered in favor of the government in a False Claims Act (FCA) case, the 6th Circuit recently rejected attempts by the government to establish FCA liability simply because a company, Renal Care Group, Inc. (“RCG”), a dialysis provider, had “created a wholly-owned subsidiary to take advantage of loopholes in the Medicare regulatory scheme that would permit it to increase profits.” United States ex rel Williams v. Renal CareGroup, 2012 WL 4748104 (6th Cir.) In the absence of regulations and statutes clearly prohibiting such an arrangement, the Court found that RCG had not acted with reckless disregard of the truth or falsity of the claims submitted by its subsidiary to Medicare because RCG had taken several steps to try to determine whether its subsidiary relationship violated applicable statutes and had not made a secret of its corporate arrangement.  

RCG was a dialysis provider that provided dialysis services at more than 260 facilities and in addition provided “dialysis supplies and services to home dialysis patients.” RCG created a subsidiary, RCGSC, that only provided dialysis equipment, but not services, to home dialysis patients. Medicare reimbursed dialysis providers according to two different methods: Method I applied to dialysis providers who operated dialysis facilities and who also provided home dialysis and services. Method II applied to providers who provided equipment and supplies to home dialysis patients but who did not provide dialysis services. Medicare reimbursed Method II providers at a higher rate than those of Method I, and further provided that “Method II payments may only go to an entity that is not a ‘provider of services [or] a renal dialysis facility . . . '”

RCG created RCGSC for the purpose of obtaining the higher Method II Medicare reimbursements. Moreover, RCG controlled RCGSC’s operations. The two companies shared RCG’s employees, officers, and directors, all of whom "held key roles in RCGSC’s corporate structure” as well as shared “office space, payroll, insurance benefits, contracts, and human resource services.”

The government alleged that RCG and RCGSC violated the False Claims Act by submitting false claims “while knowing that RCGSC was a sham corporation created for the sole purpose of increasing Medicare reimbursements” and “while knowing that RCGSC was not in compliance with Medicare rules and regulations.” The government moved for partial summary judgment on the issues of falsity and materiality, which the Court granted. The Court went a step further, however, and later found that the defendants had acted with the requisite knowledge to violate the False Claims Act as well, and it entered judgment against the defendants in the amount of $82,000,000.

The 6th Circuit reversed the judgment on all counts and instead entered summary judgment for the defendants on the two False Claims Act counts. First, the Court rejected the government’s argument that the RCG’s subsidiary was an alter-ego of RCG, observing that “[t]he corporate form need not be disregarded when its adoption was meant to 'secure its advantages and where no violence to the legislative purpose is done by treating the corporate entity as a separate legal person.'” (citation omitted). RCG, the Court went on, had not acted with an unlawful purpose simply because it sought to “maximize profits,” saying “[w]hy a business ought to be punished solely for seeking to maximize profits escapes us.” Analyzing the statutory and regulatory basis underlying the differences in reimbursement, the Court concluded “[a]ll of this points to the conclusion that the structure of RCG and RCGSC is not obviously inconsistent with Congress's goals for the payment scheme.”

Contract Interpretation and False Claims Act Cases: Applying the Contra Proferentem Doctrine to the Government

Having an ambiguous contract with the government can give rise to a to False Claims Act allegations  -- that is what the Chapman Law Firm discovered when it sought to sue the U.S. Department of Housing and Urban Development (“HUD”) for failing to perform a contract the firm had with HUD “for the management and marketing of single family homes in Ohio and Michigan.” See Chapman Law Firm v. United States, No. 09-891C,2012 WL 256090 (Fed. Cl. Jan. 18, 2012).  The government responded to the suit alleging that Chapman had violated the False Claims Act by using unlicensed pest inspectors to perform termite inspections instead of “licensed” inspectors as the contract allegedly required. The government sought summary judgment against Chapman on the grounds that the contract called for licensed inspectors; Chapman defended, claiming that the contract was ambiguous and should be construed against the government.   The U.S. Court of Claims denied the government’s summary judgment motion, applied the legal doctrine of contra proferentem, and construed the contractual ambiguity against the government. 

I commend to you the “Fraud Alert” by John Boese and Douglas Baruch of Fried Frank which discusses the Chapman case and the significance of the Court’s application of the contra proferentem doctrine in a False Claims Act case:  CIVIL FALSE CLAIMS ACT: Court Applies Contra Proferentem Doctrine Against the Government in an FCA Case Based on An Ambiguous Contract Provision.  The authors explain that the contra proferentem doctrine is a rule of contract interpretation often applied in insurance contracts and to other commercial contexts, but until Chapman, the rule had not been applied in an False Claims Act ("FCA") case.  Based on the principal that “a party that drafts and imposes an ambiguous term should not benefit from that ambiguity,” they explain that the rule provides that “a latent ambiguity in a contract provision to be construed against the party that drafted the [ambiguous] provision.” 

The authors point out that  the contra proferentem doctrine can be “be significant in a broad spectrum of FCA cases” as so many of such cases are based on allegations that the defendant violated “requirements incorporated into government grants, contracts, and regulations.” For example, the authors cite to the FCA cases where defendants are accused of falsely certifying their compliance with the myriad of contractual requirements frequently found in government contracts.  See 11/30/11 blog entry on “implied false certification.” “These requirements,” they explain, “are drafted by the government, and where they are ambiguous or capable of more than one reasonable interpretation, the rule that ambiguous requirements are construed against the drafter places the burden on the government to draft clear requirements, which is where that burden belongs.”  The authors further observe that a defendant’s “reasonable interpretation” of an ambiguous contract with the government can further support a defendant’s claim that they acted in “good faith” and did not have the requisite intent for FCA liability.

Supreme Court Passes on Opportunity to Clarify False Claims Act's Implied False Certification Theory of Liability

The blog Health Law & Policy Matters ("Health Policy") reports that the Supreme Court recently turned down a chance to clarify and define the contours of how and when a claimant seeking payment from the government may be subject to False Claims Act liability for an "implied false certification"  “Implied false certification,"  the blog explained, "generally means that a claim for payment to the government (i.e. to Medicare, Medicaid, or CHIP) is legally false if that party had, and failed to meet, an ongoing obligation to comply with an underlying law — regardless of whether that party submitted a claim that was false on its face or expressly certified compliance with that law when it submitted the claim."  Health Policy previously highlighted two petitions for certiorari filed this fall that sought to bring this matter to the Supreme Court:  Amgen Inc. et al., v. State of New York et al. and  Blackstone Medical Inc., v. U.S. ex rel. Hutcheson, No. 11-269.  Health Policy reports, however, that the Supreme Court recently denied certiorari in Hutcheson and that the Court will likely not hear Amgen since the company informed the Court that it had settled the False Claims Act claims

False Claims Act liability based on an implied false certification can be quite broadly applied, and the circuit courts, as the blog False Claims Alert noted, have not applied a consistent test for implied false certification liability.  We recently discussed United States ex rel. Wilkins v. United Health Group, Inc.,  659 F.3d 295 (3^rd Cir. 2011) and the Third Circuit's adoption of the implied certification theory of  liability.  In Wilkins, the Third Circuit found the False Claims Act was not a “blunt instrument” to enforce compliance with all regulations, just those “regulations that are a precondition to payment.”  In that case, as in other circuits, the Court found that the claimant's violation of the Anti-Kickback Act legally tainted its claims for payments, regardless of whether the services billed were actually rendered. See e.g., McNutt ex rel. United States v. Haleyville Medical Supplies, Inc., 423 F.3d 1256, 1259 (11th Cir. 2005).

Implied False Certification : Not Every Regulatory Violation Gives Rise to FCA Liability

This week I came across United States ex rel. Wilkins v. United Health Group, Inc.,  659 F.3d 295 (3^rd Cir. 2011) which was decided in late June and just published in F.3d.  In Wilkins, the Third Circuit joined several other circuits in holding that an “implied false certification” made by a provider in conjunction with its claim for payment to the government may give rise to False Claims Act (“FCA”) liability.  “Implied false certification the Court explained, “attaches when a claimant seeks and makes a claim for payment from the government without disclosing that it violated regulations that affect its eligibility for payment.” Id. at 305.  The Wilkins Court found that FCA liability could be based on a claimant seeking payment when it knew it had violated the Anti-Kickback Statute. Id. at 313.  FCA Alert and Whistleblower Qui Tam Law Blog both analyzed Wilkins, and I commend their analyses to you.  Additionally, take a look at FCA Alert’s discussion of Amgen’s recent Petition for Writ of Cert to the Supreme Court wherein Amgen challenges the implied false certification theory and discusses the differences in the Circuits that apply it.

I found the more interesting portion of Wilkins to be where the court found that violations by the Medicare Advantage provider of marketing rules contained in provider’s contract with the Centers for Medicare and Medicaid (“CMS”) did not give rise to an implied false certification FCA violation even though the provider had certified that it complied with all CMS guidelines. Id. at 299-300.  The relator in Wilkins alleged that the provider had violated  several “marketing rules” including “using  marketing flyers and forms that CMS did not approve” in making presentations, “ “using an excessive number of  sales representatives at presentations,” and “giving out door prizes” at presentations to prospective clients in “excess of $15 in value contrary to CMS guidelines.”  The Court, however, rejected FCA claims based on these alleged violations of regulations that were not preconditions to the provider’s claim for payment.