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

Courts Increasingly Find That Defendants Did Not Knowingly Submit False Claims When They Followed Plausible Interpretations of Ambiguous Regulations

Dear Readers:

There have been several dramatic examples in the last few months where courts have either granted summary judgment in favor of False Claim Act ("FCA") defendants or even overturned jury verdicts in favor of relators. See e.g., U.S. ex rel Purcell v. MWI Corporation, Civ. No.14-5210, slip. op.(D.C. Cir. Nov. 24, 2015) (overturning jury verdict); U.S. v. Aseracare Inc., Civ. No. 2:12-CV-245-KOB, slip. op. (N.D. Ala. November 3, 2015)(overturning jury verdict); U.S. ex rel Phalp v. Lincare Holdings Inc. and Lincare Inc. d/b/a Diabetic Experts of America, __ F.Supp.3d__, 2015 WL 4528955 (S.D. Fla. July 13, 2015)(granting summary judgment for defendants); US ex rel Donegan v. Anesthesia Associates of Kansas City, 2015 WL 3616640 (W.D. Mo. June 9, 2015)(granting summary judgment for defendant). In each of these FCA cases, the court found that the defendant did not submit false claims to Medicare or other government agencies because the regulations which the defendants allegedly violated were ambiguous (or silent) and the defendants had adopted a plausible interpretation of that regulation, even if that interpretation was later found to be erroneous. The decisions have fallen two ways: because the regulations at issue which the defendants allegedly violated were ambiguous and the defendants adopted a plausible interpretation of them, these courts have found that either the defendant did not violate the regulation at issue and submit a false claim or if it did submit a false claim, the defendant did not do so knowingly. See Fried Frank's recent alert addressing the Purcell case; Sidley and Austin's recent blog post on Aseracare, and my blog post on Donegan.

Another case recently decided by U.S. District Judge Amy Totenberg of the Northern District of Georgia should be added to this list: U.S. ex rel Saldivar v. Fresenius Medical Care Holdings, Inc., 2015 WL 7293156 (N.D. Ga October 30,  2015). In Fresenius, the Court issued an interesting summary judgment order in a FCA qui tam case addressing whether and when a Medicare provider can be said to "know" that its Medicare billing practices were false. In an incredibly thorough (40 pages) and well-researched opinion, the Court found that the defendant did not have knowledge that its billing practices violated Medicare, even though the Court previously found that defendant had, in fact, submitted false billings. Well worth the read, the Court's ruling contains a number of "nuggets" that may be helpful to defendants in FCA cases relating to Medicare regulations.

The relator in Fresenius alleged that the owner of the largest chain of renal dialysis facilities, Fresenius Medical Care North America, billed Medicare for using and administering the "overfill" of two injectable drugs used in the treatment of patients suffering from end stage renal disease. In the vials containing these two drugs, the drug manufacturer always included a small amount more of the medicine beyond the stated amount on the vial, i.e., "overfill." Whereas Medicare normally only reimbursed Fresenius for the stated drug amount contained in a vial, Fresenius captured that extra bit of overfill from the vials and later administered it to patients. Fresenius billed Medicare for using and administering the overfill to its patients. 

Prior to January 1, 2011, the Centers for Medicare and Medicaid Services ("CMS") had not expressly prohibited Medicare providers such as Fresenius from billing for overfill. Not long before that date, CMS issued a regulation specifically prohibiting providers from billing for overfill and stating further that "the prohibition against billing for overfill was not a new policy" but instead "a clarification of existing policy." The relator alleged that Fresenius violated the FCA by administering overfill to patients and billing Medicare during 2005 to 2010, a period in which the relator contended that Fresenius should have known that Medicare prohibited it from billing for overfill.  

Granting summary judgment in favor of Fresenius, the Court found that the company did not violate the FCA because "no reasonable jury could find that Fresenius acted knowingly or recklessly" in billing Medicare for administering overfill to patients during the period at issue. In handing down its decision, the Court 

• Bifurcated the summary judgment motions, addressing initially whether Fresenius billing Medicare for overfill constituted a "false claim." After granting summary judgment in favor of the government and finding that such billings were false, the Court permitted additional discovery and a second summary judgment motion addressing whether Fresenius "knew" or was reckless in submitting false claims. Though it initially granted partial summary judgment on the "falsity" question, the Court observed later: "If the Court had been, at that time, presented with the record as it is now developed, the Court would likely not have reached the falsity element at all. Whether overfill administration was reimbursable from 2006 through 2010 is not clear on the face of any one statute or regulation. And although, as explained in this Order, there were those in the industry who believed overfill administration was not reimbursable during that time, given the ambiguity in the Medicare rules and the record now presented, no reasonable jury could decide that Fresenius was reckless, let alone acted with actual knowledge that overfill was not reimbursable."

• Found that Fresenius did not know that billing for overfill was false nor was it reckless in failing to recognize such billings were false. In the initial part of its analysis and at the end, the Court emphasized that Medicare rules or regulations were "silent" as to the issue of whether a provider, such as Fresenius, could bill for overfill. Notwithstanding CMS's statement that its 2011 regulation forbidding providers from billing overfill was simply a "clarification" of existing policy, the Court observed that nothing unequivocally prohibited providers from using and billing for overfill.

• Acknowledged that Medicare did have a policy prohibiting billing for "discarded overfill" -- a close question that simply gave rise to an ambiguity as to whether overfill could be used and billed. The Court explained: "One could have deduced from the Medicare policy on discarded drugs that overfill was free, and thus should not be billed even if administered. But one could alternatively, reasonably assume that by prohibiting overfill billing only when overfill is discarded, Medicare implicitly recognized that overfill can be billed when administered."

• Examined numerous sources as to Fresenius' knowledge about overfill and billing in order to determine if Fresenius acted recklessly: 
• Statements by Fresenius' executives over the years reflecting that they believed billing for overfill was permissible;
• Open knowledge among staff about the policy to use and bill overfill, including knowledge by the Monitor of a Medicare Consent Decree of a company acquired by Fresenius;
• Advice by the company's lawyers that billing for overfill did not violate Medicare rules;
• Previous FCA qui tam cases brought against the company that made similar allegations and which had either been dismissed by the relator or which the company had addressed and was then dismissed or abandoned by the relator;
• Periodic reviews by HHS-OIG of the company's billing practices, its knowledge from those reviews that Fresenius was billing overfill, and the OIG's failure to object; and
• Statements made by the company to Medicare showing it was openly using/billing overfill.

• Refused to accord any real weight to a fiscal intermediary's 2005 negative comments on overfill. The Court noted that the "closest" that Fresenius "got to a warning" that billing for overfill might be improper was a 2005 document from its Medicare fiscal intermediary (n/k/a as a "Medicare Administrative Contractors") primarily addressing "wastage" but also stating that providers could not bill for "wasted overfill." Even this, the Court observed, did not "tip the scales in favor of a finding of recklessness." The fiscal intermediary's document, the Court explained, was "several steps removed from an authoritative interpretation of CMS rules or regulations" and the Court cited several cases emphasizing the "limited authority" of a fiscal intermediary. Moreover, the document itself did not qualify as "official" policy of the fiscal intermediary.

• Most importantly, the Court rejected the relator's argument that Fresenius had sufficient information at its disposal that it should have connected the dots and concluded from these different sources that it could not bill Medicare for administering overfill. Observing that a failure to put such information together may have been "arguably negligent," the Court found that it did not support a finding of recklessness. Fresenius had adopted a plausible interpretation of Medicare rules and regulations that was consistent with its communications with the OIG and CMS and some in the industry.

Fresenius together with the other cases cited above stand for strict enforcement of the FCA's knowledge requirement. As the D.C. Circuit explained in Purcell,"innocent mistakes made in the absence of binding interpretive guidance [should not be] converted into FCA liability, thereby avoiding the potential due process problems posed by penalizing a private party for violating a rule without first providing adequate notice of the substance of the rule." 

A. Brian Albritton
December 1, 2015

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.”