Fourth Circuit Holds that Facts Learned by Relators' Counsel in Previous Qui Tam Trigger Public Disclosure Bar

In United States ex rel. May v. Purdue Pharma L.P., the Fourth Circuit recently held that the pre-2010 public disclosure bar prohibits a subsequent relator from bringing a False Claims Act qui tam based upon “facts” that their counsel learned in representing a prior relator who brought a qui tam. No. 14-2299, 2016 WL 362250 (4th Cir. Jan. 29 2016). Stated simply, when one relator’s qui tam is dismissed, the public disclosure bar applies to subsequent efforts by relator’s counsel to get around that dismissal by bringing the same qui tam with new relators who are not original sources.  

In 2005, a former district sales manager (“Original Relator”) for Purdue Pharma (“Purdue”), brought a qui tam action in the U.S. District Court for the Southern District of West Virginia against Purdue. In 2010, the Court dismissed the Original Relator’s qui tam because he had signed a release when he accepted a severance package from Purdue.  

Subsequently, the Original Relator’s wife, along with a former Purdue employee that had worked with the Original Relator, filed a nearly identical qui tam against Purdue.  In doing so, they were represented by multiple attorneys, one of whom had represented the Original Relator in his qui tam against Purdue. The District Court dismissed the new qui tam, finding that it was based on claims that were publicly disclosed in the Original Relator’s suit.  In so doing, the Court applied the pre-2010 public disclosure bar. 31 U.S.C. § 3730(e)(4)(A)(2009) (“No court shall have jurisdiction over an action under this section based upon the public disclosure of allegations in a . . . civil . . . hearing unless the . . . person bringing the action is an original source of the information.”)

On appeal to the Fourth Circuit, Relators made three arguments to avoid the public disclosure bar. First, they argued that their allegations were not “derived from” a public disclosure because they had not personally reviewed the Original Relator’s lawsuit prior to instituting their qui tam. Second, though the Relators acknowledged that their attorney had represented the Original Relator and that their attorney’s knowledge was imputed to them, they argued that their attorney’s knowledge was nevertheless derived from nonpublic sources. Finally, Relators argued that the False Claims Act (“FCA”) was intended to encourage relators to bring qui tams even if based upon "second hand" knowledge of a fraud against the government. 

Affirming the District Court, the Fourth Circuit rejected the Relators’ attempt to sidestep the public disclosure bar. The Court noted that (1) the allegations in Relators’ qui tam were publicly disclosed prior to the filing of their complaint, and (2) Relators did not independently discover the facts underpinning their allegations but instead based their claims on what their attorney learned while representing the Original Relator in the prior qui tam. Rejecting the argument that the FCA encouraged relators to bring claims even if based on second hand information, the Court stated that the FCA “is not designed to encourage lawsuits by individuals like the Relators who (1) know of no useful new information about the scheme they allege, and (2) learned of the relevant facts through knowledge their attorney acquired when previously litigating the same fraud claim.” Accordingly, the Court held that Relators’ complaint was subject to the public disclosure bar and must be dismissed due to a lack of subject matter jurisdiction.

Purdue Pharma’s holding reflects the Fourth Circuit’s narrow reading of the pre-2010 public disclosure bar which prohibits jurisdiction over subsequent qui tam suits that are “based upon” prior public disclosures. Unlike other circuits, however, the Fourth Circuit narrowly construes the phrase “based upon” to preclude actions “only where the relator has actually derived from [a public] disclosure the allegations upon which his qui tam action is based.” See United States ex rel. Siller v. Becton Dickinson & Co., 21 F.3d 1339, 1348 (4th Cir.1994).  

By contrast, had this case been brought in any other circuit, it would have been more easily disposed of:  the majority of circuit courts read the phrase “based upon” to mean “substantially similar to” or “ supported by” publicly disclosed information. United States ex rel. Ondis v. City of Woonsocket, 587 F.3d 49, 57 (1st Cir.2009) (“majority view [among circuits] holds that as long as the relator's allegations are substantially similar to information disclosed publicly, the relator’s claim is ‘based upon’ the public disclosure even if he actually obtained his information from a different source”). In these circuits, simply comparing the original qui tam with the subsequent qui tam would have sufficed to show that the second was “based upon” the initially filed case.

Author: Nathan Huff 
Editor: A. Brian Albritton
February 8, 2016

Recent Qui Tam/FCA Articles from Around the Web

Dear Readers:

I apologize for my absence the last few weeks. I am happy to be back writing articles. I have recently come across several blogs and bloggers who have written about a number of interesting qui tam and False Claims Act ("FCA") cases:

• Generic drug maker filing a qui tam against a competitor in part based on the competitor’s fraudulent patent drug application.

Berger & Montague’s blog, “Latest Court Ruling Allows Groundbreaking Qui Tam Lawsuit Between Pharmaceutical Rivals to Proceed,” highlights an interesting qui tam filed by the generic drug manufacturer Amphastar against its competitor, Aventis Pharma. The qui tam alleges that Aventis fraudulently procured a patent on its drug, Lovenox, and that as a result of the false patent, Aventis overcharged Medicare and Medicaid for that drug. The Court has recently denied Aventis' Motion to Dismiss Amphastar’s Amended Complaint. See Pharmaceuticals v. Aventis Pharma, U.S.District Court, C.D. CA., EDCV-09-0023 MJG.

• In an insurance coverage dispute over a qui tam settlement, the billing practices of a medical management services organization were not subject to coverage because they were not professional services covered by the professional liability policy.

Wiley Rein recently wrote about an interesting case, MSO Washington, Inc. v. RSUI Group, Inc., 2013 WL 1914482 (W.D. Wash.), which addressed insurance coverage for a qui tam settlement: “False Claims Act Qui Tam Action Over Billing Practices Does Not Involve Professional Services; Claim Is Barred by Fraud Exclusion.” In this case, the Court granted summary judgment against the insured, a medical management services organization, who sought coverage and a finding of bad faith against its insurer for failing to reimburse it for the qui tam settlement that it paid that related to the billing practices. The Court did not find coverage because “billing claims under the [False Claims Act] does not qualify as a professional service.” Additionally, the Court found that claims arising under the False Claims Act did not fall within the scope of the policy’s coverage for a “negligent act, error or omission” because a FCA claim must involve a “knowing presentation of what is known to be false.” The article includes a link to the Court’s decision.

• Court dismisses False Claims Act Suit Related to Alleged Mortgage Fraud by Bank of America and Countrywide Financial.

Vinson & Elkins ("V&E") has a interesting article, "Court Forecloses Government’s Attempt to Use False Claims Act to Combat Mortgage Fraud," discussing the ruling by U.S. District Court Judge Jed Rakoff dismissing the False Claims Act claims brought in a qui tam in which the U.S. Attorney for the Southern District of New York has intervened. The case is U.S. ex rel O’Donnell v. Bank of America Corporation successor to Countrywide Financial Corp., 12-cv-1422, U.S. District Court, Southern District of New York. In this case, the government alleged that Countrywide used a “streamlined” loan origination model to increase the speed in which it originated and sold loans and that the use of that model resulted in “rampant instances of fraud and other serious loan defects.”  Many of those fraudulent loans, the government claims, were sold to Freddie Mac and Fannie Mae. As V&E points out, the government’s FCA claims were a stretch because the provision of the FCA under which it was proceeding was passed in 2009, after most of the loans at issue.  At the same time, the Court permitted the government to pursue its claims brought pursuant to the Financial Institutions Reform Recovery Enforcement Act (“FIRREA”). The Court has informed the parties that it will soon issue a detailed opinion in support of its ruling.

A. Brian Albritton
May 27, 2013 

What Was the Relator Thinking? Court Sanctions Relator and Counsel for Frivolous Qui Tam Claim

Under the "what were they thinking" column, a recent U.S. District Court case from the Eastern District of Wisconsin shows that relators and their counsel who bring frivolous or unfounded qui tam claims will be subject to sanctions. USA ex rel Watson v. King-Vassel, et al., 2012 WL 5272486 (E.D. Wis. Oct. 23, 2012).

In the King-Vassel case, the relator, a physician, brought a qui tam against another physician and two companies with whom she was affiliated that provided mental health services alleging that the physician violated the False Claims Act and the Wisconsin False Claims Act when she allegedly "prescrib[ed] medications to a minor patient receiving Medicaid assistance for reasons that are not medically accepted." The state and federal governments decline to intervene, and the relator proceeded with the case, though he was grossly unprepared to do so.

First, the Court observed that the relator got the idea of bringing a qui tam suit as a result of meeting an attorney at a conference and researching how to bring a qui tam claim through a website, "psychrights.org".

Second, the relator found his alleged false claim by placing an ad in the the newspaper seeking minor Medicaid patients who had received certain medications and got his "lead" when a patient responded. The doctor obtained that patient's records using a "borderline-fraudulent release" that failed to mention that the records would be used to bring suit.

Based on these patient records, the relator filed suit against the physician alleging that she had improperly prescribed psychotropic drugs to the minor patient for four years since the drugs at issue were not approved by the FDA for such indications. By doing do, the relator alleged that the physician caused false claims for reimbursement to be submitted to Medicaid. The relator further sued the two companies that the physician was affiliated with on the grounds that they employed the physician. After several months of discovery, the defendants moved for summary judgment.

Third, though it had been apparent from early in the case that the defendant companies did not employ the physician and were not responsible for her alleged conduct on the grounds of respondeat superior, the relator did not move to dismiss them until after the summary judgment was filed. At that point, however, one of the corporate defendants had moved for sanctions on the grounds that it should not have been sued since it was not the employer of the physician defendant. The Court granted sanctions against the relator and his attorney pursuant to 28 U.S.C. 1927 and its inherent powers, finding that the attorney waited far too long after she should have known better to withdraw the claim against the corporate defendant. As a result of relator counsel's failure to conduct an "appropriate investigation" after becoming aware of the "serious flaw" in his claim against the corporate defendant, the defendant "was forced to proceed through the entire discovery process and file an extensive summary judgment brief, all to combat a claim that could have been readily dismissed after a minor inquiry."

Fourth, the Court granted summary judgment against the relator who failed to provide any expert testimony or competent evidence to show that the defendant physician's prescribing of certain drugs in fact caused the submission of a false claim to Medicaid or even to show that the prescribed drugs were improper for that patient.

Overall, the Court observed that the relator's "attack here on a single doctor's prescriptions to a single patient does not provide the government with substantial valuable information, as intended by the qui tam statutes. Instead of providing the government with valuable information, [the relator] seemingly sought only to cash in on a fellow doctor's attempts to best address a patient's needs. In return, [the physician] was treated to a lawsuit, the proceeds of which would be split three ways between [the relator, his counsel, and the patient's parent]."

One question that remains is why the government did not dismiss this case or at least dismiss the corporate defendants pursuant to 31 U.S.C. 3730(2)(c)(2). This case was frivolous, and this should have been apparent as to the corporate defendants even at the sealed stage: the corporate defendants were not subject to respondeat superior liability because the physician was an independent contractor and not an employee of defendants. 

A. Brian Albritton
October 31, 2012

Court Sanctions Attorneys for Relator in Frazier v. IASIS Healthcare For Failing to Promptly Seek Ruling on Privileged Documents Obtained from Relator

The U.S. District Court in Arizona recently sanctioned the attorneys for the relator in the qui tam case of United States ex rel Jerre Frazier v. IASIS Healthcare Corporation, Case 2:05-cv-766-RCJ as a result of their failure to promptly seek a ruling from the Court concerning privileged documents of the defendant that they had received from the relator.  In an Order entered on January 10, 2012, the Court found that the relator, Frazier, had “copied and removed approximately 1,300 pages of documents, emails and other . . . proprietary materials” from the the defendant, IASIS Healthcare. After years of litigation and the dismissal of the third amended qui tam complaint in June 2011, the Court handed down its ruling in response to the Defendant's Renewed Motion for Sanctions against the relator and his counsel.

The Court denied as moot the Motion for Sanctions against the relator as the parties had settled their claims.

As to the relator's "Qui Tam Counsel," however, the Court found they "were aware that they had potentially privileged documents in the Fall of 2004," before they filed suit, but once Qui Tam Counsel filed suit, they "delayed and did not seek a ruling from the Court on what to do with IASIS’s privileged documents" until it had served the unsealed qui tam complaint. The Court further falted Qui Tam Counsel for appearing to "play dumb as to what privileged documents IASIS was talking about" once IASIS requested its docuuments  The Court explained that "[a]lthough Qui Tam Counsel were obligated to acquire Frazier’s consent before returning the documents back to IASIS, Qui Tam Counsel should have told IASIS that or should have waited for Frazier’s consent. Instead, Qui Tam Counsel feigned ignorance with respect to the Sealed Box of privileged documents in their offices." The Court found that Qui Tam Counsel breached an ethical duty to seek a ruling from the Court about the privileged documents and breached their duty to contact IASIS about the documents after the complaint was unsealed."

Though finding that sanctions were appropriate, the Court explained that the "circumstances in this case do not warrant dismissal" nor did the facts establish that Qui Tam Counsel acted in "bad faith"  In light of these considerations, the Court imposed the sanction of requiring Qui Tam Counsel to repay the "attorneys’ fees and costs expended by IASIS in its attempt to get its privileged documents back from Qui Tam Counsel."  Additionally, the Court disqualified the relator's counsel from further assisting or representing the relator "or any other party adverse to IASIS."

The Court denied Defendant's request that Qui Tam Counsel be sanctioned even more broadly for fees and costs pursuant to 28 U.S.C. § 1927.   28 U.S.C. § 1927 provides that the Court may award attorneys' fees and costs against an attorney who "unreasonably and vexatiously" . . . . . "multiplies the proceedings in any case."  The Court rejected  Defendant's request on the grounds that Qui Tam Counsel had not acted in bad faith "nor is there any evidence to establish that they knowingly raised a frivolous argument."