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
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
The Seventh Circuit recently adopted a common sense "contract damages" approach in assessing damages in False Claims Act cases: United States v. Anchor Mortgage Corporation, 2013 WL 1150213 (7th Cir. March 21, 2013). Essentially, the Court counseled that in awarding damages in a False Claims Act case, the "net damages," or damages from which the value of any collateral or mitigation are subtracted, should first be calculated before the damages are trebled as provided for by the False Claims Act.
In Anchor, the District Court found the defendants, a corporation and its CEO, liable under the False Claims Act for lying in connection with applying for federal loan guarantees. Pursuant to 31 U.S.C. 3729(a)(1), the Court imposed treble damages in the total amount of $2.7 million. Using one loan guarantee as an example, the District Court began with the amount paid to the lender under the guarantee, $131,643.05, trebled it for a total of $394,929.15, and only then subtracted from that amount the value of the mortgaged security for the failed loan,$68,000, for a final trebled damage figure of $326,729.15, to which the Court added the $5,500 statutory penalty. The Court followed this same method for each of the 11 loan guarantees at issue.
The Seventh Circuit characterized this method as a "gross trebling approach" and it contrasted this method of calculating damages with what it called a "net trebling approach." In a net damage calculation, the value of the security is subtracted from the loss before it is trebled. Applied to the guarantee above, the net trebling approach would subtract the value of the security, $68,000, from the amount of the overall loss, $131,643.05, and then treble that net amount, to reach a total of $190,329.15 to which the $5,500 penalty would then be added.
The Seventh Circuit observed that while the "False Claims Act does not specify either a gross or a net trebling approach," the FCA also does not "signal a departure from the norm [for damages] -- and the norm is net trebling." Adopting the method used for calculating breach of contract damages, the Court stated: "Basing damages on net loss is the norm in civil litigation. If goods delivered under a contract are not as promised, damages are the difference between the contract price and the value of what arrives. If the buyer has no use for them, they must be sold in the market in order to establish that value. If instead the seller fails to deliver, the buyer must cover in the market; damages are the difference between the contract price and the price of cover. If a football team fires its coach before the contract's term ends, damages are the difference between the promised salary and what the coach makes in some other job (or what the coach could have made, had he sought suitable work). Mitigation of damages is universal."
The Court acknowledged that the Supreme Court's decision in United States v. Bornstein, 423 U.S. 303 (1976) is generally cited for adopting a gross trebling approach in False Claims Acts cases. The Seventh Circuit, however, cited Footnote 13 in Bornstein where the Supreme Court appeared to adopt the "contract measure of loss" which supports a net trebling approach.
In reversing the District Court's damage calculation, the Seventh Circuit instructed the District Court to adopt a net trebling approach, and then explained further that the "United States' loss is the amount paid on the guaranty less the value of the collateral, whether or not the agent has chosen to retain the collateral. The damages should not be manipulated through the agency's choice about when (or if) to sell the property it receives in exchange for its payments."
Overall, the Seventh Circuit has adopted a sensible approach to damages, sorely needed in False Claims Act cases. The Court essentially refused to deviate from the common law approach to damages when the False Claim Act's statutory language did not specify or require a gross trebling method for calculating damages.
A. Brian Albritton
April 1, 2013
In a rather remarkable case, the Eighth Circuit Court of Appeals in a split decision affirmed an estimated $6.9 million qui tam award to two relators who, the Government argued, did not actually allege a claim against the defendant, Hewlett-Packard Company (HP): US ex rel Roberts et al. v. Accenture, LLP, et al, 2013 WL 764734 (March 1, 2013, 8th Cir.) In that case, HP had conducted its own internal audit and voluntarily disclosed to the Government that it discovered "defective pricing" in one of its government contracts that was not identified in the relators' complaint. Nevertheless, the Court found that the relators were entitled to a "finder's fee" award because HP began its internal audit of its "pricing practices" after responding to subpoenas from the Government that were drafted by the relators. In making its ruling, the Court rejected the Government's argument that relators were not entitled to recover any portion of the settlement with HP relating to HP's voluntary disclosure since the relators' Complaint did not plead or identify the HP "defective pricing" scheme with particularity sufficient to satisfy Rule 9(b).
According to the relators' Complaint, Accenture was a "systems integration consultant" (SIC) that recommended computer systems and other related products to the federal government: sometimes it resold computer products from the manufacturer to the government and other times, it recommended products to the government and the computer manufacturer would sell the products directly. The relators alleged that Accenture was receiving kickbacks from HP and other computer vendors whose equipment Accenture either sold or recommended to the government. The relators charged in their complaint that HP and others defrauded the government out of "hundreds of millions of dollars" by exchanging kickbacks to consultants for government referrals. Additionally, the relators claimed that "Defendants failed to provide to the General Services Administration (GSA) and other governmental agencies current, accurate, and complete disclosure of their best pricing . . . thereby causing the defective GSA and other governmental pricing schedules."
The Court related in its opinion that the relators worked closely with the government, including drafting administrative subpoenas to issue from the GSA-Office of Inspector General to all potential defendants, including HP in 2006. In August 2008, HP informed the government of the results of an independent audit and admitted that it had not complied with the "price reductions clause in one particular government contract, GS-35F-066N." Subsequently, the government conducted its own audit and "determined that HP had not fully informed GSA of prices it had given to non-government end users, resulting in a 'defectively priced' GSA contract."
The Government intervened in the relators' action, and entered into a $55 million settlement agreement with HP: $9 million on the relators' kickback claims and $46 million for the defective pricing claim, which the government "attributed to HP's voluntary disclosure and the government's own audit" rather than to the relators. The Government objected to the relators recovering anything from the $46 million on the grounds that the "relators' allegations of defective pricing failed to satisfy the requirements for pleading fraud under Rule 9(b)" and that "the discovery of defective contract 35F resulted from HP's voluntary disclosure . . . and was wholly unrelated to the relators' action."
The Court rejected the Government's Rule 9(b) argument and noted that "HP began its internal investigation just a few weeks after the seal was lifted [on the relators' complaint and] a copy of the relators' complaint was provided to HP." The Eighth Circuit affirmed the 15% "finder's fee" of the $46 million settlement for the relators in part because HP began "the internal audit of its pricing practices only after becoming aware of the allegations in the relators' complaint, and only after responding to the extensive subpoenas drafted by the relators at the government's request." The Court observed further: "Thus, the government's claim that HP's disclosure of its defective pricing on Contract 35F was purely 'voluntary,' and that the relators' pending action and assistance in prosecuting the action played no role in uncovering the defective pricing scheme, is disingenuous."
Additionally, following the D.C. Circuit in U.S. ex rel. Batiste v. SLM Corp.,659 F.3d 1204, 1210 (D.C. Cir. 2011), the Eighth Circuit stated: "We reject the contention that Rule 9(b) plays a part in determining whether a relator is entitled to share in the settlement proceeds resulting from a qui tam action in which the government elects to intervene. Rule 9(b)'s standards are meant to test the sufficiency of a complaint at its outset. If a defendant challenges the sufficiency of a complaint's allegations at the outset of a case, a plaintiff still has the opportunity to cure the deficiency. . . . . . at least with respect to those qui tam actions in which the government elects to intervene, a relators' initial allegations need not satisfy Rule 9(b)'s heightened pleading requirements in order to accomplish the purpose they were meant to serve, which is to provide the government sufficient information to launch an investigation of a fraudulent scheme." (internal citations omitted).
In a lengthy dissent, Judge Colloton essentially found that the proceeds of the HP's voluntary disclosure were simply not part of any claim brought by the relators and that the "better view . . . is that the relator may recover only from the proceeds of the settlement of the claim that he brought." According to the dissent, the District Court found that the relators were entitled to a recovery from HP not because they had brought such a claim against HP but "because the relators caused HP to disclose additional information that led the government to achieve the settlement of a different claim." "Whatever the merit of this theory as a policy matter," observed the dissent, "it is not derived from the statute . . . [that] allows relators to recover a percentage of the proceeds of the settlement of the claim brought by the relators, and only that claim." Stated simply, the dissent found it was not enough for the relators' suit to simply serve as a "catalyst" that led eventually to a settlement. To share in that settlement, the relators need to have brought or pled the claim that the Government settled.
Overall, US ex rel Roberts seems to be saying that "but for" the relators' complaint, there would have been no recovery, and since there was a recovery, relators are entitled to share in it, even if they did not actually state a legal claim that would have brought about such a recovery. Moreover, this case further tilts the circuit split in favor of United States ex rel. Batiste v. SLM Corp., and against, Walburn v. Lockheed Martin Corp., 431 F.3d 966, 971 (6th Cir. 2005) which held that “[o]nly a complaint that complies with Rule 9(b) can
have preemptive effect under [31 U.S.C]. § 3730(b)(5).”
A. Brian Albritton
March 11, 2013
The U.S. Department of Justice (DOJ) announced today that it will intervene in the qui tam False Claims Act suit filed by relator Floyd Landis against Lance Armstrong and others: United States ex rel. Landis v. Tailwind Sports Corporation, et al. According to the DOJ press release, the Government "notified the court that it was joining the lawsuit’s allegations as to Armstrong, Bruyneel, and Tailwind" and that it will file a formal complaint within 60 days. DOJ, however, stated that it will not be intervening as to all the defendants named in the case. The U.S. Attorney for the District of Columbia, Ronald C. Machen Jr., stated: “Lance Armstrong and his cycling team took more than $30 million from the U.S. Postal Service based on their contractual promise to play fair and abide by the rules – including the rules against doping . . . . . The Postal Service has now seen its sponsorship unfairly associated with what has been described as ‘the most sophisticated, professionalized, and successful doping program that sport has ever seen.’ This lawsuit is designed to help the Postal Service recoup the tens of millions of dollars it paid out to the Tailwind cycling team based on years of broken promises. In today’s economic climate, the U.S. Postal Service is simply not in a position to allow Lance Armstrong or any of the other defendants to walk away with the tens of millions of dollars they illegitimately procured.”
The DOJ press release announcing its decision to intervene may be found here.
A. Brian Albritton
February 22, 2013
NBC News along with other sources reports on its website that U.S. Department of Justice (DOJ) will notify the Court today that it is intervening in the qui tam/False Claims Act suit brought by relator and ex-teamate Floyd Landis against Lance Armstrong and other defendants.
The Landis qui tam against Armstrong and others was unsealed by the U.S. District Court for the District of Columbia just last month. As previously featured here in the blog, the Wall Street Journal reported in mid-January 2013 that DOJ officials had recommended that the Government intervene.
NBC reports that Armstrong's attorney Robert Luskin has released a statement saying, in effect that the Postal Service had no losses deserving of compensation: "Lance and his representatives worked constructively over these last weeks with federal lawyers to resolve this case fairly, but those talks failed because we disagree about whether the Postal Service was damaged . . .The Postal's Services own studies show that the Service benefited tremendously from its sponsorship -- benefits totaling more than $100 million."
A. Brian Albritton
February 22, 2013
In November 2012, I wrote about the False Clams Act suit brought by the U.S Attorney for the Southern District of New York (SDNY) against Wells Fargo Bank, N.A. The SDNY case alleged that while participating in the Federal Housing Administration (FHA) Direct Endorsement Lender Program,
Wells Fargo falsely certified thousands of loans to be eligible for FHA
insurance and that as a result of Wells Fargo’s false certifications, the FHA paid hundreds of millions of dollars in insurance claims on thousands of
mortgages that defaulted. U.S. v. Wells Fargo Bank
N.A.,12-cv-7527, U.S. District Court, Southern District of New
York
In April 2012 Wells Fargo previously settled with the U.S. Department of Justice (DOJ) and 49 states who together had sued Wells Fargo and other banks in D.C. District Court alleging that these banks engaged in abusive foreclosure practices. In settling that matter, Wells Fargo paid $5 billion and obtained a broad written release as part of a Consent judgement. When the SDNY filed suit against Wells Fargo in November 2012, the Company moved to enforce the Consent Judgment and release contained therein to "preclude" the SDNY from bringing its False Claims Act suit against Wells Fargo.
Yesterday, the D.C. District Court denied Wells Fargo's motion in an opinion found here:
United States et al., v. Wells Fargo et al., Civ. No. 12-361 (D.C. 2/12/13). While it brushed aside the DOJ's arguments that the Court lacked jurisdiction or that the abstention doctrine barred any injunction sought by Wells Fargo, the Court found that by its very terms the release did not stop the SDNY suit. Essentially, the Court found that the Consent Judgement released False Claims Act and FIRREA claims where the "sole basis" for such claims is that [Wells Fargo] submitted to HUD-FHA a false or fraudulent annual certification that the mortgagee had conformed to all HUD-FHA regulations necessary to maintain its HUD-FHA approval. Annual certifications, the Court observed, dealt with Wells Fargo's "company wide compliance." The Consent Judgment release also covered false individual loan certifications by Wells Fargo for HUD mortgage insurance but only if the individual loan did not contain a material violation of HUD-FHA requirements. In short, the release precluded the DOJ from seeking to bring False Claims Act claims against Wells Fargo for claims based solely on false or fraudulent annual certifications --for individual loans, however, that was another matter and the release did not cover this retail type fraud.
Having interpreted the scope of the release, the Court refused to preclude or enjoin the SDNY case but it left open the question of whether the release could still be applied to portions of the SDNY case, observing that it "leaves the interpretation of the SDNY Amended Complaint to the court that has jurisdiction over it."
A. Brian Albritton
February 13, 2013
I commend to readers the recent blog posts at Sidley's Original Source blog and Ben Vernia's False Claims Counsel blog that discuss U.S. ex rel. Nathan v. Takeda Pharmaceuticals North America, Inc., (4th Cir. Jan. 11, 2013). In that case, the 4th Circuit recently upheld the District Court's dismissal of a qui tam alleging that a pharmaceutical company engaged in the "off-label" promotion of two different drugs that, in turn, allegedly resulted in prescriptions for medical uses that were not reimbursable under federal health insurance programs. The relator's complaint and amended complaints did not identify any specific false claims that were presented to the government. Rather, the relator argued that the defendant's scheme to promote off-label uses of its pharmaceuticals must inevitably have resulted in false claims for payment being presented to the government. The Court based its ruling affirming the dismissal of the relator's amended complaint on the combination of the "plausibility" standard for initial pleading found in Ashcroft v. Iqbal, 556 U.S.662, 678 (2009) and of Rule 9(b), Fed. R. Civ. P., which requires that a party plead fraud in the complaint with particularity.
The Court rejected the relator's argument that Rule 9(b) only required the relator to allege in his complaint "the existence of a fraudulent scheme that supports the inference that false claims were presented to the government for payment." Instead, the Court emphasized that the "critical question is whether the defendant caused a false claim to be presented to the government" since liability under the False Claims Act "attaches only to a claim actually presented to the government for payment, not to the underlying fraudulent scheme." Though it acknowledged cases where Rule 9's requirement to plead fraud with particularity was satisfied "in the absence of particularized allegations of specific false claims," the Court noted that in those cases, the "nature of the schemes alleged" and "specific allegations of fraudulent conduct necessarily led to the plausible inference that false claims were presented to the government." (emphasis added). Such cases are the exception, however. Rejecting a "relaxed construction" of Rule 9(b), the Court held "that when a defendant’s actions, as alleged and as reasonably inferred from the allegations, could have led, but need not necessarily have led, to the submission of false claims," then "a relator must allege with particularity that specific false claims actually were presented to the government for payment." (emphasis added).
Thus, the 4th Circuit joins the 11th Circuit in finding that to survive a motion to dismiss, a relator must do far more than simply plead in his or her complaint that a scheme to defraud might have or could have resulted in false claims being presented to the government. The relator must allege that "specific identifiable claims" were presented to the government for payment or plead the scheme with sufficient particularity that it necessarily follows that false claims were presented to the government for payment.
A. Brian Albritton
January 30, 2013
The Wall Street Journal reports that U.S. Department of Justice "officials recommended joining" the sealed qui tam False Claims Act filed against former cyclist Lance Armstrong by his former teammate, Floyd Landis. Mr. Landis was the Tour de France winner in 2006, but was stripped of his title due to doping charges.
Though widely discussed in the press, the qui tam suit has not been unsealed, and neither DOJ nor Landis have confirmed its existence. The Wall Street Journal reports that a source who has seen the suit states that Landis alleges that Armstrong and team managers of the U.S. Postal Cycling Team "defrauded the U.S. government when they accepted money from the U.S. Postal Service." From what can be gleaned, the suit appears to be based on a false certification theory because the U.S. Postal Team contract "required that the team refrain from using performance enhancing drugs." Landis and other former team members are alleged to have testified that "Armstrong was at the center of a sophisticated doping ring and knowingly flouted the contract." The Journal reports further that the U.S. Postal Team received $30.6 million in sponsorship funds from the Postal Service, and the contract is reported to have provided that "negative publicity due to alleged possession, use or sale of banned substances by riders or team personnel would constitute an event of default as would a failure to take action if a rider violates a morals or drug clause."
According to the Wall Street Journal, Armstrong's legal team has been in settlement negotiations" with DOJ, but have been unable to reach an agreement thus far. Along with Armstrong, Landis also allegedly sued Johan Bruyneel, the U.S. Postal Team's director, and Thom Weisel, the former chair of the management company that owned the U.S. Postal Cycling Team.
This is an interesting suit. On the one hand, DOJ purportedly alleges that the Postal Service was defrauded because the Team promised not to let cyclists dope and failed to do so, while continuing to collect sponsorship money. On the other hand, the events at issue occurred many years ago -- the Postal Service sponsorship of the team ended in 2004 -- and given the success of the Team at the time, the Postal Service reaped the benefits and good will of its sponsorship during that period. According to U.S. ex rel Davis v. District of Columbia, did the government in fact receive the benefit of its bargain at the time?
A. Brian Albritton
January 17, 2013
Kudos to the Pietragallo firm blog that first posted the Landis qui tam/False Claims Act Complaint against Lance Armstrong: US ex rel Floyd Landis v. Tailwind Sports Corporation, et al, Case 1:0-cv-976 (D. D.C.). Here is the complaint. The complaint does not reflect that the U.S. Department of Justice has intervened. Along with Lance Armstrong, the complaint lists 8 other defendants, including unidentified defendants, "Does 1 -50."
A. Brian Albritton
January 18, 2013
