It is increasingly common to see plaintiffs bring a traditional employment-law discrimination claim (e.g., Title VII claim) together with a claim, based on the same facts, alleging that their employer retaliated against them for complaining about conduct that violated the False Claims Act. Indeed, I have seen an employment lawyer file a Title VII case on behalf of his client alleging discrimination on the basis of sex in one case, and that same plaintiff with a different lawyer file a False Claims Act ("FCA") retaliation claim based on the same conduct in a separate case while the first case was pending.
In a recent case, the Second Circuit Court of Appeal addressed just this scenario, and in an interesting summary opinion, they affirmed the District Court's dismissal of the second "duplicative" FCA retaliation case. Davis v. Norwalk Economic Opportunity Now, Inc., -- Fed. Appx.--, 2013 WL 4558833 (2nd Cir., August 29, 2013). In Davis, a discharged employee sued her former employer alleging retaliatory harassment and discharge in violation of the FCA's provision prohibiting retaliation, 31 U.S.C. 3730(h), for her reporting food stamp misappropriation by fellow employees. Davis had previously filed a Title VII case that was still pending against the same employer when she filed her second suit alleging FCA retaliation. The District Court dismissed her FCA retaliation claim on the grounds that it was "duplicative" of an already existing case.
The Second Circuit affirmed the dismissal of "duplicative litigation," and explained that a district court had the power to "administer its docket" and could "stay or dismiss a suit that is duplicative of another federal court suit." Though different from claim preclusion, the Court "borrowed" the test for determining claim preclusion and applied it to "assess whether the second suit raises issues that should have been brought in the first." Applying that analysis, the Court found that Davis based her Title VII and FCA claims on nearly "identical" facts. In addition, the Court observed that both actions essentially asked the same question: whether Davis's employer "had a legitimate and lawful reason for taking the adverse employment actions" that plaintiff complained about. The Court found that these two causes of action should have been brought in the same case, even though Davis alleged claims with "different retaliatory motives."
Finally, Davis complained that her FCA claim should not have been dismissed because she was not permitted to amend her Title VII claim in the other case since the deadline for adding claims had passed and she did not discover her employer's FCA violation until after that deadline. The Court rebuffed that argument as well, finding that plaintiff had "ample time" to bring her FCA retaliation claim.
According to the Second Circuit's rules, this case has no precedential effect. Nevertheless, the decision demonstrates that not all claims are fungible and that a relator splits his or her claims at their peril.
A. Brian Albritton
October 7, 2013
Monday, October 7, 2013
Sunday, September 15, 2013
Limited Discovery in Qui Tam Cases: Satisfying Rule 9 Is Not Enough to Open Door to Fishing Expedition
Dear Readers:
The recent decision in U.S. ex rel Spay v. CVS Caremark Corp, 2013 WL 4525226 (August 27, 2013, E.D. Pa.) adds to the growing number of qui tam cases in which courts appear willing to limit discovery in the face of weak or limited complaints which have nevertheless satisfied Rule 9 (b), Fed. R. Civ. P. Rule 9 (b) requires that fraud be pled with particularity, and it is usually the chief hurdle in pleading a False Claims Act violation that a relator's qui tam complaint must overcome to avoid dismissal.
In CVS Caremark, the relator alleged that CVS and its related corporations had "violated the False Claims Act . . . in their role as a Pharmacy Benefit Manager by engaging in a nationwide practice of fraudulently adjudicating and submitting improper Prescription Drug Event claims to the Center for Medicaid and Medicare Services." The defendants moved to dismiss, but the Court denied their motion and permitted the claims to proceed. The relator served a broad request to produce documents on the defendants, to which the defendants objected, and it was in the context of deciding the relator's motion to compel production of documents that the Court addressed the discovery issues.
The Court limited the "temporal scope" of discovery to a two year period. Whereas the relator had sought discovery for a 7 year period, the Court found that the relator's allegations of "continuing misconduct are superficial at best." "Such cursory allegations," the Court pointed out, "made on information and belief alone, are unquestionably insufficient to open the door to broad and burdensome discovery into Defendant's nationwide practices for over seven years." The Court noted further that this was especially true given that so much of the complaint specifically dealt only with a two year period from 2006 - 2008. Relying in part on U.S. ex rel Clausen v. Lab. Corp. of Am., Inc., 198 F.R.D. 560, 564 (N.D. Ga. 2000), aff'd 290 F.3d 1301 (11th Cir. 2002), the Court "decline[d] to allow such a fishing expedition into potential fraudulent claims beyond 2007 absent some particularized pleading that any such claims occurred."
The Court permitted nationwide discovery on 3 of the 6 fraudulent practices alleged by the relator, and it did this in part because the relator had "aptly identified hundreds of specific false claims occurring within a specific contract and then defined various company-wide practices that were part of Defendants' nationwide claims-processing services." Yet, the Court also recognized that notwithstanding the relator's showing of possible nationwide violations, the Court considered what it called an "unwelcome conundrum" between the relator's right to broad discovery and the burdens of such discovery on the defendants. The Court observed: "The cost of discovery in this case could be so prohibitive as to force Defendants into a settlement based not on any assessment of the merits of the case against it, but simply to avoid the undue burden associated with what could potentially be a mere fishing expedition. Such a result is not desirable and does not satisfy the ends of justice."
The Court adopted a phased discovery process of "an initial period of limited discovery to regions in which specific false claims had been alleged, while reserving for a later date broader nationwide discovery on claims that were supported only by reasonable inferences drawn from the allegations of the complaint." The Court explained that this "approach will achieve the dual purposes of protecting Defendants from unduly burdensome and potentially unnecessary discovery while allowing Plaintiff to test the waters of his nationwide claim with the opportunity for broadening its scope should its allegations ring true."
In short, CVS Caremark adds to that growing number of cases wherein courts are increasingly willing to limit discovery or to only permit it to proceed in phases. Simply satisfying Rule 9 and defeating a motion to dismiss is not sufficient to permit discovery. Cases such as CVS Caremark show that the courts will permit discovery only in those areas in which there are substantive factual allegations and will not allow fishing expeditions, especially when allegations are based on "information and belief."
A. Brian Albritton
September 15, 2013
The recent decision in U.S. ex rel Spay v. CVS Caremark Corp, 2013 WL 4525226 (August 27, 2013, E.D. Pa.) adds to the growing number of qui tam cases in which courts appear willing to limit discovery in the face of weak or limited complaints which have nevertheless satisfied Rule 9 (b), Fed. R. Civ. P. Rule 9 (b) requires that fraud be pled with particularity, and it is usually the chief hurdle in pleading a False Claims Act violation that a relator's qui tam complaint must overcome to avoid dismissal.
In CVS Caremark, the relator alleged that CVS and its related corporations had "violated the False Claims Act . . . in their role as a Pharmacy Benefit Manager by engaging in a nationwide practice of fraudulently adjudicating and submitting improper Prescription Drug Event claims to the Center for Medicaid and Medicare Services." The defendants moved to dismiss, but the Court denied their motion and permitted the claims to proceed. The relator served a broad request to produce documents on the defendants, to which the defendants objected, and it was in the context of deciding the relator's motion to compel production of documents that the Court addressed the discovery issues.
The Court limited the "temporal scope" of discovery to a two year period. Whereas the relator had sought discovery for a 7 year period, the Court found that the relator's allegations of "continuing misconduct are superficial at best." "Such cursory allegations," the Court pointed out, "made on information and belief alone, are unquestionably insufficient to open the door to broad and burdensome discovery into Defendant's nationwide practices for over seven years." The Court noted further that this was especially true given that so much of the complaint specifically dealt only with a two year period from 2006 - 2008. Relying in part on U.S. ex rel Clausen v. Lab. Corp. of Am., Inc., 198 F.R.D. 560, 564 (N.D. Ga. 2000), aff'd 290 F.3d 1301 (11th Cir. 2002), the Court "decline[d] to allow such a fishing expedition into potential fraudulent claims beyond 2007 absent some particularized pleading that any such claims occurred."
The Court permitted nationwide discovery on 3 of the 6 fraudulent practices alleged by the relator, and it did this in part because the relator had "aptly identified hundreds of specific false claims occurring within a specific contract and then defined various company-wide practices that were part of Defendants' nationwide claims-processing services." Yet, the Court also recognized that notwithstanding the relator's showing of possible nationwide violations, the Court considered what it called an "unwelcome conundrum" between the relator's right to broad discovery and the burdens of such discovery on the defendants. The Court observed: "The cost of discovery in this case could be so prohibitive as to force Defendants into a settlement based not on any assessment of the merits of the case against it, but simply to avoid the undue burden associated with what could potentially be a mere fishing expedition. Such a result is not desirable and does not satisfy the ends of justice."
The Court adopted a phased discovery process of "an initial period of limited discovery to regions in which specific false claims had been alleged, while reserving for a later date broader nationwide discovery on claims that were supported only by reasonable inferences drawn from the allegations of the complaint." The Court explained that this "approach will achieve the dual purposes of protecting Defendants from unduly burdensome and potentially unnecessary discovery while allowing Plaintiff to test the waters of his nationwide claim with the opportunity for broadening its scope should its allegations ring true."
In short, CVS Caremark adds to that growing number of cases wherein courts are increasingly willing to limit discovery or to only permit it to proceed in phases. Simply satisfying Rule 9 and defeating a motion to dismiss is not sufficient to permit discovery. Cases such as CVS Caremark show that the courts will permit discovery only in those areas in which there are substantive factual allegations and will not allow fishing expeditions, especially when allegations are based on "information and belief."
A. Brian Albritton
September 15, 2013
Monday, July 22, 2013
Using the False Claims Act to Police Wages on Public Works Contracts: US ex rel International Brotherhood of Electrical Workers v. The Farfield Company
Dear Readers:
The broad scope of the False Claims Act and its creative use by relators continues to surprise me. For example, I recently came across a case where the relator was a labor union that brought a False Claims Act case against an employer who it claimed failed to pay the prevailing wage to certain union employees on jobs that were funded by federal grants. U.S. ex rel International Brotherhood of Electrical Workers, Local Union No. 98 v. The Farfield Company, 2013 WL 3327505 (E.D. Pa. July 2, 2013). In that case, the union claimed that the employer, an electrical contractor, had intentionally and methodically misclassified workers in violation of the Davis-Bacon Act, 40 U.S.C. 276a et seq. ("DBA"). The DBA requires that an "appropriate wage" be paid to workers on construction contracts funded by the federal government and that contractors on such jobs must certify that their "payroll information is correct . . . and workers have been paid not less than the applicable wage rates . . . for the classification of work performed."
The union claimed that the employer violated the False Claims Act in three different ways. First, the union charged the contractor obtained an advantage in bidding for the contract by manipulating the worker classifications, whereby workers that should have been classified (and paid more) as electricians due to the work they were performing were instead classified as less expensive laborers and groundsmen. By doing so, alleged the union, the contractor was able to "underestimate its labor costs and underbid competitors" for the job contract. Second, the union alleged that the employer in fact underpaid workers by misclassifying them to positions that received lower wages. And third, the union claimed that the employer had "falsely certified" its compliance with the DBA.
The Court rejected the employer's argument that it was without subject matter jurisdiction and that the matter was committed to the discretion of the Secretary of Labor, who alone determines the prevailing wage for particular classifications. Though it acknowledged that there may be instances where a court must first defer to the primary jurisdiction of the Secretary of Labor for a determination as to a job classification, the Court did not find any "complex Davis-Bacon classification regulations in this action" and it refused to defer the matter. Additionally, the Court found that even though the employer did not present a false claim for payment to the government, nevertheless the employer faced possible liability under 31 U.S.C. 3729(a)(2), which applies to anyone using a false record or statement to get a false or fraudulent claim paid by the government. Finally, even though the employer had been subject to a Department of Labor audit, the Court denied the employer's claim that such an audit qualified as an "administrative civil money penalty proceeding in which the government is already a party" that also could have led to a loss of subject matter jurisdiction. See 31 U.S.C. 3730(e)(3).
In short, the Farfield case illustrates the breadth of the False Claims Act, and its creative use by relators; in this instance, to police the wages paid to workers on construction and other public works contracts funded by the federal government.
A. Brian Albritton
July 22, 2013
The broad scope of the False Claims Act and its creative use by relators continues to surprise me. For example, I recently came across a case where the relator was a labor union that brought a False Claims Act case against an employer who it claimed failed to pay the prevailing wage to certain union employees on jobs that were funded by federal grants. U.S. ex rel International Brotherhood of Electrical Workers, Local Union No. 98 v. The Farfield Company, 2013 WL 3327505 (E.D. Pa. July 2, 2013). In that case, the union claimed that the employer, an electrical contractor, had intentionally and methodically misclassified workers in violation of the Davis-Bacon Act, 40 U.S.C. 276a et seq. ("DBA"). The DBA requires that an "appropriate wage" be paid to workers on construction contracts funded by the federal government and that contractors on such jobs must certify that their "payroll information is correct . . . and workers have been paid not less than the applicable wage rates . . . for the classification of work performed."
The union claimed that the employer violated the False Claims Act in three different ways. First, the union charged the contractor obtained an advantage in bidding for the contract by manipulating the worker classifications, whereby workers that should have been classified (and paid more) as electricians due to the work they were performing were instead classified as less expensive laborers and groundsmen. By doing so, alleged the union, the contractor was able to "underestimate its labor costs and underbid competitors" for the job contract. Second, the union alleged that the employer in fact underpaid workers by misclassifying them to positions that received lower wages. And third, the union claimed that the employer had "falsely certified" its compliance with the DBA.
The Court rejected the employer's argument that it was without subject matter jurisdiction and that the matter was committed to the discretion of the Secretary of Labor, who alone determines the prevailing wage for particular classifications. Though it acknowledged that there may be instances where a court must first defer to the primary jurisdiction of the Secretary of Labor for a determination as to a job classification, the Court did not find any "complex Davis-Bacon classification regulations in this action" and it refused to defer the matter. Additionally, the Court found that even though the employer did not present a false claim for payment to the government, nevertheless the employer faced possible liability under 31 U.S.C. 3729(a)(2), which applies to anyone using a false record or statement to get a false or fraudulent claim paid by the government. Finally, even though the employer had been subject to a Department of Labor audit, the Court denied the employer's claim that such an audit qualified as an "administrative civil money penalty proceeding in which the government is already a party" that also could have led to a loss of subject matter jurisdiction. See 31 U.S.C. 3730(e)(3).
In short, the Farfield case illustrates the breadth of the False Claims Act, and its creative use by relators; in this instance, to police the wages paid to workers on construction and other public works contracts funded by the federal government.
A. Brian Albritton
July 22, 2013
Tuesday, July 2, 2013
Limiting Discovery in False Claims Act Cases: US ex rel Duxbury v. Ortho Biotech Products, L.P.
I recently came across an interesting case that provides some hope to False Claims Act ("FCA") defendants who seek to limit discovery in the event they have not been successful in stopping a FCA complaint at the motion to dismiss stage: U.S. ex rel. Duxbury v. Ortho Biotech Products, L.P., 2013 WL 2501930 (1st Cir., June 12, 2013). Essentially, in Duxbury, the relator alleged that the defendant had engaged in a "nationwide" kickback scheme to encourage healthcare providers "across the United States" to prescribe the drug, Procrit, to patients. In turn, the relator argued that he should be permitted discovery for the six year period after he left the company and that discovery be allowed "nationwide" since his amended complaint alleged a "nationwide" kickback scheme. The District Court refused to permit discovery past the date of the relator's termination from the company and beyond the state where the relator worked for the company. The relator could not substantiate his kickback claim with this limited discovery and summary judgement was granted against him.
On appeal, the First Circuit affirmed the District Court's order and discretion in limiting relator's discovery of the defendant to the time period when the relator worked for the company as well as to the "five accounts" in Washington state about which the relator "had direct and independent knowledge." The First Circuit observed that the "district court was not required to expand the scope of discovery based upon the amended complaint's bald assertions that the purported kickback scheme continued after [the relator's] termination or that it was nationwide in scope." The Court agreed with the district court to limit relator's discovery to only those allegations for which the relator had satisfied Rule 9(b)'s requirement to plead fraud with particularity and rejected the relator's attempt to "undertake a fishing expedition into the amended complaint's purely speculative allegations."
Duxbury is a reminder that just because a relator survived a Rule 9(b) challenge, that does not open the flood gates to all discovery based on the bald allegations of a relator's complaint. Courts can and in many instances should fashion limits on discovery, such that the relator is first allowed a limited though reasonable opportunity to substantiate or support their specific claims before permitting more wide ranging and burdensome discovery, especially on a nationwide basis.
The question, of course, is the basis or principle on which a court should limit discovery or allow it only in stages. In U.S. ex rel Minge v. Tect Aerospace, Inc, 2012 WL 1118948 (April 3, 2012 D. Kan), we saw one solution. In that case, the Court permitted the relator to engage in what it called "litmus test" discovery, whereby the relator obtained discovery of a sample of "exemplar aircraft" in order to prove his claims. In Duxbury, we see another solution: the Court permitted the relator to obtain discovery in that region and time period in which the relator had "direct experience." I would be interested in hearing from readers about other cases where courts have allowed relators only limited discovery and their basis for doing so.
A. Brian Albritton
July 2, 2013
On appeal, the First Circuit affirmed the District Court's order and discretion in limiting relator's discovery of the defendant to the time period when the relator worked for the company as well as to the "five accounts" in Washington state about which the relator "had direct and independent knowledge." The First Circuit observed that the "district court was not required to expand the scope of discovery based upon the amended complaint's bald assertions that the purported kickback scheme continued after [the relator's] termination or that it was nationwide in scope." The Court agreed with the district court to limit relator's discovery to only those allegations for which the relator had satisfied Rule 9(b)'s requirement to plead fraud with particularity and rejected the relator's attempt to "undertake a fishing expedition into the amended complaint's purely speculative allegations."
Duxbury is a reminder that just because a relator survived a Rule 9(b) challenge, that does not open the flood gates to all discovery based on the bald allegations of a relator's complaint. Courts can and in many instances should fashion limits on discovery, such that the relator is first allowed a limited though reasonable opportunity to substantiate or support their specific claims before permitting more wide ranging and burdensome discovery, especially on a nationwide basis.
The question, of course, is the basis or principle on which a court should limit discovery or allow it only in stages. In U.S. ex rel Minge v. Tect Aerospace, Inc, 2012 WL 1118948 (April 3, 2012 D. Kan), we saw one solution. In that case, the Court permitted the relator to engage in what it called "litmus test" discovery, whereby the relator obtained discovery of a sample of "exemplar aircraft" in order to prove his claims. In Duxbury, we see another solution: the Court permitted the relator to obtain discovery in that region and time period in which the relator had "direct experience." I would be interested in hearing from readers about other cases where courts have allowed relators only limited discovery and their basis for doing so.
A. Brian Albritton
July 2, 2013
Thursday, June 6, 2013
The First Circuit Strictly Applies False Claims Act's First-to-File Rule to Bar Subsequent Qui Tam Suits Based on Same Facts
The First Circuit recently followed the D.C. Circuit's decision in United States ex rel. Batiste v. SLM Corp., 659 F.3d 1204 (D.C. Cir. 2011) in holding that a relator's qui tam complaint does not have to satisfy the heightened pleading requirement of Federal Rule of Civil Procedure 9(b), which requires that fraud be pled with particularity, in order to bar qui tam suits based on the same facts filed by subsequent relators: U.S. ex rel Heinman-Guta v. Guidant Corp., 2013 WL 2364172 (1st Cir., May 31, 2013).
Referred to as the "first-to-file rule," 31 USC 3730(b)(5) of the False Claims Act provides that "when a person brings an action under this subsection, no person other than the Government may intervene or bring a related action based on the facts underlying the pending action." In interpreting the first-to-file rule, the Sixth Circuit held in Walburn v. Lockheed Martin Corp., 431 F.3d 966, 972 (6th Cir. 2005) that in deciding whether a second or subsequently filed qui tam complaint was barred, the initial relator's complaint concerning the same matter must satisfy the heightened pleading standard of Rule 9(b). If the initial relator's qui tam complaint does not plead fraud with sufficient particularity to satisfy Rule 9(b), then section 3730(b)(5) does not apply and will not bar a subsequent relator's suit based on the same facts.
The First Circuit's Guidant decision, along with Batiste, rejects Walburn, and it essentially holds that Rule 9 has no bearing on whether to bar or allow a subsequently filed qui tam complaint. Rather, according to the "plain language" of 3730(b)(5), "if the earlier filed complaint contains enough material facts to alert the government to a potential fraud, a later-filed complaint . . . containing the same essential facts but incorporating additional or somewhat different details is . . . barred."
The First Circuit was certainly not troubled by the policy concern that guided the Sixth Circuit's Walburn decision: "failing to impose Rule 9's particularity requirements on earlier filed complaints . . . would encourage would be qui tam relators to file overly broad, vague and speculative complaints simply to prevent other potential relators from filing more-detailed complaints." In fact, the Court could not imagine "how an overly broad and speculative complaint lacking essential material facts would be sufficient in the first instance to notify the government of a fraudulent scheme under the FCA." The Court stated further that "[a] first-filed complaint that failed to [allege essential facts] would not preclude a later-filed complaint . . ." Yet, the Court does not really provide any instruction as to what this means. Apparently, it does not take much to preclude subsequently filed qui tam complaints because the "purpose of the first-filed complaint under section 3730(b)(5) is to provide notice of the potential fraud to the government so that it may initiate its investigation into the fraudulent scheme, nothing more."
In reality, the "purpose" of section 3730(b)(5) is not so clearly reflected in the statute's plain language and the identified policy of simply "providing notice" does not reflect how important the quality of a relator's information is to the government. In order to prosecute the False Claims Act and to effectively employ the government's limited investigative resources, the government needs factually intensive, well pled, investigated, and supported qui tams. If valuable information is provided by a subsequent relator, what incentive does that person have to file or cooperate, often at risk to themselves, if their subsequent complaint is barred?
A. Brian Albritton
June 6, 2013
Referred to as the "first-to-file rule," 31 USC 3730(b)(5) of the False Claims Act provides that "when a person brings an action under this subsection, no person other than the Government may intervene or bring a related action based on the facts underlying the pending action." In interpreting the first-to-file rule, the Sixth Circuit held in Walburn v. Lockheed Martin Corp., 431 F.3d 966, 972 (6th Cir. 2005) that in deciding whether a second or subsequently filed qui tam complaint was barred, the initial relator's complaint concerning the same matter must satisfy the heightened pleading standard of Rule 9(b). If the initial relator's qui tam complaint does not plead fraud with sufficient particularity to satisfy Rule 9(b), then section 3730(b)(5) does not apply and will not bar a subsequent relator's suit based on the same facts.
The First Circuit's Guidant decision, along with Batiste, rejects Walburn, and it essentially holds that Rule 9 has no bearing on whether to bar or allow a subsequently filed qui tam complaint. Rather, according to the "plain language" of 3730(b)(5), "if the earlier filed complaint contains enough material facts to alert the government to a potential fraud, a later-filed complaint . . . containing the same essential facts but incorporating additional or somewhat different details is . . . barred."
The First Circuit was certainly not troubled by the policy concern that guided the Sixth Circuit's Walburn decision: "failing to impose Rule 9's particularity requirements on earlier filed complaints . . . would encourage would be qui tam relators to file overly broad, vague and speculative complaints simply to prevent other potential relators from filing more-detailed complaints." In fact, the Court could not imagine "how an overly broad and speculative complaint lacking essential material facts would be sufficient in the first instance to notify the government of a fraudulent scheme under the FCA." The Court stated further that "[a] first-filed complaint that failed to [allege essential facts] would not preclude a later-filed complaint . . ." Yet, the Court does not really provide any instruction as to what this means. Apparently, it does not take much to preclude subsequently filed qui tam complaints because the "purpose of the first-filed complaint under section 3730(b)(5) is to provide notice of the potential fraud to the government so that it may initiate its investigation into the fraudulent scheme, nothing more."
In reality, the "purpose" of section 3730(b)(5) is not so clearly reflected in the statute's plain language and the identified policy of simply "providing notice" does not reflect how important the quality of a relator's information is to the government. In order to prosecute the False Claims Act and to effectively employ the government's limited investigative resources, the government needs factually intensive, well pled, investigated, and supported qui tams. If valuable information is provided by a subsequent relator, what incentive does that person have to file or cooperate, often at risk to themselves, if their subsequent complaint is barred?
A. Brian Albritton
June 6, 2013
Monday, May 27, 2013
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:
A. Brian Albritton
May 27, 2013
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.
- 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.
- Court dismisses False Claims Act Suit Related to Alleged Mortgage Fraud by Bank of America and Countrywide Financial.
A. Brian Albritton
May 27, 2013
Tuesday, April 9, 2013
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
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
Monday, April 1, 2013
Contract Damages in False Claims Act Cases: the 7th Circuit Adopts a Net Trebling Approach to Calculating Damages
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 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
Monday, March 11, 2013
Eighth Circuit Finds that Relators Are Entitled to Share of FCA Settlement Obtained by Government Because Their Suit Resulted in Defendant Making a Voluntary Disclosure on a Different Claim
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
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
Friday, February 22, 2013
Update - DOJ Will Join Qui Tam Filed Against Lance Armstrong
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
The DOJ press release announcing its decision to intervene may be found here.
A. Brian Albritton
February 22, 2013
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