Dealing a blow to the Department of Justice (DOJ) in what has
otherwise been a record-setting year of False Claims Act recoveries
(over $9 billion in FY 2012), the U.S. Court of Appeals for the
Sixth Circuit recently rejected the notion that corporate profit
seeking is presumptively fraudulent under the False Claims Act
(FCA). As a result, the court rescinded the lower court's $82.6
million award of damages to the government and granted summary
judgment to the defendants on the substantive FCA claims.
The defendants were a dialysis provider and its wholly owned
subsidiary, which the dialysis provider had created in order to
take advantage of a Medicare program that offered higher
reimbursement rates to companies that only provided in-home
dialysis equipment. See United States ex rel. Williams v. Renal
Care Grp., Inc., -- F.3d --, No. 11-5779, 2012 WL 4748104 (6th
Cir. Oct. 5, 2012). The newly created subsidiary was dedicated to
supplying in-home dialysis equipment, which would be reimbursed at
a higher rate, while the parent company continued to provide
dialysis services, which was reimbursed at a lower rate. Much to
the government's dismay, the defendants' sole objective in
creating the wholly-owned subsidiary was to maximize profits based
upon the company's interpretation of admittedly ambiguous
Medicare statutes and regulations. The parent company concluded
that creation of the subsidiary was within the bounds of the law.
The government, on the other hand, contended that parent company
had manipulated a loophole in the Medicare regulations by creating
the subsidiary as an "alter ego" and violated the FCA by
submitting claims "while knowing that [the subsidiary] was a
sham corporation created for the sole purpose of increasing
Medicare reimbursements." Id. at *4.
In its opinion, the Sixth Circuit made clear that profit
maximization alone does not a fraud make, stating, "Why a
business ought to be punished solely for seeking to maximize
profits escapes us." Id. at *9. Without additional
evidence that defendants' creation of the subsidiary violated
the Medicare statute, the court rejected the government's
contention that profit maximization was inherently improper.
Id. at *11. DOJ's failure to identify any "clear
legislative purpose" of the regulations that defendants could
have frustrated was "fatal for its assertion of the alter-ego
doctrine" and the court was "similarly unable to divine
any such purpose from the scheme transgressed by the
defendants' acts." Id. at *9. Finding no basis in
the regulations to conclude that defendants' corporate
structure was "obviously inconsistent with Congress's
goals for the payment scheme," the court held that the
government failed to establish the most essential element of a FCA
action: the falsity of the claim. And without evidence that
defendants acted with reckless disregard of the possible falsity of
any claims for reimbursement, the government also failed to
establish defendants' "knowledge" that the claims
were potentially false.
In this era of widespread government success in the FCA arena, the
Williams decision provides some comfort to FCA defendants
that have begun to feel that they have little recourse as DOJ seeks
to employ overly aggressive or unfounded theories of liability. The
Sixth Circuit's rejection of DOJ's theory here could not
have been clearer — legitimate attempts to maximize profits
based upon a reasonable interpretation of government regulations
does not give rise to FCA liability.
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