United States: False Claim Act: 2013 Year In Review

Last year continued the trend of robust False Claims Act (FCA) enforcement by the U.S. Department of Justice (DOJ) and proliferating qui tam lawsuits brought by whistleblowers on behalf of the United States. In 2012, DOJ recovered a record-breaking $5 billion in civil fraud judgments and settlements. While DOJ's recoveries in 2013 of $3.8 million didn't match that level, they still represent the second-largest total recorded, and few anticipate a downward trend. Like 2012, 2013 saw health care as the industry most affected by FCA recoveries, accounting for $2.6 billion, while procurement matters (primarily from the defense industry) accounted for $890 million. Although the overall amount of recoveries was below that of 2012, the number of qui tam lawsuits filed in 2013 did break records with 752 whistleblower complaints, an increase of 100 from 2012 filings.

While 2013 showed continued aggressive use of the FCA by DOJ and plaintiffs' attorneys representing whistleblowers, legal developments in the courts were more balanced. Expansive interpretation of damages and liability theories under the FCA were common—the $237 million judgment in the Tuomey retrial may be the most obvious example—but other courts expressed a growing unease with the most aggressive FCA theories. Most notably, that unease can be seen in decisions by the Sixth and Eighth U.S. Circuit Courts of Appeal, each of which rejected the FCA as a regulatory compliance tool. Courts also continued to wrestle with recurring FCA issues, including the pleading standard under Rule 9(b), first-to-file issues, and application of the excessive fines provisions within the U.S. Constitution's Eighth Amendment. Below, we summarize the most notable court decisions, settlements, and related developments in the FCA from the past year.

Regulatory Noncompliance as an FCA Violation

U.S. ex rel. Ketroser v. Mayo Foundation, 729 F.3d 825 (8th Cir. 2013).

In Ketroser, the relator (another term for the whistleblower bringing the lawsuit) alleged that the defendant medical center violated the FCA by submitting one pathology report, rather than two, as part of its two-stage analysis of tissue samples taken during surgery. The relator argued that the current procedural terminology (CPT) codes charged by the defendant for the two stages of analysis each required "reporting," and thus the defendant should have created two separate written reports—one for each CPT code charged.

The district court dismissed the case, and the Eighth Circuit affirmed, finding that the defendant had reasonably interpreted the regulatory requirements. Specifically, the court found the requirements ambiguous and the defendant's interpretation reasonable. The court stated, "[The defendant's] reasonable interpretation of any ambiguity inherent in the regulations belies the scienter necessary to establish a claim of fraud under the FCA." Id. at 832. The court further added that the "FCA does not encompass those instances of regulatory noncompliance that are irrelevant to the government's disbursement decisions." Id. at 829.

U.S. ex rel. Hobbs v. MedQuest Assocs., 711 F.3d 707 (6th Cir. 2013).

In an FCA action for filing false reimbursement claims under Medicare Part B, the relator alleged that MedQuest (1) employed supervising physicians who were not approved by Medicare to supervise the range of tests offered at facilities and (2) failed to register a newly acquired testing center with the Medicare program, using instead the former owner's payee ID number.

The district court granted summary judgment in favor of the government on both counts, but the Sixth Circuit reversed. First, the appellate court held that use of non-approved physicians could not form the basis of an FCA false certification claim because such action constitutes simply a violation of a "'condition of participation' in the Medicare program," not a "condition of payment from Medicare funds." As to the registration violation, the court held that under the facts of the case, MedQuest's actions amounted only to a "failure to update enrollment information," which is not a violation of a condition of payment. See also Courts of Appeals Continue to Limit the Government's Aggressive False Claims Act Theories.

Rule 9(b) Pleading Standard

U.S. ex rel Nathan v. Takeda Pharmaceuticals North America, 707 F.3d 451 (4th Cir. 2013), petition for cert. filed (U.S. May 10, 2013) (No. 12-1349).

Indicating that it may soon grant certiorari and resolve a circuit split on the Rule 9(b) pleading requirements to bring FCA claims, on October 7, the U.S. Supreme Court asked the Solicitor General to file a brief on the subject in U.S. ex rel Nathan v. Takeda Pharmaceuticals North America. The case involves allegations that Takeda promoted its pharmaceutical product Kapidex off-label for uses not approved by the Food and Drug Administration (FDA), causing prescriptions of the product to be written for the off-label uses and submitted to the government for reimbursement. The lower courts dismissed the FCA claims for failure to meet the Rule 9(b) standard for pleading fraud with specificity, finding that although the relator provided examples of 98 specific prescriptions, he had not plausibly alleged that any of the 98 prescriptions were written for off-label uses.

Currently, the Fourth, Sixth, Eighth, and Eleventh Circuits require a plaintiff to allege specific false claims with particularity to satisfy 9(b), while the First, Fifth, Seventh, and Ninth Circuits have allowed FCA claims to survive based only on reliable indicia that lead to a strong inference that claims were actually submitted.

U.S. ex rel. Simpson v. Bayer Healthcare, 732 F.3d 869 (8th Cir. 2013).

On October 15, the Eighth Circuit issued a ruling on the Rule 9(b) pleading standard for FCA claims, continuing its alignment with the Fourth, Sixth, and Eleventh Circuits. The relator alleged that Bayer's misrepresentation of the efficacy and safety of its cholesterol product Baycol caused false claims to be submitted both (a) to Medicare/Medicaid and (b) in the context of Bayer's contract with the U.S. Department of Defense (DOD). The lower court dismissed the complaint on 9(b) grounds, and the Eighth Circuit affirmed, finding that the relator had not pleaded his Medicare/Medicaid claims with "at least some representative examples of false claims . . . or show[n] how any particular reimbursement claim was fraudulent in and of itself." Id. at 879. By contrast, the court reversed the dismissal of the claims relating to the DOD contracts, stating that the relator had sufficiently pleaded a claim of fraud in the inducement of a government contract. The relator's allegations satisfied Rule 9(b) because he (1) pleaded the who, what, where, when, and why of the misrepresentation, (2) connected the misrepresentation to the entry of a contract, and (3) alleged that the government made payment under the contracts.

US ex rel. Ge v. Takeda Pharmaceutical Co. Ltd., 737 F.3d 116 (1st Cir. 2013).

In an interesting move, on December 6, the First Circuit dismissed US ex rel. Ge v. Takeda Pharmaceutical Co. Ltd. on 9(b) grounds, citing with approval the Fourth Circuit's decision in U.S. ex rel. Nathan v. Takeda Pharmaceuticals North America—the decision underlying the pending U.S. Supreme Court appeal. The approval from one side of the circuit split to the other may indicate that the split is not as distinct as previously thought.

Wartime Suspension of Limitations Act

United States v. Wells Fargo, No. 12 Civ. 7527, 2013 U.S. Dist. LEXIS 136539 (S.D.N.Y. Sept. 24, 2013).

In a case alleging misconduct in the originating and underwriting of government-insured home mortgage loans, the Southern District of New York held that the Wartime Suspension of Limitations Act (WSLA) tolled the statute of limitations for FCA claims, keeping the government's claims against Well Fargo alive.

The WSLA provides that the statutes of limitations for cases of fraud against the United States are suspended when the United States is at war. In October 2008, the Act was amended to also suspend statutes of limitations when Congress has specifically authorized the use of armed forces. That suspension lasts for five years after the termination of hostilities (as proclaimed by the President) or a congressional resolution. In Wells Fargo, the court found that any claims that were live as of the WSLA's amendment have been tolled and remain timely:

In light of the 2008 amendment, there is no dispute that the WSLA is now in effect as to offenses "involving fraud or attempted fraud against the United States or any agency thereof." After all, on September 18, 2001, Congress authorized the use of military force "against those responsible for" . . . the September 11, 2001 terrorist attacks, see Authorization for Use of Military Force, Pub. L. No. 107-40, 115 Stat. 224 (2001); and on October 16, 2002, Congress authorized the use of military force in Iraq, see Authorization for Use of Military Force Against Iraq Resolution of 2002, Pub. L. No. 107-243, 116 Stat. 1498. Additionally, there has been neither a Presidential proclamation, with notice to Congress, nor a congressional resolution suspending hostilities.

Id. at *35-36. The court rejected the argument that the WSLA should apply only to fraud claims with some nexus to the war:

Applying the WSLA to all frauds against the United States, including those unrelated to the war, accords with the purpose of the Act. The WSLA serves not only to allow the Government to combat fraud related to wartime procurement programs, but also "to give the government sufficient time to investigate and prosecute pecuniary frauds" of any kind "committed while the nation [is] distracted by the demands of war." Courts, including the Supreme Court in Grainger, have routinely applied the WSLA to fraud having nothing to do directly with the prosecution of war or the military. In short, "it makes no difference that the fraud in this case [was] . . . unrelated to the Iraqi or Afghani conflicts."

Id. at *46 (citations omitted).

U.S. ex rel. Carter v. Halliburton, 710 F.3d 171 (4th Cir. 2013).

The Fourth Circuit found the WSLA to toll the statute of limitations for FCA claims when a former employee alleged that Halliburton submitted false claims for services provided to the military in Iraq. The relator alleged that the defendant billed for hours not worked and water purification services that were not performed. Addressing the defense's argument that the WSLA should not apply to claims brought by private citizens, the court held that the WSLA applies to toll the statute of limitations for FCA claims brought by private qui tam relators, regardless of whether the government intervenes in the case.

U.S. ex rel. Emanuele v. Medicor Associates, No. 10-245, 2013 WL 3893323 (W.D. Pa. July 26, 2013).

In contrast with the Fourth Circuit's opinion in Carter, the Western District of Pennsylvania declined to apply the WSLA to a case in which a cardiologist filed a qui tam action alleging that his former employer entered into kickback arrangements for patient referrals and submitted claims for medically unnecessary procedures. The court declined to toll the statute of limitations for FCA claims brought by a private relator, stating that legislative history and congressional intent "caution against application of the WSLA's tolling provisions to private FCA claims." Id. at *7. The court also stated that as a matter of policy, it did not want to give relators an incentive to postpone filing FCA claims in order to increase potential recovery.

Overpayments

U.S. ex rel. Keltner v. Lakeshore Med. Clinic, Ltd., No. 11-cv-00892, 2013 WL 1307013 (E.D. Wis. March 28, 2013).

A former billing employee brought FCA claims against Lakeshore Medical Clinic in Wisconsin, alleging that the defendant failed to repay overpayments to the government. The defendant allegedly discovered in an annual audit that two physicians had "upcoding" error rates greater than 10%. It repaid the specific identified overpayments but allegedly did not go back to review other claims from the physicians. The defendant also allegedly ceased auditing physicians. The defendant moved to dismiss. The court denied the motion, stating that the relator "plausibly suggest[ed] that [the defendant] acted with reckless disregard for the truth and submitted some false claims," Id. at 3, and that the defendant "intentionally refused to investigate the possibility that it was overpaid" and "may have unlawfully avoided an obligation to pay money to the government." Id. at 4.

Eighth Amendment: Excessive Fines

U.S. ex rel. Bunk v. Gosselin World Wide Moving, N.V., No. 12-1369, 2013 WL 6671270 (4th Cir. Dec. 19, 2013).

Following a 2011 jury verdict finding FCA liability based on collusive bidding for government contracts, the district court found that the statutory minimum civil penalty under the FCA (roughly $50 million) was unconstitutionally excessive, particularly in light of the fact that the relator sought no damages. U.S. ex rel. Bunk v. Birkart Globistics GmbH, No. 1:02cv1168, 2012 WL 488256 (E.D. Va. Feb. 14, 2012). Although the relator and the government recommended that the court enter civil penalties in the reduced amount of $24 million, the district court awarded no civil penalties at all, holding that it did not have authority under the FCA to order a civil monetary penalty less than the statutory minimum.

On appeal, the Fourth Circuit reversed and sent the case back with instructions for the district court to enter an award of $24 million. The court found that the plaintiff's discretion to willingly elect to take a lesser judgment "is virtually unbounded," and "the court must permit the government or its assignee the freedom to navigate its FCA claims through the uncertain waters of the Eighth Amendment." Gosselin, 2013 WL 6671270 at *12. The court further noted that an award of nothing at all on Eighth Amendment grounds creates perverse incentives for dishonest contractors to create as many false claims as possible.

Analyzing whether the $24 million amount was grossly disproportionate under the Eighth Amendment, the court found that it was not limited to economic analysis but may also consider the need for civil penalties to have an appropriate deterrent effect "on the defendant and on others perhaps contemplating a related course of fraudulent conduct." Id. at 15. The court found that $24 million appropriately reflected the gravity of the offense and provides the appropriate deterrence. Whereas the district court's opinion seemingly opened new doors for FCA arguments under the Eighth Amendment, this decision effectively closes those doors.

United States ex rel. Drakeford v. Tuomey Healthcare System, No. 3:05-2858, 2013 WL 5503695 (D.S.C. Oct. 2, 2013).

In the latest chapter in the Tuomey Healthcare FCA saga, the District of South Carolina entered a judgment of $237 million against the hospital based on the government's claims that the defendant's contracts with physicians constituted impermissible self-referral agreements in violation of Stark Law, and any resulting claims submitted to Medicare were false. Even though the physicians did not contract directly with Tuomey but with its subsidiaries, they had "indirect compensation arrangements" because their compensation "varie[d] with, or otherwise [took] into account, the volume or value of referrals." Id. at 10.

Under the contracts, Tuomey subsidiaries collected the professional fees for the physicians' work from payors and paid the physicians (1) a base salary tied to their collections, (2) a "productivity bonus" of 80% of their collections, and (3) an additional quality incentive bonus up to 5.6% of their collections. The hospital also received corresponding facility fees from payors for each procedure performed. The government presented testimony that value of anticipated referrals was used as a benchmark to determine the physicians' total compensation.

In its defense, Tuomey argued that the agreements fit into an exception to the Stark Law because they were for fair market value and accounted only for personally performed professional services, not the volume or value of referrals. The government countered that argument with evidence that the physicians' payments adjusted in direct correlation with referrals. Tuomey also argued that. because the contracts were drafted by attorneys with the assistance of a reputable fair market value appraisal firm, it could not have had the requisite "knowledge" for an FCA violation. The government countered that argument with evidence that Tuomey did not heed the warnings of one of its attorneys who thought the agreements could be problematic.

The jury found both Stark Law and FCA violations. The court's $237 million judgment was calculated by implementing a $5,500 penalty for each of 21,730 claims submitted and trebling (tripling) the $39 million actual value of the claims. The court further found that its judgment was within the bounds of the Eighth Amendment's Excessive Fines clause. The court held the FCA's civil penalties were not punitive and therefore not subject to Eighth Amendment scrutiny. Regardless, the court stated that the $237 million judgment was not grossly disproportional to the gravity of the offense.

Damages Calculations

United States v. Anchor Mortgage, 711 F.3d 745 (7th Cir. 2013).

The Seventh Circuit addressed whether courts should account for amounts already recaptured by the government before ("net") or after ("gross") trebling damages for FCA violations. Although the Ninth Circuit has adopted the gross trebling approach, Judge Easterbrook cited the Second, Sixth, D.C., and Federal Circuits in observing that appellate decisions generally favor the net trebling approach, stating "The False Claims Act does not specify either a gross or a net trebling approach. Neither does it signal a departure from the norm—and the norm is net trebling." Id. at 749. He added:

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.

Id. See also Courts of Appeals Continue to Limit the Government's Aggressive False Claims Act Theories.

Public Disclosure Bar

U.S. ex rel. May v. Purdue Pharma LP, No. 12-2287, 2013 WL 6501327 (4th Cir. Dec. 12, 2013).

In a suit alleging fraudulent marketing of the narcotic pain medication OxyContin to physicians, the Fourth Circuit declined to affirm the dismissal of a relator's case on the grounds that it had previously dismissed a nearly identical action brought by the relator's husband. In its prior opinion, the Fourth Circuit found that the then-relator's claims had been waived when he signed a general release of claims against the defendant as part of a severance package. U.S. ex rel. Radcliffe v. Purdue Pharma L.P., 600 F.3d 319 (4th Cir. 2010).

When that relator's wife filed a qui tam action making nearly identical allegations, the defendant moved to dismiss on res judicata and public disclosure grounds. The court found res judicata inapplicable because the prior dismissal did not constitute a final decision on the merits of the underlying claims. The court found that the FCA's public disclosure bar would apply only if the relator's allegations were "based upon" the prior litigation—that is, if she learned of the alleged fraud from the previous complaint itself and not from conversations with her husband. The Fourth Circuit sent the case back to the lower for additional fact-finding to determine whether the public disclosure bar applies.

U.S. ex rel. Estate of Cunningham v. Millennium Labs of Cal., 713 F.3d 662 (1st Cir. 2013).

The facts underlying a qui tam complaint filed against Millennium were previously disclosed in a state-court complaint that Millennium filed against the relator and others. When the relator learned of Millennium's fraudulent practices while employed by a competitor, he emailed warnings to a Millennium customer and other individuals, prompting Millennium to sue for defamation and intentional interference with contractual relations. The relator filed his complaint five days after Millennium initiated its state-court action, and Millennium moved to dismiss, maintaining among other things that the public disclosure bar deprived the court of subject matter jurisdiction.

The district court granted Millennium's motion. On appeal, the First Circuit partially affirmed, holding that while some of the allegations in the state-court complaint were "substantially similar" to those in the qui tam complaint, others were not. In partially affirming, the court acknowledged that a company could potentially "sanitize" itself from a qui tam action and FCA liability by "preemptively filing its own action." Nevertheless, it reiterated the Supreme Court's description of such concerns as largely "unwarranted."

First-To-File Bar

U.S. ex rel. Heineman-Guta v. Guidant Corp., No. 12-1867, 2013 WL 2364172 (1st Cir. May 31, 2013).

As discussed above, when lawsuits are brought for certain types of claims, such as fraud, Federal Rule of Civil Procedure 9(b) requires the complaint to include extra factual information. In this case, when the relator brought a qui tam action, the district court dismissed it for lack of subject matter jurisdiction under the FCA's "first-to-file" rule because another complaint had previously been filed on the same facts. On appeal, the relator argued that the earlier-filed complaint could not bar her claim because that complaint failed to include the extra factual information required by Rule 9(b). The First Circuit affirmed the district court's dismissal, holding that Rule 9(b) did not apply in the context of the FCA's first-to-file rule. See also The First Circuit Joins the D.C. Circuit in Hampering Relators' Ability to Bring Duplicative Actions Under the False Claims Act's First-to-File Rule.

Types of Whistleblowers

U.S. ex rel. Fair Laboratory Practices Assocs. v. Quest Diagnostics Inc., 734 F.3d 154 (2d Cir. 2013).

In a case involving a general counsel bringing FCA claims against his former employer, the Second Circuit affirmed dismissal on ethical grounds. The whistleblower alleged that the defendant, a provider of medical diagnostic testing services, submitted claims while in violation of the Anti-Kickback Statute by providing unreasonable discounts on nonfederal business in order to induce referrals of Medicare and Medicaid business, for which it allegedly charged much higher prices. The court found that the former general counsel violated the State of New York's ethical rules when he disclosed more of the defendant's confidential information than was necessary in pursuit of a fraud claim against his former employer/client.

U.S. ex rel. Myers v. Shands Healthcare, No. 3:08-cv-00441 (M.D. Fla. 2013).

In August 2013, Shands Healthcare agreed to a $26 million settlement with DOJ over the alleged submission of claims for inpatient services that should have been billed as outpatient services. Notably, the government's relator was a consultant who previously had been engaged by Shands to review billing issues at its facilities.

According to the complaint, the consultant from YPRO Corp. found what he believed to be billing errors and other compliance issues in the course of his audit and reported its findings to Shands, which then developed a plan to address the issues. When the consultant saw no indication that the alleged overpayments had been refunded, saw the identified issues worsening in a follow-up audit conducted the next year, and was not asked to do any additional follow-up work, he filed a qui tam action against the hospital. The case raises significant questions for companies that employ outside consultants, especially when done so outside an attorney-client privileged relationship.

Novel Theories

Amphastar Pharm v. Aventis Pharma SA, No. EDCV-09-0023 (C.D. Cal. Apr. 19, 2013).

A federal district court in California found a theory plausible that misrepresentations in a patent application could make every claim for government reimbursement of the patented product a violation of the FCA. Following a previous suit in which a federal district court found an Aventis patent for its product Lovenox unenforceable based upon inequitable conduct in the application process, one of Aventis's competitors brought an FCA action. The claim alleged that the defendant fraudulently inflated the price of Lovenox by relying on the unenforceable patent to delay generic entry. The court denied Aventis's motion to dismiss, stating, "The factual allegations present a plausible contention that every claim for reimbursement at the inflated price was an actionable false claim." Slip op. at 8 (emphasis in original).

Retroactive Application of FERA Amendments

On June 24, 2013, the Supreme Court denied Allison Engine's petition for certiorari on the issue of whether the FERA amendments in 31 U.S.C. § 3729(a)(1)(B) apply retroactively to all claims for payment pending on June 7, 2008, or to all causes of action pending on June 7, 2008. Thus, the Supreme Court left the circuit split that has developed on this issue in place. Allison Engine Co. v. U.S. ex rel. Sanders, 133 S.Ct. 2855 (U.S. 2013).

Selected settlements

Health care and Pharmaceuticals

• In November, Johnson & Johnson reached a $2.2 billion settlement of criminal and civil investigations into off-label marketing of its products Risperdal, Invega, and Natrecor and paying physicians kickbacks.
• In May, Ranbaxy USA Inc. reached a $500 million settlement of criminal and civil investigations into the manufacture and distribution of adulterated drugs and the claims submitted for those drugs.
• In July, Wyeth Pharmaceuticals reached a $490 million settlement of criminal and civil investigations into the marketing of Rapamune for non-approved FDA uses and the claims resulting from such marketing.
• In October, Omnicare reached a $120 million settlement of allegations that it made agreements with nursing homes for discounts on pharmaceuticals provided to Medicare Part A patients in exchange for referrals of Medicare Part D patients.
• In November, Ensign Group Inc. reached a $48 million settlement for claims submitted for medically unnecessary rehabilitation therapy services.

Procurement

• In August, RPM International Inc. and Tremco Inc. reached a $60 million settlement for (1) failing to provide the General Services Administration with current and comprehensive pricing information during the fulfillment of a government contract for roofing supplies and services, (2) marketing generic products as superior, and (3) using defective adhesive in the roofing systems provided.
• In July, the Gallop Organization agreed to pay $10.5 million to resolve allegations that, among other things, it violated the FCA and the Program Integrity Act by overstating labor hours in proposals to the U.S. Mint and State Department.

Financial Institutions

• In November, JPMorgan Chase reached a $13 billion settlement with DOJ and several states to resolve civil claims related to its residential mortgage-backed securities business.
• In September, PNC Bank N.A. reached a $7.1 million settlement with DOJ to resolve allegations that PNC had failed to use appropriate underwriting practices when issuing Small Business Administration loans.

Other Developments

On October 23, the U.S. Chamber of Commerce released a report urging FCA reform. For more information, visit http://www.mainjustice.com/2013/10/23/u-s-chamber-of-commerce-proposes-false-claims-act-reforms/. n

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