United States: Circuit Court Provides Clarification Of Pleading Standards In FCA Cases

Christopher Myers is a Partner and Denisse Velarde-Cubek is an Associate in Holland & Knight's Northern Virginia office.

The Court's Holding Details Requirements for Alleging the Knowledge and Falsity Elements of an FCA Claim


  • A recent U.S. Court of Appeals case from the Seventh Circuit has brought further insight into the heightened pleading standard required under the False Claims Act (FCA). The case, Thulin v. Shopko Stores Operating Co., LLC, addressed the standards for sufficiently pleading the knowledge and falsity elements required under the FCA.
  • To survive a motion to dismiss, the relator must allege with particularity that at the time the defendant submitted the false claim, the defendant had knowledge of the claim's falsity. Mere references to a company's size or sophistication do not, on their own, establish knowledge.
  • During an exit interview, a company should specifically discuss whether the departing employee knew or suspected the company of engaging in fraudulent or other improper behavior. If the employee believes the company has committed misconduct, the employee should be asked to provide all known details. The company should then conduct an internal investigation to determine whether a violation actually has occurred.

A recent U.S. Court of Appeals case from the Seventh Circuit has brought further insight into the heightened pleading standard required under the False Claims Act (FCA). The case, Thulin v. Shopko Stores Operating Co., LLC, 7th Cir., No. 13-3638, addressed the standards for sufficiently pleading the knowledge and falsity elements required under the FCA.

Thulin Case Background

On Nov. 12, 2014, the Seventh Circuit affirmed the U.S. District Court for the Western District of Wisconsin's dismissal of an FCA qui tam action which alleged that Shopko Stores Operating Co., LLC ("Shopko"), a pharmacy chain, fraudulently overbilled Medicaid by reporting higher prescription costs to the government than it charged to private insurers. According to the relator, Carl Thulin, a former pharmacist for Shopko, federal law required Shopko to assign the government its rights in private insurer contracts – including the lower prescription prices paid to Shopko by private insurers. By billing Medicaid higher prescription amounts, Thulin argued, Shopko submitted false claims in violation of the FCA.

In its decision on Shopko's motion to dismiss, the Seventh Circuit held that to survive the heightened pleading requirements, a relator must not only provide factual details that support the elements of the FCA violation, but must also provide sufficient legal analysis to support the elements of the cause of action.

In his complaint, Thulin provided 31 billing transactions from Shopko in support of his allegations. Even with these factual details, the Seventh Circuit ultimately dismissed the case because Thulin failed to provide a legal theory that supported the elements of an FCA claim. To survive a motion to dismiss under the version of the FCA in effect at the time of the alleged billing scheme, Thulin needed to allege with particularity that Shopko made: (1) a claim to receive money from the government; (2) that was false, and; (3) with knowledge of its falsity. The court explained that the falsity element is satisfied when a claim is made to the government in contravention of a statute or law. Knowledge exists if the defendant acted with actual knowledge of the claim's falsity or with reckless disregard as to the falsity.

In this case, the court found two reasons why Shopko's billing practices did not violate the FCA. First, Shopko's billing policies were not false or fraudulent because applicable assignment law, the Medicaid Manual, and the required electronic billing system permitted Shopko's billing practices. Although Thulin argued that various federal laws required Shopko to assign its private contract rights to the government, the court found that the plain language of the statutes negated such an interpretation. Second, the court refused to find that Shopko acted with "reckless disregard" to applicable federal rules and regulations merely due to its large size and purported sophistication.

Seventh Circuit Analysis in Thulin

Specifically, Thulin's qui tam action alleged that Shopko fraudulently overbilled the federal government when seeking payment of prescriptions purchased by "dual-eligibles" – individuals that have coverage through both private insurance and Medicaid. In such instances, the federal government acts as a "payer of last resort." This means that after a private insurance company pays the amount due under the contract, Medicaid pays the remaining cost.

The problem arises when the private insurance company agrees to pay an amount for the prescription that differs from what the federal government agrees to pay. Sometimes, based on its negotiating power, a private company will contract to pay a lower price for a prescription than will the Medicaid programs.

Thulin argued that two separate federal assignment laws required Shopko to inform Medicaid whenever the private insurer paid a lower price for the medication. According to Thulin, the fraud occurred when Shopko – after selling prescriptions to dual-eligibles – billed Medicaid the higher amount due under its agreement with the government as opposed to the lower differential the government would pay for its share of the private insurance contract. In support of his case, Thulin submitted 31 billing transactions he obtained from Shopko's computerized billing system.1 These transactions, according to Thulin, showed the disparity between how Shopko billed private insurers and the government when selling prescriptions to dual-eligibles.

The District Court granted Shopko's motion to dismiss, finding that Thulin "failed to allege the requisite falsity to state a claim under the False Claims Act."2 The District Court found that the two federal statutes Thulin relied upon – 42 U.S.C. 1396k(a)(1)(A) and 42 C.F.R 433.14 – provided little support for the claim that federal assignment laws were violated. In addition, the District Court found that Thulin did not establish that Shopko, or any of its employees, knew whether it had to report cost information to Medicaid.

FCA Definition of a False Claim

Among other elements, to survive the pleadings stage of an FCA action, the relator must allege with particularity that the defendant submitted claims to the government, and that those claims were false. Under the FCA, a claim is false if it goes against "a statute, regulation, or contract."3 In this case, Thulin argued that Shopko's claims to Medicaid were false because they violated regulations at 42 U.S.C. 1396k(a)(1)(A) and 42 C.F.R. 433.145, which require patients to assign Medicaid any rights or benefits they have under private insurance.

Thulin believed that these federal statutes required Shopko to bill Medicaid the lower fees negotiated under private insurance contracts. By failing to assign Medicaid the lower prices negotiated by private insurers, Thulin argued, Shopko submitted false claims to Medicaid. The Seventh Circuit rejected Thulin's argument for two reasons.

  • First, the court could not find any cases that supported Thulin's interpretation of the previously mentioned statutes. Instead, the court discussed Supreme Court precedent and appellate court decisions that countered Thulin's "novel" interpretation. Those cases, and the plain meaning of the statutes, established that the government only had a right to obtain reimbursement if a patient received payment or settlement from a tortfeasor. Nothing in the statutes supported Thulin's belief that the government was entitled to receive the benefit of private insurer-negotiated contracts.
  • Second, the court found that the electronic billing system pharmacies are required to use when billing Medicaid, and the specifications in the Medicaid Manual ("manual"), supported Shopko's billing practices. Specifically, the billing system marked submission of co-pay information as "optional" instead of making it obligatory. The court found that by making such disclosures optional, Shopko never had to inform Medicaid of its co-payment information.

The guidelines laid out in the manual also weakened Thulin's argument. The manual instructed Medicaid to withhold payment if it was billed more than the differential owed under the private insurer-negotiated contracts. The court found that these instructions made it Medicaid's responsibility to recognize when it was overbilled and not Shopko's duty to inform Medicaid of co-payment information. Thus, the Seventh Circuit established that when a company follows agency guidelines, and when regulations make it the agency's responsibility to discover over-billing, the company does not make a false claim by failing to inform the agency of its private co-payment agreements.

Knowledge of a Claim's Falsity Is Key

The court further explained that to survive a motion to dismiss, the relator must allege with particularity that at the time the defendant submitted the false claim, the defendant had knowledge of the claim's falsity.4 As applied to the FCA, knowledge means "actual knowledge," or acting with "deliberate ignorance" or "reckless disregard" that the claims submitted to the government were false or fraudulent.5 A company acts with "reckless disregard" when it is grossly negligent or has "reason to know of facts that would lead a reasonable person to realize that it was submitting false claims."6

In this instance, Thulin alleged that due to Shopko's sophistication and size – over 300 stores in 24 states – it should have been aware of the applicable federal laws and regulations.7 Therefore, Thulin argued, Shopko's billing practices with Medicaid were conducted with "reckless disregard" to their falsity.

The court found that Thulin's general allegations did not satisfy the heightened pleading requirements under the FCA. The court explained that mere references to a company's size or sophistication do not, on their own, clear the pleading threshold. Although a company's size may show the possibility that it acted with the requisite intent, the Seventh Circuit requires more specific allegations before it will find that the company plausibly acted with "reckless disregard."

How the Thulin Decision Affects Your Company

The Thulin decision reaffirms the importance of a company's compliance program. In Thulin, the court found a relator cannot sufficiently allege that a company acted with "reckless disregard" through mere references to its size or sophistication. It also found that when a company follows applicable regulations, manual guidelines and billing policies, it may be insulated from FCA liability. This holding provides a roadmap regarding how a company's compliance and ethics programs can be used to insulate companies from potential violations and deter whistleblowers from bringing claims.

In many instances, federal regulations, guidelines and billing policies are unclear, overly complex, or ambiguous. A company's compliance program should address how to respond to such regulations to ensure compliance, or at least demonstrate that the company is doing everything it can to understand and comply with regulations. The program should require employees to confer with counsel or the compliance department when there is any uncertainty about the requirements of any statute or regulation. Further, when uncertainty or ambiguity remains, the company should communicate with agency personnel for clarifications to confirm accurate understanding. Such communications with agency personnel should be carefully documented either through confirmatory communications or memoranda to a permanent file. If necessary, this documentation can be shown to agency personnel or investigators to demonstrate that the company has not acted with reckless disregard or willful ignorance. By taking these steps, a company – regardless of size – may limit its exposure to FCA allegations and actions.

As the relator in Thulin previously worked as a pharmacist for Shopko, this case also highlights the importance of a company's policies and compliance procedures surrounding a departing employee. Specifically, compliance policies should require companies to conduct exit interviews that, among other issues, address compliance and ethics concerns. With a thorough exit interview, a company can either discover and investigate alleged improprieties known to the departing employee, or lock in the employee's statement that he or she is not aware of any violations. At a minimum, this can have a deterrent effect on former employees bringing claims that were not disclosed in the exit interview.

During the exit interview, a company should specifically discuss whether the departing employee knew or suspected the company of engaging in fraudulent or other improper behavior. If the employee believes the company has committed misconduct, the employee should be asked to provide all known details. The company should then follow up with an internal investigation based on the information provided and determine whether a violation actually has occurred. In the event of a violation, and depending on its nature, the company will be in a position to evaluate whether or not a disclosure and/or repayment to the government is warranted and also to take corrective action as necessary. This, in turn, can serve to not only deter future FCA actions by departing (and potentially disgruntled) employees, but, if such a claim is filed, the company's actions to investigate and correct any problems can be used to defeat the knowledge/intent element of the FCA.


1. No. 13-3638 at 5.

2. Id. at 6.

3. Id. at 10.

4. 13 C.F.R. 3729.

5. No. 13-3638 at 14.

6. Id.

7. Id. at 2, 14.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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