United States: Corporate Outsiders – On The Wrong Side Of The Circuit Split On Rule 9(b)

A district court in the Middle District of Florida issued a new decision that will continue to make it challenging for corporate outsiders to successfully pursue a declined qui tam complaint – at least in the Eleventh Circuit. In U.S. ex rel. Chase v. Lifepath Hospice, Inc., et al., No. 10-cv-1061, 2016 WL 5239863 (M.D. Fla. Sept. 22, 2016), the court dismissed a False Claims Act (FCA) complaint based on the heightened pleading requirement of Federal Rule of Civil Procedure 9(b). The complaint, which alleged that defendants billed Medicare for hospice care that was either never provided or provided to ineligible patients, was dismissed primarily because the plaintiff did not adequately allege that false claims were actually submitted to the government. While the court held that the plaintiff had described a "private scheme in detail, to include facts as to some disturbing medical practices, she has not alleged 'facts as to time, place, and substance of the defendant's alleged fraud' —that is, a fraudulent claim." Id. at *7.

In its ruling, the district court relied largely on U.S. ex rel. Clausen v. Laboratory Corp. of America, Inc., 290 F.3d 1301, 1310-12 (11th Cir. 2002), which held that to state a claim under the FCA, a plaintiff must not only plead facts as to the scheme, but must also plead specific facts as to the claims submitted to the government. In other words, alleging the details of a "scheme" is not enough unless there are sufficient allegations regarding the submission of claims, "the sine qua non of a False Claims Act violation." Id. The Chase court explicitly referenced Clausen's acknowledgment that satisfying this heightened pleading standard would be difficult for "a corporate outsider . . . who does not have ready access to actual claims or first-hand knowledge of billing practices." Chase, 2016 WL. 5239863, *7 (citing Clausen, 290 F.3d at 1314).

The Chase complaint included broad-ranging allegations concerning ineligible patients, upcoding, failure to provide services and kickbacks. For instance, the relator alleged that defendants fraudulently obtained physician certifications that patients were "terminally ill" and thus eligible for hospice. Relator alleged that once patients were in hospice care, the defendants engaged in upcoding by lying on medical records about a patient's condition in order to inflate the patient's needs and corresponding care, e.g., continuous home care. Relator provided one example of this alleged conduct. The relator also provided a small number of examples of other types of alleged misconduct, such falsifying records regarding hospice eligibility. However, the relator failed to identify any claims submitted to the government. Instead, the relator alleged, for example, that "roughly 80 percent of [the] patients were Medicare or Medicaid beneficiaries," and "if just 20 percent of the ... Medicare/Medicaid-eligible patients were not hospice appropriate, then the [defendants] submitted at least $20 million in false or fraudulent claims to the Government each year."

The court held that while the relator had alleged a "private scheme" of troubling conduct, the relator fell "well short" of meeting Rule 9(b) requirements with respect to pleading a false claim: "Chase does not identify a single claim submitted to the government, let alone a false one. She does not identify anyone who submitted the alleged false claims she cannot specifically identify. She does not specify when any false claims were submitted. What Chase has done is describe a private scheme in detail, to include facts as to some disturbing medical practices," but not as to the "fraudulent claim." Id. at *7.

The district court also distinguished Chase from a recent, unpublished Eleventh Circuit case, U.S. ex rel. Mastej v. Health Management Associates, Inc., 591 F. App'x. 693 (11th Cir. 2014), in which the appellate court reversed a dismissal under Rule 9 even though the complaint lacked details about specific claims. The Chase court noted that in Mastej, the circuit court  found that relator's allegations of actual false claims were sufficiently reliable because of "the relator's role as a corporate insider and the information to which his role gave him access,'" e.g., attending meetings where Medicare and Medicaid patients and billing were discussed. Chase, 2016 WL 5239863 *7. By contrast the Chase relator had no such inside information. Although the relator, a social worker employed by the defendants, alleged knowledge of admission policies and medical practices, she did not allege firsthand knowledge of billing practices. Thus, she did not provide the needed "indicia of reliability" regarding whether a false claim was actually submitted, so failed the heighted pleading requirement of Rule 9.

So how does this square with Rule 9 standards in other circuits? Historically, there has been a split in how Rule 9 pleading requirements are applied to FCA allegations. The Eleventh Circuit has long been in the category of circuits that tend to require more specificity with respect to the pleading of a fraudulent claim (separate and apart from a fraudulent scheme), see Clausen, 290 F.3d 1301; U.S. ex rel. Hopper v. Solvay Pharmaceuticals, Inc., 588 F.3d 1318, 1324 (11th Cir. 2009), and the fate of the Chase relator seems in line with that circuit's precedent. Interestingly, Chase also appears fully consistent with the recent Sixth Circuit decision in U.S. ex rel. Eberhard v. Physicians Choice Lab. Servs. LLC, No. 15-5691, 2016 WL 731843 (6th Cir. Feb. 23, 2016), where the court held that Rule 9 could not be satisfied by estimating the proportion of fraudulent claims and that personal knowledge of a "fraudulent scheme" was inadequate to replace personal knowledge of the submission of claims or billing practices. By contrast, the Chase complaint might have survived in the more lenient Fifth Circuit, where fraudulent medical records may supply some indicia of reliability. See, e.g., Grubbs v. Kanneganti, 565 F.3d 180, 190 (5th Cir. 2009) (allegation that providers created fraudulent medical records, reflecting unprovided services, gave some of the needed indicia that fraudulent claims were likely submitted to the Government).

In 2013, this circuit split was up for resolution by the Supreme Court in U.S. ex rel. Nathan v. Takeda Pharmaceuticals N.A, No. 12-1349 (S. Ct.), though certiorari was ultimately denied. In that case, the government's amicus brief argued that the distance between the various Rule 9(b) standards appeared to be narrowing and that the Takeda case was not the right vehicle to resolve any disagreement. Notably, the government took the position that the "correct" standard was the more lenient Grubbs standard and that circuits with more "rigid" articulations of Rule 9(b) appeared to be relaxing those requirements and, perhaps, moving toward convergence with Grubbs.

Others — such as the Middle District of Florida and the Sixth Circuit Court of Appeals — beg to differ, particularly where the lack of claim information makes any inference that a defendant submitted claims to a federal healthcare program simply speculative. It will be interesting to follow the Chase case in the event of an appeal and watch whether the Eleventh Circuit continues to solidify its current approach to the pleading requirements for false claims. In the meantime, it looks like corporate outsiders still have an uphill battle when it comes to successfully asserting a false claim under the FCA.

Corporate Outsiders – On The Wrong Side Of The Circuit Split On Rule 9(b)

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