United States: Putting The False In False Claims Act Cases

Last Updated: November 15 2016
Article by Eric Alexander

People send us things to consider discussing in our posts. Usually, those things are court decisions in drug and device cases. Sometimes, they are so far afield from our comfort zone that we do not give them much consideration. This week, we received a motion from a False Claims Act case that we thought was interesting enough to enlist a colleague to add some subject matter expertise while we fretted about the election, work, the election, and some other stuff (i.e., the election). Much of the credit for this post goes to Andy Bernasconi, a fine lawyer for a crazy Red Sox and Patriots fan.

While we do dabble in the FCA on this blog, we lean on Andy for a quick primer on the FCA's provisions. Congress originally passed the FCA in 1863 as a way to deter and punish government contractors' fraud against the U.S. and Union troops during the Civil War. The statute (as amended) generally creates liability for any person who knowingly submits a materially false claim demanding payment from the United States. See 31 U.S.C. § 3729(a)(1). An FCA violation is punishable by treble damages, civil penalties of up to $21,563 for each false claim, and an award of attorneys' fees. Id. §§ 3729(a)(1) &(3); id. § 3730(d)(1); 81 Fed. Reg. 42491 (June 30, 2016).

One of the most notable aspects of the FCA is that it contains unique qui tam provisions that permit a private whistleblower, also known as a "relator," to file FCA claims on behalf of the federal government. Id. § 3730(b)(1). In doing so, the relator files the case under seal, at which point the Justice Department investigates the allegations and decides whether the government will intervene and take over the case to litigate for itself. Id. §§ 3730(b)(2), (4). If the government declines to intervene in the case, the relator may litigate the case in the name of, and on behalf of, the government. Id. § 3730(c)(3).

To encourage whistleblowers with personal knowledge of fraud against the government to come forward, the statute provides a "bounty" or relator's share of up to 30% of a settlement or judgment in an FCA case filed by a whistleblower. The relator's bounty varies depending on whether the government intervenes in the case, and the extent of the relator's efforts in bringing the case to successful resolution. The relator thus is entitled to between 25-30% of any settlement or judgment in the case when the government declines to intervene and the relator litigates the case on its own, and is entitled to 15-25% of the recovery if the government intervenes and litigates the case on its own. Id. §§ 3730(d)(1)-(2).

These numbers can and do add up quickly due to the trebling of damages and per-claim civil penalties. Cases against health care providers, drug and device companies, and other government contractors have resulted in recoveries of hundreds of millions, and even billions, of dollars. Considering the relator's bounty in that context, it is easy to see that there can be an enormous incentive to bring FCA claims, convince the government to intervene, and get past the motion to dismiss stage—often the point when such cases resolve.

The problem is that these incentives bring out of the woodwork not only legitimate whistleblowers with facts about actual fraud, but also relators without real facts who are simply seeking a financial windfall. Any regular reader would be shocked that we would be suspicious of the motives of plaintiffs and their counsel, but the allegations—just allegations at this point, which we have seen in a redacted form—in U.S. ex rel Leysock v. Forest Laboratories LLC et al., Case No. 12-cv-11354-FDS (D. Mass.), seemed to be worth sharing. The relator in Leysock originally filed in 2012 with broad allegations that the defendant violated the FCA by improperly marketing certain of its drugs. After the government declined to intervene, the relator filed an amended complaint that abandoned the prior claims and asserted new FCA allegations that defendants improperly caused the submission of Medicare claims for the off-label use of one of its drugs (indicated for moderate-to-severe Alzheimer's Disease). The defendants moved to dismiss the complaint, arguing that the complaint failed to state a claim and failed to allege fraud with the particularity required by Rule 9(b). The court denied the motion in most respects and explicitly relied on allegations about specific patients to hold that the complaint satisfied the Rule 9(b) pleading requirements. U.S. ex rel Leysock v. Forest Labs., Inc., 55 F. Supp. 3d 210, 218-219 (D. Mass. 2014) (finding that allegations as to eight specific patients were sufficient to satisfy Rule 9(b) pleading standards).

Rather than just settle, the defendants pursued discovery and successfully moved to compel on where the relator came up the information about specific patients. Apparently, relator's counsel had retained a physician (a former National Institutes of Health researcher) to help counsel obtain medical records for use in the litigation. However, according to the motion to dismiss, that physician – at counsel's direction – misled other physicians into turning over confidential patient information, medical records, and data under the guise of conducting a research study concerning dementia patients, and under the further guise that the information would not be disclosed to any third party and would be used only for research purposes; misled a healthcare consulting firm with physician databases into identifying physicians from whom to seek information; and asked physicians compound and ambiguous questions – developed by relator's counsel – about their prescribing practices so the ambiguous answers could be used to support the FCA claims crafted by counsel. In reality, there was no research study, and it appears that the confidential information collected was designed and intended to be used as factual allegations in the complaint, for the purpose of helping relator's counsel survive a motion to dismiss – and some of the information collected ended up in relator's amended complaint. As relator probably hoped, these allegations were precisely what the court relied upon in ruling that the amended complaint was sufficient to deny a motion to dismiss.

This was the end of the story, with an alleged crime going not only unpunished, but potentially richly rewarded. On October 10, 2016, defendants filed another motion to dismiss, asking the court to dismiss the case in its entirety on the grounds that relator's counsel's "deceit" in obtaining confidential information for use in the amended complaint resulted in violations of legal ethics, bioethical rules and laws, and patient privacy principles. Without the information obtained through relator counsel's deceit, the motion reasons, the case would not have survived a motion to dismiss in the first instance; and in any event, permitting relator's claims to proceed would encourage similar abuses in the future. We will be looking to see what relator has to say and whether the court here is as annoyed at having been duped (allegedly) as we might expect.

If counsel for relators in FCA cases are pursuing tactics like this, then maybe these tactics are being pursued in other cases and maybe defense lawyers should be on the lookout for them. It is certainly true that the purported conduct described in the pending motion underscores the flaws with the qui tam bounty scheme: it creates extraordinary financial incentives for relators and counsel alike to burden defendants' and courts' resources with meritless FCA claims. Due to the risk of enormous litigation exposure and the burdens of litigating complex cases of alleged fraud, numerous defendants have settled FCA cases because they could not justify the potential costs to litigate the case and roll the dice at trial. See Ohio Hosp. Ass'n v. Shalala, 978 F. Supp. 735, 740 n.6 (N.D. Ohio 1997), aff'd in part, rev'd in part, 201 F.3d 418 (6th Cir. 1999) ("[T]he risk of loss in a False Claim[s] Act case carries potentially devastating penalties, ... unlike most litigation or even an administrative recoupment action. . . ."); see also Sharon G. Finegan, The False Claims Act and Corporate Criminal Liability: Qui Tam Actions, Corporate Integrity Agreements and the Overlap of Criminal and Civil Law, 111 Penn St. L. Rev. 625, 674-675 (2007) (observing that "[t]he potential for the imposition of significant penalties is enough to cause many defendants to think twice about taking a case to trial, even if the plaintiff's case is unlikely to succeed. Thus, many qui tam cases are not adjudicated before a judge, but decided in negotiations between lawyers"); Joan H. Krause, Twenty-Five Years of Health Law Through the Lens of the Civil False Claims Act, 19 Annals Health L. 13, 15 (2010) ("Faced with potential exposure in the tens or hundreds of millions of dollars, it is no wonder that most defendants choose to settle FCA allegations rather than testing their luck at trial."). Thus, a relator or relator's counsel has an enormous incentive to obtain sufficient information to survive a motion to dismiss an FCA complaint, which they may well be able to leverage into a settlement. The FCA's qui tam incentives thus are strong enough to encourage relators/counsel to cut corners, violate ethical rules, and even to fabricate evidence; indeed, the U.S. Chamber Institute for Legal Reform in 2013 proposed statutory amendments to the FCA that would "decreas[e] unhealthy incentives for frivolous litigation and coercive out-of-court settlements." See U.S. Chamber Institute for Legal Reform, Fixing the False Claims Act at 8 (Oct. 2013), available at http://www.instituteforlegalreform.com/research/fixing-the-false-claims-act-the-case-for-compliance-focused-reforms .

In drug and device product liability cases, we have seen our share of sleazy conduct from the other side. It takes committed clients and open-minded judges to make them pay for conduct, even if it takes ancillary proceedings to do it. As we said, we do not know if the Leysock counsel and their "researcher" did what has been alleged. If they did, however, then dismissal of the relator's case, costs and sanctions assessed against his counsel, and loss of licenses for the counsel and their "researcher" may be coming. And, maybe, anyone considering a fraudulent scheme to pursue a FCA case may think twice.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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