United States: First Circuit Affirms Dismissal Of False Claims Act Case

Happy birthday to Stan Lee, the main man behind Marvel Comics. He wrote the stories for The Amazing Spider Man which, when we were 10 years old, we read with a good deal more enthusiasm than we presently feel when encountering the deathless prose in (a) a plaintiff motion to compel, or (b) pretty much any opinion out of the Missouri state courts. When we were at Comic Con in San Diego last Summer, the only autograph we wanted was Stan Lee's. But the line was indecently long. Hundreds of Thors, Daredevils, and X-men stood between us and the object of our adoration. We knew any hope of meeting our hero was pure fantasy. Anyway, if our friends at the Abnormal Use blog do not have a picture of a Marvel comic at the top of today's post, we will be very much disappointed.

Happy birthday, also, to Denzel Washington. Most of you probably know him from his movies, such as Glory, Malcolm X, Training Day, and, currently, Fences. But we first laid eyes on Washington when he appeared in the very fine television show, St. Elsewhere. That program was set in a Boston hospital. It ran from 1982 to 1988. Denzel Washington was in the cast all six years. The entire cast was superb, and the writing was inventive. It is possible that the ending of St. Elsewhere (cleverly titled "The Last One") was a little too inventive. It turned out that everything that happened in the series was the fantasy of an autistic child. To our eyes, it seemed a bit of a cheat. But maybe it was a commentary on art. Art is artifice. It is a lie in service of some bigger truth. It is a fine falsehood.

So fantasy and falsehood seem to be our themes for the day. Massachusetts has an interesting history of falsehoods in legal history. The Salem Witch trials had their origin in a silly girl's lies. It is easy to read the trial transcripts of the Sacco and Vanzetti trial, or the trial of Lizzy Borden, and conclude that great injustices were done. More recently, and more to the point for the sort of law we practice, the history of False Claim Act cases against drug and device companies in the Bay State has been inglorious. Cases have marched forward and cost companies many millions of dollars in the absence of any actual falsehoods. We are even more dismayed when we consider the overly aggressive and incoherent positions sometimes adopted by our former employer, the Department of Justice. But maybe, just maybe, courts in the Bay State are starting to exercise some control over, and impose reasonable limits on, False Claims Act cases.

That certainly seems to be the case with Hagerty ex rel. U.S. et al. v. Cyberonics, Inc., 2016 U.S. App. LEXIS 22405 (1st Cir. Dec. 16, 2016). Hagerty brought a qui tam action (hence the "ex rel.") alleging that the defendant had promoted medically unnecessary replacements of batteries in nerve stimulator medical devices. Those battery replacements, according to the plaintiff, resulted in patients and medical providers filing – ta da! – false claims for reimbursements from government health care programs. Such false claims supposedly added up to violations of the False Claims Act.

The first thing that occurs to us is that this case presents a classic case of damned-if-you-do/damned-if-you-don't. If any of those batteries wore down prior to replacement, you can be sure there would be a product liability action – maybe even one for wrongful death. We bet you've even heard of similar such cases. If you want to get hypertechnical, any replacement of a battery before it runs down is unnecessary. Or perhaps you could call it being careful. Whatever. Is this really a case of a false claim?

The second thing that occurs to us is that Hagerty is the second First Circuit case we have posted on this week that imposes limits on False Claims Act cases. It almost seems like a Christmas miracle. The two First Circuit decisions are like a pair of presents under the tree, occupying places of honor amidst the drone, ice bucket, Amazon Echo, Yankee candles, beer growler, and die cast 1/64 scale Aston Martin DB5 that Santa left for us.

The Hagerty trial court dismissed the case under Federal Rule of Civil Procedure 9(b), which requires that fraud claims be pleaded with specificity. Well, that makes sense. A claim under something called the False Claims Act must be alleging some sort of fraud. In Hagerty, after the plaintiff filed the qui tam case in February 2013, the government declined to intervene. (We would say that such declination reflects weakness on the merits, but every time we say something like that a plaintiff qui tam lawyer drops a comment or sends us a note telling us we're all wet.) Then the defendant in Hagerty filed a motion to dismiss, and the plaintiff responded by filing a First Amended Complaint ("FAC"). [Yes, the False Claims Act is commonly abbreviated as the "FCA," so we could refer in this post to the FCA FAC, but the spirit of the season moves us to be merciful.] The FAC accused the company of using "aggressive sales quotas" that inspired sales representatives to share inaccurate battery life calculations with doctors and to encourage premature battery replacements. The FAC projected that at least 10,000 batteries had been replaced prematurely, with a cost of $20,000 per procedure, with 50-60% of that cost being covered by government health programs. Did we mention that the plaintiff in Hagerty was a former company sales representative?

The trial court held that the FAC did not pass muster under Rule 9(b). There was no specificity about which medical providers submitted reimbursement claims, or how many reimbursement claims were submitted by which providers, or how exactly the defendant's actions caused the submissions. The court refused to infer that the defendant's actions generally "infected" reimbursement claims with fraud. There was no allegation of which specific patients were actually covered by government programs. Indeed, the FAC identified only one patient, but never alleged that the patient was an actual Medicare recipient. Fighting "an uphill battle," the plaintiff resorted to "statistical allegations." That is how the plaintiff ended up talking about 50-60% coverage. But the court concluded that the statistical approach was insufficient, amounting to nothing more than "insinuation." There is no doubt that the trial court's approach was rigorous. Remarkably, and wonderfully, the First Circuit completely affirmed the trial court's approach, and affirmed dismissal of the False Claims Act cause of action.

Now anyone with a tender heart and warm sympathies for plaintiff lawyers (so we're talking about somebody utterly unlike us), might grouse about this result. What more could the plaintiff lawyers do? Weren't they as specific as they could be? The answer is no, and that is proved by the plaintiff's own arguments, and that takes us to the second part of the First Circuit's opinion. The plaintiff eventually sought to amend his complaint yet again, so apparently his lawyers did manage to think up some additional allegations that might inject some specificity into the False Claims Act claim. But the trial court was unimpressed by the plaintiff's "listless approach toward amending his complaint," and denied the amendment on the grounds of undue delay. What was the delay? The FAC had been filed on May 29, 2014. The defendant moved to dismiss the FCA on June 18, 2014. No undue delay by the defendant, obviously. The court granted the defendant's motion on March 31, 2015. The plaintiff did not move for leave to file a second amended complaint until August 14, 2015. Put another way, the plaintiff tried to file a second amended complaint more than two and a half years after filing the qui tam lawsuit, more than 13 months after the defendant filed its motion to dismiss the FCA, and more than four months after the court granted the motion to dismiss. The plaintiff argued that the only period of alleged delay that mattered was the four months after the court's ruling, and that did not constitute undue delay.

Maybe we are jaded defense hacks, but four months does seem like rather a long time. But the First Circuit reasoned that the longer period of delay, starting from the filing of the motion to dismiss, was relevant. The motion put the plaintiff on notice of potential deficiencies, and "nothing prevented [the plaintiff] from moving for leave to plead any new information once he became aware of it." Accordingly, the First Circuit concluded that the plaintiff "did not meet his burden of providing a valid reason for his delay and that the district court did not abuse its discretion in denying his motion for leave to amend." There is a valuable practice pointer in the Hagerty case. When fashioning an argument of undue delay, you might be able to lengthen that delay by looking earlier in the timeline.

Moreover, the Hagerty opinion offers a more fundamental way out from pernicious False Claims Act cases. Plaintiffs should be required to allege actual falsehoods. They should be required to allege them with specificity. That specificity must include not only the who, what, where, and when, but also the how – the causative link between the alleged falsehoods and the government payments. Many False Claims Act cases will have real trouble meeting this standard. Those cases are not only meritless, they are fantasies.

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

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