I. Introduction
Health care providers often contract with third parties to perform services at the provider's facility. Assume for example, that a hospital contracts with a specialized cancer treatment center to provide services within the hospital. If the hospital bills for such services and signs the Medicare certifications, the hospital is exposed to False Claims Act ("FCA") liability if those certifications contain false information.1
When an FCA action arises, the relator and/or the government will name both the hospital (or other provider) submitting the claims and the third party providing the services. Is the hospital in this situation able to recover its costs and legal fees from the treatment center for defending the FCA litigation? If the hospital decides to settle the FCA litigation, can it recover the amounts paid in settlement from the treatment center? The answer to both questions is yes. That is, assuming the original contract between the parties includes a properly worded warranty and indemnification clause.
II. Generally, Public Policy Prevents FCA Defendants From Seeking Common Law Indemnification for FCA Violations
Indemnity is a remedy that secures the right of one person to recover reimbursement from another upon the occurrence of an event. Indemnity essentially shifts the loss from one party to another, either because the parties have agreed in advance on who should bear the loss or because principles of fairness compel the shifting.
The right of indemnity can be contractual or it can arise under common law or statute. The distinction between common law indemnity (seeking to shift liability based on judicial precedent) and contractual indemnity (seeking to shift liability based on the terms of a contract) is critical in the context of an FCA case.
This is because when considering a party's right to indemnity, courts evaluate public policy concerns associated with shifting loss from one party to another. "Public policy seeks to encourage people to exercise due care in their activities for fear of liability, rather than to act carelessly cloaked in the knowledge that [indemnification] will relieve such indifference."2
Based on this principle, courts have generally held that a party found liable for violating the FCA may not seek to recover all or some of the liability it has or may suffer under a theory of common law indemnity or contribution. Thus, one wrongdoer has no common law right to seek indemnification or contribution from a joint wrongdoer in an FCA proceeding.3
In Mortgages Inc. v. United States, the Court examined the legislative history of the FCA, noting both an absence of any mention of contribution or indemnification as well as recognition that the qui tam provisions of the FCA were based upon the idea of "setting a rogue to catch a rogue."
With respect to congressional intent, the court concluded as follows: "The FCA is in no way intended to ameliorate the liability of wrongdoers by providing defendants with a remedy against a qui tam plaintiff with 'unclean hands.' Congress did not intend to create a right of action for contribution or indemnification under the FCA."4
The policy justification for such a holding is the need to encourage whistleblowers to come forward freely, which could be hampered if whistleblowers were subject to counterclaims.
It makes sense that common law indemnity is not allowed in FCA cases because common law indemnity is an equitable remedy. Equitable remedies are based in fairness, which means the party seeking indemnity must be without fault and the party against whom indemnity is sought must be wholly at fault. Unlike common law indemnity, however, no court has ever held that the FCA bars a party from enforcing a contractual right to indemnity.
III. No Restriction Exists to Pursue Contractual Indemnity Under State Law for Claims Related to the FCA
In the context of a contract right to indemnification, there are two important considerations when determining the viability of a claim for indemnification against a third party relating to an FCA claim: whether the claim be appropriately considered an "independent claim;" and whether there has been a finding of liability that would preclude dependent claims that might in effect give the FCA defendant indemnity.5 So what does this mean?
A. The Claim for Indemnification Must Not Be Dependent on a Defendant's Liability Under the FCA
An independent claim is one that is not dependent on a qui tam defendant's liability under the FCA.6 To understand these principles, consider the example above of the hospital and cancer treatment center. Assume that both the hospital and treatment center are co-defendants in an FCA action.
As a part of that action, the hospital brings a cross-claim for common law indemnification against the treatment center. The thrust of such a claim is: if I (the hospital) am found liable, you (the treatment center) must indemnify me.
In this example, the hospital's claim for indemnification would be "dependent" upon the hospital's (a qui tam defendant's) liability under the FCA. Such claims for indemnification in the context of an FCA case are not permissible.7
In comparison, if the hospital brought a claim for indemnification against the treatment center under the terms of their contract, the hospital's claim would not depend on the FCA liability of the hospital.8 Instead, the hospital's claim would stem from the express language of the indemnification provision (i.e., certain acts or omissions of the parties) and likely be based on breach of contract, breach of express and implied warranties, and negligence theories.
Because such claims could exist irrespective of any finding of FCA liability, they should be considered "independent" claims. Therefore, contractual indemnity based on an FCA proceeding is permitted where the party seeking indemnification is relying on its contractual right to indemnification under state law for claims arising out of the other party's acts or omissions.9
The case of Cell Therapeutics, Inc. v. Lash Group, Inc. provides a further illustration of the types of claims courts consider "independent claims" and when a party may seek indemnification relating to FCA claims. In Lash, one FCA defendant (CTI) sought indemnification against its FCA co-defendant (Lash) based on the indemnity provisions in their contract.
CTI contracted with Lash to handle its Medicare reimbursement and serve as a reimbursement consultant. During the course of this relationship, Lash mistakenly advised CTI that the off-label uses of the drug developed by CTI were reimbursable by Medicare. Subsequently, an FCA case was brought against both CTI and Lash alleging that they knowingly and willfully promoted the sale and use of the drug for indications that had not been approved by the FDA and made false and misleading claims to treating doctors causing them to present false or fraudulent claims to Medicare.
CTI immediately settled the FCA case for $10.6 million and brought suit against Lash for contractual indemnification under the terms of their contract. The Court allowed CTI to bring an indemnification claim in this context because none of CTI's claims depended on whether CTI was found liable under the FCA. The Court noted that none of CTI's claims against Nash were raised in the qui tam litigation, nor were they included in the settlement, and no final judgment on the merits had been entered.
B. There Must Not Be a Finding of Liability Against the FCA Defendant Seeking Indemnity
The next question is whether there has been a finding of liability that would preclude indemnification claims for public policy reasons. It is important to note that a settlement agreement should not be considered a finding of liability that would preclude dependent claims.
First, settlements generally do not bar claims against non-parties.
Second, settlements do not usually have issue-preclusive effect on the subsequent litigation of issues not expressly resolved in the settlement (this is particularly true where a settlement agreement specifically disclaims liability and the third party against whom indemnification is being sought is not a party to the settlement agreement).
Also, in resolving disputes under the FCA, courts have recognized the general policy in favor of encouraging parties to settle disputes.10 In fact, the express language of the FCA shows that Congress contemplated that disputes under the FCA would be resolved through settlement.11
Presuming "that a settlement with the government is equivalent to a finding of liability would chill the settlement process, signaling to future qui tam defendants that the only way to preserve potentially legitimate claims would be to secure a litigated judgment in court."12
Therefore, "a settlement agreement under the FCA should not, absent specific and clearly identified intent to the contrary, be viewed as an admission of liability the precludes non-FCA claims against third parties."13
Luckily for FCA defendants, the most likely scenario is that the party will settle the case and that a contract exists between the FCA defendants that contains an indemnification clause.14 Accordingly, the questions then become what provisions should be included to ensure recovery in such a scenario when drafting (1) indemnification clauses at the time an agreement with a third party is entered into, and (2) settlement agreements entered into in the context of FCA claims.
IV. Ensure That Your Contracts Contain Well-Drafted Indemnity Provisions That Allow You to Recover in the Event of an FCA Settlement
Broad indemnity provisions will provide for the most protection in seeking indemnification following settlement of a FCA claim. The following language should be considered for inclusion in contracts between health care providers and third party contractors when considering indemnification in the context of FCA claims: s include the right to recover for injury or damage caused by the negligence of the third party contractor;
- include warranty provisions that require the third party contractor to warrant that it is compliant and will remain compliant throughout the term of the agreement with all applicable regulatory guidelines and will uphold all regulatory requirements;
- include a provision that requires the third party contractor to inform you of any instances of regulatory non-compliance;
- include language that the entity must be indemnified for any loss or damage arising out of any breach of warranty or representation contained in the agreement; and
- do not hinge indemnification provisions on the liability of the health care provider and try to avoid conditional phrases such an entitled to indemnification if a third party (i.e., the United States or a relator) sustains damages.
V. Ensure That Your FCA Settlement Agreements Contain Appropriate Language to Allow You to Seek Indemnification Following Settlement
The language contained in the actual FCA settlement agreement between a health care provider and the government is just as important as the language contained in the indemnification clause.
FCA defendants should carefully consider whether to include any third parties in the settlement agreement from whom the defendant may want to seek indemnification. Also, when drafting a settlement agreement of an FCA claim, be sure to consider inclusion of the following terms:
- the agreement is neither intended by the parties to be, nor should be, interpreted as an admission by the health care provider;
- agree that no representation, term or condition of the settlement agreement, or any draft of the settlement agreement shall be admissible as an admission, or evidence of any fault, act or omission of the health care provider in any proceeding whatsoever; and
- specify that the agreement is for the benefit of the parties only and that the parties do not release any potential claims against any other persons or entities (however, remember to specifically include parent and/or subsidiary companies in the settlement agreement).
In sum, it is possible to seek indemnification relating to allegations involving the FCA. However, it is important to remember the contours of the applicable case law when drafting both indemnification provisions at the time contracts with third parties are entered into and when drafting settlement agreements of FCA claims.
Such forethought will maximize the likelihood of a health care provider's ability to seek indemnification if it ever finds itself in the unfortunate situation of being an FCA defendant.
Originally published in BNA's Health Care Fraud Report, 12/12/2012
Footnotes
1 The purpose of the FCA is to discourage fraud against the government. Robertson v. Bell Helicopter Textron, Inc., 32 F.3d 948, 951 (5th Cir. 1994). The FCA imposes civil liability on any person who knowingly uses a false record or statement (here, potentially an inaccurate Medicare certification) to get a false or fraudulent claim paid or approved by the government. 31 U.S.C. § 3729(a)(2). To encourage the disclosure of potential fraud, under the qui tam provisions of the FCA, relators may bring civil actions for a violation of the FCA on behalf of the person and the United States government. 31 U.S.C. § 3730(b)(1).
2 Park Pride Atlanta, Inc. v. City of Atlanta, 541 S.E.2d 687, 689 (Ga. Ct. App. 2000) (holding that unless a contract for indemnification explicitly and expressly states that the negligence of the indemnitee is covered, courts will not interpret such an agreement as a promise to save the indemnitee from his own negligence).
3 Mortgages, Inc. v. United States, 934 F.2d 209 (9th Cir. 1991); see also United States v. Kennedy, 431 F. Supp. 877 (C.D. Cal. 1977).
4 Mortgages, Inc., 934 F.2d at 213.
5 Cell Therapeutics, Inc. v. Lash Group, Inc., 586 F.3d 1204, 1209 (9th Cir. 2010).
6 Id.
7 Even courts that have dismissed claims relating to indemnification of FCA allegations have declined to foreclose the possibility that Defendants may, in the future and assuming they were not found liable under the FCA, be able to assert one or more claims for independent damages that were previously pled as indemnification claims. United States ex rel. Battiata v. Puchalski, 2012 WL 5363375, at *9 (D. S.C. Oct. 30, 2012) (disagreeing with the analysis in the Lash opinion); United States v. Campbell, 2011 WL 43013 (D. N.J. Jan. 4, 2011).
8 United States v. Campbell, 2011 WL 43013, at *11 (D. N.J. Jan. 2, 2011).
9 See United States v. Moody, 895 F. Supp. 294 (S.D. Ala. 1995) (implicitly recognizing the right to bring separate state law claims for indemnification).
10 United States ex rel. Hall v. Teledyne Wah Chang Albany, 104 F.3d 230 (9th Cir. 1997).
11 See, e.g., 31 U.S.C. § 3730(d)(1)(3) (specifying the proportion of the proceeds of an "action or settlement" a relator is entitled to receive).
12 Lash Group, Inc., 586 F.3d at 1210-1211.
13 Id. Lash also noted an additional public policy argument that favors contractual indemnification in FCA cases: the importance of ensuring that relators do not engage in wrongful conduct. Id. at 1209.
14 While it is particularly difficult to ascertain what percentage of qui tam action are settled because many settlements are not reported, commentators agree that the majority of qui tam actions are resolved through settlement. See, e.g., Kaz Kikkawa, Note, Medicare Fraud and Abuse and Qui Tam: The Dynamic Duo or the Odd Couple?, 8 HEALTH MATRIX 83, 122 (1988); Joseph P. Tomain, False Claims Act Litigation: Whistleblower Qui Tam Suits Against Contractors Who Cheat the Government, 47 ADMIN.L.REV. 299, 301 (1995).
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.
