- False Claims Act plaintiff cannot use discovery to satisfy Fed. R. Civ. P. 9(b).
- Payment of fair market value is a dispositive defense in FCA actions alleging a violation of the Anti-Kickback Statute.
- Qui tam plaintiffs cannot proceed with separate claims or against separate defendants once the government intervenes unless the government intervenes in the relator's additional claims.
- CMS's most recent Stark law interpretation significantly diverges from recent Stark law/FCA court decisions.
- Subregulatory guidance that is not tethered to a statute or regulation cannot serve as the foundation to an FCA action.
The Department of Justice (DOJ) recorded another banner year of over $3 billion in False Claims Act (FCA) recoveries in 2019.1 The health care industry, as usual, bore the brunt of the recoveries with DOJ registering over $2.6 billion in recoveries.2
Aside from FCA recoveries, 2019 also produced significant new FCA case law. During the year, 781 cases addressed the FCA.3 Of these, 164 addressed Fed. R. Civ. P. 9(b), failure to state fraud with specificity; 119 referenced Section 3730(h), the whistleblower retaliation provision; 105 also cited Universal Health Servs. v. U.S. ex rel. Escobar, 136 S. Ct. 1989 (2016), the Supreme Court's FCA materiality decision; and collectively, 110 cases referenced either Medicare or Medicaid kickbacks or the Stark law.
Most cases reiterate longstanding precedent.4 But a few cases dramatically break from existing precedent or address a common issue in a novel fashion that impacts the manner in which lawyers bring and defend FCA actions and how health care entities operate their compliance programs.
During 2019, courts issued a handful of cases that will have a lasting impact on FCA procedural and substantive issues. As to FCA process, in U.S. ex rel. Wride v. Stevens-Henager College, Inc.,5 a court, after undertaking a comprehensive review of the FCA's text and structure, restricted the relator's ability to assert additional allegations and name additional defendants once the government intervenes in the qui tam action. The case, consistent with the FCA, reaffirms the United States' primacy in qui tam litigation and protects defendants' from meritless lawsuits.
Additionally, as to process, in Bingham v. HCA, Inc.,6 the 11th Circuit affirmed the district court's decision to strike allegations based upon information relator obtained during discovery while defendant had a pending Rule 9(b) motion. The decision will ensure that relators, who presumably have inside information, cannot use the discovery process to bring qui tam actions but, consistent with the statute, can only proceed if they possess specific information regarding purported fraud before filing their actions.
Substantively, several cases will impact the government's and relator's ability to invoke the FCA without a sufficient foundation to warrant its use. In Polansky v. Exec. Health Res., Inc.,7 a district court ruled that the Centers for Medicare & Medicaid Services' (CMS) subregulatory guidance cannot serve as the predicate to an FCA action when the guidance constitutes a substantive legal standard that should have been promulgated pursuant to notice and comment rulemaking.
Also, substantively, courts issued important decisions regarding the use of the Anti-Kickback Statute (AKS) and Stark law in FCA actions. In Bingham v. HCA, Inc.,8 the 11th Circuit ruled that there is no unlawful remuneration exchanged in violation of the AKS when payments are at fair market value. And, in U.S. ex rel. Bookwalter v. UPMC,9 the 3rd Circuit applied a broad theory of Stark law liability, but the conceptual underpinning for the court's decision was directly undermined by CMS's proposed rulemaking to revise the Stark law.
Finally, in United States v. AseraCare, Inc.,10 the 11th Circuit cemented existing precedent that reasonable clinical judgment cannot be "false" as a matter of law. Significantly, the court also endorsed limits regarding how evidence demonstrating that the defendant purportedly knowingly tendered false claims must be linked, in time and place, to the actual false claims to serve as evidence of an FCA violation.
Set forth below is a discussion of each of these cases, the court's reasoning and the reasons the cases will have a lasting impact on FCA procedural and substantive issues.
The Relator Cannot Pursue Separate Claims and Defendants Once the Government Intervenes: U.S. ex rel. Wride v. Stevens-Henager College, Inc.
Historically, in qui tam actions, the relator freely added defendants or claims even after the government intervened. Courts frequently assumed that this practice is permitted.11
In U.S. ex rel. Wride v. Stevens-Henager College, the court considered whether, after the government's intervention, the relator may file amended complaints to pursue additional claims or defendants when the government did not intervene in the relator's additional claims.12
The court found that the FCA's plain language, structure and legislative history dictated that once the government intervenes in a lawsuit, the relator cannot pursue separate defendants and causes of action. Instead, the court concluded that there can only be one operative complaint and one lead plaintiff, not two or more operative complaints and multiple lead plaintiffs.13
As to the FCA's plain language, the court noted that a relator "may bring a civil action for the person and for the United States Government."14 After review, "the Government shall (A) proceed with the action, in which case the action shall be conducted by the Government; or (B) notify the court that it declines to take over the action, in which case the [relator] shall have the right to conduct the action."15 In short, the court reasoned that the FCA authorizes the government to either intervene in "the action" or decline to take over "the action."16 There is no third alternative that permits the government to proceed with some claims or causes of action but not others.
The court also noted that in multiple respects the FCA's structure further demonstrates that the relator cannot pursue separate allegations once the government intervenes. First, Section 3730(c)(1) provides that if the government intervenes, it has "the primary responsibility for prosecuting the action, and shall not be bound by an act of the [relator]."17 The court pointed out that allowing relators to pursue the non-intervened claims is in direct conflict with this provision because the government would not have "primary responsibility" for conducting the action if, after the government files a complaint in intervention, a relator's complaint remained operative and the relator retained the right to amend that complaint, adding parties and claims to the government's action.18
Second, the court also pointed to the FCA provisions addressing awards to relators as demonstrating that Congress did not contemplate that relators would be entitled to recover regarding non-intervened in causes of action. Sections 3730(d)(1) and (d)(2) contemplate only two scenarios. Section 3730(d)(1) anticipates that the government will proceed with the action "[i]f the Government proceeds with an action brought by a [relator] under subsection (b), such [relator] shall ... receive at least 15 percent but not more than 25 percent of the proceeds of the action or settlement of the claim." Section 3730(d)(2) contemplates that the relator will proceed with the action "[i]f the Government does not proceed with an action under this section, the [relator] ... shall receive ... not less than 25 percent and not more than 30 percent of the proceeds of the action or settlement." The court pointed out that there is no provision that attempts to compute what portion of the recovery the relator will obtain when the government intervenes in a portion of the civil action and declines as to a portion of the civil action because Congress never anticipated that result.19
Third, the court pointed out that if the relator were allowed to proceed with separate claims after the government intervenes, the FCA's fee-shifting provision would be undermined. Section 3730(d)(4) provides that "[i]f the Government does not proceed with the action and the [relator] conducts the action," the court may award reasonable attorney's' fees "if the defendant prevails in the action and the court finds that the claim of the [relator] was clearly frivolous, clearly vexatious, or brought primarily for purposes of harassment." Specifically, the court noted that if the relators, after the government intervenes, are allowed to add defendants and claims to the action, the attorney fee provision is undermined because the relators' new claims could prove frivolous, and the defendants would nevertheless be precluded from recovering attorney fees because the government "proceed[ed] with the action."20 The court reasoned that the attorney fee provision envisions that the government, when it intervenes, takes responsibility for the entire action, and it does not contemplate a situation in which a relator continues to add claims or defendants to the action.21
Fourth, the court noted that under the FCA when the government intervenes, the relator can continue as a party, but that right is narrowly defined in the statute and does not include the right to conduct the action and it does not encompass the right to add defendants and claims to the action.22 Instead, Section 3730(c)(2)(C) contemplates the rights that a relator would have as a party to the action. It provides that the court, after the government has intervened, can limit the number of witnesses a relator may call, limit the testimony of those witnesses and limit the relator's cross-examination of other witnesses.23 Thus, while it is clear Congress anticipated that relator's may call witnesses, and took measures to limit that participation when contrary to the government's interest, Congress neither in this provision nor elsewhere indicated that it anticipated that beyond calling witnesses the relator would be adding causes of action or defendants once the government intervened.24
Further, Section 3730(c)(2)(D) authorizes a court to limit a relator's "participation during the course of litigation" if the defendant shows that the relators' participation "would cause the defendant undue burden or unnecessary expense."25 The court reasoned that if "Congress truly intended that the right to continue as a party to the action included the right to add defendants and claims to the action, Congress would not have given courts the ability to limit a relator's 'participation' upon a showing that the defendant would suffer undue burden or unnecessary expense."26 Instead, the court concluded that Section 3730(c)(2)(D) contemplates that the right to continue as a party to the action is more limited (e.g., calling and cross-examining witnesses and engaging in discovery), and the provision suggests that Congress did not intend to let relators maintain the non-intervened portion of an action.27 Consistent with this interpretation, the court noted that the legislative history indicated that the relator would only possess limited rights once the government intervened.28 For example, "the Senate Bill provided relators the right to request 'copies of all pleadings filed in the action and copies of all deposition transcripts'", and furnished relators the right to "'file objections with the court and petition for an evidentiary hearing to object to any proposed settlement or to any motion to dismiss filed by the Government'."29
In sum, the Court found that both the FCA's plain language and the legislative history suggest that Congress envisioned that a relator, as a party to the action, could (1) call witnesses, (2) cross examine witnesses, (3) request to receive pleadings and deposition transcripts, (4) object to proposed settlements, and, (5) at the most, conduct discovery.30 But neither the statute nor the legislative history suggests that a relator, as a party to an action, can add defendants and claims to the action.31 The Court concluded that if "Congress intended to give relators such rights, one would imagine that either the statute or the legislative history would reflect its intent to do so. But neither does."32
The relators contended that the court's interpretation will lead to a perverse outcome because relators will simply "file separate complaints – perhaps for each defendant, each cause of action, or both."33 But the court responded that the FCA's first-to-file bar —which provides that "[w]hen a person brings an action under this subsection, no person other than the Government may ... bring a related action based on the facts underlying the pending action"34—would prevent such conduct because the plain language of the first-to-file bar prevents a relator from commencing a second action that is based on the facts underlying the first.35 The relators also contended that "a construction that eliminates partial intervention will simply lead the Government and relators to sever the nonintervened claims into separate actions during the seal period."36 Again, the court responded that it failed to discern how "this is possible when relators cannot file a second action that is based on the underlying facts of the first action."37
As a result of the court's reasoning, it concluded that in the action, the government's complaint superseded the relators' complaint and became the operative pleading and the relators then lost the right to add defendants and claims to the action. It ruled that any pleading the relators filed after the government elected to intervene lacked legal effect. The court concluded that, at most, the relators could have persuaded the government to amend its complaint to include additional claims, allegations or defendants. But "the relators were unable to take the steering wheel from the Government, adding new claims, allegations, and defendants to the Government's action."38 Accordingly, the court struck the relators' second, third and fourth amended complaints because they had no legal effect.39
This case may significantly limit many qui tam lawsuits. The relator, historically, had pursued additional defendants and causes of action that the government elected not to pursue, which has significantly increased the cost of litigation. If other courts confronting this issue adopt Wride's reasoning, the number of FCA claims will be reduced. Additionally, the case may result in the United States pursing fewer qui tam actions. If the United States only wants to pursue a single defendant or single claim, and the relator believes that many defendants engaged in the same conduct, the United States and relators may agree that the United States should not intervene so the relator can pursue those additional claims. Given the relator's record of very limited success when litigating without the government's assistance, this result should inevitably also benefit defendants.
Relator Cannot Use Discovery to Satisfy Rule 9(b) and Payment at FMV is a Dispositive Defense in an FCA Case Predicated Upon an AKS Violation: Bingham v. HCA, Inc.
Frequently, relators will file qui tam actions that do not identify specific claims that the defendant submitted to the government.40 As a result, defendants commonly move to dismiss under Fed. R. Civ. P. 9(b), pointing out that the relator failed to identify even a single claim with specificity.
Once defendants move to dismiss under Rule 9(b), most courts will not permit discovery.41 The logic underlying staying discovery is twofold: (1) permitting the relator to obtain evidence of fraud for the first time during discovery directly undermines the purpose of Rule 9(b) which is that the relator obtain a sufficient quantum of evidence of fraud before suing for fraud and tarnishing the defendant's reputation in the community42; and (2) ensuring that the government, consistent with the FCA, has sufficient evidence that the relator has supplied before deciding whether it is in the government's interest to intervene in the lawsuit.43 But, at times, some courts, in order to move their dockets, will not, as a matter of practice, delay discovery while they consider the defendant's motion to dismiss.
The issue raised in Bingham is what should occur when the court elects not to stay discovery, and the relator then obtains discovery and amends his complaint to supply sufficient specificity to satisfy Rule 9(b).
Another frequently arising issue in FCA actions alleging an AKS violation is whether evidence that defendant paid fair market value (FMV) is a dispositive defense. In Bingham, the 11th Circuit ruled that relator cannot use discovery to surmount Rule 9(b) and a FMV payment is a dispositive defense under the AKS.
1 See Justice Department Recovers Over $3 Billion From False Claims Act Cases in Fiscal Year 2019, U.S. Dep't of Justice (Jan. 9, 2019), https://www.justice.gov/opa/pr/justice-department-recovers-over-3-billion-false-claims-act-cases-fiscal-year-2019.
3 Specifically, according to a LEXIS search of all cases issued in calendar year 2019, and used the phrase "False Claims Act."
4 For a description of the general issues arising under FCA cases addressing Rule 9(b), whistleblower retaliation and Escobar, see Robert Salcido, False Claims Act & the Health Care Industry: Counseling & Litigation (3d ed. American Health Lawyers Association 2018) at §§ 3:09; 3:07; 2:06, respectively (2020 Supplement forthcoming).
5 359 F. Supp. 3d 1088 (D. Utah 2019).
6 783 Fed. Appx. 868 (11th Cir. 2019).
7 No. 12-CV-4239, 2019 U.S. Dist. LEXIS 192332 (E.D. Pa. Nov. 5, 2019).
8 783 Fed. Appx. 868 (11th Cir. 2019).
9 No. 18-1693, 2019 U.S. App. LEXIS 38367 (3d Cir. Dec. 20, 2019).
10 938 F.3d 1278 (11th Cir. 2019).
11 Robert Salcido, False Claims Act & the Healthcare Industry: Counseling & Litigation (3d ed. American Health Lawyers Ass'n 2018) at § 3:02 (discussing case law).
12 359 F. Supp. 3d 1088 (D. Utah 2019).
13 Id. at 1116 (after intervention, while "a relator retains a limited right to continue as a party to the action, that right does not allow the relator to amend his or her complaint to add defendants and claims to the Government's action. Those rights necessarily belong to the party with the primary responsibility for conducting the action – in this case the Government. Consequently, the Government's complaint in intervention superseded the relators' amended complaint, and any pleading subsequently filed by the relators lacked legal effect").
14 Id. at 1116-17 (quoting 31 U.S.C. § 3730(b)(1)).
15 Id. at 1117 (quoting § 3730(b)(4) (emphasis added)).
16 The court also rejected the government's view that Congress used the word "action" to mean "cause of action" rather than "civil action." Id. at 1118. The court ruled that the FCA's plain language undermined the government's contention:
First, § 37370(b)(1) unambiguously shows that Congress used "action" to mean "civil action." The first sentence provides that a relator may bring a "civil action," and the following sentence explains that the "action" (i.e., the civil action) shall be brought in the name of the Government. § 3730(b)(1). The next sentences provides that "[t]he action [i.e., the civil action] may be dismissed only if the court and the Attorney General give written consent to the dismissal and their reasons for consenting." § 3730(b)(1).
Second, other provisions show that Congress used "action" to mean something other than "cause of action." "The court shall dismiss an action or claim under this section, unless opposed by the Government, if substantially the same allegations or transactions as alleged in the action or claim were publicly disclosed." § 3730(e)(4)(A) (emphasis added). If "action" means "cause of action," the words "or claim" would be superfluous. See Cause of Action, BLACK'S LAW DICTIONARY (10th ed. 2014) (suggesting that one review the definition of "claim" for more information on the definition of "cause of action"). That is, interpreting "action" to mean "cause of action" runs afoul of the rule that courts must "give effect, if possible, to every clause and word of a statute."
Id. at 1118 (citation and footnote omitted).
18 Id. at 1121.
19 Id. The court also pointed out that nothing in the legislative history describing the provision suggests that "Congress intended for courts to apply the damages provision for intervened actions to the claims that the Government prosecuted and then apply the damages provision for non-intervened actions to the claims that the relators prosecuted." Id. at 1121-22.
20 Id. at 1123.
22 Id. at 1124-25.
23 Id. at 1125.
28 Id. at 1125-26.
29 Id. But the court was required to grant an evidentiary hearing only "upon a showing of substantial and particularized need." Id. The court noted that the Senate Judiciary Committee explained that the proposed Senate Bill gave relators "increased involvement in suits brought by the relator but litigated by the Government." Id. (quoting S. Rep. No. 99-345, at 13 (1986), reprinted in 1986 U.S.C.C.A.N. 5266, 5278 (emphasis added)). By contrast, the court noted that the House Bill proposed to expand the "role of the relator so that when the Government enters the action ..., the relator remains a party to the suit with the same rights as if he had been an intervenor of right under Rule 24(a), Federal Rules of Civil Procedure." Id. at 1126. The court noted that while the House Bill defined the relators' rights by express reference to the rights of an intervenor of right under Federal Rules of Civil Procedure, the FCA's final language did not. The court concluded that this severely undercuts the relators' argument that the court must look to the Federal Rules of Civil Procedure to ascertain what rights a relator has as a "party to the action." Id.
32 Id. (footnote omitted).
33 Id. at 1119, n. 12.
34 § 3730(b)(5) (emphasis added).
35 Id. at 1119, n. 12.
38 Id. at 1127.
40 A "claim" is a defined term in the FCA, meaning generally a demand or request for money or property. See 31 U.S.C. § 3729(b)(2). It is important to identify a "claim" in an FCA action because, as many courts have noted, it is "a fairly obvious notion that a False Claims Act suit ought to require a false claim." U.S. ex rel. Cafasso v. Gen. Dynamics C4 Sys., 637 F.3d 1047, 1055 (9th Cir. 2011). Indeed, the "central question" in an FCA case is "whether the defendant ever presented a false or fraudulent claim to the government." Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 785 (4th Cir. 1999). This is because the "[FCA] attaches liability, not to the underlying fraudulent activity or to the government's wrongful payment, but to the 'claim for payment'." Cafasso, 637 F.3d at 1055 (quoting United States v. Rivera, 55 F.3d 703, 709 (1st Cir. 1995)); see also In re: Baycol Prods. Litig., 732 F.3d 869, 875 (8th Cir. 2013) (same).
41 Robert Salcido, False Claims Act & the Health Care Industry: Counseling & Litigation (3d ed. American Health Lawyers Association 2018) at § 3:09 (discussing case law).
42 See, e.g., U.S. ex rel. Atkins v. McInteer, 740 F.3d 1350, 1359 (11th Cir. 2006) ("[t]he particularity requirement of Rule 9 is a nullity if Plaintiff gets a ticket to the discovery process without identifying a single claim") (internal quotation marks omitted).
43 See, e.g., U.S. ex rel. Estate of Donegan v. Anesthesia Assocs. of Kan. City, PC, 4:12-CV-0876-DGK, 2015 U.S. Dist. LEXIS 74239, at *21-23 (W.D. Mo. June 9, 2015) ("[a] relator may not assert new theories of liability based on information learned during discovery.... [P]ermitting a relator to assert new theories of liability after conducting discovery would enable the relator to conduct an end-run around the heightened pleading standard, effectively allowing the relator to file a flimsy lawsuit subjecting the defendant to time-consuming and expensive discovery in the hope of uncovering an unknown wrong or extracting a settlement from the defendant").
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