Sixth Circuit Holds That Regulatory Ambiguity Precludes A “Knowing” Violation of the FCA

Posted by Scott Stein and Nirav Shah

A recurring issue in FCA cases based on alleged violations of complex statutory or regulatory requirements is the extent to which, as a practical matter, “regulatory ambiguity” is a viable response to the argument that defendants knowingly submitted false claims to the government. We were encouraged when, this past summer, a Pennsylvania district court dismissed FCA claims against a variety of pharmaceutical manufacturers because the relator failed to show that the defendants acted knowingly or recklessly in light of regulatory ambiguity on a complicated price reporting issue. See U.S. ex rel. Streck v. Allergan, et al., No. 08-5135, 2012 WL 259379 (E.D. Pa. Jul. 3, 2012).

A recent decision from the Sixth Circuit provides additional support for this argument. In United States ex rel. Williams v. Renal Care Group, Inc., No. 11-5779, 2012 WL 4748104 (6th Cir. Oct. 5, 2012), the Court reversed a district court’s grant of summary judgment in favor of the government and ordered summary judgment in favor of the defendant, concluding that the defendants’ good-faith efforts to “sort through ambiguous regulations” precluded the government from meeting the knowledge requirement of the FCA.

The United States alleged that defendant, Renal Care Group, Inc. (“RCG”), formed a wholly-owned subsidiary, Renal Care Group Supply Company (“RCGSC”), for the sole purpose of taking advantage of a higher Medicare payment rate. This rate was available only to certain patients and payable only to specific entities—namely, those that were not “renal dialysis facilities.” Op. at 15. The government alleged that in light of overlapping officers, shared office space, and, concurrent financial management, RCGSC was a sham alter-ego of RCG, making claims submitted by RCGSC ineligible for payment and therefore false. Op. at 6.

The core issue on which liability turned was “the degree of ‘separateness’ demanded under the pertinent Medicare statutory provisions and regulations in order for a supplier to be deemed ‘not a provider of services [or] a renal dialysis facility.'” Op. at 23. The Court first addressed this question in the context of whether the claims submitted were “false.” The government contended that the regulations at issue prohibited a subsidiary (here, RCGSC) from receiving Medicare reimbursement, meaning that claims for services that it rendered were false. The Court disagreed with the Government’s position, concluding that the neither the statute nor regulations was clear on this issue. Given that regulatory scheme was intended “to ensure that home dialysis patients could engage in cost comparisons,” there was no reason that Congress would have barred a wholly-owned subsidiary from being eligible for reimbursement. Op. at 15.

But turning to the issue of “knowledge,” the Court concluded that given the complex regulatory backdrop and the defendants’ diligence in attempting to comply with the letter of the law, the defendants could not possibly be deemed to have “knowingly” violated the FCA. The Court credited the defendants’ diligence in attempting to determine whether its reimbursement arrangement passed legal muster. Op. at 18. Indeed, defendants engaged legal counsel had attempted to obtain some degree of assurance from the government by submitting a letter requesting confirmation of the legality of the defendants’ corporate arrangement (though no response to the letter was received). Defendants also openly disclosed the corporate structure to the government in various regulatory filings. Taken together, these factors showed that the defendants did not act in “reckless disregard” of the truth of falsity of their claims, but rather made, transparent, good-faith efforts to ensure their approach was lawful.

Another aspect of the Court’s opinion is worth noting. As in many FCA cases, the plaintiff(here, the United States) sought to cast aspersions on the defendants by emphasizing that RGC created RCGSC solely out of a desire to increase profits by taking advantage of certain reimbursement advantages. The opinion noted that the government “focuse[d], somewhat obsessively,” on this assertion to argue that claims submitted by RCGSC were ipso facto false. The Court properly rejected the government’s attempt to suggest that a defendant’s desire to generate profit from participating in federal healthcare programs is, in and of itself, an indicator of fraud, stating “Why a business ought to be punished solely for seeking to maximize profits escapes us.” Op. at 9. As the Court’s comment recognizes, the desire of a for-profit company to maximize profits is irrelevant to the question of whether the means it uses to generate profits is lawful. The fact that the defendants set up a separate corporation in which to enroll certain dialysis patients to garner more Medicare revenue could not, without more, establish any intent or knowledge to commit fraud.