Jun 122014

Third Circuit Adopts More Lenient Application Of Rule 9(b) In FCA Cases

Robert J. Conlan Jr.
,

As we previously reported, on March 31, 2014 the Supreme Court denied certiorari in response to a petition seeking to resolve a Circuit split concerning the application of Rule 9(b) in FCA cases. U.S. ex rel. Noah Nathan v. Takeda Pharms. N. Am., Inc., 134 S. Ct. 1759 (2014). Last Friday, the Third Circuit weighed in on the issue, adopting the less restrictive approach. See U.S. ex rel. Foglia v. Renal Ventures Mgmt., LLC, 2014 U.S. App. LEXIS 10549 (3d Cir. June 6, 2014); see also U.S. ex rel. Foglia v. Renal Ventures Mgmt., LLC, 2014 U.S. App. LEXIS 10726 (3d Cir. June 10, 2014) (notice of amended opinion).

Rule 9(b) requires that, “[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.” The Circuits differ on what a qui tam relator or the government must allege at the pleading stage of an FCA case to satisfy the particularity standard. The Fourth, Sixth, Eighth and Eleventh Circuits, the Foglia court noted, apply a strict standard and generally require that the plaintiff allege at least representative examples of the purportedly false or fraudulent claims submitted for payment. See, e.g., U.S. ex rel. Bledsoe v. Cmty. Health Sys., Inc., 501 F.3d 493, 510 (6th Cir. 2007). The First, Fifth and Ninth Circuits, the Foglia court observed, have permitted FCA claims to proceed on the basis of allegations providing “reliable indicia that lead to a strong inference that claims were actually submitted.” See, e.g., U.S. ex rel. Grubbs v. Kanneganti, 565 F.3d 180, 190 (5th Cir. 2009).

In Foglia, the relator alleged that the defendant, Renal, had harvested and re-used leftover portions of an injectable medication without following HHS procedures, and had charged Medicare as though it had been using new vials of the medication with each patient. As evidence to support his claim that Renal had defrauded Medicare, the relator alleged that Renal’s inventory logs for a particular period showed that it was using between 29 and 35 vials of the medication per day, when it would have required 50 vials if it had been using new vials with each patient. See U.S. App. LEXIS at *9-13. The district court held that these allegations, which did not identify any purportedly false claim for payment, failed under Rule 9(b).

The Third Circuit disagreed and reversed. First, the Foglia court discussed the Circuit split on the pleading standard and sided with the less restrictive approach. The court stated “it is hard to reconcile the text of the FCA, which does not require that the exact content of the false claims in question be shown, with the ‘representative samples’ standard favored by the Fourth, Sixth, Eighth and Eleventh Circuits.” Id. at *6-7. The Foglia court also cited as support for its interpretation the Solicitor General’s amicus curiae brief filed in connection with the petition for a writ of certiorari in the Rule 9(b) case the Supreme Court recently declined to hear. In that brief, the Foglia court observed, the Solicitor General stated that the United States believes the more rigid pleading standard is “‘unsupported by Rule 9(b) and undermines the FCA’s effectiveness as a tool to combat fraud against the United States.'” Id. at 7 (citing Brief for the United States as Amicus Curiae at 10-11, Noah Nathan, 134 S. Ct. 1759).

After adopting the less demanding pleading standard, the Foglia court, while acknowledging that the case before it was “close,” went on to find that what it characterized as the relator’s “hypothesis” passed muster under Rule 9(b). The court accepted the allegations that Renal used fewer vials of the medication per day than it would if each had been used with a single patient, as well as the allegations that Renal did not follow HHS procedures to harvest unused medication from previously used vials. The court stated that the relator had shown “an opportunity for the sort of fraud alleged,” and had “give[n] Renal notice of the charges against it, as is required by Rule 9(b).” Id. at * 13. The court also observed, as further support for its conclusion, “that Renal, and only Renal, has access to the documents that could easily prove the claim one way or another – the full billing records for the time under consideration.” Id.

The chasm between the two camps of Circuits on the Rule 9(b) issue has been sharply delineated for some time. The Third Circuit’s opinion in Foglia further highlights the need for the Supreme Court finally to resolve the dispute and set forth clear guidance as to how Rule 9(b) applies to FCA claims.

Robert J. Conlan Jr.

Washington, D.C.

rconlan@sidley.com

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