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March 9, 2015

09 March 2015

SEC Examines Companies’ Use of Employment Contracts to Discourage Whistleblowers

Posted by Kristin Graham Koehler and Kaitlyn Findley

On February 25, the Wall Street Journal (“WSJ”) reported that the SEC recently sent nonpublic letters to several companies asking them to disclose all confidentiality agreements, nondisclosure agreements, severance agreements, settlement agreements, any documents that “refer or relate to whistleblowing,” and a list of terminated employees since the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) went into effect.

SEC officials and “pro-whistleblower” stakeholders have expressed concern that clauses in these agreements undermine the efficacy of the agency’s whistleblower program by limiting employees’ ability to report a company’s potential wrongdoing or other securities-law violations to the SEC. For example, Congressional democrats recently have alleged that defense contractor KBR Inc. used such nondisclosure agreements to prohibit employees from reporting suspected violations to the government without first obtaining approval from KBR Inc.’s General Counsel — an allegation KBR denies. In addition, some agreements require employees to forego any share of settlement amounts obtained as the result of the employee’s tip, thereby eliminating the financial incentive to participate in the SEC whistleblower program.

The agency’s whistleblower program was created after passage of Dodd-Frank in 2010, which prohibits companies from interfering with employees’ reporting of potential securities-law violations to the SEC. Whistleblowers that participate in the program can recover 10% to 30% of the penalties collected if their information leads to an enforcement action with sanctions of more than $1 million. In 2014, the SEC received 3,620 tips regarding potential securities-law violations, which marks a 21% increase since 2012. Despite this steady increase in tips, SEC officials, including SEC Chairman Mary Jo White, remain concerned about companies’ treatment of internal whistleblowers and consider the issue a “high priority” action item for the agency.

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09 March 2015

District Courts Split Over Whether Relators Can be Original Sources of Claims Based on Misconduct Occurring After Employment Termination

Posted by Jaime L.M. Jones and Brenna Jenny

On March 4, 2015, the Central District of Illinois granted a defendant hospital’s motion to dismiss FCA claims based on “upcoding” allegations, holding the relator was not an original source of certain allegations and finding his remaining allegations insufficient to satisfy the requirements of Rule 9(b). U.S. ex rel. Gravett v. The Methodist Med. Ctr of Ill., No. 12-1008 (C.D. Ill. Mar. 4, 2015). In reaching its decision the court rejected relator’s argument that he could be the original source of allegations based on conduct that occurred after he left defendant’s employ, breaking with recent precedent out of the Eastern District of Pennsylvania. See U.S. ex rel Galmines v. Novartis Pharma. Corp., No. 06-cv-03213 (Feb. 27, 2015).

The relator in U.S. ex rel Gravett worked as an emergency room physician at Methodist Medical Center until January 1, 2007. According to his allegations, Methodist Medical Center employed coding software that it knew had a tendency to inflate the otherwise applicable CPT codes for physician and hospital services to codes associated with higher reimbursement. As a result, the relator alleged the submission of false claims for patients treated during the period 2006-2011. The defendant moved to dismiss relator’s claims under the public disclosure bar, arguing that it had disclosed the essential elements of the alleged fraud to the U.S. Attorney’s Office in the course of a government investigation beginning in 2010. Following Seventh Circuit precedent, the court held that relator’s allegations were publicly disclosed before proceeding to assess whether the relator qualified as an original source of those allegations. The court held that relator could not have direct knowledge of any alleged upcoding that occurred after his employment ended. As such, he could not be an original source of those allegations, which were barred.

The Central District of Illinois’ refusal to consider allegations of misconduct occurring after the relator’s employment was terminated stands in contrast to a recent order by the Eastern District of Pennsylvania in U.S. ex rel Galmines v. Novartis Pharma. Corp. Under an earlier ruling, the relator’s allegations—that during the time of his employment at Novartis, the company engaged in off-label marketing and entered into kickback arrangements with respect to the drug Elidel—had been deemed publicly disclosed. Nonetheless, the court concluded that the relator was an original source of those allegations. The relator subsequently moved to amend his complaint to extend the time period of the alleged misconduct past the termination of his employment. The court granted the motion, ruling that relators may “pursue the entire fraudulent scheme for which they have direct and independent knowledge of the operative substantive facts,” without limitation to the “specific time periods for which they have direct and independent knowledge.” The court viewed this conclusion as mandated by how the public disclosure and first-to-file rules have been interpreted. In particular, the court was concerned that constraining a relator to the time period of his direct involvement could create situations in which no relator could bring a lawsuit for a particular time period of a fraud. For example, this could arise where an original source who was the first to file lacked direct knowledge of a later portion of the scheme, but would-be relators with direct knowledge as to this later period would be barred from filing a suit under the first-to-file rule. The Galmines court further ruled that because the relator had sufficiently alleged a course of conduct continuing past his misconduct, he could amend his complaint and obtain discovery for conduct occurring after he filed earlier iterations of his complaint.

In contrast to the claims arising from conduct after his termination, the Gravett court held the relator was the original source of allegations related to upcoding he observed during his employment. As to that alleged upcoding, the court ruled that despite his direct knowledge relator failed to include any particulars regarding the false claims, such as invoices or requests for payment to a federal healthcare program that resulted from the alleged upcoding. Under well-established precedent, relators advancing upcoding allegations are only entitled to a relaxation of Rule 9(b)’s requirement to plead specific information of at least one submitted false claim if they are “in a special position of personal knowledge or involvement in the billing practices of the defendant that affords some indicia of reliability to the allegations.” The Gravett court determined that as a former emergency room physician, the relator was only involved in the delivery of care, and he lacked “first hand knowledge of Defendants’ actual billing practices, submission of claims for payment, or receipt of payments from the Government payors.” Absent actual involvement in claims or billing practices, the relator was effectively relying on “rumor or innuendo.” Thus, the court dismissed relator’s remaining claims pursuant to Rule 9(b).

A copy of the opinion in U.S. ex rel. Gravett v. The Methodist Med. Ctr of Ill., No. 12-1008 (C.D. Ill. Mar. 4, 2015) can be found here.

A copy of the opinion in U.S. ex rel Galmines v. Novartis Pharma. Corp., No. 06-cv-03213 (Feb. 27, 2015) can be found here.

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