Seventh Circuit Holds That 2009 CMS Letter Triggered Public Disclosure Bar for Pre- and Post-Letter Conduct

On August 8, 2017, the Seventh Circuit affirmed the dismissal of an FCA suit alleging that a psychiatric hospital (“Hartgrove”) submitted claims to Medicaid despite maintaining a higher patient census than Hartgrove was licensed to maintain, providing some important clarification on the scope of the public disclosure bar.

Hartgrove argued that two 2009 letters from the government triggered the public disclosure bar. On March 23, 2009, the Illinois Department of Public Health sent a letter that concluded that Hartgrove had been over census on two separate audit dates. On May 5, 2009, CMS issued a letter and report noting that Hartgrove was over census on 52 separate occasions between December 3, 2008, and February 28, 2009. Slip Op. 4 n.1.  Analyzing the public-disclosure bar as jurisdictional because some of the alleged fraud occurred prior to the 2010 amendments, Slip Op. 9, the Seventh Circuit agreed with Hartgrove.  The Court reasoned that Relator had to infer that Hartgrove was knowingly over census, and “[t]here is no reason that the government could not have made the same inference based on its audits.”  Slip Op. 11. The Court suggested that this rule was limited to situations where the defendant violated an objective standard, because if the regulatory violation related to a qualitative rule such as standards of care, it would be equally plausible to infer that the defendant did not knowingly violate the rule.

Regarding the scope of the disclosure, the district court had found that Relator’s allegations were substantially similar to the conduct alleged up until the time of the CMS letter.  After the CMS letter, however, the district court concluded that the allegations involved a different time period and thus the post-letter allegations were not barred. The Seventh Circuit disagreed, holding that the conduct that was disclosed and the conduct for the entire time period alleged were substantially similar, because the only new information that Relator added was conclusory allegations regarding Hartgrove’s state of mind. Because the post-letter conduct was performed by the same entity and of the same nature as the conduct disclosed in the government’s letters, the Court found that the letters disclosed Hartgrove’s continuing practice regardless of time frame. Further, in analyzing whether Relator was an original source, the Seventh Circuit determined that the amended definition of that term applied and that it need not address whether Relator had the opportunity to observe the conduct alleged, because Relator did not materially add to the publicly disclosed allegations.

This opinion is notable for several reasons. First, the Court held that government letters or audit reports identifying regulatory violations constitute public disclosure of those violations for purposes of the FCA.  Second, when the alleged misconduct relates to an objective standard, the government’s knowledge that the standard was violated implicitly includes an inference that the defendant acted with scienter. Third, disclosure of conduct triggers the public disclosure bar for future similar conduct by the same entity.  Fourth, the original source exception to the public disclosure bar is irrelevant when Relator does not materially add to the publicly disclosed allegations.

The Seventh Circuit’s opinion can be found here.