Two recent decisions add to the growing body of case law addressing the tension between attorneys’ ethical obligations to current and former clients and the qui tam provisions of the False Claims Act.
Posted by Scott Stein and Allison Reimann
A recent case provides an interesting example of one company citing a business partner’s settlement of an FCA case, without admitting liability, as a basis for terminating the parties’ contract for cause. CareMed Pharmaceutical Services (“Caremed”), a specialty pharmacy, filed a complaint against pharmacy benefit managers Express Scripts, Inc. and MedCo Health Services, Inc. (collectively, “Express Scripts”). The complaint alleges that Express Scripts improperly cited CareMed’s recent settlement of a qui tam action as a pretext to cancel CareMed’s participation agreement with Express Scripts for the purpose of diverting CareMed’s business to Express Scripts’s own specialty pharmacy. CareMed asserts claims under federal and state antitrust law, ERISA, and common law, including a breach of contract claim.
According to government press releases, a whistleblower filed a qui tam complaint against CareMed in 2012 under the federal False Claims Act and the New York False Claims Act alleging that CareMed made false statements in securing prior authorization for the coverage of certain drugs and submitted false claims for payment for prescriptions that were not received by patients. In early October 2014, following a government investigation, CareMed entered into a $10 million settlement agreement with the federal government and State of New York. In connection with the settlement, CareMed made limited admissions, including that some CareMed representatives falsely stated that they were calling from physician offices in obtaining prior authorizations for Medicare beneficiaries; that CareMed failed to adequately oversee and train responsible staff; and that CareMed had inadequate procedures and auditing processes in place relating to certain prescription drug claims submitted to Medicare and Medicaid. However, no criminal charges were brought against CareMed, and CareMed made no admissions of fraud or intent to deceive in connection with the settlement.
CareMed claims that soon after it notified Express Scripts of the settlement, Express Scripts notified CareMed that it was terminating the participation agreement. According to CareMed, the claimed bases for the termination were that CareMed’s owner pled guilty to fraud and that CareMed failed to notify Express Scripts of the plea – both of which CareMed claims are untrue. CareMed promptly informed Express Scripts that there had been no guilty plea. However, Express Scripts allegedly issued CareMed a second termination letter based on the new justification that CareMed’s admissions in connection with the settlement established that it had violated Express Scripts’s Network Provider Manual, which, among other things, requires all information submitted to Express Scripts to be accurate and complete, prohibits providers from knowingly making false claims, and obligates providers to comply with the False Claims Act. CareMed claims these grounds are baseless, reflect selective enforcement of the Manual against CareMed, and are a pretext to divert CareMed’s customers to Express Scripts’s own specialty pharmacy. CareMed claims that termination of the agreement will cause CareMed to lose approximately $100 million in annual revenues overnight and force it to close its doors.
Along with the complaint, CareMed also filed a motion for a temporary restraining order, which the court denied. The court reasoned that at this stage of the proceedings, it could not predict which party was likely to prevail, and that CareMed had failed to show that any harm from the termination could not be addressed with an award of money damages. While this suit is in the very early stages and the truth of CareMed’s allegations has yet to be proven, the lawsuit is notable because it highlights the collateral consequences that the terms of an FCA settlement can have even where the settlement disclaims liability.
Posted by Scott Stein and Allison Reimann
On October 25, 2013, the Second Circuit affirmed the dismissal of United States ex rel. Fair Laboratory Practices Associates v. Quest Diagnostics Incorporated (No. 11-1565-cv), in a case that confronts head-on the tension between whistleblower incentives and the professional obligations of lawyers—and concludes that an attorney’s ethical obligations trump. Peter Keisler, Richard Raskin, Scott Stein, and Allison Reimann of Sidley Austin represented the defendants in this victory.
Relator Fair Laboratory Practices Associates (“FLPA”) filed the suit in 2005 in the Southern District of New York against the clinical laboratory company Quest Diagnostics Incorporated and its subsidiary Unilab Corporation. FLPA’s claim related to the defendants’ contracting practices. FLPA is a general partnership formed by three former Unilab executives, including Mark Bibi, who was Unilab’s general counsel from 1993-2000. As general counsel, Bibi advised the company on a variety of matters, including its contracts, and handled all of the company’s litigation.
After the defendants learned that one of FLPA’s members was Unilab’s former general counsel, the district court permitted limited discovery to determine whether Bibi and FLPA had improperly used or disclosed Unilab’s confidences in bringing the lawsuit. Following discovery, the defendants moved to dismiss on grounds that Bibi had breached his ethical obligations to his former client by using and disclosing Unilab’s client confidences for his own financial benefit, thereby tainting the entire proceeding. The district court agreed and dismissed FLPA’s action. A few months later, the United States gave notice that it was declining to intervene.
In the Second Circuit, FLPA contended that the district court erred in dismissing the case, arguing that deference to state ethical rules would undermine federal policy that uses whistleblower rewards as a vehicle for rooting out fraud. FLPA also disputed that Bibi violated New York’s ethical rules, maintaining that Bibi was permitted to disclose Unilab’s confidences because he reasonably believed that the defendants were committing a crime.
A unanimous three-judge panel affirmed the district court’s decision. Writing for the court, Judge Cabranes explained that, first, the FCA does not preempt state ethical rules. He wrote that “[n]othing in the False Claims Act evinces a clear legislative intent to preempt state statutes and rules that regulate an attorney’s disclosure of client confidences.” Slip Op. at 15. Furthermore, although the FCA permits relators to bring qui tam suits, “it does not authorize that person to violate state laws in the process.” Id. (quoting United States ex rel. Doe v. X. Corp., 862 F. Supp. 1502, 1507 (E.D. Va. 1994)).
The court also agreed that Bibi violated New York’s ethical rules by disclosing confidential information beyond what was “necessary,” as required by those rules. While FLPA claimed that the disclosures were necessary because the FCA requires relators to provide a “written disclosure of substantially all material evidence and information the person possesses to the government,” 31 U.S.C. § 3730(b)(2), the court agreed that Bibi had means of exposing the alleged fraud other than using client confidences in an FCA suit against his former client.
The Second Circuit’s decision has significant implications, particularly in the health care industry where companies rely heavily on their counsel—both in-house and external—to navigate increasingly complicated fraud and abuse laws. Had FLPA’s view of the law prevailed, such candor with counsel would come at considerable risk, because counsel would be free to parlay those confidences into a FCA suit against that client, all the while standing to collect up to 30 percent of the proceeds of a successful action. See 31 U.S.C. § 3730(d). In other words, counsel’s duty to maintain client confidences would always be in potential conflict with that lawyer’s personal financial interest. A contrary ruling also would have threatened another means of reducing government losses: encouraging clients to seek legal advice on fraud and abuse requirements and then obey that advice.
The ruling, however, shows that the federal interest in identifying fraud is not limitless, but rather gives way to ethical obligations that otherwise would prevent an attorney’s participation as an FCA relator. The decision also has implications beyond the FCA context, including the Dodd-Frank Act, which provides its own whistleblower incentives for reporting corporate wrongdoing.
Posted by Scott D. Stein and Allison W. Reimann
In a February 25, 2013 opinion, a federal district court in Massachusetts dismissed a complaint against twenty-four drug manufacturers, distributors, and labelers, holding that the court lacked subject matter jurisdiction because the facts on which the relator’s claims were based were “publicly disclosed” in drug reimbursement data files and similar documents.
The case concerned the requirement that drug manufacturers file a list of “covered outpatient drugs” they market with the Centers for Medicare and Medicaid Services (“CMS”) and inform CMS whether any of these drugs (or drugs that are identical, related or similar) were subject to review under the Drug Efficacy Study Implementation (“DESI”) program. The relator alleged that the defendants fraudulently misrepresented that their products were covered outpatient drugs eligible for Medicaid reimbursement by listing with CMS unapproved drugs, false DESI codes, and non-drug products. The relator claimed that the federal government thus had erroneously reimbursed over $500 million for the defendants’ products.
The defendants moved to dismiss on public disclosure grounds because both the “true” facts and the facts that the defendants allegedly misrepresented all were publicly disclosed. First, the defendants argued that the allegedly misrepresented facts were disclosed in two places: (1) lists of covered outpatient drugs and associated DESI codes that are published quarterly by CMS (which would show any false statements that the defendants’ products were covered outpatient drugs); and (2) lists of the products and the amounts that the federal government reimbursed to states, also published by CMS (which would show that state Medicaid programs relied on such misrepresentations). Second, the defendants asserted that the “true” facts would be disclosed by three other sources: (1) FDA’s Orange Book (which lists all FDA-approved drugs, making any unapproved drugs listed by defendants conspicuous by their absence); (2) Federal Register notices (which notify the public of FDA’s DESI determinations); and (3) FDA’s National Drug Code Directory (which provides information necessary to show that two drugs are identical, related, or similar).
The court agreed that, read together, these sources created a plausible inference of fraud sufficient to trigger the public disclosure bar – even if substantial expertise would be required to identify the alleged discrepancies. The court explained that “the only question is whether the material facts exposing the alleged fraud are already in the public domain, not whether they are difficult to recognize.” Slip. Op. at 8. The court also rejected the relator’s contention that CMS data lists could not be considered “administrative reports” for purposes of the public disclosure bar, reasoning that the agency engages in at least minimal preparation and synthesis in compiling the data into a usable format for the public.
This case is significant in that it affirmatively holds that information contained in government data files, such as CMS’s state drug utilization data, can qualify as a public disclosure, even where understanding and interpreting the data requires specialized expertise. This holding could be significant in a number of pricing-related contexts where pricing to federal health care programs and other customers may be in the public domain. The decision confirms that relators cannot bring whistleblower actions where their contribution consists of nothing more than drawing inferences from publicly available information.
Posted by Scott Stein and Allison Reimann
On December 6, 2011, the Department of Justice intervened in an FCA suit against AseraCare Hospice, a hospice provider with facilities in nineteen states. The lawsuit, filed in 2009 by two former AseraCare employees, alleges that AseraCare knowingly filed false claims to Medicare for hospice care for patients who were not terminally ill. The DOJ’s complaint alleges that AseraCare, by pressuring employees to reach aggressive Medicare targets, admitted and retained individuals who were ineligible for Medicare hospice benefits—even after being alerted to problems by an internal auditor.
The case is United States ex rel. Richardson v. Golden Gate Ancillary LLC d/b/a AseraCare Hospice, No. 09-CV-00627, and is pending before Judge Abdul Kallon in the Northern District of Alabama. As reported by Bloomberg News, the DOJ’s complaint in intervention is part of a wider federal crackdown of suspected fraud by hospice providers.