Court Finds Amended AKS and Stark-Based FCA Complaint Pleads Unlawful Remuneration With Particularity
Posted by Scott Stein and Brad Robertson
A recent decision by a federal district court clarifies the Rule 9(b) standard for pleading violations of other laws that underlie false certification FCA claims. Readers of this blog may recall our previous post on an earlier decision in United States ex rel. Osheroff v. Tenet Healthcare Corporation, No. 09-cv-22253 (S.D. Fla.), in which the Court dismissed the Relator’s first amended complaint for failure to plead the alleged violations of the Anti-Kickback Statute and Stark law with particularity. The Court has now ruled on the motion to dismiss Relator’s second amended complaint and found that Relator’s newly pled facts pass muster.
In its previous decision, the Court provided specific guidance on what a Relator must allege for a claim of unlawful remuneration. Relator alleged that Tenet Healthcare Corporation and its affiliated companies leased office space to physicians at below-market rates in violation of AKS and Stark and had falsely certified compliance with those statutes in violation of FCA. The Court found Relator’s allegations too conclusory and held that an allegation of improper remuneration based on below-market-value pricing must also “allege a benchmark of fair market value” and “particular examples of rent being charged . . . in a comparable unit.”
With its second amended complaint, the Court found that Relator sufficiently pled the Stark and AKS violations to satisfy Rule 9(b), although Relator did not literally “allege a benchmark of fair market value” as the Court directed. Instead, Relator alleged details of Tenet “systematically misrepresent[ing] the square footage of the office space” so that referring physicians paid for less square footage than they actually received. In addition, Relator provided examples of “non-standard lease benefits” that Tenet allegedly provided to referring physicians, including excessive allowances for improving the rental space. The Court found that the additional factual allegations could enable someone to reasonably infer that Tenet used below-market-rate leases with referring physicians.
In its motion, Tenet attacked Relator’s assessment of the proper measure and valuation of square footage, which Relator had supported in part by its own empirical analysis of rental rates in various markets around the United States. But the Court made clear that it would not assess the methodology of Relator’s calculations at the motion to dismiss stage, stating “[T]he Court’s role is only to determine whether Relator plausibly alleges that Tenet was charging its physician-tenants rent that was inconsistent with fair market value—not to determine definitively whether the figure Relator advances, in fact, represents fair market value.”
The Court similarly found that Relator pled the Anti-Kickback Statute’s scienter requirement with the proper particularity. In its previous decision, the Court found Relator’s allegations deficient in part because there were “no allegations that any particular physicians were induced to alter their referral decisions on account of their financial relationship with the Defendants.” (emphasis added). However, in its latest opinion, the Court held that “Relator need not allege that Tenet’s physician-tenants referred Medicaid or Medicare patients to Tenet on account of Tenet’s offer or payment of remuneration.” Instead, the Court found scienter satisfied by the inference that Tenet knowingly sought to induce referrals, as it could “reasonably infer that a landlord would not enter into a lease agreement for a price that fell below the fair market rate if some other consideration [(here, patient referrals)] were not involved.”
This decision also joins the body of caselaw holding that representations made in hospital cost reports and Medicare provider applications may form the basis of false certification claim under the FCA. In deciding that the cost report certification of compliance “easily qualif[ies] as a misrepresentation of material fact,” the Court elected not to decide whether statements in Tenet’s Corporate Integrity Agreements could form the basis of a false certification FCA claim.
While the Court may have clarified aspects of the pleading standard it set in its first opinion, it continues to hold that violations of other laws underlying FCA claims must be pled with Rule 9(b) particularity. There may be no bright line rule for pleading the facts constituting fraud in a false certification FCA case, but Relators must nonetheless plead sufficient facts to demonstrate that inferences of violations of the underlying laws are warranted.
Violation of Federal Requirement Not a Condition of Payment Where Government Has Options Other Than Denial of Claims
Posted by Scott Stein and Brad Robertson
Under the “implied certification” theory of FCA liability, relators assert that violation of some federal law or rule renders all claims submitted “false” because, they allege, compliance with that federal law or rule is a condition of the government’s payment of the claims. While compliance with certain laws, such as the Anti-Kickback Statute, is generally considered to be a condition of payment, it is often a key contested issue in implied certification cases whether compliance with the law allegedly violated is a condition of payment—i.e., whether the government would have denied the claim had it known of the defendant’s non-compliance—or not.
At least one court has now found that violation of a law or regulation cannot be deemed a condition of government payment where the government has discretion to take several different actions in response, not all of which would deny payment of claims submitted when the defendant was not in compliance with the law.
In United States ex rel. Ge v. Takeda Pharmaceutical Co. Ltd., Case No. 10-cv-11043 (D. Mass, Nov. 1, 2012), a federal district court in Massachusetts dismissed a relator’s complaint on Rule 9(b) and 12(b)(6) grounds for failure to either plead specific false claims with particularity or to plead sufficiently that all claims submitted in violation of FDA requirements could be deemed false under an implied certification theory.
The relator alleged that the defendant manufacturer misrepresented and misclassified adverse events for four of its products to avoid reporting them to the FDA. Had the adverse events been reported, the relator alleged, the FDA may have required amendments to the products’ approved labeling or additional entries in FDA databases that may have resulted in physicians disfavoring and decreasing prescription of the products. Furthermore, relator alleged, had the defendant reported the adverse events, the FDA may have withdrawn approval for the products, rendering all claims for reimbursement of the product ineligible for reimbursement under federal healthcare programs.
The court dismissed the complaint under Rule 12(b)(6), holding that the relator could not prove that compliance with the FDA’s adverse event reporting requirements is a material precondition of payment under federal healthcare programs. The court explained that the FDA not only has the discretion to determine when to prosecute violations of adverse event reporting requirements, but also has a range of potential civil and criminal fines to impose when it decides to pursue violators, including withdrawal of the product’s approval, injunctive orders, monetary fines and imprisonment for individual defendants, and that not all of these potential remedies would lead to the denial of claims for the manufacturer’s drug.
The court also held that the complaint did not satisfy Rule 9(b) because the relator produced only aggregate government expenditure data on the defendant’s drugs, rather than information about any specific false claims. The court stated, “relator apparently suggests that all of the claims for these particular drugs in the relevant years were rendered false by Takeda’s failure to properly report adverse events. Relator, however, has failed to provide the specific factual allegations necessary to support the inference that the FDA would have withdrawn approval from all four drugs immediately upon receiving the proper adverse reports.”
The opinion is sure to be useful for anyone defending an FCA case based on an implied certification theory. It demonstrates the importance in an implied certification case of understanding how violations of the federal law or regulation alleged to be violated are enforced, and being able to explain that enforcement scheme to the court. This is particularly important in the healthcare context, where the agencies charged with enforcing the laws that are most frequently cited as the bases for implied certification claims—FDA, CMS, and OIG—have a broad range of enforcement tools, not all of which necessarily require denial of claims.
Court Dismisses Government’s Claims Premised On Violations of Industry Standards Under Rule 9(b)
Posted by Scott Stein and Brad Robertson
It is relatively rare for courts to grant motions to dismiss FCA cases in which the United States has intervened. So we read with interest the recent decision of a federal district court in Maryland, United States v. Kernan Hospital, No. 11-cv-02961 (D. Md. July 30, 2012), in which the court dismissed the government’s complaint on Rule 9(b) grounds for failure to plead with particularity specific false statements submitted to the government and how those statements affected the defendant’s reimbursement.
The government’s complaint alleged that the defendant hospital systematically upcoded patients’ secondary diagnoses in order to make the hospital’s case mix appear more severe. The hospital allegedly had personnel review each patient’s chart after the fact for data consistent with malnutrition. The personnel then returned the chart to the treating physician to prompt him or her to consider including a secondary diagnosis of malnutrition. Hospital coders then entered the ICD-9-CM code for an extreme form of malnutrition known as Kwashiorkor for any malnutrition diagnosis.
The government alleged that it conducted an investigation of the hospital’s coding that concluded that 23% of the cases were inappropriate because the medical evidence in the chart did not justify the diagnosis or contained contradictory, incomplete, or ambiguous information. The government further alleged that the hospital’s conduct, and the resultant 23% error rate, violated “industry norms” and “applicable standards” established by the American Health Information Management Association (AHIMA). The government took the position that the hospital’s “practice of deliberately disregarding this industry standard rendered the coding false and fraudulent.”
The court dismissed the complaint, holding that it failed to link the alleged activity to any specific claims submitted to the government for payment. When pressed at oral argument, counsel for the government identified the hospital’s cost reports as the false claims at issue. However, the court noted, the complaint did not allege what effect the upcoded diagnoses had on cost reports, did not allege that the cost reports that cost reports were submitted to the government, or that the cost reports caused the government to pay for services that were not rendered. Indeed, the government conceded that each alleged “false” secondary diagnosis would not necessarily increase the hospital’s rate of compensation, but did not explain the circumstances in which a false diagnosis would result in falsely increased payments.
Because the government failed to allege any specific claims submitted—”the crucial link between the alleged scheme and ultimate False Claims Act liability”—the court dismissed its claims for failure to satisfy Rule 9(b). As the court explained, “The False Claims Act does not punish a system that might allow false claims to be sent to the government—instead, it punishes actual claims containing objective falsehoods.” (emphasis in original).
A copy of the court’s opinion can be found here.
Dismissal and Sanctions Sought for Obtaining Protected Documents from Adversary’s Former Employees
Posted by Jaime L.M. Jones and Brad Robertson
Echoing a fact pattern often found in False Claims Act matters (see related post here), a recent motion filed in an unfair competition suit pending in the Southern District of Florida seeks sanctions for the inappropriate collection and use of confidential information from the opposing party’s former employees. In Millennium Laboratories, Inc. v. Aegis Sciences Corporation, consolidated cases No. 11-cv-20451 and 11-cv-22815, Millennium Laboratories claims that counsel for Aegis Sciences Corporation initiated numerous inappropriate ex parte communications with two of Millennium’s former employees and collected over 5,000 pages of Millennium’s documents—many of which were clearly marked as containing proprietary, confidential and/or attorney-client privileged information—and used the documents as the foundation of a counterclaim against Millennium. The motion further alleges that the former employees’ non-disclosure and confidentiality agreements with Millennium protected these materials and that documents in the production put counsel for Aegis on notice of the agreements. When faced with responding to discovery requests asking for the basis of its counterclaims, the motion asserts that counsel for Aegis allegedly attempted to cover up the circumstances of its receipt of these documents by returning them to the former employees and re-collecting them via a “friendly” third party subpoena before serving its responses.
Millennium seeks dismissal of the defendant’s counterclaims, monetary sanctions, and disqualification of counsel based on Federal Rule of Civil Procedure 37 and violation of the Florida Rules of Professional Conduct. While Aegis will almost certainly oppose the motion, it serves as another reminder that relators (and their counsel) may face significant legal risk when they rely on improperly obtained or retained internal company documents to bring an FCA claim.
Relator Attempting to Avoid The Scope of A Release Pleads Himself Out of Court
Posted by Brad Robertson and Scott Stein
A recent decision explains how one relator, in an effort to plead around a release of FCA claims in favor of his former employer, managed to plead himself right out of court. U.S. ex rel. McNulty v. Reddy Ice Holdings, Inc., No. 08-cv-12728 (E.D. Mich.), December 7, 2011 Slip Op. The relator alleged that his former employer, Arctic Glacier, and two other manufacturers of packaged ice, overcharged the government. These same companies are also currently defending a series of antitrust lawsuits alleging that they conspired to allocate markets. The increased prices resulting from the alleged market allocation form the basis of the relator’s FCA claims in this action.
The plaintiff alleged that he discovered the market allocation conspiracy while employed with Arctic Glacier, and that he was terminated after refusing to participate in the conspiracy. As part of his severance package, he signed a broad release waiving any and all claims against the company for the time period prior to the release.
The defendants moved to dismiss on public disclosure/original source grounds and for failure to plead with sufficient particularity. The relator filed a cross-motion to dismiss Arctic Glacier’s counterclaim that he breached his release agreement. In an attempt to plead around the scope of release, the relator alleged that he learned that the alleged market allocation scheme resulted in overcharges to the United States government from a discussion with a former co-worker only after his termination from Arctic Glacier and after signing the release. Accordingly, he contended that his FCA claims were outside the scope of the release. Ruling on the defendants’ motion to dismiss, the court found the allegations of the discussion with his former co-worker particularly crucial to its 12(b)(6) analysis, as “the only allegations that relate in any way to the FCA claim itself” as opposed to the market allocation conspiracy. The court dismissed the complaint, finding that the allegations of market allocation had been publicly disclosed through the antitrust lawsuits, and that the relator was not an original source of the FCA allegations, as he “was no longer employed by Arctic Glacier at the time and could not possibly have ‘observed’ or ‘learned’ this information firsthand.”
Adding insult to the relator’s injury, the court then proceeded to declare the release that the relator had been attempting to plead around unenforceable, dismissing Arctic Glacier’s counterclaim. Without evidence that the government knew of the claims prior to the execution of the release, the court held, public policy concerns barred enforcement of the agreement as to the FCA claims.