Carol Lynn Thompson

24 March 2015

Ninth Circuit Hears Argument En Banc in Hartpence and Godecke Appeals

On Tuesday, March 17, 2015, the Ninth Circuit Court of Appeals heard two consolidated False Claims Act cases en banc, US ex rel. Hartpence v. Kinetic Concepts, Inc. (12-55396) and US ex rel. Godecke v. Kinetic Concepts, Inc. (12-56117). As discussed here, the challenged district court ruling dismissed the Relators’ cases under the public disclosure bar. In Tuesday’s argument, the Relators urged the court to overturn its holding in U.S. ex rel. Wang v. FMC Corp., 975 F. 2d 1412 (9th Cir. 1992), upon which the district court relied in ruling that an original source must have “played a part in publicly disclosing the allegations and information on which their suits were based” to escape the FCA’s public disclosure bar. The Relators argued that the Supreme Court’s decision in Rockwell Int’l Corp., v. United States, 549 U.S. 457 (2007) abrogated Wang‘s “hand in the disclosure” requirement when it held that the “direct and independent knowledge” that a relator must have to qualify as an original source is the information upon which his or her complaint is based, not the information underlying the public disclosure. Defendant-Appellee countered that Rockwell did not disturb Wang‘s test, and asked the court not to upset its long-standing precedent.

The eleven-member court struggled at argument to align the procedural history of the suit, the Wang test, the text of the FCA, and Congress’ recent amendments and policy concerns. Almost immediately after Relators’ counsel began his argument, J. Kozinski pressed him on why precisely Wang and Rockwell were inconsistent. J. Kozinski seemed incredulous at Relators’ assertion that Rockwell defined an “original source” solely based on knowledge of the allegations in the complaint, and J. Berzon pointed out that under Relators’ proposed definition, any relator with direct knowledge could always bring a qui tam suit even if a public disclosure had already occurred. When Relators’ counsel suggested that Congress intended that result to prevent companies from inoculating themselves against FCA claims by strategically releasing information to the public, J. Kozinski seemed mystified, and asked whether voluntary disclosure of bad acts was a “bad thing” that Congress would seek to prevent. Chief Judge Thomas also pressed Relators’ counsel on whether any empirical evidence backed his claim that companies were engaging in such strategic releases. Relators’ counsel admitted not. J. Berzon, however, noted that Relators’ problem was perhaps not only with the Wang test, but also with the Ninth Circuit’s broad interpretations of “public disclosure.”

Defendant-Appellee’s counsel also faced tough questioning. The court quickly gained an admission from Appellee that Wang‘s “hand in the disclosure” prong did not appear in the FCA’s text. When J. Wardlaw asked Appellee’s counsel why the Wang test should survive, he replied that Wang‘s test created a policy “golden mean” between protecting whistleblowers and requiring their speedy action. But J. Berzon noted that under Appellee’s interpretation a whistleblower could give a great deal of accurate and timely inside information to the government, but could never become a relator if he or she did not directly aid in a later public disclosure. When Appellee’s counsel responded that the Wang test furthered Congress’ intent to prevent “parasite” cases, J. Smith and J. Berzon again observed that the Wang test’s “hand in the disclosure” policy solution to such a “parasite” problem appeared neither in the FCA’s text nor in its statutory history. J. Ikuta noted that Congress amended the FCA as of 2010 expressly to balance the policy considerations at play, and asked how many pre-2010 cases now were left to be decided. Appellee’s counsel could not answer; most such cases remain under seal. J. Callahan then asked Appellee’s counsel what would become of United States ex rel. Meyer v. Horizon Health Group, 565 F.3d 1195 (9th Cir. 2009), which relied on Wang to lay out other important requirements to define an original source, if the court overturned Wang. Appellee’s counsel replied that at least some of Meyer could survive, and J. Smith particularly seemed amenable to a ruling that could “surgically” separate Wang from Meyer.

Finally, J. Bea brought the argument back to procedural matters: had the Relator Godecke been correctly dismissed as second to file? Appellee argued that both Relators had related claims and both should be dismissed, but certainly Godecke remained always in second place. But J. Bea and J. Smith appeared unconvinced, and queried whether Godecke might have claims sufficiently separate and independent from Hartpence’s to move forward on remand.

In the end, although it was difficult to predict what form or reasoning the final decision might take, the court in general appeared open to the suggestion that, especially in light of Congress’ recent amendment to the FCA, the Wang test is due for an upgrade.

27 August 2014

Seventh Circuit Restricts Public Disclosure Bar Where Suit Is Only “Partly” Based Upon Public Disclosures

On July 28, 2014, the Seventh Circuit issued another decision in a string of recent decisions by that court restricting the scope of the public-disclosure bar.

In United States ex rel. Heath v. Wisconsin Bell, Inc., the relator, Todd Heath, alleged that Wisconsin Bell, Inc., was overcharging school districts, libraries, and the federal government for telecommunications services provided pursuant to the E-Rate Program. Telecommunications providers participating in the E-Rate Program are required to offer eligible school districts the lowest price that is charged to “similarly situated” non-residential customers. Heath was retained by several Wisconsin school districts to audit their telecommunications bills and determined that some school districts were paying higher rates than other school districts so that the government was providing greater subsidies. Heath further discovered that the school districts were not receiving the rates offered to the Wisconsin Department of Administration (the “DOA), which contained “similarly situated” government agencies, under Wisconsin Bell’s Voice Network Services Agreement (the “VNS Agreement”).

After Wisconsin Bell refused to provide the more-favorable pricing given to the DOA to the school districts, Heath discovered more pricing information, including the VNS Agreement itself, on the DOA’s website. Heath filed a qui tam complaint in 2008, and the United States declined to intervene. The district court granted Wisconsin Bell’s motion to dismiss for lack of subject-matter jurisdiction, finding Heath’s reliance on the pricing information available on the DOA’s website dispositive in applying the public-disclosure bar.

The Seventh Circuit reversed, holding that Heath’s allegations were not “based upon” a public disclosure. The court reasoned that, unlike cases in which a relator’s complaint “merely added specificity” to publicly disclosed allegations, Heath’s allegations “required independent investigation and analysis to reveal any fraudulent behavior.” Although Heath’s allegations relied in part on the VNS Agreement, “[n]o one could view the agreement in a vacuum and realize that Wisconsin Bell was overcharging school districts.” Rather, Heath’s prior knowledge of the rates being charged to other “similarly situated” entities was necessary to understand the significance of the VNS Agreement. Accordingly, the court held that the public-disclosure bar does not apply because Heath’s prior knowledge brought “genuinely new and material information” to the government’s attention.

The Seventh Circuit’s opinion limits the potentially broad interpretation of “based upon” articulated in the Seventh Circuit’s decision in Glaser v. Wound Care Consultants, Inc., 570 F.3d 907 (7th Cir. 2009). While acknowledging that Glaser had stated that “based upon” does not mean “solely based upon” and that a “qui tam action even partly based upon” public information will fall within the public-disclosure bar, the court found that Heath’s allegations “required independent investigation and analysis to reveal any fraudulent behavior.” The court in Wisconsin Bell thus distinguished Heath’s claim from that of the relator in Glaser, which “merely added specificity (and maybe a few additional instances)” to the publicly available information. Accordingly, defendants in the Seventh Circuit should be aware that the public-disclosure bar may not apply if the relator relies on public information that “had to be supplemented with knowledge of other pricing . . . to establish fraud.”

A copy of the opinion can be found here.

01 April 2013

Court Rules That Defendant Precluded From Using Evidence to Support Advice of Counsel Defense in FCA Action By Waiting Until Close of Discovery To Produce Supporting Evidence

On March 14, 2013, U.S. Magistrate Judge Frank J. Lynch, Jr. issued a discovery order which may effectively foreclose defendants’ use of an advice of counsel defense in a FCA suit currently pending in the U.S. District Court for the Southern District of Florida. United States ex rel. Matheny v. Medco Health Solutions, Inc., 2:08-cv-14201-DLG, Dkt. # 258 (S.D. Fla. Mar. 14, 2013). The order prohibits defendants from using an email and meeting minutes supporting an advice of counsel defense because defendants’ production of these materials was untimely. Slip op. at 12-13. The court noted that it was “limit[ing] its ruling to the discovery context since that is the scope of its Order of Reference.” Id. at 13. However, the court went on to note that except for the email and the meeting minutes, “the Defendants produced no other documentary, testimonial, or other evidence of legal advice upon which they relied,” thereby indicating that the order likely will foreclose defendants’ use of an advice of counsel defense as a practical matter. Id.

The key document at issue in the opinion is a September 22, 2006 email from William Eck, former general counsel of Medco subsidiary PolyMedica, in which Mr. Eck opined that Medicare Part D overpayments, which the plaintiffs allege were fraudulently hidden to avoid paying government refunds, do not count as “overpayments” under the governing contracts. Id. at 4-5. The document was produced to the plaintiffs at the deposition of a corporate representative on February 6, 2013, three business days before the February 11 discovery deadline in the case. See id. at 7. At that deposition, defendants also produced a heavily redacted set of meeting minutes relevant to the advice of counsel defense. Id. at 7. Additionally, on February 8, defendants provided plaintiffs their Second Amended Initial Disclosures, in which defendants for the first time, listed Mr. Eck as an individual likely to have discoverable information, and an updated privilege log, which listed the Eck email. Id. at 8.

Defendants argued that their invocation of the attorney-client privilege at an October 2012 deposition put plaintiffs on notice that Mr. Eck had rendered legal advice and thus that defendants might raise an advice of counsel defense. See id. at 9. Judge Lynch disagreed, finding that defendants’ invocation of the privilege signaled that defendants intended to maintain the privilege, not to raise an advice of counsel defense. Id. at 9-10. Judge Lynch also found that defendants produced the email and minutes “too late to be of any use to the Plaintiffs, and the late production [of the email and minutes] fell short of the Defendants’ general obligation to produce relevant discovery in a timely fashion.” Id. at 10-11. As a result, the court granted plaintiffs relief under Rule 37(c) and ordered that defendants are foreclosed from using the email and minutes. Id. at 12-13.