Douglas Axel

23 January 2013

Fourth Circuit Establishes Rigorous 9(b) Standard For Conduct That Merely “Could” Have Led To Submission of False Claims

Posted by Douglas Axel and Tom Joksimovic

On January 11, 2013, the Fourth Circuit Court of Appeals, reaffirming its adherence “firmly to the strictures of Rule 9(b) in applying its terms to cases brought under the [False Claims] Act,” upheld the district court’s dismissal with prejudice of a qui tam false claims action against a pharmaceutical company. See U.S. ex rel. Nathan v. Takeda Pharmaceuticals North America, Inc., No. 11-2077, slip op., (4th Cir. Jan. 11, 2013).

The relator alleged that the company violated the False Claims Act (FCA) by causing the off-label use of its drug by: (1) promoting the drug to rheumatologists, who typically do not treat the conditions for which the drug had been approved; and (2) distributing samples only containing 60 mg of the drug – double the dose for the most common condition for which it had been approved.

These allegations, the Court held, fell short of the pleading standard under Rule (9)(b). The Court rejected the relator’s argument that alleging a fraudulent scheme obviates the need to allege a specific false claim to satisfy Rule (9) (b). Instead, because FCA liability attaches only to a specific claim actually presented to the government for payment, the court held that “Rule 9(b) requires that ‘some indicia of reliability’ must be provided in the complaint to support the allegation that an actual false claim was presented to the government.”

The Court recognized that this requirement may act as a barrier to a relator without independent access to certain medical records, and it held that Rule 9(b) could be satisfied when “specific allegations of the defendant’s fraudulent conduct necessarily [lead] to the plausible inference that false claims were presented to the government.” (Emphasis added). However, “when a defendant’s actions, as alleged and as reasonably inferred from the allegations, could have led, but need not necessarily have led, to the submission of false claims, a relator must allege with particularity that specific false claims actually were presented to the government for payment.” In this case, the Court found that the relator’s fraud allegations did not involve “an integrated scheme in which presentment of a claim for payment was a necessary result.”

Nathan is another in a line of cases strictly applying Rule 9(b)’s heightened pleading requirements in a False Claims Act case.

22 January 2013

Case Involving Government Employees As Whistleblowers Heads Back to Court of Appeals

Posted by Douglas Axel and Wesley Montalvo

A long running case dealing with the ability of government employees to receive compensation for serving as whistleblowers appears to be heading back to the D.C. Circuit Court of Appeals.

In 1997, the Project on Government Oversight (“POGO”) brought a False Claims Act lawsuit against several oil companies, alleging that they had understated the value of oil extracted from Federal and Native American lands, and had thus underpaid the associated royalties. POGO had consulted with Richard A. Berman, a government economist, on issues related to the lawsuit, and asked him to join as a relator. Although Berman declined to join the lawsuit, POGO nevertheless gave him $383,600 of its $1.2 million share of the qui tam settlement as a “Public Service Award.”

The government filed a civil action against POGO and Berman in 2003, alleging that POGO’s payment to Berman was an illegal supplement to his government salary under 18 U.S.C. § 209, which forbids anyone other than the government from paying a government employee “as compensation for” the employee’s government work, and prohibits government employees from receiving such payments. The government prevailed in the district court twice, and twice the judgment was reversed in the Court of Appeals. In the first appeal, after summary judgment was granted for the government, the court held a genuine issue of fact existed as to whether POGO’s payment to Berman was made “as compensation for his services as an . . . employee of the executive branch.” United States v. Project on Gov’t Oversight, 454 F.3d 306, 313 (D.C. Cir. 2006). In the second appeal, after a jury verdict for the government, the court held that the jury instructions failed to require the government to show that the parties to the transaction intended that the payment be for official government work, which is also an element of a § 209 violation. United States v. Project on Gov’t Oversight, 616 F.3d 544, 557 (D.C. Cir. 2010).

On remand, Berman moved for summary judgment, arguing among other things that the POGO money was compensation for whistleblowing, which Berman argued cannot, as a matter of law, be part of an employee’s duties. The district court disagreed, holding that “‘whistleblowing’ in the broad sense that Berman uses it often is part of an employee’s job.” Because “Berman was assigned to analyze policy issues—potentially including fraudulent behavior by regulated entities—that were relevant to the mission of the Department of the Interior,” the court reasoned that his job duties “could have included whistleblowing, and a payment for whistleblowing could thus have been compensation for his government services.” United States v. Project on Gov’t Oversight, 839 F. Supp. 2d 330, 341 (D.D.C. 2012).

The government moved for summary judgment on a breach of fiduciary count, which the court granted, finding that Berman had accepted an interest in the qui tam litigation while performing government work that could have affected POGO lawsuits, without disclosing such interest to his government employer. Rejecting Berman’s defense that he could not have breached his duty to the United States because its interests were aligned with POGO, the court reaffirmed that the interests of qui tam relators are different from the government because they “are motivated primarily by the prospect of monetary rewards rather than the public good.” Id. at 353.

After the case proceeded to a mistrial last month, the government dropped its suit against POGO. Berman has indicated his intent to appeal the grant of summary judgment on the government’s breach of fiduciary duty claim, so it appears that the litigation is not quite finished.

Although not directly involving a government whistleblower seeking an award as qui tam relator, the POGO litigation provides an interesting parallel to those cases disqualifying as a relator, under the public disclosure bar, a government employee whose job responsibilities included the reporting of government fraud. E.g. United States ex rel. Fine v. Chevron, U.S.A., Inc., 72 F.3d 740 (9th Cir. 1995).

20 December 2012

District Court Refuses To Allow Government To Use CID To Try To Remedy Deficiencies In Complaint

Posted by Douglas Axel and Anand Singh

We previously wrote about a decision in United States v. Kernan Hospital, in which a district court dismissed an FCA complaint brought by DOJ based on the failure to plead with particularity under Rule 9(b). The government’s attempt to remedy its pleading deficiencies has spawned another interesting opinion in the same case. In an opinion issued on November 20, the district court held that the authority to issue a Civil Investigative Demand (“CID”) under the False Claims Act is unavailable to the government after it files a complaint.


On June 3, 2008, the government began investigating Kernan Hospital (“Kernan”) for Medicare fraud. On October 17, 2011, it filed a False Claims Act suit alleging that Kernan had engaged in fraudulent practices respecting Medicare billing.

Kernan filed motions to dismiss based on the government’s failure to state a claim (under Federal Rule of Civil Procedure 12(b)(6)) and failure to plead fraud with sufficient particularity (under Federal Rule of Civil Procedure 9(b)). The court agreed that the government had failed to adequately plead its fraud allegations and dismissed the government’s complaint without prejudice.

Following the court’s dismissal, on August 23, 2012, the government served Kernan with a CID seeking additional documents concerning Kernan’s billing practices. Kernan filed a petition to set aside the CID (“Petition”), asking the Court to set aside the August 23 CID on the grounds that section 3733 of the False Claims Act does not authorize the government to issue CIDs after it has filed a False Claims Act complaint.

The Court’s Analysis and Holdings

The court agreed with Kernan and granted the Petition. Under section 3733 of the False Claims Act, an Attorney General may issue a CID “before commencing a civil proceeding under § 3730(a) or other false claims law.” 31 U.S.C. § 3733(a)(1). Thus, the court recognized that “[s]ection 3733 sets out a prefiling limitation on the use of the civil investigative demand.” United States v. Kernan Hospital, No. RDB-11-2916, 2012 WL 5879133, *4 (D. Md. Nov. 20, 2012). However, “neither the statute nor the case law interpreting it suggests whether that limitation expires after an initial complaint is dismissed.” Id. The government advanced two arguments why the court should deny the Petition, both of which the court rejected.

First, the government argued that section 3733 “inherently deprives the Attorney General of the power to issue a civil investigative demand only if a suit is pending.” Id. (emphasis added). In rejecting this argument, the court explained that the “plain words of the statute does not invite an interpretation of ‘before commencing a civil proceeding’ to include the period after the commencement of a civil proceeding when no suit is pending.” Id. The court also analyzed the legislative history of the False Claims Act and concluded that it “suggest[ed] that when Congress circumscribed the period during which the Government could issue a civil investigative demand to the prefiling stage, it did not mean to provide the Government with that power at any time a suit was not pending.” Id. at *5.

Second, the government argued that the Petition should be denied “based on policy,” because the government was considering filing an amended complaint and the granting of the Petition “would prevent [the government] from obtaining the information it need[ed]” to cure the deficiencies in its pleading, i.e., the government’s failure to plead fraud with particularity and satisfy the requirements of Federal Rule of Civil Procedure 9(b). Kernan, 2012 WL 5897133 at *6. In rejecting this argument, the court explained that the government already had “conducted a thorough investigation and gathered the information it needed to determine whether to file suit,” and therefore, the court was “not persuaded that the Government needs to exercise its section 3733 power before it can sufficiently amend its complaint.” Id. The court also explained that “the civil investigative demand provision and Rule 9(b) are intended to encourage careful behavior when alleging fraudulent conduct,” and therefore its granting of the Petition was “in keeping with the policy goals underlying both section 3733 and Rule 9(b).” Id. at *7.

Based on the court’s ruling, the government is not able to use CIDs to obtain information after it has initiated an action. This may benefit defendants in False Claims Act cases. However, the ruling may counsel the government to issue broader CIDs at the pre-filing stage, which may impose additional burdens on companies and individuals that are potential defendants in such cases.

09 October 2012

California Expands Whistleblowers’ Rights To Bring <i>Qui Tam</i> Actions Under The State’s False Claims Act

Posted by Doug Axel, Tomislav Joksimovic and Ellyce Cooper

The Federal False Claims Act (“FCA”) has undergone significant amendments in recent years, through the Fraud Enforcement and Recovery Act (“FERA”) in 2009 and the Patient Protection and Affordable Care Act (“PPACA”) in 2010. For states to remain eligible to receive a 10% bonus on Medicaid-related false claims recoveries, federal law requires in part that “the [state] law contains provisions that are at least as effective in rewarding and facilitating qui tam actions for false or fraudulent claims” as the FCA. 42 U.S.C. § 1396(h) (2012). On September 29, 2012, California Governor Jerry Brown signed into law Assembly Bill 2492, which aims to further align the California False Claims Act (“CFCA”) with the FCA and thus preserve bonuses for the state in connection with Medicaid-related false claims recoveries.

Among the new key provisions of the amended CFCA are the following:

1. Scope of Potential Whistleblowers: The previous version of the CFCA barred suits by a whistleblower based on publicly disclosed allegations, unless the whistleblower had “direct and independent” knowledge of the allegations and had provided the information that led to the public disclosure. The amended CFCA allows a whistleblower to proceed with a lawsuit based on allegations that had been publicly disclosed if the Attorney General opposes dismissal of the whistleblower’s claims, if the whistleblower had disclosed to the state or relevant political subdivision the information on which the lawsuit is based prior to the public disclosure, or if the whistleblower’s knowledge is independent of and “materially adds” to the public information and he or she voluntarily provided the information to the state or political subdivision before filing suit.

2. Involvement in Wrongful Conduct: The amended CFCA no longer bars recovery for whistleblowers who “actively participated in the fraudulent activity.” Instead, it now provides for a more lenient standard by granting a court discretion to determine whether to reduce recovery and then only for persons who “planned and initiated” the fraudulent conduct. Even a whistleblower who “planned and initiated” the scheme may receive up to 33% or 50% of the recovery, depending on whether the state intervenes in the action. The import of this change is best illustrated (albeit under a different statutory scheme) by Bradley Birkenfeld, a former UBS banker who provided information to the government that led to UBS entering into a deferred prosecution agreement for tax fraud charges and paying $780 million in penalties. As a result, Mr. Birkenfeld received a $104 million award under the IRS whistleblower program despite his participation in the underlying fraudulent conduct. Under the previous version of the CFCA, a whistleblower involved in the fraud would have been barred from any recovery and therefore without any monetary incentive to report fraudulent activity. Now, individuals who are actual participants in fraudulent activity have a considerable incentive to report false claims under the amended CFCA.

3. Enhanced Whistleblower Protections: The amended CFCA now provides for reinstatement of employment as an additional remedy for employees who suffered retaliation by their employers. Moreover, this protection now extends to employees who “engaged in efforts to stop one or more [false claims] violations” in addition to employees who acted “in furtherance” of a false claims action.

4. Increased Penalties: The amended CFCA increases the low and high end of the civil penalty range by $500, i.e. from $5000 – $10,500 to $5,500 – $11,000.

09 August 2012

Ninth Circuit Holds That “Underbidding” Is Actionable Under The FCA

In a case of first impression in the Ninth Circuit, the court held in United States ex rel. Hooper v. Lockheed Martin Corp., __ F.3d __, 2012 WL 3124970 (9th Cir. Aug. 2, 2012) that “false estimates, defined to include fraudulent underbidding in which the bid is not what the defendant actually intends to charge, can be a source of liability under the FCA, assuming that the other elements of an FCA claim are met.” (Id. at *9).

The defendant argued that an allegedly false estimate cannot form the basis of FCA liability, because it is an opinion or prediction that cannot be false within the meaning of the FCA. In reversing the district court’s grant of summary judgment, the Ninth Circuit reasoned that an opinion or estimate “carries with it an implied assertion, not only that the speaker knows no facts which would preclude such an opinion, but that he does know facts which justify it.” (Id. (citations and internal quotations omitted)).

In a passage of the opinion somewhat in tension with its holding – that a bid lower than “what the defendant actually intends to charge” can give rise to FCA liability – the court found the district court erred by requiring evidence of the defendant’s wrongful intent. (Id. at *9). In opposing summary judgment, the relator submitted testimony that the defendants’ employees were instructed to lower their cost estimates without regard to actual costs, and that the defendant “was dishonest in the productivity rates that it used to determine the cost.” (Id.). No evidence appears to have been submitted regarding what the defendant intended to charge. Nevertheless, citing the FCA’s definition of “knowing” to include deliberate ignorance and reckless disregard, the court found this evidence sufficient to prevent summary judgment and require a trial on the merits. (Id.).

In support of its ruling, the Ninth Circuit relied on the Supreme Court’s decision in United States ex rel. Marcus v. Hess, 317 U.S. 537 (1943), which the court interpreted as supporting a “‘fraud-in-the-inducement’ theory of FCA liability.” (2012 WL 3124970 at *8). Thus, this decision will likely be cited as support for all types of “fraud-in-the-inducement” theories of FCA liability, including fraudulent underbidding. Precisely when an ultimately inaccurate cost estimate becomes “false or fraudulent,” however, is not clearly answered by Hooper and will no doubt be the subject of further litigation.

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