On June 12, 2013, the First Circuit in United States ex rel. Duxbury v. Ortho Biotech Products, L.P., No. 12-2141, held that the district court properly limited discovery on the relator’s FCA claims to only those time periods and regions of the country as to which relator could be considered an “original source.”
Relator, a former employee of manufacturer Ortho Biotech Products, based his FCA claims in part on allegations that OBP delivered kickbacks to doctors in various forms to induce prescriptions of OBP’s anemia drug, Procrit. In 2007, the District of Massachusetts dismissed the kickback-related allegations for failure to plead fraud with sufficient particularity. The First Circuit reversed that decision, finding that the complaint properly set forth allegations of kickbacks that resulted in false claims by eight healthcare providers in the western U.S. between 1992 and 1998. The Court then remanded the case to the district court for consideration of discovery and statute of limitations issues.
On remand, Judge Zobel found that the temporal scope of discovery properly was limited to a roughly seven month period in late 1997 and early 1998. The district court reasoned that claims accruing prior to this time frame were barred by the FCA’s statute of limitations, and claims arising afterwards fell outside the scope of the court’s subject matter jurisdiction, because relator could not be an “original source” of claims arising after his termination. Additionally, the court limited relator’s discovery to the facts arising in the western United States because he only had “direct and independent knowledge” of OBP’s activities there. At the close of discovery, the parties stipulated that relator had not identified and did not possess any admissible evidence to support his remaining claims. OBP moved for summary judgment, which the district court granted.
Relator appealed, contending that the district court erroneously had applied the “original source” rule in determining the scope of its subject matter jurisdiction. Without reaching the merits of the district court’s subject matter jurisdiction, the First Circuit held that the limitations imposed by the district court were well within its “broad discretion in managing discovery.” Specifically, the First Circuit found the district court was not required to “expand the scope of discovery based upon the amended complaint’s bald assertions that the purported kickback scheme continued after [relator’s] termination or was ‘nationwide’ in scope.” Accordingly, the Court found that relator’s claims “evaporated” with the failure to uncover any admissible evidence to support the allegations in the complaint by the close of discovery, and upheld the grant of summary judgment for the defendant.
A copy of the First Circuit’s opinion can be found here.
The Seventh Circuit Court of Appeals issued a decision last week that should assist defendants seeking to reduce their treble damages exposure under the FCA. In U.S. v. Anchor Mortgage, Nos. 10–3122, 10–3342, 10–3423 (7th Cir. Mar. 21, 2013), the Court rejected the “gross trebling” approach to calculating damages advocated by DOJ, in favor of the “net trebling” approach advocated by defendants, which recognizes the value received by the government and excludes that value from the damages calculation.
In the trial court, DOJ prevailed on FCA claims against mortgage lender Anchor Mortgage and its CEO premised on false statements to the U.S. Department of Housing and Urban Development to secure federal guarantees on 11 residential mortgage loans. The lower court calculated single damages by totaling the guarantees the government paid on the 11 loans. The court then trebled that number and added penalties. From the total treble damages amount, the court then subtracted the amount the government already had recovered by selling the properties that secured the loans.
On appeal, the Seventh Circuit dubbed the district court’s approach to calculating FCA damages a “gross trebling” calculation. The DOJ argued that this “gross trebling” approach – its standard approach to calculating FCA damages – is supported by the Supreme Court’s 1976 opinion in U.S. v. Bornstein, 423 U.S. 303, in which the defendant was found liable for violating its government contract by supplying inferior radio kit tubes. DOJ relied on the holding in Bornstein that “the Government’s actual damages are to be doubled before any subtractions are made for compensatory payments previously received by the Government from any source” to support a “gross trebling” damages calculation under the FCA. The Seventh Circuit rejected this reading of Bornstein, holding the quoted language only addressed the question whether third party payments for the tubes should be subtracted before damages were multiplied, not whether the appropriate calculation of single damages was the difference between the price paid and the fair market value of the tubes. On that question, the Seventh Circuit pointed to a footnote in Bornstein directing that “The Government’s actual damages are equal to the difference between the market value of the tubes it received and retained and the market value that the tubes would have had if they had been of the specified quality.”
Thus, citing Bornstein as support, the Seventh Circuit concluded a “net trebling” approach to calculating FCA damages, in which single damages first are calculated based on the difference between the price paid by the government and the value of what the government received. The court noted that this approach has been adopted by the Second, Sixth, D.C., and Federal Circuits, though rejected by the Ninth, and reflects the “norm in civil litigation.” Accordingly, the court reversed the district court’s decision on damages and remanded the case with the instruction to calculate damages using a “net trebling” approach.
The resulting potential reduction in damages to the defendant – illustrated by an example in the court’s opinion – reinforces the importance of this decision to defendants and companies under investigation for FCA violations. For 1 of the 11 loans at issue, the government paid $131,643 on its guarantee, and later sold the property for $68,200. Under the “gross trebling” approach, damages related to this loan were $326,729 (($131,643 x 3) – $68,200). Under the “net trebling” approach, damages would be only $190,329 (($131,643 – $68,200) x 3), a difference of $136,400 and a 40% decrease in damages related to that loan. Thus, it is clear that this decision should have a significant impact on damages in FCA cases and negotiated resolutions.
This week DOJ and HHS issued a joint report on the enforcement efforts in fiscal year 2012 of the Health Care Fraud and Abuse Program. This now-sixteen year old program has recovered over $23 billion for the Medicare Trust Funds according to the report, $4.2 billion of which was recovered by the government in 2012. Notably, that represents a significant return on investment for the government, which allocated approximately $600 million to the Program in 2012. The report provides a summary of each of the civil, criminal, and administrative actions concluded in 2012 against providers, manufacturers, and other health care providers. The report also highlights the trend of increased enforcement activity and settlements of health care fraud claims in recent years, noting that over the last four years alone the government has recovered almost $15 billion as a result of the Program efforts – more than double the amount recovered during the prior four year time period. That trend will almost certainly continue; according to the report, federal prosecutors had 2,032 health care fraud criminal investigations and 1,023 civil health care fraud matters pending at the end of 2012.
The SEC OIG recently released a report on the Dodd-Frank whistleblower program. The report, which describes in detail the internal process followed by SEC in responding to whistleblower complaints, concludes that SEC’s Office of Market Intelligence is timely reviewing all whistleblower complaints received by the Division of Enforcement, including returning all phone calls to the whistleblower hotline within 24 hours. The report concludes that SEC has implemented the final rules required by Dodd-Frank to administer the whistleblower program, and that those rules are easily comprehensible to the target audience of prospective whistleblowers — middle management personnel, controllers, finance department personnel, and others with basic securities laws, rules, and regulations knowledge. SEC’s minimum/maximum whistleblower award levels of 10-30% were determined by OIG to be consistent with other government whistleblower programs, including the FCA, and sufficient to encourage whistleblowers to come forward. Notably, the OIG concluded that adding a private right of action for whistleblowers to bring securities fraud claims on behalf of the government, such as that available to FCA relators, may have “unintended consequences,” and that it is too soon in the whistleblower program’s existence to determine whether adding a private right of action is necessary or advisable.
In 2011, Maxim Healthcare entered into a settlement agreement with DOJ under which it paid $121 million plus interest to resolve civil claims arising under the False Claims Act based on allegations that it had fraudulently billed Medicaid and the VA for services not provided or at inflated rates. The company also entered into a deferred prosecution agreement and nine individuals pled guilty to criminal charges related to the same conduct. On October 29, 2012, Maxim filed suit against DOJ under the federal FOIA to obtain the details of how the government apportioned its $121 civil settlement in order to allow Maxim accurately to claim the single damages “compensatory” portion of its settlement payment as a deduction, in accordance with applicable U.S. tax laws. When DOJ enters into FCA settlements it prepares a Civil Fraud Disposition Report, in which it describes how it has calculated single damages and penalties and how it has allocated the settlement funds. As companies that have entered into civil FCA settlements with DOJ know, DOJ routinely refuses to share the specific details of those calculations and allocations with defendants, making it difficult to determine the deductible portion of the settlement for income tax purposes.
Maxim’s complaint alleges that DOJ produced a copy of the Civil Fraud Disposition Report related to its settlement in response to Maxim’s FOIA request that was redacted of the information necessary to determine the amount attributed to compensatory damages, claiming that information was protected by the government’s attorney work product and pre-deliberative process privileges. Maxim argues that the Report was drafted two weeks after the settlement was finalized and is routinely shared with the IRS, preventing the application of the claimed privileges. In response to a separate FOIA request, DOJ produced a copy of a receipt detailing the financial breakdown of one of the 34 separate payments scheduled under the settlement agreement, which Maxim argues further undercuts the government’s privilege claims. If granted, Maxim’s request that DOJ be ordered to disclose the Civil Fraud Disposition Report would significantly assist defendants seeking to fully avail themselves of the tax benefits of future FCA settlements.
The case is pending in the U.S. District Court for the District of Columbia.
As mentioned previously, conduct that gives rise to potential liability under the FCA can also trigger liability under the Foreign Corrupt Practices Act (FCPA). The latest issue of Sidley Austin’s Anti-Corruption Quarterly newsletter, a quarterly publication that provides updates on the latest in FCPA regulatory, enforcement, and compliance trends, is now available. In this edition:
- Congressional FCPA Investigations: Is There Another Sheriff In Town?
- Burden Shifts to DOJ for Proving Facts Used to Increase Penalties
- Global Watch: Mexico Enacts Broad Anti-Corruption Law
- In The Interim
- Compliance Corner: Training and Certification
In a decision released yesterday, Judge Robreno of the Eastern District of Pennsylvania dismissed all FCA claims against nine pharmaceutical manufacturers pursuant to Rule 8(a), finding that relator had failed to plead any evidence they acted knowingly or recklessly in light of regulatory ambiguity. U.S. ex rel. Streck v. Allergan, et al., No. 08-5135 (E.D.P.A. Jul. 3, 2012). Relator’s claims against those defendants were based on allegations that they had improperly calculated Average Manufacturer Price (“AMP”) by including certain price increases that triggered credits owed by wholesalers in the calculation of service fees owed to those wholesalers, which fees were in turn excluded from the manufacturers’ calculation of AMP as “bona fide service fees.” Relying on Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47 (2007), Robreno held that due to the lack of any statutory or regulatory guidance regarding price appreciation credits and the calculation of AMP, relator was required but had failed to plead facts to show that defendants’ interpretation of those regulations was unreasonable. The court found that the conduct of those manufacturers was “not unreasonable, let alone reckless,” and dismissed all claims against them with prejudice as to the relator.
The court also dismissed in part the claims against another group of four manufacturers. These “discount defendants” were alleged to have included service fees paid to wholesalers as discounts in their calculations of AMP. While the court dismissed all claims against the discount defendants for conduct prior to 2007, it allowed later claims to proceed based on regulatory developments occurring in 2007.
This decision, like the Supreme Court’s decision in Christopher v. SmithKlineBeecham Corp., recently reported on this blog, should give relators’ counsel and the government pause when considering FCA claims based on alleged violations of ambiguous statutes or regulations.
Sidley represented three of the defendants against whom all claims were dismissed in the litigation.
The Supreme Court this morning announced that the so-called “individual mandate,” the centerpiece of the Patient Protection and Affordable Care Act (PPACA), which requires most individuals to maintain a minimum level of health insurance, is a constitutional exercise of Congress’s power to tax. Separately, the Court held that a provision of PPACA that would penalize States that elected not to participate in the expansion of the Medicaid program by withdrawing their existing federal Medicaid funding is unconstitutional. However, the Court concluded that this violation can be cured by severing this provision from the rest of the law, leaving the remainder of PPACA standing.
Thus, those False Claims Act and Anti-Kickback Statute-related amendments enacted as part of PPACA, briefly listed here, remain standing: (1) the amendment to the AKS establishing that claims “resulting from” AKS violations that are submitted to the federal healthcare programs give rise to FCA liability (PPACA § 4204(f)(1)); (2) the further AKS amendment, clarifying that knowledge of and specific intent to violate the AKS are not necessary to establish a violation (PPACA § 6402(f)(2)); (3) amendments to the FCA’s “public disclosure bar” provision that convert it from a jurisdictional bar to an affirmative defense that can be raised by a defendant in a motion to dismiss but rejected by the government, precluding judicial resolution of the issue, and significantly limiting the types of disclosures that can give rise to the defense (PPACA § 10104(j)(2)); (4) requiring recipients of “overpayments” to report and return them, and making the failure to do so the basis of a “reverse false claim” cause of action under the FCA (PPACA § 6402(a)); and (5) creating additional civil monetary penalties that may be applied to conduct that violates the FCA (PPACA §§ 6402(d)(2), 6408(a)).
The opinion is available at http://www.supremecourt.gov/opinions/11pdf/11-393c3a2.pdf
Last week, the United States District Court for the Northern District of Illinois denied a motion to dismiss an FCA suit brought by the government against the president of MDR Mortgage Corp., a HUD and FHA loan correspondent. U.S. v. Luce, 2012 U.S. Dist. LEXIS 85095 (N.D. Ill. Jun. 20, 2012). The court held that the government may pursue its claims based on allegations that the defendant falsely certified in HUD residential loan applications (Form 92900-A) and annual verification reports that he had not previously been charged with “making false statements,” a crime for which he was indicted in 2005. In reaching this holding, the court held that the government had alleged that at least some of the loans connected to the false statements had defaulted, causing the government to pay money on the loan insurance policies, and was not required to specify the amount of damages at the pleadings stage. Notably, however, the court rejected the government’s contention that the defendant would be subject to statutory penalties for each of the loans for which false statements were submitted; rather, the court held that the government could only recover penalties as to those loans that resulted in a “claim” on the loan insurance.
On June 18, the Supreme Court ruled for GlaxoSmithKline that the Fair Labor Standard Act’s outside sales exemption applies to pharmaceutical sales representatives, who are therefore not entitled to overtime wages. Christopher v. SmithKlineBeecham Corp., No. 11-204. In analyzing the issue, both the majority and the dissenting justices determined that the deference generally granted by courts to agency interpretations of ambiguous regulations was not warranted with respect to the Department of Labor’s position set forth in its Amicus Curiae brief. The Court held that the position adopted by the Department in its brief – that a “sale” for purposes of the “outside sales” exemption is only made if the salesman transfers title to the property at issue – was not clearly set forth in the statute or regulations, and had not been previously articulated by the Department. In this connection, the Court noted as conspicuous the absence of any enforcement activity premised on the Department’s reading of the outside sales exemption, and characterized the agency’s position as creating an “unfair surprise” for the industry. The Court recognized that extending deference to agency interpretations of ambiguous regulations “creates a risk that agencies will promulgate vague and open-ended regulations that they can later interpret as they see fit, thereby ‘frustrating the notice and predictability purposes of rulemaking.'”
The Christopher decision thus suggests that courts should decline to extend deference to agency interpretations of vague regulations that may result in significant liability, such as under the FCA, absent evidence that the agency has provided clear guidance consistent with those interpretations in advance of the litigation. Courts frequently are confronted with this issue in FCA cases premised on alleged regulatory violations by defendants in highly regulated industries such as the healthcare industry, and we expect defendants in those cases to rely on the decision to push back on attempts by the government to advance for the first time in litigation interpretations of ambiguous regulations.