By

Jaime L.M. Jones

12 December 2014

Citing Role of Statistics in Title VII Litigation, Court Rules Sampling Provides Evidence of Broader FCA Falsity

Posted by Jaime L.M. Jones and Brenna Jenny

Yet another district court has joined recent opinions (as reported here and here) permitting relators and the government to proceed to trial on the basis of extrapolations of FCA liability from a sample of submitted claims. See United States v. AseraCare Inc., No. 12-cv-00245 (N.D. Ala. Dec. 4, 2014). Following the government’s intervention in a suit against hospice care provider AseraCare, it submitted an expert witness opinion based on a review of a sample of 233 claims. The expert concluded that the patients in 124 of the claims failed to meet the criteria for medically indicated hospice care. The government then sought to extrapolate this finding to the full universe of 2,181 claims submitted by AseraCare.

AseraCare filed a motion for partial summary judgment, arguing that the government had failed to introduce any evidence regarding any of the claims other than the 124 that its expert testified were unsubstantiated. These remaining claims broadly fell into three categories: those the expert agreed were substantiated; those the Medicare Administrative Contractor or ALJ had found to be substantiated (regardless of the expert’s opinion); and those claims which were signed by a physician attesting to the medical necessity of the hospice care. The court disagreed that the government had failed to produce any evidence regarding these claims. Noting that “statistical evidence is evidence,” the court ruled that the 124 claims would serve as statistical evidence of the falsity of the remaining claims in the pool, and left it to the jury to decide the relative weight properly applied to the government’s statistical evidence and AseraCare’s evidence related to the circumstances of individual claims.

The court’s decision to allow the jury to weigh the government’s statistical evidence was premised only on a Supreme Court case relating to the type of statistical regression analyses sufficient to allow a court to infer a pattern or practice of racial discrimination under Title VII. In doing so, the court did not distinguish that case on the basis that the means appropriate for proving classwide liability for a pattern or practice of discrimination under Title VII do not necessarily transfer to the still novel use of statistical sampling to establish liability under the False Claims Act, which attaches only to the submission of individual false claims.

A copy of the court’s opinion can be found here.

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23 October 2014

District Court Rejects Default Judgment Based on Assumption That All Claims Submitted By Defendants Were False, Orders New Trial on Damages

Posted by Jaime L.M. Jones and Emily Van Wyck

A Florida federal district court granted a motion for a new trial on damages after an $89.6 million default judgment was entered for False Claims Act violations by a doctor and cancer treatment center. See United States ex rel. McBride v. Makar, No. 8:12-cv-792-T-27MAP, 2014 WL 5307469 (M.D. Fla. Oct. 15, 2014). The court entered a default judgment against the defendant physician and American Cancer Treatment Centers, Inc. (“ACTC”) after defendants failed to respond to the complaint. In calculating damages, the court relied on data compiled by the relator from Medicare records reflecting the total amount paid in reimbursement by the government for all claims submitted by defendants during the time period at issue.

In the order granting a new trial, the court concluded that the damages award was calculated based on allegedly fraudulent claims that were outside the scope of the original complaint. The complaint alleged that the defendant physician submitted false claims for radiation therapy services performed at ACTC that were unnecessary, never performed, or improperly administered. The court noted that these allegations did not support the conclusion that all claims made during this period were false because the existence of some fraudulent billing practices “does not necessarily taint each claim for every patient.” Makar, 2014 WL 5307469, *4. Indeed, as the court recognized, some of the procedures submitted during this period may have been properly supervised and administered.

In reaching its decision, the court distinguished the fraudulent claims submitted in this case from those addressed in United States v. Rogan, 517 F.3d 449 (7th Cir. 2008). In Rogan, the court awarded damages for all claims submitted for patients referred to the defendant through an illegal kickback scheme even if those patients received medical services. Id. at 453. By contrast, the Makar defendants were not alleged to have engaged in illegal conduct that would necessarily taint all claims submitted by the defendants. Therefore, the court ruled that the damages calculation must be based only on those claims determined to be false; specifically, those claims submitted for unnecessary, never performed, or improperly administered services. The court’s order requires additional discovery and a new trial to establish the amount of damages associated with such fraudulent claims.

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02 October 2014

Courts Expand Use of Statistical Inferences to Establish FCA Liability

Posted by Jaime L.M. Jones and Brenna Jenny

Although relators and the government have long leveraged statistical inferences to estimate damages in FCA cases, in two recent opinions, courts have permitted the extension of these approaches to efforts to establish FCA liability. This is a troubling signal for defendants because, particularly when utilized in conjunction with the lower pleading standard of certain circuits, these decisions will make it easier for FCA plaintiffs to fend off a motion to dismiss.

On September 29, 2014, the District of Tennessee significantly expanded the role of statistical sampling in FCA litigation, when it ruled that extrapolation from a small sample can be used not merely to calculate damages, but to establish liability. In U.S. ex rel. Martin v. Life Care Centers of America, Inc., the government alleged that Life Care Centers, which owns a chain of skilled nursing facilities, pressured therapists to overstate the amount and intensity of therapy residents required, resulting in higher daily per diem payments under Medicare Part A. The government did not present the court with any specific examples of patients who received medically unnecessary therapy. Instead, the government sought to select a random sample of 400 Medicare beneficiaries who received high-intensity therapy, examine their medical records to determine whether they any of this therapy was medically unnecessary, and then extrapolate any findings of unnecessary services received by these 400 patients across 54,396 patient admissions, comprising 154,621 claims, to ascertain the number of false claims the defendant submitted.

The defendant strongly disagreed that this novel statistical application could establish falsity or materiality in this case, arguing that the unique nature of each patient’s condition requires an individual assessment of medical necessity, thereby precluding extrapolation. This is particularly so because the per diem payments received by skilled nursing facilities hinge on a patient’s Resource Utilization Group (“RUG”) classification, and even if a portion of a patient’s therapy were medically unnecessary, a patient could remain in the same RUG based on the balance of the necessary portion of his therapy.

The court acknowledged the distinction between using extrapolation to establish damages after liability has already been proven, and using extrapolation to establish liability in the first instance. However, after assessing the case law marshaled by both sides, the court found all to be inapposite and, left to decide the matter in a perceived vacuum, the court determined that the fraud-fighting goals of the FCA would be stymied if the court sided with the defendants and effectively required a “claim-by-claim review” in every FCA suit. The court reasoned that if “Congress intended to preclude statistical sampling from being used in this context, it has had ample opportunity to have that intention reflected in the language of the FCA.” Furthermore, the court viewed defendants as sufficiently protected from specious statistics through other sturdy safeguards, such as the opportunity to cross-examine opposing expert witnesses.

A recent decision in U.S. ex rel. Greenfield v. Medco Health Systems, Inc., demonstrates how reliance on statistical inferences, in conjunction with adoption of the more lenient pleading standard, can resuscitate a qui tam suit that may otherwise struggle to survive a motion to dismiss. The relator alleged that defendants—providers of specialty pharmacy services and hemophilia therapy management programs—tied their charitable donations to hemophilia foundations to the recipients’ patient referrals back to the defendants. In addition, defendants allegedly gave gifts to patients, including Medicare and Medicaid beneficiaries, in order to encourage them to continue to use their services. The court dismissed the second amended complaint without prejudice, ruling that it failed to show that any of defendants’ charitable contributions were tied to federal funds. Indeed because the recipients of the donations used the funds to purchase insurance for financially needy patients, the court ruled that the alleged quid pro quo scheme “demonstrate[s] that defendants’ contributions were used by [the foundations] to avoid the need to avail themselves of any federal benefits program.” The court also concluded the “plaintiff’s math (and his corresponding assumption that federal funds are implicated) is too attenuated and derivative to state a viable claim under the heightened Rule 9(b) standard.”

The relator’s Third Amended Complaint still relied on statistical inferences. For example, the relator concluded that because nationwide, 6% of hemophilia patients are Medicare beneficiaries and one-third are Medicaid beneficiaries, 6% of defendants’ 401 hemophilia patients in New Jersey (24 patients) must be Medicare beneficiaries and 33% (133 patients) must be Medicaid beneficiaries. The relator’s estimates were either widely off—defendants had 53 patients in New Jersey who were Medicaid beneficiaries—or completely unsubstantiated—relator could only show the number of defendants’ Medicare beneficiaries (149) nationwide. Moreover, the relator could not point to any of these Medicare or Medicaid beneficiaries as having received inappropriate gifts from the defendants.

However, the Third Amended Complaint survived defendants’ motion to dismiss in no small part because in the intervening time period, as we previously reported, the Third Circuit Court of Appeals sided with the First, Fifth, Seventh, and Ninth Circuits in adopting a less restrictive pleading standard satisfied by “indicia that lead to a strong inference that claims were actually submitted,” rather than by representative samples of allegedly false claims submitted. The new standard transformed the plaintiff’s “attenuated and derivative math” into “plausible statistical inferences” that adequately pled a “a strong inference that claims were actually submitted for reimbursement for these illegally procured patient prescriptions from federal funds.”

As the Martin court observed, there is little pre-existing case law in this area, and the extent to which statistical sampling can evolve into a tool for establishing FCA liability is a topic we will continue to monitor.

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02 July 2014

Industry Seeks Clarification of Constitutional Limits on Civil Penalties Under the False Claims Act

Posted by Jaime Jones and Brenna Jenny

Three industry advocacy groups recently filed an amicus brief urging the Supreme Court to provide clear measures of proportionality between misconduct and financial liability under the FCA. See Gosselin World Wide Moving, N.V. v. United States ex rel. Bunk, U.S., No. 13–13–99, amicus brief filed 6/23/14. The Pharmaceutical Research and Manufacturers of American (“PhRMA”), the American Hospital Association (“AHA”), and the U.S. Chamber of Commerce are seeking review of a Fourth Circuit decision upholding a $24 million fine against a government contractor. The penalty was premised on the contractor’s one-time filing of a single false statement in a $3.3 million contract, which the contractor performed with no evidence of economic loss to the government. The industry stakeholders expanded on the appellant’s own arguments, which the Fourth Circuit rejected as we reported here, that this fine violates the Eighth Amendment’s Excessive Fines Clause.

The Fourth Circuit adopted a rigid approach to the imposition of penalties under the FCA, applying a separate penalty to each claim for payment that was tainted by the earlier false statement made during the contracting stage. Despite being mechanical, this approach has created great industry uncertainty. As the amici pointed out, healthcare is one of several sectors disproportionately penalized under this approach, due to the small-value, high volume nature of the claims often submitted to the government.

As the brief details, this issue presents a two-fold circuit split: not only have some courts rejected the application of the Excessive Fines Clause to FCA penalties, but those that have acknowledged Eighth Amendment-based limitations on fines have not adhered to Supreme Court precedent requiring penalties to bear a relationship to the extent of the defendant’s “clearly individualized” acts of fraud, the degree of his culpability, and the harm caused to the government.

We will continue to monitor the important developments in this case and under the Eighth Amendment, and provide updates as appropriate.

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30 June 2014

Court Rejects Application of Wartime Tolling to Qui Tam Claims

Posted by Jaime Jones and Amy DeLine

The U.S. District Court for the District of Columbia ruled on June 19, 2014 that the Wartime Suspension of Limitations Act (WSLA) does not apply to the FCA. As a result, the court dismissed Floyd Landis’s non-intervened qui tam claims against his former cycling teammate, Lance Armstrong.

As we have discussed previously on the blog, Lance Armstrong is the defendant in a False Claims Act qui tam case brought by Landis alleging that Armstrong and others defrauded the United States Postal Service of approximately $42 million in sponsorship fees between 1995 and 2004 as a result of Armstrong’s use of performance enhancing drugs and practices. Landis filed suit in 2010 and the Government intervened in part back in February 2013. Landis has continued to press forward with those claims on which the Government has not intervened.

In its order on the defendants’ motion to dismiss, the District Court ruled that Landis’s claims are largely time-barred. Principally, the court held that the tolling provision of the FCA does not apply to Landis. Section 3731(b)(2) of the FCA provides that government has up to three years to bring claims after it knows or has reason to know that a violation of the FCA has occurred, even if this extends beyond the law’s six year statute of limitations (up to a maximum of ten years). Despite his arguments to the contrary, Landis, as a whistleblower and not a government official, is not covered by the provision. All but approximately $68,000 of Landis’s claims are therefore time-barred by the law’s six year statute of limitations, and were accordingly dismissed with prejudice.

In analyzing the statute of limitations arguments, the court addressed the applicability of the WSLA to Landis’s claims. The WSLA, in brief, suspends statutes of limitations for offenses involving fraud against the government during wartime. In recent years, the government often has relied on the law to stop the clock from running, arguing that while the U.S. is still at war in Iraq and Afghanistan, it has nearly unlimited time to bring fraud claims. According to a Wall Street Journal article last year, U.S. Uses Wartime Law to Push Cases Into Overtime (April 15, 2013), the government relied on the WSLA twelve times between 2008 and 2012. That is equal to the number of times the government used the law in the preceding 47 years.

Until this month, the wartime law has been invoked with almost complete success in FCA cases. The Landis court, however, found that the WSLA does not apply to the FCA. According to the court, the WSLA only suspends statutes of limitation when the offense at issue requires proof of specific intent to defraud the government. The FCA does not and has not since its amendment in 1986. Therefore, the court found that Landis cannot rely on the WSLA to bring his otherwise stale claims. While other courts have previously limited the reach of the WSLA (e.g., to FCA cases in which the government has intervened; to cases regarding war-related contracts), the District Court is the first to completely reject its applicability to the FCA.

The court’s motion to dismiss order in United States ex rel. Floyd Landis v. Tailwind Sports Corporation, et al., No. 10-cv-976 (RLW) can be found here.

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30 June 2014

Third Circuit Dismisses Qui Tam Claims For Lack of Intent Due to Ambiguity in a Government Contract

A. Brian Albritton at the False Claims Act and Qui Tam Law blog recently posted “Defendant’s Breach of Ambiguous Government Contract Prevents Court from Finding the Defendant Knowingly Submitted a False Claim for Payment.”  In the post, he analyzes the recent Third Circuit opinion in U.S. Department of Transportation ex rel Arnold v. CMC Engineering, Inc., et al., __ Fed. Appx.__, 2014 WL 2442945 (3rd Cir. June 2, 2014). In that case, the court dismissed an FCA action after holding that the contract defendant allegedly violated was so ambiguous that any violation could not have been “knowing.” The holding in this case is consistent with those on which we have previously reported (here and here) in which courts have held that ambiguity in allegedly violated regulations precludes a finding of a “knowing” submission of a false claim.

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27 June 2014

Ex-Employee’s Threat to Bring Qui Tam Is Extortion, According to California Appeals Court

Posted by Jaime Jones and Nicole Brown

Recently, the California Court of Appeals held that an individual who threatens a whistleblower action in an attempt to drive a settlement of unrelated employment claims may be held liable for extortion. Stenehjem v. Sareen, No. H038324 (Cal. Ct. App. Jun. 13, 2014). The matter resolved a counterclaim against Jerry Stenehjem, who had sued his former employer, Akon, Inc., and Surya Sareen, Akon’s CEO, for defamation and wrongful termination. Prior to trial of those claims, Stenehjem and his attorney made several unsuccessful attempts to initiate settlement discussions with Akon and Sareen. The last of these attempts was an e-mail from Stenehjem to Sareen’s attorney, extending “one last opportunity to settle,” which Stenehjem suggested would trigger “the Qui Tam option,” if rejected.

In response to Stenehjem’s e-mail, which included several other inflammatory statements and accusations of fraudulent business practices, Sareen countersued Stenehjem for extortion. Stenehjem moved to strike Sareen’s counterclaim under California’s anti-SLAPP statute, a law permitting dismissal of lawsuits that seek to chill or punish a party’s constitutional free speech. The trial court granted Stenehjem’s motion to strike, and Sareen appealed, claiming that Stenehjem’s e-mail was not protected by the anti-SLAPP statute because it was extortion.

The Court of Appeals agreed that Stenehjem’s threat to alert federal authorities to the alleged fraud and FCA exposure met the legal definition of extortion. Notably, the court held that the veracity of the allegations in Stenehjem’s e-mail was irrelevant to deciding this question. More importantly, the court held that Stenehjem’s statements could not be considered pre-litigation communications, protected under the anti-SLAPP statute, because the “qui tam action was entirely unrelated to any alleged injury suffered by Stenehjem as alleged in his demotion and wrongful termination claims.” Thus, the court signaled that in the future similar statements may be treated differently if there is an established nexus between the pending litigation and threatened FCA suit. Nonetheless, FCA defendants will be sure to focus on the outcome in this case and consider such counterclaims where appropriate.

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26 June 2014

Fourth Circuit Dismisses Case Despite Applying Narrow Interpretation of Public Disclosure Bar

Posted by Jaime Jones and Catherine Kim

In a June 23, 2014 opinion, the Fourth Circuit affirmed the dismissal of qui tam claims against suppliers of the National Center for Employment of the Disabled (“NCED”) and the National Industries for the Severely Handicapped (“NISH”) under the FCA’s public disclosure bar, as well as the relator’s failure to satisfy the relevant pleading requirements.

The relator initially filed this qui tam suit on June 20, 2006, alleging that NCED engaged in various schemes to defraud the government, primarily by receiving payments under the Javits-Wagner-O’Day Act (“JWOD”) program despite failing to comply with JWOD regulations. Prior to the filing, however, various newspapers published articles discussing NCED’s lack of compliance with JWOD program requirements. A criminal investigation followed and in 2010, a jury convicted NCED’s former CEO of making false statements and conspiracy to defraud the government.

In light of such events, NISH and the supplier defendants filed motions to dismiss, asserting that the district court lacked subject matter jurisdiction pursuant to the public disclosure bar and that the relator’s first amended complaint suffered from various pleading defects. The district court granted the defendants’ motions, and the relator appealed.

In reviewing the district court’s decision, the Fourth Circuit adopted an interpretation of the FCA’s public disclosure provision that “stands in contrast to the broader tests applied by our sister circuits[.]” Specifically, while other circuits generally assess whether the allegations are “supported by” or “substantially similar” to fraud that has already been publicly disclosed, the Fourth Circuit asked whether the relator’s allegations were “actually derived from the public disclosure itself.”

With respect to the claims against NISH and three supplier defendants, the court held that the district court lacked subject matter jurisdiction over such claims because the relator had apparently relied on and even cited to information appearing in public disclosures and had not demonstrated “direct and independent knowledge” of the alleged fraud. Although the court concluded that the relator was an original source with respect to the claims against Weyerhaeuser Co., it nonetheless dismissed such claims as well due to various pleading defects.

The Fourth Circuit’s narrower reading of the public disclosure provision could present challenges to FCA defendants, depending on how lower courts ultimately apply the “derived from” standard adopted in this case. While it is unclear which interpretation of the public disclosure bar will ultimately prevail among the circuit courts, we will continue to monitor this issue and provide updates on any new developments.

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12 June 2014

Court Holds that Pharmacy Cannot Be Liable Under the FCA for Filling “Off-Label” Prescriptions

Posted by Jaime Jones and Catherine Starks

A federal district court in Georgia recently granted summary judgment in favor of Omnicare, Inc. in a qui tam suit asserting FCA liability against the specialty pharmacy for purportedly dispensing atypical antipsychotics for off-label uses and seeking Medicare Part D reimbursement for those prescriptions. United States ex rel. Fox Rx, Inc. v. Omnicare, Inc., No. 1:11-cv-962-WSD (N.D. Ga. May 23, 2014).

The relator, a Medicare Part D plan sponsor, alleged that Omnicare had actual or constructive knowledge that it was submitting “false” claims for off-label, non-reimbursable, uses because Omnicare’s consultant pharmacists regularly reviewed patient records and recorded diagnosis information in Omnicare’s computer system. In a previous post, we reported that this court earlier ruled that Part D does not cover off-label uses of drugs that are not for “medically accepted indications.” See http://fcablog.sidley.com/blog.aspx?entry=95&fromSearch=true. In ruling on the summary judgment motion, the court rejected the notion that there was evidence that Omnicare acted “knowingly” with respect to the off-label and non-reimbursable nature of the claims, finding that there was no proof that Omnicare’s dispensing pharmacists had actual knowledge of or even access to this patient diagnosis information. The court also held that even if the pharmacists had accessed the diagnosis information, there was still no evidence that they knew the diagnoses were not for medically-accepted indications, and thus not subject to reimbursement by Medicare. Moreover, the court held that there was no duty for Omnicare or its pharmacists to make this determination (such as by reviewing the label for FDA approval of the specific use or referring to Medicare Part D- recognized compendia to determine whether the use was supported and therefore properly reimbursable).

This case has important implications for specialty pharmacies and similarly situated parties that are implicated in cases alleging the submission of claims for off-label use of drugs, and supports the argument that dispensing pharmacists do not have a duty to evaluate whether a drug has been prescribed for an on-label or otherwise medically accepted indication prior to submitting a claim for reimbursement to the federal healthcare programs.

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31 March 2014

Supreme Court Denies Certiorari In Nathan

Posted by Jaime Jones and Nirav Shah

Today, the Supreme Court denied certiorari in U.S., ex rel. Nathan v. Takeda Pharmaceuticals, et al. As we previously reported, this case involved the pleading requirements for qui tam cases brought under the FCA. Earlier this month, the Solicitor General filed a brief urging the Court not to grant certiorari.

At issue is whether Rule 9(b) requires a complaint to “allege with particularity” that certain claims false claims were submitted for payment. Circuits are split on the issue, with the Fourth, Sixth, Eight, and Eleventh Circuits requiring stricter pleading while the First, Fifth, Seven, and Ninth adopting a more permissive approach. The Court’s denial of certiorari means that the Fourth Circuit’s ruling that the relator’s complaint “failed to plausibly allege that any false claims had been presented to the government for payment” will stand.

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