Posted by Jaime L.M. Jones and Jessica Rothenberg
In a recent decision, the Third Circuit provided additional guidance on the scope of the original source exception to the FCA’s public disclosure bar. In U.S. ex rel. Morgan v. Express Scripts, Inc., the court affirmed the dismissal of a qui tam suit based on allegations – widely covered in numerous lawsuits and media reports – that defendants artificially inflated Average Wholesale Prices (“AWPs”) for brand-name drugs. Relator David Morgan, a pharmacist, was never employed by any of the defendants and learned of the alleged scheme to inflate AWPs only through his review and comparison of two publicly available price listings. The court explained that knowledge gained through reviewing files—which was the full extent of Morgan’s “diligence” that led to his discovery of the price inflation—is not sufficient to demonstrate the “direct and independent knowledge” that is required to qualify as an original source. The court went on to note that Morgan’s general knowledge of the pharmaceutical industry, although it may have informed his review of the publicly available information, also was not enough to rescue his claims under the original source exception. The court then applied the familiar two step analysis under the public disclosure bar and found that Morgan’s allegations of a price inflation scheme were (1) disclosed in the news media, previously filed lawsuits, and a Congressional report, and (2) based on those public disclosures. In this connection, the court noted that the mere fact that Morgan calculated specific “markups” tied to the allegedly inflated AWPs was not sufficient to “remove his allegations from the public disclosure realm.” Thus, and since Morgan was not the original source of the allegations in his complaint, the court affirmed the district court’s dismissal of his claims for lack of subject matter jurisdiction under the pre-FERA version of the public disclosure bar.
A copy of the Third Circuit’s opinion in U.S. ex rel. Morgan v. Express Scripts, Inc., No. 14-1029 (3d Cir. 2015) can be found here.
Posted by Jaime L.M. Jones and Brenna Jenny
The Eastern District of Tennessee recently clarified the discovery implications of its September 2014 ruling (reported here) permitting the government to establish FCA liability based on a sampling of claims. See U.S. ex rel. Martin v. Life Care Centers of America, Inc., No. 08-cv-251 (E.D. Tenn. Feb. 18, 2015). In rejecting the defendant’s motion to compel discovery as to the allegedly false claims outside of the government’s sample, the court underscored the significance of its earlier ruling narrowing the evidence necessary to establish liability, and significantly constrained the government’s discovery obligations.
Well before the court’s September 2014 ruling, the defendant, a chain of skilled nursing facilities, had served on the government an interrogatory requesting that it “[i]dentify each false or fraudulent claim or false record or statement that you contend [defendants] knowingly presented or caused to be presented, or knowingly made, used, or caused to be made or used, in violation of the False Claims Act.” The government only provided claims information as to the ten patients identified in its complaint, and, following the court’s ruling, the government confirmed that it would only provide information relating to its sample of 400 patients. The defendant moved to compel the government to produce the information it had requested, arguing that, regardless of the government’s “trial strategy” to only present evidence as to a sample of patients, it was nonetheless entitled under the Federal Rules of Civil Procedure to “the foundational information on the claims it contends violated the FCA–and not just those that it has self-selected for proof at trial.”
The court denied the motion, ruling that the defendant was attempting to relitigate the same arguments regarding sampling that the court rejected in its September 2014 ruling and subsequent denial of the defendant’s motion to certify the decision for an interlocutory appeal. According to the court, allowing the defendant to conduct discovery as to claims outside of the government’s sample would require the very claim-by-claim review that the court previously determined to be unnecessary for establishing FCA liability. Thus, this court not only has lowered the government’s burden to establish liability for the submission of false claims but also has significantly lessened the government’s discovery obligations, particularly when alleging fraudulent schemes caused the submission of voluminous claims.
A copy of the court’s order can be found here.
Posted by Jaime L.M. Jones and Brenna Jenny
In a remarkable opinion sure to be cited by FCA defendants facing FCA claims premised on alleged regulatory non-compliance, on January 7 the Northern District of California granted defendant Gilead’s motion to dismiss FCA claims premised on alleged violations of current Good Manufacturing Practices regulations (“cGMPs”), holding that fraudulent conduct directed at FDA standing alone cannot render subsequent Medicare or Medicaid reimbursement requests false under the FCA. See U.S. ex rel. Campie v. Gilead Sciences, Inc., No. 11-cv-00941 (N.D. Cal. Jan. 7, 2015). The ruling expands on the reasoning of the Fourth Circuit’s decision last year in Rostholder (as reported here) and reiterates the judiciary’s hesitancy to permit the FCA to displace FDA’s institutional capacity to enforce its own regulatory scheme.
Two former Gilead employees with quality control responsibilities filed a qui tam suit against their previous employer, alleging various violations of cGMP requirements. The relators asserted these regulatory issues gave rise to FCA liability because had FDA been aware of the them it would not have approved the affected drugs or would have withdrawn approval; as a result, relators claimed that all claims for payment submitted to Medicare and Medicaid for these drugs were false under the FCA. The government declined to intervene in the suit but did file a statement of interest on these issues, which the court cites in its opinion.
The court first dispensed with relators’ claim that allegedly false certifications to FDA or other allegedly fraudulent conduct during the drug approval process could give rise to FCA liability. Although FDA’s New Drug Application (“NDA”) form requires manufacturers to certify compliance with cGMP regulations, the court found the fact that manufacturers make this statement to FDA, and not to CMS for the purpose of securing payment, to be critical to the viability of relators’ claims. The court ruled that “FCA liability cannot be based on fraudulent statements made before one regulatory agency and from that implying a certification putatively made to the payor agency where there is neither an express certification nor condition of payment.” As even relators conceded during a hearing, Gilead never made any direct misrepresentations to a payor.
In an attempt to avoid this result, relators had argued in supplemental briefing that FDA served as a “gatekeeper” for CMS, with both entities standing as “two arms of the same federal department,” and thus fraudulent conduct directed toward one arm and a request for payment directed toward another arm could be synthesized so as to have a sufficiently direct nexus. The court disagreed, distinguishing between “Gilead’s non-disclosure and misrepresentations . . . [made] during the FDA approval process” and the “subsequent reimbursement requests to CMS,” and rejecting relators’ invitation to rule that a false statement to one regulatory agency “can form the basis of FCA liability simply because the fraudulently induced action of that agency was part of a causal chain that ultimately led to eligibility for payment from the payor agency.”
In similarly dismissing relators’ claims that Gilead had also made false implied certifications of compliance to CMS, the court then adopted the reasoning of the Fourth Circuit in Rostholder that the mere assertion of drugs being adulterated or misbranded as a result of a manufacturer violating cGMP requirements falls short of articulating a claim under the FCA, because Medicare and Medicaid do not condition reimbursement on compliance with cGMP regulations. Instead, payment is conditioned on a drug receiving FDA approval, which Gilead’s products had undisputedly obtained. Accordingly, the relators’ claims were held to be fundamentally flawed.
The court’s opinion generally addresses the heightened policy concerns generated by the proposition that regulatory non-compliance, particularly within the complex FDA regime, can trigger a cognizable FCA claim. If false statements made during the FDA approval process could serve as the basis for FCA liability, then courts would have to determine whether, but for the fraudulent conduct, the agency would have denied approval of the drug. Delving into the nuances of the FDA approval process, the court explained, would be a task the courts lack the expertise to execute. The court also echoed Rostholder‘s concern with using the FCA to short-circuit FDA’s own enforcement powers. Notably, however, the language and the logic of the Campie court’s opinion sweeps much broader than allegations focused on compliance with FDA regulations, and bear relevance on all FCA claims premised on alleged fraudulent conduct directed at a regulatory agency other than the one which pays the affected claims.
Finally, the court addressed the relators’ alternative theory of FCA liability, namely that the manufacturing defects were so significant they rendered the resulting product “worthless.” As we previously reported here, and as the Campie court observed, the Seventh Circuit recently constrained the viability of FCA suits premised on a theory of “worthless services,” ruling that a product or service’s diminished value must not be simply “worth less,” but rather must be truly “worthless.” Although the government has argued through statements of interest in both this case and Rostholder that some cGMP violations may so affect a drug “that the drug is essentially ‘worthless’ and not eligible for payment by the government,” the court ruled that the Campie relators had not alleged facts meeting the requirements of “the narrow ‘worthless services’ theory.”
The court granted the relators an opportunity to amend their complaint and either articulate a worthless services theory or a direct misrepresentation made during the payment process. We will continue to monitor any developments in this case, which is sure to be cited by defendants facing a broad range of FCA claims based on alleged regulatory non-compliance, and not just by defendants in FCA cases premised on alleged violations of cGMP and other FDA requirements. A copy of the district court’s opinion can be found here.
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.
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.
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.
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.
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.
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.
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.