By

Jeff Beelaert

09 September 2013

Fifth Circuit Dismisses Conclusory Allegations and Rejects Implied False Certification Theory

Posted by Gordon Todd and Jeff Beelaert

The Fifth Circuit recently had good news for government contractors when, in Steury v. Cardinal Health, Inc., No 12-20314 (5th Cir. Aug. 20, 2013) (per curiam), it rejected the contention that an alleged false certification of merchantability, without more, does not support an FCA claim unless payment was specifically conditioned on the certification. “Not every breach of a federal contract is an FCA problem,” the Court held, because the FCA “is not a general enforcement device for federal statutes, regulations, and contract.” Slip op. at 5 (quoting U.S. ex rel. Steury v. Cardinal Health, Inc., 625 F.3d 262, 268 (5th Cir. 2010) (“Steury I“).

The relator alleged the defendant had sold medical devices to the federal government despite being aware of a potential defect. Moreover, she contended that the defendant had “expressly warranted that the [devices] were merchantable,” that the contracts “required the [devices] be merchantable,” and merchantability was “a martial contractual requirement.” The District Court dismissed the Complaint for failure to satisfy Rule 9(b), and the Fifth Circuit affirmed.

The court held the relator had failed to “set forth the who, what, when, where, and how of the alleged fraud.” Because the complaint did not identify how the devices deviated from any required specification or contractual obligation, the court held that the pleadings were insufficient to support an “implied false certification” theory. The Fifth Circuit refused to recognize the “implied certification of an implied contract provision that is an implied prerequisite to payment.”

Moreover, the relator failed to show that in the absence of the merchantability provision the government would not have paid for the devices. The court had previously held that the government “may accept (and pay) for noncompliant commercial items.” Steury I, 625 F.3d at 270. In stark contrast to the relator’s allegations, this analysis confirms that the government’s payment is not conditioned on a warranty of merchantability. Even if the relator sought to rely on an “implied warranty of merchantability,” her argument fails because she would be asking the court to find a knowingly false claim from an implied certification of an implied contract provision—something the court refused to “reckon actionable.”

The Fifth Circuit did not address the relator’s “worthless goods” theory because her complaint similarly failed to plead it with the requisite particularity. She did not point to a single device that was sold to the government over a period of nine years that was ever found to be deficient or worthless.

In his concurring opinion, Judge Higginson urged the court to restore Congress’s statutory distinction between falisity and fraud and apply the “common-sense” understanding of those terms. Because the relator failed to allege that an invoice presented by defendant “contained, on its face, a factual assertion capable of confirmation or contradiction that was untrue when made,” the claim was not “false” under the FCA. Nor was the claim “fraudulent” under the FCA because the relator failed to allege that the defendant knew about the device’s defects but, intending to deceive, sold them anyway.

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05 September 2013

Seventh Circuit Slams Relator’s Unsavory Tactics; Declines to Mandate Use of Expert Testimony on Claims and Causation Issues

Posted by Gordon Todd and Jeff Beelaert

In Watson v. King-Vassel, No. 12-3671 (7th Cir. Aug. 28, 2013), the Seventh Circuit had stern words for a relator’s unsavory litigation tactics, but also declined to endorse a rule mandating expert testimony on certain issues in every case.

The Relator, Dr. Watson, alleged that defendant Dr. King-Vassel’s off-label prescription of psychotropic drugs to a minor caused the submission of false claims to the Medicaid program. The defendant sought summary judgment because, inter alia, Relator had failed to adduce any expert testimony, including to explain how Medicaid claims are submitted, to prove that by prescribing off-label the defendant knowingly caused the submission. The district court granted summary judgment, holding that expert testimony would be required to explain whether defendant actually caused the claims to be filed, and also holding that expert testimony would be required to explain pharmaceutical data including information in medical compendia, i.e., whether a submitted claim was false.

The Seventh Circuit reversed. As to the first issue, the Court held that expert testimony was not required to prove either how the Medicaid system works, or the defendant doctor’s knowledge regarding the submissions. Instead, a relator need only show that the defendant “had reason to know of facts that would lead a reasonable person to realize that she was causing the submission of a false claim,” or that she “failed to make a reasonable and prudent inquiry into that possibility.” The minor’s mother had testified that she had provided defendant with the minor’s Medicaid billing information and had never paid for the services out-of-pocket. This, the Circuit held, was sufficient for a reasonable juror to extrapolate the defendant’s state of mind. The Circuit rejected the district court’s characterization of Medicaid as a “grand mystery” and “black box,” instead analogizing it to a car: even though “most people could not explain every step turn-key and ignition, the cause-effect relationship is commonly appreciated.” In light of this analogy, a reasonable juror could find, without the aid of expert testimony, that the doctor’s prescription caused a Medicaid claim to be filed.

The Court also rejected as “premature and overbroad” the District Court’s blanket statement that “medical documents typically are not readily understandable by the general public,” thereby requiring expert testimony to explain medical compendia in every case. Instead, the Circuit held that whether such testimony is required turns on a more case-specific analysis as to whether a particular off-label use is supported by one or more compendia. On remand, the Court noted, a more specific analysis may show that the lack of expert testimony is indeed fatal.

While reversing summary judgment, the Court disapproved sternly of the Relator’s “unsavory” litigation generation tactics. The Relator had never treated or even met the patient, but had instead advertised for minor Medicaid patients to “participate in a possible Medicaid fraud suit.” Relator then secured the minor’s medical records by soliciting the minor’s mother to lie to the defendant doctor about their intended use. The Court approved of the District Court’s use of its inherent powers to impose monetary sanctions on Relator and his counsel for their conduct, which the Circuit hoped would dissuade the future use of such tactics.

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23 April 2013

Federal District Court Bars Repeat Relator’s “Opportunistic” Action

Posted by Gordon Todd and Jeff Beelaert

The United States District Court for Middle District of Tennessee recently dismissed a qui tam action with prejudice after finding that the relator’s “opportunistic” claims were barred by the public disclosure provision of the FCA. In Osheroff v. HealthSpring, Inc., No. 3:10-1015 (M.D. Tenn. April 5, 2013), the Court granted the defendant’s motion to dismiss after finding that the allegations were “substantially the same as the allegations or transactions exposed by the Miami Herald and found on the [company’s] website.” Slip Op. at 14.

The relator was a self-described “entrepreneur” who has business experience in a variety of fields, ranging from motorcycles, to electronics, to commercial real estate and medical clinics for cosmetic surgery and MRIs. He is no stranger to qui tam actions; indeed, the Court cited two other qui tam actions that he filed in Florida federal court. Id. at 8. In this case, Osheroff alleged that HealthSpring—one of the largest managed-care companies in the United States—had devised a “scheme” to secure Medicare payments by doling out lavish inducements to patients.

Specifically, Osheroff alleged that HealthSpring’s medical clinics in South Florida provided “luxurious” Cuban-style healthcare, where “patients are chauffeured in free limousine-class vehicles to enjoy free meals, take-away food, personal pampering, bingo, dominoes, raffles, music and dance as part of an expense-free social or entertainment outing of great cost to the clinics and significant value to their patrons.” Id. at 4. Osheroff allegedly discovered these activities through his own “research” and “investigation.”

The Court disagreed and found that his claims were based on publicly disclosed knowledge. While public disclosure would not necessarily bar the suit if Osheroff had been the original source of the claims, there is nothing to suggest that he presented his information to the Government before the media reports appeared. Moreover, there is nothing to suggest that he added any independent or material information to what was already disclosed. Consequently, the Court dismissed the action with prejudice, noting that “the FCA abjures parasitic lawsuits, that is, suits in which ‘would-be relators merely feed off a previous disclosure of fraud.'” Id. at 12 (quoting Walburn v. Lockheed Martin Corp., 431 F.3d 966, 970 (6th Cir. 2005)).

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