Posted by Gordon Todd and Paul Sampson
The Rule 15(a)(2) threshold for amending a complaint – that “[t]he court should freely give leave when justice so requires” – is not a high one. But from time to time even a State intervenor manages to miss it, as was the case in U.S. ex rel. Kester v. Novartis Pharmaceuticals Corp., No. 1:11-cv-08196, 2015 WL 1650767 (S.D.N.Y. Apr. 10, 2015).
In January 2014, the State of Washington filed a complaint-in-intervention naming only Novartis Pharmaceuticals Corp. (“Novartis”) as a defendant, even though a little over a year earlier the relator’s complaint—which alleged that Accredo Health Group, Inc. (“Accredo”), a specialty pharmacy through which Novartis sells its pharmaceutical products, participated with Novartis in an illegal kickback scheme—was unsealed. Id. at *5. Almost a full year later, in January 2015, Washington filed a motion to amend its complaint, seeking to add claims against Accredo for the alleged kickback scheme. Id.
The district court denied the motion for two principal reasons. First, the district court held that Washington delayed moving for leave to amend without an adequate explanation, noting that “a lengthy delay without a reasonable explanation justifies denying leave to amend.” Id. The district court rejected Washington’s “excuse” that Novartis had produced upwards of 50,000 documents beginning in March 2014, reasoning that “the State should be expected to receive and promptly review large volumes of documents in a complex case such as this one.” Id. at *6. The district court also rejected Washington’s assertion that it did not obtain certain audio recordings of phone calls between Accredo staff and Novartis patients until December 2014, and that those phone recordings “solidified” the extent of the kickback scheme. Id. at *7. The district court explained that “[t]he fact that a party later uncovers additional evidence supporting a theory that it could have raised earlier does not excuse delay in moving to amend.” Id.
Second, the district court held that “Accredo would be prejudiced by granting Washington’s motion to dismiss” because “granting the motion would prolong the disposition of this case and require additional time for discovery.” Id. Among other things, additional discovery would be needed regarding a forum selection clause contained in Accredo’s Medicaid core provider agreement with Washington. Id. at *8. Thus, “granting the motion would burden both Novartis and Accredo with added litigation time and expense—well-established forms of prejudice.” Id. at *7.
The Kester case reminds qui tam litigants that a Rule 15(a)(2) motion to amend a pleading is not automatic, and that plaintiffs must seek to amend their pleadings in a timely manner so as not to unnecessarily delay the expeditious resolution of qui tam actions.
Posted by Kristin Graham Koehler and Paul Sampson
Government investigators have continued to hone in on one particular type of business arrangement—the use of so-called minority or disadvantaged business enterprises (“MBEs” and “DBEs”) to secure government contracts. Myriad state and federal contracts require MBE or DBE participation, or at least grant advantages to MBE or DBE bidders. As recent prosecutions have demonstrated, businesses have used MBEs or DBEs to win lucrative government contracts, only to perform the work themselves and retain all – or virtually all – of the money the government had intended for the MBEs or DBEs.
In July 2014, the former owner and COO of Schuylkill Products Inc., a Pennsylvania-based construction company, after having pled guilty, was sentenced to 51 months in prison and leveled a fine of $25,100 by a federal judge in Pennsylvania for what the U.S. Department of Transportation called the largest DBE fraud in U.S. history. Prosecutors alleged that the DBE fraud involved more than $136 million in government contracts in Pennsylvania over a period of more than 15 years. According to the allegations, the construction company used a DBE as a front to gain lucrative DBE contracts, but then performed all work under the contracts and gave only a small cut to the DBE, even though the DBE was actually the contract award recipient. See United States v. Nagle, et al., No. 1:09-cr-00384 (M.D. Pa.).
In a separate case out of Chicago, the owner of an MBE recently pleaded guilty to one count of mail fraud for failing to disclose that his MBE was not performing the work on a $3.5 million sewer service contract with the city of Chicago. Prosecutors had alleged that the MBE owner invoiced the city for work performed under the contract, even though another company, headed by a coconspirator, was performing the work. Prosecutors further alleged that the MBE owner retained approximately 15 percent of the payments from the city before passing the rest on to his coconspirator’s company, which actually performed the work. In March 2014, a federal judge in Illinois sentenced the MBE owner to 17 months in prison and ordered him to pay $533,749 in restitution for his role in the scheme. See United States v. Brunt et al., No. 1:11-cr-00017 (N.D. Ill.).
Although these were criminal resolutions, these types of cases could also easily lend themselves to state or federal qui tam cases. Companies either serving as – or utilizing – MBEs or DBEs in order to obtain government contracts would be well served to adhere closely to the contractual requirements regarding the MBE/DBE relationship, as this is an area that continues to be scrutinized closely by the government.
Posted by Gordon Todd and Paul Sampson
In U.S. ex rel. Prince v. Virginia Resources Authority, No. 5:13CV00045, 2014 WL 3405657 (W.D. Va. July 10, 2014), the Western District of Virginia recently held that dismissal of a relator’s suit on procedural grounds does not prejudice the United States’ ability to subsequently to pursue identical FCA claims, despite having declined to intervene in the dismissed action.
Relator Mark Prince filed suit against the Virginia Resources Authority (the “VRA”) and others, alleging FCA violations relating to federal subsidies and tax exempt status for certain bonds through the Build America Bonds program. The VRA moved to dismiss on the basis of collateral estoppel due to Prince’s involvement in prior litigation against the VRA. On April 15, 2014, the District Court granted the motion, dismissing Prince’s claims with prejudice.
The United States had neither intervened in the suit, nor had it been party to Prince’s prior litigation against the VRA. On May 12, 2014, it filed a “Motion to Clarify” the dismissal. Acknowledging that it had “declined to intervene and is therefore not a party to this action,” the Government nevertheless insisted that it “remains the real party in interest, entitled to share in any recovery that may be obtained in the qui tam action.” Accordingly, it asked the Court to amend the order of dismissal “to clarify that the dismissal with prejudice extends only to Relator, and that the dismissal is without prejudice to the United States.”
On July 10, 2014, the district court granted the government’s motion, holding that “dismissals for reasons unrelated to the merits of a FCA claim are appropriately entered without prejudice to the United States.” Prince, 2014 WL 3405657, at *3. The decision not to intervene, the Court observed, does not necessarily suggest that the Government doubts the viability of an FCA claim, but rather may result from “a cost-benefit analysis.” Id. (internal quotation marks omitted). “Accordingly,” it reasoned, “it would be inappropriate to dismiss with prejudice as to the United States … on whose behalf relator brought this claim.” Id. (internal quotation marks omitted). Because the dismissal of Prince’s claims resulted from his procedural failures and not those of the United States, the district court held that “it is proper for the dismissal of these claims to be without prejudice as to the United States.” Id.
The Prince case reminds qui tam defendants that non-intervention is not necessarily the end of the United States’ interest in a matter, and that the Government continues to monitor FCA actions brought on its behalf to maximize its returns.