Two years ago, the Seventh Circuit reversed itself by abandoning its “but-for” causation test in FCA cases in favor of a “proximate cause” rule that had been adopted by all other circuits that had addressed the issue. See United States v. Luce, 873 F.3d 999 (7th. Cir. 2017) (overruling United States v. First National Bank of Cicero, 957 F.2d 1362 (7th Cir. 1992)). The Seventh Circuit remanded the case to the district court with instructions to determine whether the government could establish that the defendant’s conduct proximately caused harm to the government. In an opinion issued last week, the district court strictly applied the new standard and concluded the government could not show proximate cause. United States v. Luce, 2019 U.S. Dist. LEXIS 114718 (N.D. Ill. July 10, 2019).
On March 14, 2018, the Third Circuit affirmed in part and vacated in part a district court ruling granting the United States’ motion for summary judgment. The case raised three issues: (1) whether an individual without any ownership interests in a company can face FCA liability for the company’s failure to perform a required act to qualify for Medicare reimbursement; (2) whether an unsworn statement is sufficient to create a material issue of fact when weighed against facts admitted during a plea colloquy; and (3) whether a defendant corporation is collaterally estopped from contesting FCA liability or damages based on an individual’s plea colloquy.
Faced with a challenge to its authority to do so, DOJ recently withdrew several Civil Investigative Demands (“CIDs”) which it had issued after declining to intervene in a qui tam case brought by former employees who had accused their employer, Lexington Foot & Ankle Center PSC, of fraudulent billing. In re Civil Investigative Demands 18-13-EDKY, 18-02-EDKY, and 18-03-EDKY, No. 5:18-cv-00283 (E.D. Ky.) (filed Apr. 23, 2018). (more…)
On April 28, 2017, the District Court for the District of Massachusetts dismissed a qui tam complaint alleging off-label promotion against a pharmaceutical manufacturer. Dismissal was a sanction for relator’s counsel having devised and implemented what the Court called “an elaborate scheme of deceptive conduct in order to obtain information from physicians about their prescribing practices, and in some instances about their patients.”
Relator filed his initial complaint in 2012, alleging that the manufacturer was promoting off-label use of two drugs and paying physicians kickbacks for prescribing those drugs. While the case was under seal, the relator filed an amended complaint adding detail to his allegations and including a reference to a third drug. After the United States declined to intervene and the case was unsealed in April 2014, relator filed a second amended complaint that focused only on alleged off-label promotion of the third drug.
On September 9, 2016, the Securities and Exchange Commission filed in U.S. District Court for the District of Columbia a civil lawsuit against a government contractor, RPM International, Inc., and its General Counsel, alleging they had failed timely to disclose a loss contingency and record an accrual for a DOJ FCA investigation that the company ultimately settled for $60.9 million.
Suppose you’re a relator who files a qui tam case against your former employer only to see your case dismissed on the grounds that you released the claims as part of accepting a severance package from your employer. Can your wife or another former employee who didn’t sign the release subsequently retain the lawyer who represented you in your qui tam case and file her own lawsuit making identical claims against your former employer? Not in the Fourth Circuit, as a result of a January 29, 2016 panel decision in U.S. ex rel. May v. Purdue Pharma L.P., No. 14-2299.
On September 4, 2015, the District Court for the District of Columbia granted partial summary judgment in favor of a government contractor, finding that the plain language of an applicable commercial warranty could not render claims for defective products false under the FCA because the warranty simply required the contractor to replace any products that did not live up to the warranty. U.S. ex rel. Westrick v. Second Chance Body Armor, Inc., et al., Nos. 04-280, 07-1144 (D.D.C. Sept. 4, 2015). A copy of the court’s decision can be found here. The district court rejected partial summary judgment motions filed by both the contractors and the government for claims that concerned a revised commercial warranty that expressly included a measurable quality guarantee, finding a material fact in dispute based on multiple reasonable interpretations of the revised warranty.
On July 16, 2015, the Ninth Circuit held that a relator convicted criminally for his role in a fraud against the government must be dismissed from a qui tam action related to the fraud, even if he played only a minor role in the underlying misconduct.
In U.S. ex rel. Schroeder v. CH2M Hill, relator Carl Schroeder, who worked for a U.S. Department of Energy (“DOE”) contractor, submitted false time cards to his employer and was paid over $50,000 in unearned overtime. Many of Schroeder’s colleagues had engaged in similar conduct. DOE’s Office of Inspector General (“OIG”) launched an investigation in 2008. In an OIG interview conducted in December 2008, Schroeder admitted to over-billing for his time.
In a recent decision, United States ex rel. Ceas v. Chrysler Group LLC, No. 12-CV-02870 (N.D. Ill. Jan. 28, 2015), a judge in the Northern District of Illinois provided guidance on the issue of successor liability for FCA claims in connection with a corporate asset sale in the bankruptcy context.
On April 30, 2009, Chrysler LLC (“Old Chrysler”) filed a pre-packaged Chapter 11 bankruptcy petition in the U.S. Bankruptcy court for the Southern District of New York. That same day, Old Chrysler agreed to sell to Chrysler Group LLC (“New Chrysler”) substantially all of its assets free and clear of claims and liabilities, except for a defined set of specific liabilities that New Chrysler assumed. The bankruptcy court approved the sale on June 1, 2009. Three years later, relator William Ceas, Jr. filed a complaint under the FCA claiming that Old Chrysler had made false statements to the United States regarding warranties on vehicles it sold to the government in 2004 and 2005. The United States declined to intervene, and Ceas continued to pursue the claims under the FCA’s qui tam provisions. New Chrysler moved to dismiss the complaint, including on the grounds that the Sale Order in the bankruptcy proceeding barred such claims against New Chrysler.
The court acknowledged that bankruptcy courts’ authority to approve a sale of assets free and clear of any claims is “an issue of some disagreement….” Order at 4 n.3. That is, Chapter 11 of the Bankruptcy Code provides only for the debtor’s sale of property “free and clear of any interest in such property.” 11 U.S.C. § 363(f) (emphasis added). Despite the potential for alternate readings, however, the district court was persuaded that the term “interest” in section 363(f) should be construed broadly, to include successor or transferee liability claims. Further, the court concluded, the Sale Order in issue “adopted a broad, inclusive definition of ‘claim,'” both as to timing and subject matter, and – when viewed in light of the Bankruptcy Code’s definition of “claim” – covered FCA and other fraud claims. Order at 4-5. In addition, the district court found, the Sale Order issued by the bankruptcy court affirmatively enjoined future litigation in conflict with the terms that order. Order at 5-6.
Notwithstanding these restrictive terms, the relator argued that his FCA claims were rooted in breach-of-warranty or product-liability claims, which New Chrysler had expressly assumed under the terms of the sale. The court rejected this argument, noting that the relator’s FCA claims did not constitute breach-of-warranty or products-liability claims, and even if they did the relator would not be authorized (under the FCA or otherwise) to pursue such claims on behalf of the government. Order at 7-8. Moreover, even though the relator’s FCA claims were “factually related” to product warranties, the district court refused to construe the language of the transfer agreement so broadly as to provide a “loophole for qui tam plaintiffs to seize upon[,] an unexpected and unwelcomed vulnerability for asset purchasers.” Order at 8.
The relator also argued that, despite the narrow language of the transfer agreement, New Chrysler was nonetheless liable for Old Chrysler’s violations of the FCA as its successor because FCA claims are not dischargeable in bankruptcy. The court agreed that FCA claims are not dischargeable in bankruptcy, see Order at 10 (citing 11 U.S.C. § 1141(d)(6)(A)), but also found that—distinguishing between a reorganization and an asset sale—the relator’s argument “misse[d] the mark” because New Chrysler was not the successor of Old Chrysler:
The elephant in the room is the notable distinction between a bankrupt entity that chooses to restructure and emerge under a traditional chapter 11 reorganization and an entity that elects an asset sale under § 363(f) of the Bankruptcy Code. Had Old Chrysler elected the former path, because the FCA claims (which arose prior to confirmation) cannot be discharged, Plaintiff would likely be entitled to proceed with his claims against the reorganized Old Chrysler today. However, because the bankruptcy court approved a § 363 sale of Old Chrysler’s assets free and clear of any successor claims or interests, Plaintiff’s claims lie solely against a now-defunct, potentially-successorless entity.
Order at 11.
The court acknowledged that, as “one way around this predicament,” the agreement between Old and New Chrysler (and the Sale Order) could have been written to expressly impute FCA liability to the Section 363 purchaser. Order at 11 (citing In re Haven Eldercare, LLC, 2012 WL 1357054, at *6 (Bankr. D. Conn. 2012) (“nothing in this Sale Order shall limit the federal government’s right to pursue or collect any claim for civil fraud under the False Claims Act”)). However, no such provision was made a term of the transfer between Old and New Chrysler. Order at 12 (“[A]bsent any controlling guidance to the contrary, the Court is inclined to uphold the plain language of the Sale Order, absolving New Chrysler of successor liability for all claims not expressly assumed in the [Master Transaction Agreement], including Plaintiff’s FCA claims.”).
The Ceas decision thus provides a useful template for understanding the limited circumstances in which liability for FCA claims might be extinguished in bankruptcy cases. A copy of the district court’s opinion and order can be found here.
Earlier this week, the Fourth Circuit followed five other Circuits and held that a disclosure of information made solely within the government does not constitute a “public disclosure” under the FCA. While the decision – United States ex rel. Wilson v. Graham Cnty. Soil & Water Conservation Dist., No. 13-2345 (4th Cir. Feb. 3, 2015) – addresses the pre-Patient Protection and Affordable Care Act (PPACA) version of the public disclosure bar, the PPACA amendments did not alter the requirement that triggering disclosures be “public.” Thus, the Fourth Circuit’s decision will have ongoing significance.
The Wilson case has a long history, having been to both the Fourth Circuit and the Supreme Court twice before. The case comprises a qui tam action that the relator filed against a North Carolina county, various county entities and individuals related to disaster recovery work conducted under the Emergency Watershed Protection (EWP) Program. In 1995 and 1996, one of the named county entities was audited and an Audit Report was published that detailed various issues with the handling of the EWP Program. Subsequently, the U.S. Department of Agriculture Inspector General’s office issued a Report addressing other aspects of the handling of the EWP Program. Copies of the Audit Report and USDA Report were distributed only to certain state and federal agencies. Each report made clear on its face that it was intended for official use only, and the USDA Report included a warning that it was not to be distributed outside the receiving agency without prior consent from the USDA IG’s office.
The relator filed her qui tam action in 2001, alleging that fraudulent invoices had been submitted to the government under the EWP Program. After the relator made various amendments to the complaint and the case had taken two trips up and down the appellate ladder, the district court in 2013 dismissed the qui tam action for lack of jurisdiction. It concluded that the Audit Report and USDA Report constituted public disclosures under the FCA, that the relator had based her allegations on them, and that the relator was not an original source under the FCA.
On review, the Fourth Circuit reversed. The sole question that the panel considered was whether the reports were publicly disclosed for FCA purposes. The panel held that a public disclosure “‘requires that there be some act of disclosure outside of the government.'” Wilson, No. 13-2345, slip op. at 13 (quoting Rost v. Pfizer, Inc., 507 F.3d 720, 728 (1st Cir. 2007)). In so holding, the Fourth Circuit joined five other circuits to consider this question and rejected the Seventh Circuit’s reasoning in United States v. Bank of Farmington, 166 F.3d 853, 861 (7th Cir. 1999), which found disclosure to a “competent public” official sufficient to constitute public disclosure
The Fourth Circuit instead reasoned that public disclosure requires that the information reach the public domain. To hold otherwise, the Wilson panel concluded, would incorrectly equate the government with the public and render superfluous the “public” aspect of the public disclosure bar. The Fourth Circuit stated that its conclusion is bolstered by the history of the FCA, since Congress, in the 1986 amendments to the Act, replaced the so-called “government knowledge bar,” which barred qui tam actions based on information in the possession of the United States, with the public disclosure bar. Finally, the Fourth Circuit noted that the fact that the Audit Report and USDA Report were eligible for disclosure to the public through the use of a public records act request was not sufficient to constitute public disclosure because the talisman of the public disclosure bar is information that is “affirmatively provided to others.” Wilson, No. 13-2345, slip op. at 17 (citing United States ex rel. Ramseyer v. Century Healthcare Corp., 90 F.3d 1514, 1521 (10th Cir. 1996)).
A copy of the Fourth Circuit’s opinion can be found here.