Sixth Circuit Awards Defendant Nearly Half a Million Dollars in Attorneys’ Fees Despite Government’s FCA Victory

The Sixth Circuit recently awarded a defendant $468,704 in attorney’s fees, despite the government winning its FCA suit. The Court found that the defendant was entitled to recover its fees under the plain language of the Equal Access to Justice Act (“EAJA”), even though it was not the prevailing party, because the government’s demand for $1.6 million in damages was “unreasonable” and “substantially in excess” of the final judgment of $14,748.   (more…)

District Court Awards Pharmacy Servicer Attorney’s Fees in “Clearly Frivolous” FCA Suit Based on “Obvious Misreading” of Contracts Between Servicer and its Clients

Posted by Kristin Graham Koehler and Brian P. Morrissey

A federal district court in the Southern District of New York has ordered a qui tam relator to pay attorneys fees to a pharmacy servicer that it accused of defrauding the Medicare program based on a legal theory that had “no reasonable chance of success.” United States ex rel. Fox, Rx, Inc. v. Omnicare, Inc., No. 12-cv-275, 2104 WL 6750277, *4 (S.D.N.Y. Dec. 1, 2014).

Fox Rx, Inc., a sponsor of Medicare Part D prescription drug programs, filed a qui tam action against several pharmacies that provide services to long-term care facilities, and MHA Long Term Care Network (“MHA”), a servicer that contracted with the pharmacies to negotiate reimbursement rates on their behalf and to manage Medicare Part D claims. Id. at *1. Fox alleged that the defendants violated the federal FCA by (1) failing to “substitute generic drugs for brand-name drugs” in states that require such substitution, and by (2) dispensing drugs “after the termination of their national drug codes” in states that prohibit a drug from being dispensed after its “shelf-life expiration date[].” Id. at *1. The Government declined to intervene.

The District Court dismissed the action as to all defendants. United States ex rel. Fox Rx, Inc. v. Omnicare, Inc., No. 12-cv-275, 2014 WL 3928780 (S.D.N.Y. Aug. 12, 2014). After securing that dismissal, MHA, the pharmacy servicer, moved for attorneys fees and costs pursuant to 31 U.S.C. § 3730(d)(4), which authorizes a district court to grant such an award against a qui tam relator if it concludes that the relator’s claim was “clearly frivolous, clearly vexatious, or brought primarily for purposes of harassment.”

MHA argued that Fox’s claims against it were “clearly frivolous” because MHA is not a pharmacy, and thus could not have participated in the fraud Fox alleged. As MHA explained, it “does not fill prescriptions,” “does not itself dispense drugs,” and “exercises no control or supervision” over the dispensing practices of its pharmacy clients. Id. at *1–*3.

Fox countered that MHA was nonetheless liable for the pharmacies’ allegedly fraudulent conduct. On behalf of the pharmacies, MHA had entered into contracts with pharmacy benefits managers, who provide claim adjudication services to the pharmacies and submit claims to Medicare and Medicaid for payment. In those contracts, Fox alleged that MHA had agreed to “supervise and ensure” compliance with “with all applicable laws.” Id. *3. In dismissing Fox’s complaint, the District Court rejected that interpretation of the contracts, holding that only the pharmacies had undertaken those duties, not MHA. Id. at *2. In its order granting attorney’s fees, the District Court held that Fox’s misreading of the contract was so “obvious” as to render its allegations against MHA “clearly frivolous.” Id. *4.

Highly relevant to the District Court’s conclusion was the fact that MHA met with Fox before Fox filed the operative complaint in the case. In that meeting, MHA presented Fox with a PowerPoint presentation and supporting documentation demonstrating that Fox’s interpretation of the contracts and its allegations against MHA were untenable. It also provided Fox with a draft motion for sanctions that MHA planned to file if Fox did not withdraw its allegations against the servicer. Id. at *3. But, “[i]nstead of dropping MHA from this action following the January 10, 2014 meeting, Fox concocted a theory of liability . . . based wholly on an obvious misreading of the [contracts].” Id. at *3–*4.

The District Court thus granted MHA’s motion for attorney’s fees and costs incurred since that meeting with Fox. (MHA requested a total of $140,000 in expenses. The Court directed MHA to supply additional supporting evidence of those expenses before deciding the amount of the award.)

The case serves as a reminder that a relator’s objectively unreasonable legal argument—such as an implausible interpretation of a contract—may serve as the basis for an attorney’s fees award in an FCA case. In addition, the case illustrates that, in appropriate circumstances, FCA defendants can be well served by meeting with a relator in advance of litigation in an effort to explain why the relator’s legal theory is not viable, and by documenting all such meetings. Even if the meetings do not result in the resolution of the case, they may support a defendant’s future claim for attorney’s fees, if the relator’s action is later dismissed and can fairly be characterized as “frivolous.”

Qui Tam Counsel May Recover For Both Contingent and Statutory Fees

Posted by Ellyce Cooper and Brent Wilner

A recent opinion by the United States District Court for the District of New Jersey underscores the significant incentives for attorneys to represent whistleblowers in False Claims Act litigation. In resolving a fee dispute between a relator and his counsel following a settlement of FCA claims, the court found that the fee shifting provisions of the FCA, 31 U.S.C. § 3730(d)(1)-(2), do not preclude the relator’s attorney from receiving contingency fees in addition to the statutorily mandated attorney’s fees. United States ex rel. DePace v. Cooper Health System, __ F. Supp. 2d __, 2013 WL 1707952 (D.N.J. Apr. 22, 2013).

Relator Dr. Nicholas DePace alleged that Cooper Health System paid illegal kickbacks to physicians to induce referrals for expensive cardiac services causing false claims for reimbursement to be submitted to government payors in violation of the FCA and its New Jersey parallel. Dr. DePace retained Pietragallo, Gordon, Alfano, Bosick, & Raspanti, LLP to represent him in this qui tam matter. He also was represented by his personal counsel, Joseph Milestone. Dr. Depace’s contingency fee agreement provided that the Pietragallo Firm would receive 40 percent of any recovery on his FCA claims prior to trial, and expressly contemplated that these contingency fees would be “in addition to” any attorney’s fees paid under the state or federal FCAs. The contingency fee agreement allocated a portion of that amount to Milestone.

The federal and New Jersey governments ultimately intervened in Dr. DePace’s action for purposes of settling the claims prior to trial. Under the settlement agreement, Cooper agreed to pay the United States and New Jersey a combined $12,600,000, out of which the United States and New Jersey agreed to pay Dr. DePace a total of $2,394,000. Cooper also agreed to pay “as full payment” attorney’s fees of $430,000 “in accordance with subsection 3730(d)(1).”

Thereafter, when allocating the funds, the Pietragallo Firm withheld 40 percent of Dr. DePace’s award to fulfill the contingency fee agreement. (Milestone declined any fees and the Pietragallo Firm withheld 30 percent and provided Dr. DePace with 70 percent). Dr. DePace challenged the allocation of contingency fees beyond the statutory fees, with the dispute ultimately returning to Judge Irenas, the judge who presided over the underlying FCA action.

After finding that the court had jurisdiction to reopen the case, Judge Irenas rejected Dr. DePace’s pleas. In particular, the court rejected Dr. DePace’s argument “that because the Federal False Claims Act states that ‘all’ attorneys’ fees are to be awarded against the defendant, the statute does not allow for attorneys to receive additional fees from clients through contingency agreements.” Judge Irenas relied heavily on the Supreme Court’s policy rationale in Venegas v. Mitchell, 495 U.S. 82, 89-90 (1990) (a case involving 42 U.S.C. § 1988, rather than the FCA) that “‘depriving plaintiffs of the option of promising to pay more than the statutory fee if that is necessary to secure counsel of their choice would not further . . . general purpose of enabling such plaintiffs in civil rights cases to secure competent counsel.'” The court pointed to analogous concerns articulated in the FCA’s legislative history that “‘[u]navailability of attorneys fees inhibits and precludes many individuals, as well as their attorneys, from bringing civil fraud suits.'” See S. Rep. No. 99–345, at 29 (1986), reprinted in 1986 U.S.C.C.A.N. 5266, 5294.

The court also rejected the relator’s distinction between non-intervention cases and cases like Cooper where the government had intervened, noting that there was “no case law or statistics to support his broad generalizations about the amount of risk and work involved in intervention and non-intervention cases,” particularly given that in the five-year litigation of this qui tam matter, the government in Cooper only intervened “shortly before” settlement. Moreover, the court noted that because the language in § 3730(d)(1) and § 3730(d)(2) (intervention and non-intervention cases) is identical, there is no reason to interpret these subsections differently.

While the issue was one of first impression in the Third Circuit, Judge Irenas noted that several other courts had made similar rulings in FCA cases. See United States ex rel. Lefan v. General Electric Co., 394 Fed. App’x 265, 272 (6th Cir.2010); United States ex rel. Alderson v. Quorum Health Group, Inc., 171 F. Supp. 2d 1323, 1335 n.35 (M.D. Fla. 2001); United States ex rel. Poulton v. Anesthesia Assocs. of Burlington, Inc., 87 F. Supp. 2d 351, 359 (D. Vt. 2000); United States ex rel. John Doe I v. Pennsylvania Blue Shield, 54 F.Supp.2d 410, 413 (E.D. Pa. 1999).

Finally, the opinion also discussed the implications of New Jersey’s ethical rules on the fees, but still did not find the fee arrangement unenforceable. Consistent with the reasoning above, the court concluded “the policy behind the fee shifting provisions of the Federal False Claims Act was to ensure that litigants had access to competent counsel. This policy would not be undermined by allowing a party to choose to pay a contingency fee in addition to a statutory fee in order to secure his preferred counsel.”