Professional Medical Society Files Qui Tam Against Physicians, Anesthesia Service Providers, and Surgery Centers

In what may be a first-of-its-kind suit, a professional medical association has filed a qui tam against physicians and other medical providers for allegedly engaging in a kickback scheme designed to divert referrals from the association’s members.  The complaint, filed by the Florida Society of Anesthesiologists, alleges that the defendants—a number of physicians, anesthesiology companies, and ambulatory surgical centers (“ASCs”)—violated the federal False Claims Act and the Florida False Claims Act by defrauding the Medicare and Medicaid programs.[1]   Citing the Department of Health and Human Services Office of Inspector General Advisory Opinion Number 12-06, the complaint and alleges that defendant anesthesiology companies and their physician owners, many of whom were gastroenterologists, allegedly paid kickbacks in the form of shared profits to ASCs that referred business to the anesthesiology companies and that were owned by the same physicians.


District Court Clarifies Protections Available to Employers Whose Employees Misappropriate Confidential Information for Use in FCA Suits

Posted by Jonathan F. Cohn and Brian P. Morrissey

Last week, in United States ex rel. Wildhirt v. AARS Forever, Inc., No. 09-C-1215, 2013 WL 5304092 (N.D. Ill. Sept. 19, 2013), a federal district court in Illinois issued an important decision that helps to clarify the rights of employers to bring counterclaims against employees who misappropriate confidential company information and later use that information as the basis of an FCA suit.

The Defendants, two business affiliates, were parties to contracts with the Veterans Administration (“VA”) to provide home healthcare services and equipment to patients with respiratory illnesses. Two former employees filed a qui tam action against Defendants, alleging, inter alia, that Defendants breached performance requirements under their VA contracts and, thereby, submitted false claims to the VA’s Medicare and Medicaid programs. Litigation on those FCA claims remains pending.

In the meantime, Defendants asserted counterclaims against the Relators. As Defendants’ employees, Relators signed a confidentiality agreement, in which they agreed not to disclose confidential company information to third parties and to indemnify Defendants for any losses arising from their unauthorized disclosures. Id. at *1-*2. Separately, Relators periodically signed internal-reporting agreements, in which they declared that they were responsible to report any “suspect business practices” to Defendants and were “unaware” of any such practices. Id. *3.

In their counterclaims, Defendants alleged that Relators breached the confidentiality agreement by disclosing confidential company information to the VA and the public, and breached the internal-reporting agreements by failing to report the alleged “suspect business practices” that formed the basis of their FCA complaint. Id. at *3-*4. Defendants sought indemnification for damages suffered as a result of Relators’ disclosures, including legal expenses. Id. at *4.

Relators moved to dismiss the counterclaims, arguing that the confidentiality agreement was contrary to public policy, and therefore unenforceable, because it sought to “thwart” important policy interests in the “detection and exposure of potential fraud against the United States.” Id. at *5. The court (Judge Feinerman) refused to dismiss the counterclaims outright on that basis. Joining the conclusion of another district court, the court held that “‘an FCA defendant found liable of FCA violations may not pursue a counterclaim” that has “the equivalent effect of contribution or indemnification.'” Id. at *5 (quoting United States ex rel. Miller v. Bill Harbert Int’l Constr., Inc., 505 F. Supp. 2d 20, 26 (D.D.C. 2007)). But an FCA defendant may pursue counterclaims against the qui tam relator that are “not dependent on a finding that the [FCA] defendant is liable.'” Id.

Applying this rule, the court dismissed Defendants’ counterclaims to the extent they sought indemnification for damages or penalties that may be imposed on them in the FCA suit. Id. But the court held that the counterclaims were otherwise “independent of the FCA claim.” Id. at *6. The court noted the “extremely broad scope of the documents that Relators are alleged to have retained and disclosed,” and ruled that Defendants could pursue counterclaims against Relators for violating the confidentiality agreement to the extent Relators’ “retentions and disclosures went beyond the scope of those necessary to pursue their qui tam suit.” Id. In addition, the court held that Defendants could recover legal expenses from Relators if Defendants prevail on the merits of the FCA suit and persuade the court that Relators’ FCA claims were “frivolously pursued given [Relators’] alleged lack of relevant knowledge of the VA contracts and Defendants’ performance thereunder.” Id. Finally, the court held that Defendants could pursue counterclaims for breach of the internal-reporting agreements if Defendants prevail in the FCA suit and demonstrate a “causal relationship between Relators’ failure to report and their filing of the qui tam action.” Id. at *7.

As this decision demonstrates, employers in highly-regulated industries, in which FCA exposure is an ever-present risk, can obtain at least some protection by requiring employees to sign confidentiality and internal-reporting agreements. At a minimum, these agreements serve as valuable elements of any effective FCA compliance program by emphasizing to employees the importance of properly handling confidential information and promptly reporting potentially unlawful conduct to superiors. In addition, such agreements can serve as a valuable tool in qui tam litigation initiated by former employees and, specifically, may provide a basis for a counterclaim against the relator. Although such agreements cannot insulate employers from liability for actual FCA violations, they can protect against frivolous qui tam suits and unauthorized disclosures of confidential information that are not reasonably necessary to inform the government of potential fraud.

First Circuit Weighs In On Circuit Split Concerning First-To-File Rule

The First Circuit has deepened a Circuit split on whether an earlier-filed qui tam action must meet the heightened pleading requirements of Federal Rule of Civil Procedure 9(b) in order to serve as a jurisdictional bar to a later-filed suit under 31 U.S.C. § 3730(b)(5). Section 3730(b)(5) of the FCA states that “[w]hen a person brings [a qui tamU.S. ex rel. Heineman-Gupta v. Guidant Corp., No. 12-1867 (1st Cir. May 31, 2013), the First Circuit joined the D.C. Circuit in holding that the earlier-filed action need not satisfy Rule 9(b) in order to have preemptive effect. The Sixth and Ninth Circuits, on the other hand, have required the earlier-filed suit to be jurisdictionally viable and legally sufficient to trigger the first-to-file rule.

In Heineman-Gupta, the relator, Heidi Heineman-Gupta, alleged that Guidant Corporation and Boston Scientific Corporation (“BSC”) had engaged in a kickback scheme designed to promote sales and use of cardiac rhythm management devices. The relator’s allegations largely mirrored allegations that another relator, Elaine Bennett, had made in a separate qui tam action against BSC that she filed in another district at an earlier time. The Bennett qui tam action, which was pending (and under seal) when Heineman-Gupta filed her lawsuit, was ultimately voluntarily dismissed by Bennett and the government.

BSC moved to dismiss Heineman-Gupta’s later-filed suit as jurisdictionally barred by the first-to-file rule. Heineman-Gupta argued that Bennett’s earlier action could not have preemptive effect because it did not pass muster under Rule 9(b) in that did not include specific allegations regarding the particulars of the purported fraud, including dates, places and names of the physicians involved. The district court denied the motion, concluding that Rule 9(b) was inapplicable to the analysis, and the First Circuit affirmed.

The First Circuit stated that nothing in Section 3730(b)(5) references Rule 9(b); rather, the statute states simply that “an action is barred if it is a ‘related action’ that is ‘based on the facts underlying the pending action.'” Had Congress intended Rule 9(b) to be relevant to the analysis, the First Circuit stated, it could have referenced the Rule explicitly in Section 3730(b)(5), just as it references other Federal Rules of Civil Procedure in other provisions of the FCA, including Sections 3732(a), 3733(b)(1)(B), 3733(c)(2), 3733(h)(1), and 3733(j)(6)).

The First Circuit also observed that requiring the earlier-filed complaint to comport with Rule 9(b) would not serve any proper purpose. Rule 9(b) exists to protect defendants from frivolous allegations of fraud and to allow them to prepare a sufficient defense. The first-to-file rule, on the other hand, is focused on putting the Government on notice of potential fraudulent conduct. Quoting the D.C. Circuit’s decision in U.S. ex rel. Batiste v. SLM Corp., 659 F.3d 1204, 1210 (D.C. Cir. 2011), the First Circuit stated that Section 3730(b)(5) “ʻallow[s] recovery when a qui tam relator puts the government on notice of potential fraud,’ and ‘bar[s] copycat actions that provide no additional material information’ about the fraud.” According to the First Circuit, “[t]his means that if the first-filed complaint contains enough material information (the essential facts) about the potential fraud, the government has sufficient notice to launch its investigation. At that point, the purpose of the [prior, pending] qui tam action under § 3730(b)(5) is satisfied.”

As indicated above, the First Circuit’s decision in Heineman-Gupta joins the D.C. Circuit’s decision in Batiste in holding that Rule 9(b) is irrelevant to a first-to-file-rule analysis. The Sixth and Ninth Circuits have held to the contrary, finding that earlier-filed complaints that are jurisdictionally barred or legally insufficient cannot have preemptive effect under the first-to-file rule. See U.S. ex rel. Poteet v. Medtronic, Inc., 552 F.3d 503, 516 (6th Cir. 2009) (earlier-filed suit subject to FCA public disclosure bar cannot have preemptive effect under the first-to-file rule); Campbell v. Redding Med. Ctr., 421 F.3d 817, 825 (9th Cir. 2009) (same); Walburn v. Lockheed Martin Corp., 431 F.3d 966, 972 (6th Cir. 2005) (earlier-filed complaint failing to meet Rule 9(b) pleading standards cannot have preemptive effect).

First Circuit Rejects Potential for Manufactured Public Disclosure; Applies Public Disclosure Bar Based On Disclosures Made by Defendant in Prior Lawsuit

Posted by Gordon Todd and Loui Itoh

On April 12, 2013, the First Circuit in United States ex rel. Estate of Cunningham v. Millennium Labs., No. 12-1258 held that the FCA’s public disclosure bar applies even to disclosures made by the defendant in a prior lawsuit. The Court rejected relator’s contention that applying the bar under these circumstances would permit a defendant to manufacture a public disclosure defense by selectively placing a sanitized version of its story on a public docket.

Relator Estate of Robert Cunningham (“Relator”) filed an FCA suit against Millennium Laboratories of California (“Millennium”) and John Doe physicians (“physicians”) claiming that Millennium had engaged in a fraudulent scheme in which it encouraged physicians to (1) bill the government multiple times for single drug tests; (2) conduct excessive, medically unnecessary initial tests and (3) misrepresent the medical necessity of confirmation testing.

Five days prior to the filing of this suit, Millennium had filed its own complaint against Relator’s former employer, Calloway Laboratories (“Calloway”) in California state court, alleging, inter alia, defamation and intentional interference with contractual relations. Millennium asserted that Calloway employees had sent emails to third parties describing Millennium’s practice of billing insurance companies and the government twice for the same service, and attached these emails to its complaint. In defense of Cunningham’s subsequent suit, Millennium argued that the emails constituted a public disclosure under the FCA. The District Court agreed an dismissed Relator’s complaint for lack of subject matter jurisdiction.

The Court of Appeals reversed in part, remanding for a more parsed analysis of one of Relator’s claims. However, the Court of Appeals largely affirmed, concluding that Relator’s complaint and the disclosures made in the California suit were “substantially similar.” The court explained that, “[w]hile we share Relator’s concern that a person or entity committing fraud against the government could theoretically shield itself from a qui tam action through preemptively filing its own action, thus creating a sanitized public disclosure while barring a future whistleblower action, the Supreme Court has been clear that self-disclosure can bar such suit under the FCA, and it has further characterized concerns about insulation from FCA liability as unwarranted in most cases.” Cunningham at 26 (citing Schindler Elevator Corp. v. United States ex rel. Kirk, 131 S. Ct. 1885, 1895 (2011); Graham Cnty. Soil & Water Conservation Dist. v. United States ex rel. Wilson, 559 U.S. 280 (2010)).

Fifth Circuit Reaffirms Applicability of Heightened Pleading Standards Post-Grubbs

Posted by Gordon Todd and Elizabeth McEachron

On April 3, 2013, the Fifth Circuit affirmed the dismissal of relator’s complaint in United States ex rel. Nunnally v. West Calcasieu Cameron Hospital, No. 12-30656, clarifying that in United States ex rel. Grubbs v. Kanneganti, 565 F.3d 180 (5th Cir. 2009), the Circuit had not absolved FCA relators from heightened pleading requirements.

Relator Nunnally alleged that the defendant hospital had violated the AKS and FCA by (1) charging physicians reduced laboratory test fees in exchange for the physicians’ referring patients to the hospital’s laboratory and (2) charging Medicare more than the price changed to non-Medicare patients. In affirming the dismissal, the court explained that the elements of both statutes must be pleaded with particularity.

With respect to the AKS, the relator had failed to plead the contents of the referral agreements, the identity of the physicians involved, any actual inducements provided to those individual physicians, or any particular improper referrals from those physicians. The court further explained that because “actual inducement is an element of the AKS violation,” a relator must plead “that WCCH knowingly paid remuneration to specific physicians in exchange for referrals. Nunnally at 5. Nunnally failed to allege any particular details of any actual referral by a physician who entered an agreement with WCCH, or even to offer a meaningfully relevant time period.

With respect to the FCA, Nunnally had failed “to allege with particularity an actual certification to the Government that was a prerequisite to obtaining the government benefit.” Id. Because, the Fifth Circuit has not adopted the implied certification theory of FCA liability, the court looked to the complaint for details about explicit certifications of compliance with federal law and found the complaint lacking.

The Circuit emphasized that its prior decision in Grubbs had not absolved FCA relators of the Rule 9(b) heightened pleading requirements. While Grubbs opened the door to statistical and factual evidence that supports an inference of fraud without providing details about each false claim, the Fifth Circuit clarified in Nunnally that FCA relators must still provide “reliable indications of fraud and to plead a level of detail that demonstrates that an alleged scheme likely resulted in bills submitted for government payment.” Nunnally at 3.

DOJ to Join FCA Qui Tam Suit Against Lance Armstrong

Posted by Michael D. Mann

As widely reported in the media, on February 22, 2013, the U.S. Department of Justice filed a Notice of Election to Intervene In Part in Floyd Landis’ False Claims Act qui tam suit against his former cycling teammate Lance Armstrong. The government alleges Armstrong, Johan Bruyneel and Tailwind Sports “submitted or caused the submission of false claims to the U.S. Postal Service (“USPS”) in connection with its sponsorship of a professional bicycle racing team by regularly employing banned substances and methods to enhance their performance, in violation of the USPS sponsorship agreements.” In its press release, the government contends the USPS sponsorship agreements “required the team to follow the rules of cycling’s governing bodies, which prohibited the use of certain performance enhancing substances and methods.” The USPS paid the Tailwind-owned professional cycling team approximately $31 million in sponsorship fees between 1996 and 2004. Armstrong was the lead rider on the team and Bruyneel was the manager or directeur sportif. Bruyneel is alleged to have known “team members were using performance enhancing substances and facilitated the practice.”

At this time the government has declined to intervene and reserved the right to seek dismissal against others named in Landis’ claim, including defendants William Stapleton, Barton Knaggs, Capitol Sports and Entertainment Holdings, Inc., and Thomas Wiesel. The government has 60 days, or until April 23, 2013, to file its Complaint in Intervention.

The Landis suit raises a number of novel questions, which were discussed in an earlier post by Jonathan F. Cohn and Brian P. Morrissey.

U.S. District Judge Robert L. Wilkins has lifted the seal on all matters going forward in the proceeding, which is captioned United States ex rel. Floyd Landis v. Tailwind Sports Corporation, et al., No. 10-cv-976 (RLW).

An unsealed copy of Landis’ Second Amended Complaint, also filed on February 22, 2013, can be found here.

Ninth Circuit Reverses Dismissal of FCA Suit When Allegations Raised “Strong Inference” False Claims Were Actually Submitted

Posted by Michael D. Mann

On February 13, 2013, the United States Court of Appeals for the Ninth Circuit breathed new life into allegations that a for-profit college owned by Kaplan, Inc., violated the False Claims Act by submitting sham financial aid claims to the U.S. Department of Education. See United States ex rel. Jajdelski v. Kaplan, Inc., No. 11-16651, slip op.

The relator, Charles Jajdelski, a former admissions representative for Kaplan, Inc., alleged that Las Vegas, Nevada-based Heritage College violated the FCA by falsely seeking financial aid for students who either never enrolled at Heritage College or had dropped out of the school. Kaplan acquired Heritage College in May 2003. On October 25, 2003, Jajdelski attended Heritage’s graduation ceremony and allegedly discovered five boxes of diplomas that were never distributed to students. Jajdelski was concerned by the boxes of extra diplomas and made inquiries into the absence of the students. He was allegedly told by the college’s director of education that the diplomas had gone unused because Heritage College admissions representatives were required to sign up a certain quota of applicants per month, despite the fact that only 50% of the enrolled students actually participated in and completed the program. Instructors at the college allegedly kept the students enrolled in the program on their attendance sheets to prevent a return of federal aid funding after a student withdrew from the program. After Jajdelski was allegedly warned to keep his “nose” out of the financial aid status of students, he was terminated a mere ten days later.

Kaplan moved to dismiss the complaint for its failure to allege that Kaplan, the only defendant in the case, submitted false claims for financial aid or explain why Kaplan should be held responsible for conduct that allegedly happened before it acquired or had any ownership interest in Heritage College. The district court agreed and found that Jajdelski had failed, in his sixth amended pleading, to meet the heightened standard required of claims of fraud under Rule 9(b). In its July 7, 2011 Order granting dismissal, U.S. District Judge Kent J. Dawson concluded that “[a]t no point has Plaintiff stated his allegations with sufficient specificity relating to time, place, and the identity of the parties to the alleged fraud to put Kaplan on notice of the ‘particular misconduct which is alleged to constitute the fraud charged.’ Nowhere does Plaintiff identify the false claims that were submitted to the Government, or when or where these false claims were submitted or even by whom. According to the information provided in Plaintiff’s previous and most recent complaint, all of Plaintiff’s fraud allegations occurred at times prior to Defendant acquiring Heritage in May 2003. Under the standards governing successor liability, Defendant cannot be held liable for those activities as alleged in Plaintiff’s Complaint” without some demonstration that Kaplan continued the allegedly fraudulent conduct following its acquisition of Heritage College. See United States ex rel. Jajdelski v. Kaplan, Inc., No. 2:05-CV-1054 (KJD) (GWF) (D. Nev. July 7, 2011).

The Ninth Circuit disagreed and remanded. The Court, adopting the rationale of the Fifth Circuit in United States ex rel. Grubbs v. Kanneganti, 565 F.3d 180, 190 (5th Cir. 2009), found Jajdelski’s fraud claims under Rule 9(b) sufficient in so much as they alleged “particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inferencegt; that claims were actually submitted.” (Emphasis added). Specifically, Jajdelski met the pleading standard because he “allege[d] his first-hand experience of the scheme unfolding” and “describe[d] in detail, including the date, place, and participants, meetings during which the phantom student scheme was revealed.” The Court determined that the continued enrollment of non-attending students created at least a strong inference that Heritage College, and possibly Kaplan, had submitted financial aid claims for those students. Indeed, it would “stretch the imagination” to believe that “Kaplan employees fastidiously (and secretively) documented fake student enrollment statistics and met about them once the threshold for financial aid eligibility was crossed, ‘only for the scheme to deviate . . . at the last moment’ such that they did not submit those claims to the Department of Education.”

In a dissenting opinion, Judge Consuelo Callahan conceded that Jajdelski’s claims provided at least circumstantial support for his “phantom student” theory, but declined the invitation to “tie the extra diplomas, employee confessions, or wrongdoing by apparently everyone at all times to an actual false claim for financial aid by Kaplan.” (Emphasis in original). Judge Callahan acknowledged that Jajdelski did not have to provide representative examples to support each allegation, but concluded that he did not provide a representative false claim for any of the allegations or even provide a “strong inference” that Kaplan ever actually submitted a false claim.

The decision appears to be a split from the Fourth Circuit’s decision last month in United States ex rel. Nathan v. Takeda Pharmaceuticals North America, Inc., No. 11-2077, slip op. (4th Cir. Jan. 11, 2013), in which the Court rejected the relator’s argument that alleging a fraudulent scheme obviates the need to allege a specific false claim to satisfy Rule 9(b).

FCA Suit Against Lance Armstrong Raises Novel Questions about the Act’s Reach

Posted by Jonathan F. Cohn and Brian P. Morrissey

Amidst last week’s coverage of Tour de France-winning cyclist Lance Armstrong’s public acknowledgement that he used banned performance-enhancing substances during all of his Tour victories, numerous news outlets reported that Amstrong’s “doping” had also become the basis of a federal False Claims Act suit. The suit was brought under the FCA’s qui tam provisions by Armstrong’s former teammate, Floyd Landis, and alleges that Armstrong and other defendants defrauded the U.S. Postal Service, which paid millions of dollars to sponsor Amstrong’s team in six of his Tour de France wins. The contract between the Postal Service and the team allegedly prohibited team members from using performance-enhancing drugs. Landis contends that Armstrong’s use of banned substances violated this contractual term and, thus, constituted a false claim against the Postal Service.

Landis’s suit, filed in the U.S. District Court for the District of Columbia, remains under seal. However, the New York Daily News last week obtained and published a copy of the qui tam complaint. (News of this suit had emerged even earlier when a federal magistrate judge issued an order in December 2012 unsealing the record in a subpoena enforcement proceeding initiated by the Postal Service Office against Armstrong. Briefing filed in that case referenced the separate, sealed FCA action.)

Several media outlets reported that the seal on Landis’s qui tam complaint was set to expire on January 17, 2013. That date has come and gone, however, suggesting that the Department of Justice likely requested and received an extension of the seal. The Department may be continuing to consider whether its intervention in the case is appropriate, or it may be engaged in settlement negotiations with Armstrong. (It was reported last week that Armstrong offered the Department $5 million to resolve the case, and that his offer was declined.)

If the case proceeds to litigation, it would raise many novel questions regarding the scope of the Act. For one thing, few—if any—courts have been called upon to assess whether a false statement made to a Government agency to induce its assent to an advertising or sponsorship contract can be considered an actionable false claim. Moreover, there may be interesting arguments as to whether Armstrong’s alleged false statements can be considered material to the Postal Service’s decision to enter into that type of contract.

Separately, the suit raises several fascinating questions regarding Landis’s share of any recovery. Landis’s 2006 Tour de France victory was revoked because of his own use of banned substances. Consequently, because Landis was a member of Armstrong’s teams, a court may conclude that Landis was complicit in any alleged false claims made by the team to the Postal Service. Under the FCA, 31 U.S.C. § 3730(d)(3), a court has discretion to reduce the FCA award to any qui tam relator who “planned or initiated” the FCA violation that forms the basis of his complaint. Moreover, if Landis is convicted of a crime in association with his alleged doping, the Act would preclude him from receiving any proceeds from the qui tam suit entirely. Id.

Finally, several anecdotes appearing in the Complaint had appeared in the press prior to Landis’s filing suit. This could create obstacles to his recovery under the FCA’s original source bar. See § 3730(e)(4)(iii) (authorizing courts to dismiss FCA actions based on allegations “publicly disclosed” in the “news media” unless the qui tam relator is an “original source” of the information). In all events, the case bears watching as it moves forward.

District Court Dismisses Off-Label FCA Claims After Concluding That Industry Guidelines Do Not Constitute A Legal Restriction

Posted by Scott Stein and Catherine Kim

In August, we wrote about a decision in which a court rejected the government’s theory that submission of claims for services that failed to comply with industry guidelines were “false.” Last week, another plaintiff seeking to impose FCA liability based on violation of voluntary guidelines suffered a similar defeat.

On November 14, Judge Brian Cogan of the Eastern District of New York dismissed the relator’s Fifth Amended Complaint in United States ex rel. Polansky v. Pfizer, Inc., No. 04-cv-0704 (E.D.N.Y. Nov. 14, 2012) alleging that Pfizer engaged in off-label marketing of its popular statin Lipitor in violation of the False Claims Act. The complaint alleged that Pfizer engaged in off-label marketing by encouraging physicians to prescribe Lipitor to lower the cholesterol of patients whose risk factors for heart disease and cholesterol levels did not fall within the National Cholesterol Education Program (“NCEP”) Guidelines. Specifically, the relator contended that the publication of an NCEP Guidelines chart in Lipitor’s 2005 label prohibited Pfizer from marketing the drug to physicians for use on patients who fell outside the parameters of the guidelines. Though such guidelines were not republished in the 2009 label, the relator noted that they were still referenced in the Dosage and Administration section.

Concluding that “[o]ff-guideline use does not equate to off-label[,]” the court dismissed the complaint, holding that the NCEP Guidelines did not constitute a legal restriction, but were “merely informational and advisory[.]” The court noted that had the FDA desired to limit Lipitor use to patients falling within the NCEP guidelines, it could have done so expressly. Yet the 2009 label, as read by the court, contained no restrictions regarding the appropriate patient population for Lipitor. Indeed, the only reference to the guidelines appeared in a four-word parenthetical in the label’s dosage instructions.

For these reasons, the court held that the relator’s off-label claims failed under the 2009 label. And since the relator conceded that the changes to the 2009 label from the earlier label were not substantive, the court concluded that the relator’s claims must fail under the 2005 label as well.

“The False Claims Act, even in its broadest application, was never intended to be used as a back-door regulatory regime to restrict practices that the relevant federal and state agencies have chosen not to prohibit through their regulatory authority,” wrote Judge Cogan. “I cannot accept plaintiff’s theory that what the scientists at the [NCEP] clearly intended to be advisory guidance is transformed into a legal restriction simply because the FDA has determined to pass along that advice through the label.”

Court Dismisses Government’s Claims Premised On Violations of Industry Standards Under Rule 9(b)

Posted by Scott Stein and Brad Robertson

It is relatively rare for courts to grant motions to dismiss FCA cases in which the United States has intervened. So we read with interest the recent decision of a federal district court in Maryland, United States v. Kernan Hospital, No. 11-cv-02961 (D. Md. July 30, 2012), in which the court dismissed the government’s complaint on Rule 9(b) grounds for failure to plead with particularity specific false statements submitted to the government and how those statements affected the defendant’s reimbursement.

The government’s complaint alleged that the defendant hospital systematically upcoded patients’ secondary diagnoses in order to make the hospital’s case mix appear more severe. The hospital allegedly had personnel review each patient’s chart after the fact for data consistent with malnutrition. The personnel then returned the chart to the treating physician to prompt him or her to consider including a secondary diagnosis of malnutrition. Hospital coders then entered the ICD-9-CM code for an extreme form of malnutrition known as Kwashiorkor for any malnutrition diagnosis.

The government alleged that it conducted an investigation of the hospital’s coding that concluded that 23% of the cases were inappropriate because the medical evidence in the chart did not justify the diagnosis or contained contradictory, incomplete, or ambiguous information. The government further alleged that the hospital’s conduct, and the resultant 23% error rate, violated “industry norms” and “applicable standards” established by the American Health Information Management Association (AHIMA). The government took the position that the hospital’s “practice of deliberately disregarding this industry standard rendered the coding false and fraudulent.”

The court dismissed the complaint, holding that it failed to link the alleged activity to any specific claims submitted to the government for payment. When pressed at oral argument, counsel for the government identified the hospital’s cost reports as the false claims at issue. However, the court noted, the complaint did not allege what effect the upcoded diagnoses had on cost reports, did not allege that the cost reports that cost reports were submitted to the government, or that the cost reports caused the government to pay for services that were not rendered. Indeed, the government conceded that each alleged “false” secondary diagnosis would not necessarily increase the hospital’s rate of compensation, but did not explain the circumstances in which a false diagnosis would result in falsely increased payments.

Because the government failed to allege any specific claims submitted—”the crucial link between the alleged scheme and ultimate False Claims Act liability”—the court dismissed its claims for failure to satisfy Rule 9(b). As the court explained, “The False Claims Act does not punish a system that might allow false claims to be sent to the government—instead, it punishes actual claims containing objective falsehoods.” (emphasis in original).

A copy of the court’s opinion can be found here.