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4th Circuit

21 January 2016

Relators Urge Fourth Circuit to Limit DOJ Authority to Veto FCA Settlements

Under what circumstances can the government veto a settlement between a relator and the defendant in a case in which the government has not intervened?  As previously reported here, that is a question that has divided the Circuits, and one that the Fourth Circuit will soon be deciding.  See United States ex rel. Michaels v. Agape Senior Cmty., Inc., No. 15-2145 (4th Cir.).

The district court held that the plain language of the FCA gives the government absolute veto authority, adopting the approach of the Fifth and Sixth Circuits, and rejecting a Ninth Circuit ruling that the government has unreviewable veto authority only during the period following the filing of a qui tam suit when the government is deciding whether to intervene.  Under the Ninth Circuit rule, once the government declines to intervene, government rejections of settlements are subject to a reasonableness review by the Court.

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20 January 2016

Relators Argue Fourth Circuit Must Permit Use of Sampling to Establish FCA Liability

The Fourth Circuit has agreed to consider on interlocutory appeal whether statistical sampling can be used to establish FCA liability, as we previously reported hereSee United States ex rel. Michaels v. Agape Senior Cmty., Inc., No. 15-2145 (4th Cir.).  Because no circuit court has yet ruled on the issue, the Fourth Circuit’s decision could significantly impact the development of this hotly-debated issue in FCA litigation.

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01 October 2015

Fourth Circuit Agrees to Consider Statistical Sampling and DOJ Authority To Oppose Settlements in FCA Cases

The Fourth Circuit has agreed to hear an interlocutory appeal from a case in the District of South Carolina (discussed here), regarding the now hotly-debated role of statistical sampling in establishing liability and damages in FCA cases.  See United States ex rel. Michaels v. Agape Senior Cmty., Inc., No. 15-238 (4th Cir. Sept. 29, 2015).  The Fourth Circuit will be the first appellate court to weigh in on the issue.  The district court initially ruled that the relator could not use sampling for purposes of extrapolating damages, but it ultimately certified the question for interlocutory appeal, alongside a second question as to whether the government has unfettered veto authority over settlements resolving non-intervened qui tam suits.  As we discussed here, the government and the defendant in the qui tam suit both filed briefs opposing appellate review of the district court’s ruling on statistical sampling, while the relator urged the Fourth Circuit to rule on the question.  We will continue to monitor and provide updates on the appeal.

A copy of the Fourth Circuit’s order can be found here.

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06 July 2015

In Long Running Tuomey Saga, the Fourth Circuit Provides a Roadmap For Constitutional Challenges to Excessive FCA Awards

On July 2, 2015, the Fourth Circuit affirmed a $237 million verdict against Tuomey Hospital following a retrial in the government’s long-running effort to pursue alleged violations of the Stark law. (See our previous posts on the case here and here). As we previously reported, in 2013 in U.S. ex rel. Gosselin v. Bunk, the Fourth Circuit acknowledged that FCA awards are subject to Eighth Amendment scrutiny, but it rejected the constitutional challenge in that case without providing any concrete standards against which the constitutionality of an award in any particular case could be measured. In the more recent Tuomey opinion, the Fourth Circuit again rejected Eighth Amendment and Due Process challenges to the constitutionality of the award. However, the opinion provides a roadmap for future challengers that suggests that constitutional challenges could find traction in cases in which there is a significant discrepancy between per-claim damages and penalties.

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05 February 2015

Fourth Circuit Holds That Disclosures Made Solely Within The Government Do Not Trigger The Public Disclosure Bar

Posted by Robert J. Conlan and Kristen A. Knapp

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.

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15 January 2015

Fourth Circuit Recognizes Implied Certification Theory

Posted by Ellyce Cooper and Collin Wedel

On January 8, 2015, in United States ex rel. Badr v. Triple Canopy, Inc., No. 13-2190, — F.3d — (4th Cir. 2015), the U.S. Court of Appeals for the Fourth Circuit revived a False Claims Act suit brought by the U.S. Government and a qui tam relator against security firm Triple Canopy, Inc., explicitly recognizing for the first time the implied certification theory of FCA liability.

The case arose out of a contract between Triple Canopy and the government under which Triple Canopy was to provide security services at an airbase in Iraq. Among several provisions in the contract, each of the security officers that Triple Canopy hired would have to obtain a passing score on a qualifying U.S. Army-grade rifle marksmanship course. In fact, according to the relator, very few guards were capable of meeting this requirement. Nevertheless, Triple Canopy continued to submit monthly invoices to the government for the guards’ services. Triple Canopy allegedly ordered one of its medics, relator Omar Badr, to retroactively falsify marksmanship scorecards for 40 guards. Badr subsequently filed a qui tam suit against Triple Canopy. The government then intervened as to certain counts.

The district court granted Triple Canopy’s motion to dismiss the case, largely on the ground that the defendants had never submitted a demand for payment that contained an objectively false statement. The court reasoned that the Government never alleged that Triple Canopy “invoiced a fraudulent number of guards or billed for a fraudulent sum of money.” Rather, citing Fourth Circuit precedent regarding the “crucial distinction between punitive FCA liability and ordinary breaches of contract,” the court reasoned that the defendant’s actions amounted at most to a breach of contract, not an FCA suit.

Although it affirmed the district court’s dismissal of certain claims, the Fourth Circuit reversed as to the bulk of the plaintiffs’ claims, holding that the district court’s interpretation of the distinction between breach-of-contract suits and FCA suits was too rigid. Instead, after reviewing the relevant circuit opinion and distinguishing its prior precedents, the Fourth Circuit held, “the Government pleads a false claim when it alleges that the contractor, with the requisite scienter, made a request for payment under a contract and withheld information about its noncompliance with material contractual requirements. The pertinent inquiry is whether, through the act of submitting a claim, a payee knowingly and falsely implied that it was entitled to payment.”

In so holding, the Fourth Circuit, for the first time, has expressly endorsed the implied certification of FCA liability, at least in certain circumstances. The Court noted that, since its 1999 opinion in U.S. ex rel. Harrison v. Westinghouse Savannah River Co., 176 F.3d 776 (4th Cir. 1999), “the weight of authority has shifted significantly in favor of recognizing this category of claims at least in some instances. Thus, the opinion states, “[c]ourts [may] infer implied certifications from silence where certification was a prerequisite to the government action sought.” The court noted its awareness of the fact “that this theory is prone to abuse by parties seeking to turn the violation of minor contractual provisions into an FCA action,” and took pains to highlight the “several key distinctions between this case and . . . garden-variety breaches of contract,” including the government’s active intervention and the clear falsehood at issue here (as opposed to vague contract provisions in other cases promising “diligence” or the like). It also clarified its view that the best way to prevent most contract suits from morphing into FCA suits is “strict enforcement of the Act’s materiality and scienter requirements,” which it concluded were readily met in this case.

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

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26 June 2014

Fourth Circuit Dismisses Case Despite Applying Narrow Interpretation of Public Disclosure Bar

Posted by Jaime Jones and Catherine Kim

In a June 23, 2014 opinion, the Fourth Circuit affirmed the dismissal of qui tam claims against suppliers of the National Center for Employment of the Disabled (“NCED”) and the National Industries for the Severely Handicapped (“NISH”) under the FCA’s public disclosure bar, as well as the relator’s failure to satisfy the relevant pleading requirements.

The relator initially filed this qui tam suit on June 20, 2006, alleging that NCED engaged in various schemes to defraud the government, primarily by receiving payments under the Javits-Wagner-O’Day Act (“JWOD”) program despite failing to comply with JWOD regulations. Prior to the filing, however, various newspapers published articles discussing NCED’s lack of compliance with JWOD program requirements. A criminal investigation followed and in 2010, a jury convicted NCED’s former CEO of making false statements and conspiracy to defraud the government.

In light of such events, NISH and the supplier defendants filed motions to dismiss, asserting that the district court lacked subject matter jurisdiction pursuant to the public disclosure bar and that the relator’s first amended complaint suffered from various pleading defects. The district court granted the defendants’ motions, and the relator appealed.

In reviewing the district court’s decision, the Fourth Circuit adopted an interpretation of the FCA’s public disclosure provision that “stands in contrast to the broader tests applied by our sister circuits[.]” Specifically, while other circuits generally assess whether the allegations are “supported by” or “substantially similar” to fraud that has already been publicly disclosed, the Fourth Circuit asked whether the relator’s allegations were “actually derived from the public disclosure itself.”

With respect to the claims against NISH and three supplier defendants, the court held that the district court lacked subject matter jurisdiction over such claims because the relator had apparently relied on and even cited to information appearing in public disclosures and had not demonstrated “direct and independent knowledge” of the alleged fraud. Although the court concluded that the relator was an original source with respect to the claims against Weyerhaeuser Co., it nonetheless dismissed such claims as well due to various pleading defects.

The Fourth Circuit’s narrower reading of the public disclosure provision could present challenges to FCA defendants, depending on how lower courts ultimately apply the “derived from” standard adopted in this case. While it is unclear which interpretation of the public disclosure bar will ultimately prevail among the circuit courts, we will continue to monitor this issue and provide updates on any new developments.

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31 March 2014

Supreme Court Denies Certiorari In Nathan

Posted by Jaime Jones and Nirav Shah

Today, the Supreme Court denied certiorari in U.S., ex rel. Nathan v. Takeda Pharmaceuticals, et al. As we previously reported, this case involved the pleading requirements for qui tam cases brought under the FCA. Earlier this month, the Solicitor General filed a brief urging the Court not to grant certiorari.

At issue is whether Rule 9(b) requires a complaint to “allege with particularity” that certain claims false claims were submitted for payment. Circuits are split on the issue, with the Fourth, Sixth, Eight, and Eleventh Circuits requiring stricter pleading while the First, Fifth, Seven, and Ninth adopting a more permissive approach. The Court’s denial of certiorari means that the Fourth Circuit’s ruling that the relator’s complaint “failed to plausibly allege that any false claims had been presented to the government for payment” will stand.

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26 February 2014

4th Circuit Affirms Dismissal of FCA Suit Premised on Alleged Violations of FDA GMP Regulations

Posted by Jaime Jones and Jessica Rothenberg

On February 21, 2014, the Fourth Circuit upheld the dismissal of a former employee’s False Claims Act suit against Omnicare, Inc. (“Omnicare”), holding that while the relator alleged violations of certain Food and Drug Administration (“FDA”) regulations by Omnicare’s subsidiary, Heartland Repack, his failure “to allege that the defendants made a false statement or that they acted with the necessary scienter” was fatal to his claim. Relator Barry Rostholder alleged that Heartland Repack violated drug GMP regulations that require penicillin and non-penicillin drugs be packaged in isolation from each other so as to avoid cross-contamination, by repackaging penicillin in facilities also used for non-penicillin drug packaging operations. In his suit, which was first filed in 2007, Rostholder alleged that as a result of this violation, the drugs were adulterated and ineligible for Medicare or Medicaid reimbursement, and that any claims presented to the government for reimbursement were false under the FCA. The government declined to intervene in 2009. The district court granted Omnicare’s motion to dismiss and denied relator’s request to file an amended complaint.

The Fourth Circuit held that whatever Rostholder had alleged, he had not identified any false statement or other fraudulent misrepresentation made by Heartland Repack to the government, as required under the FCA. The court first held that a drug must be merely FDA-approved to qualify for reimbursement, and that the Medicare and Medicaid statutes do not prohibit reimbursement for adulterated drugs and do not require compliance with FDA safety regulations as a precondition to reimbursement. Therefore, “the submission of a reimbursement request for [an FDA-approved] drug cannot constitute a ‘false’ claim under the FCA on the sole basis that the drug has been adulterated . . . in violation of FDA safety regulations.” Because Rostholder failed to plead the existence of any false statement or fraudulent course of conduct, his FCA claims failed. The court summarily dismissed Rostholder’s attempt to proceed under implied certification or worthless services theories of FCA liability. Holding that any amendment would be futile in light of its holding, the Fourth Circuit also upheld the lower court’s decision to deny Rostholder leave to file a third amended complaint.

In arriving at its decision, the Fourth Circuit declined to sanction the use of the False Claims Act as a tool to ensure regulatory compliance, particularly where an agency such as the FDA has the power to enforce its own regulations. As Judge Barbara Milano Keenan, writing for the panel, noted, “[T]he correction of regulatory problems is a worthy goal, but is ‘not actionable under the FCA in the absence of actual fraudulent conduct.'” This case is significant in particular in light of numerous recent statements by various government lawyers signaling DOJ’s intent to pursue FCA actions based on GMP violations, and is sure to be frequently cited in defense of such claims.

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30 December 2013

Fourth Circuit Avoids Excessive Fines Clause By Allowing Relator To Select An Alternative FCA Penalty

As we previously reported, a federal court in Virginia last year held that the minimum statutory civil FCA penalties were unconstitutionally excessive in light of the facts before it, and refused to impose any penalties. U.S. ex rel. Bunk v. Birkard Globistics GMBH (E.D. Va. Feb. 14, 2012). On December 19, the Fourth Circuit reversed and remanded the district court’s decision to enter no penalties with an instruction to award the plaintiff $24 million – the amount relator Bunk previously had expressed a willingness to accept. United States ex rel. Bunk v. Gosselin World Wide Moving, N.V., No. 12-1369, slip op. 30 (4th Cir. Dec. 19, 2013).

At trial, the jury found defendants liable under the FCA for conspiring with subcontractors to fix prices in advance of a bid for a government contract and submitting a false Certificate of Independent Pricing. The Relator did not seek damages, but only penalties based on the parties’ stipulation that the defendant had filed 9,136 invoices under the fraudulently obtained contract. While Relator proposed a $24 million civil penalty, the court calculated the mandatory minimum penalty as no less than $50,248,000 ($5,500 x 9,136). The court determined that this penalty violated the Excessive Fines Clause of the Eighth Amendment in light of the relator’s failure to establish that the defendant’s fraud caused any economic harm to the government. As such, the district court concluded “that [it] must simply refuse to enforce the mandated penalty . . . and not substitute its own fashioned penalty.”

The Fourth Circuit reversed, rejecting the district court’s determination that it was unable to craft an alternative penalty. The court held that the government – or a relator standing in the government’s shoes – has “unbounded” discretion to pursue a lesser judgment than that to which it may be entitled and, by exercising that discretion, may avoid the application of the Excessive Fines Clause. In reaching this conclusion, the court noted that the dilemma under the Excessive Fines Clause was the result of the court’s own precedent construing the FCA penalty provisions broadly to impose penalties on each false or fraudulent claim submitted, rather than narrowly to attach only to an underlying fraud. By concluding that a relator may simply select an alternative penalty without regard to the FCA’s requirements, the Fourth Circuit avoided the Constitutional dilemma created by the law’s draconian penalty provisions and the court’s precedent. The court then concluded – without analysis – that the alternative penalty proposed by the relator was not unconstitutionally excessive in light of the “gravity” of defendant’s misconduct and the “necessary and appropriate deterrent effect” served by the FCA’s penalties provision.

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