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7th Circuit

15 March 2016

Seventh Circuit Re-Affirms That Disclosure to Government Officials Constitutes Public Disclosure, But Suggests It May Be Open to Reconsidering That View

On February 26, 2016, the Seventh Circuit refused to revive a public interest group’s False Claims Act suit alleging that the Chicago Transit Authority (CTA) misreported transit data to gain additional federal grant allocations.  The three-judge panel upheld the district court’s dismissal of the suit, which accused the CTA of over-reporting bus mileage to secure up to $55 million in inflated grant allocations.  The district court found that the group’s accusations had already been publicized in a state performance audit report and federal agency letter, and the Seventh Circuit agreed that the relator, public interest group Cause of Action, failed to establish subject-matter jurisdiction under the FCA’s public-disclosure bar, which limits jurisdiction over qui tam actions based on allegations that already have been disclosed publicly through certain sources unless the relator is an “original source” of the information.  See Cause of Action v. Chicago Transit Authority, No. 15-1143 (7th Cir. Feb. 29, 2016).

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14 September 2015

Seventh Circuit Holds Relator’s Share Is Taxable As Ordinary Income Rather Than Capital Gain

Late last month, in Patrick v. Commissioner, No. 14-2190,  _ F. 3d __ (7th Cir. Aug. 26, 2015), the Court of Appeals for the Seventh Circuit unanimously affirmed a United States Tax Court opinion as to the characterization of a qui tam award received by a relator.  The Seventh Circuit held, as had the Tax Court, that the award constituted ordinary income rather than capital gain and thus was subject to tax at the highest individual rate rather than the preferential (lower) capital gain rate.   Previously, this characterization issue had only been addressed by one other federal circuit, the Ninth, in Alderson v. United States, 686 F.3d 791 (9th Cir. 2012).

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20 July 2015

Fifth Circuit Passes On Opportunity To Join Seventh Circuit in Rejecting Implied False Certification Theory

Last month, the Seventh Circuit bucked the trend of several other circuits in expressly rejecting the theory of implied false certification under the FCA.  See  United States v. Sanford-Brown, Limited, No. 14-2506 (7th Cir. June 8, 2015) (opinion here).  The Fifth Circuit recently had an opportunity to decide whether to follow the Seventh Circuit’s lead.  But acknowledging that, “[f]or over a decade, this court has avoided deciding whether to recognize the implied certification theory,” the Fifth Circuit declined – again – to decide the issue.  After concluding that the relator’s allegations would fail to satisfy Rule 9(b) even if the theory was valid, the court once again declined to decide whether the theory should be recognized.  Thus, the opinion provides helpful guidance on the pleading standards applicable to implied certification claims in the Fifth Circuit – assuming the theory is viable in the first instance.

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04 September 2014

Seventh Circuit Limits “Worthless Services” Theory, Heightens The Bar For Public Disclosure

Posted by Scott Stein and Catherine Kim

Several circuit courts have recognized the “worthless services” theory of FCA liability, which allows qui tam relators to assert FCA claims premised on the notion that the defendant received reimbursement for goods or services that were worthless. In a recent case, U.S. ex rel. Absher v. Momence Meadows Nursing Center, Inc., the Seventh Circuit held that assuming the theory is viable in the Seventh Circuit (an issue it declined to decide), it does not apply to situations in which deficient performance of a contract is alleged to have resulted in services “worth less” than what was contracted for. As the court succinctly put it, “[s]ervices that are ‘worth less’ are not ‘worthless.'”

The case was originally filed by two nurses who formerly worked at Momence, alleging that the nursing home knowingly submitted false claims to Medicare and Medicaid by seeking reimbursement for treatment that allegedly failed to comply with standards of care. Although the United States and Illinois declined to intervene, the relators proceeded to trial. The jury reached verdicts against Momence and awarded over $3 million in compensatory damages, which was trebled under the FCA.

On appeal, Momence argued that the district court lacked jurisdiction under the public disclosure bar because the FCA action was based on allegations of non-compliant care that were the subject of previous government reports. The Seventh Circuit, however, continuing its streak of recent opinions narrowing the scope of the public disclosure bar, held that the bar was not implicated because the reports did not disclose “that Momence had the scienter required by the FCA.”

The court then proceeded to assess whether the relators’ claims failed as a matter of law. Although the Seventh Circuit declined to address the viability of a worthless services theory of FCA liability – “a question best saved for another day” – it nevertheless concluded that even if that theory was valid, “[i]t is not enough to offer evidence that the defendant provided services that are worth some amount less than the services paid for.” Because the court concluded that the relators failed to offer evidence establishing that Momence’s services were “truly or effectively ‘worthless[,]'” it held that the worthless services theory could not support the jury’s verdict.

Similarly, the court found that the relators’ evidence in support of the express certification theory was also insufficient because the relators not only failed to put forth evidence of “precisely how many . . . forms contained false certifications[,]” but they also failed to identify “even a roughly approximate number of forms contain[ing] false certifications.” While the court acknowledged the difficulty in producing evidence that supports “even an approximate finding[,] . . . under the FCA, the plaintiff must ‘prove all essential elements of the cause of action . . . by a preponderance of the evidence.'”

Lastly, with respect to the implied certification theory, the court acknowledged that it had not expressly determined whether such theory is recognized in the Seventh Circuit. However, it declined to answer the question here since the realtors did not argue to the jury that the purported implied certifications were conditions of payment, thereby waiving the theory on appeal.

The Seventh Circuit vacated the judgment and remanded the case for judgment to be entered for the defendants. Although the court did not definitively preclude the possibility of a plaintiff prevailing on a worthless services theory in the Seventh Circuit, the reasoning contained in its ruling strongly suggests that such theory, if recognized, would likely be reserved for the most extreme cases.

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

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27 August 2014

Seventh Circuit Restricts Public Disclosure Bar Where Suit Is Only “Partly” Based Upon Public Disclosures

Posted by Carol Lynn Thompson and Chris Rendall-Jackson

On July 28, 2014, the Seventh Circuit issued another decision in a string of recent decisions by that court restricting the scope of the public-disclosure bar.

In United States ex rel. Heath v. Wisconsin Bell, Inc., the relator, Todd Heath, alleged that Wisconsin Bell, Inc., was overcharging school districts, libraries, and the federal government for telecommunications services provided pursuant to the E-Rate Program. Telecommunications providers participating in the E-Rate Program are required to offer eligible school districts the lowest price that is charged to “similarly situated” non-residential customers. Heath was retained by several Wisconsin school districts to audit their telecommunications bills and determined that some school districts were paying higher rates than other school districts so that the government was providing greater subsidies. Heath further discovered that the school districts were not receiving the rates offered to the Wisconsin Department of Administration (the “DOA), which contained “similarly situated” government agencies, under Wisconsin Bell’s Voice Network Services Agreement (the “VNS Agreement”).

After Wisconsin Bell refused to provide the more-favorable pricing given to the DOA to the school districts, Heath discovered more pricing information, including the VNS Agreement itself, on the DOA’s website. Heath filed a qui tam complaint in 2008, and the United States declined to intervene. The district court granted Wisconsin Bell’s motion to dismiss for lack of subject-matter jurisdiction, finding Heath’s reliance on the pricing information available on the DOA’s website dispositive in applying the public-disclosure bar.

The Seventh Circuit reversed, holding that Heath’s allegations were not “based upon” a public disclosure. The court reasoned that, unlike cases in which a relator’s complaint “merely added specificity” to publicly disclosed allegations, Heath’s allegations “required independent investigation and analysis to reveal any fraudulent behavior.” Although Heath’s allegations relied in part on the VNS Agreement, “[n]o one could view the agreement in a vacuum and realize that Wisconsin Bell was overcharging school districts.” Rather, Heath’s prior knowledge of the rates being charged to other “similarly situated” entities was necessary to understand the significance of the VNS Agreement. Accordingly, the court held that the public-disclosure bar does not apply because Heath’s prior knowledge brought “genuinely new and material information” to the government’s attention.

The Seventh Circuit’s opinion limits the potentially broad interpretation of “based upon” articulated in the Seventh Circuit’s decision in Glaser v. Wound Care Consultants, Inc., 570 F.3d 907 (7th Cir. 2009). While acknowledging that Glaser had stated that “based upon” does not mean “solely based upon” and that a “qui tam action even partly based upon” public information will fall within the public-disclosure bar, the court found that Heath’s allegations “required independent investigation and analysis to reveal any fraudulent behavior.” The court in Wisconsin Bell thus distinguished Heath’s claim from that of the relator in Glaser, which “merely added specificity (and maybe a few additional instances)” to the publicly available information. Accordingly, defendants in the Seventh Circuit should be aware that the public-disclosure bar may not apply if the relator relies on public information that “had to be supplemented with knowledge of other pricing . . . to establish fraud.”

A copy of the opinion can be found here.

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05 September 2013

Seventh Circuit Slams Relator’s Unsavory Tactics; Declines to Mandate Use of Expert Testimony on Claims and Causation Issues

Posted by Gordon Todd and Jeff Beelaert

In Watson v. King-Vassel, No. 12-3671 (7th Cir. Aug. 28, 2013), the Seventh Circuit had stern words for a relator’s unsavory litigation tactics, but also declined to endorse a rule mandating expert testimony on certain issues in every case.

The Relator, Dr. Watson, alleged that defendant Dr. King-Vassel’s off-label prescription of psychotropic drugs to a minor caused the submission of false claims to the Medicaid program. The defendant sought summary judgment because, inter alia, Relator had failed to adduce any expert testimony, including to explain how Medicaid claims are submitted, to prove that by prescribing off-label the defendant knowingly caused the submission. The district court granted summary judgment, holding that expert testimony would be required to explain whether defendant actually caused the claims to be filed, and also holding that expert testimony would be required to explain pharmaceutical data including information in medical compendia, i.e., whether a submitted claim was false.

The Seventh Circuit reversed. As to the first issue, the Court held that expert testimony was not required to prove either how the Medicaid system works, or the defendant doctor’s knowledge regarding the submissions. Instead, a relator need only show that the defendant “had reason to know of facts that would lead a reasonable person to realize that she was causing the submission of a false claim,” or that she “failed to make a reasonable and prudent inquiry into that possibility.” The minor’s mother had testified that she had provided defendant with the minor’s Medicaid billing information and had never paid for the services out-of-pocket. This, the Circuit held, was sufficient for a reasonable juror to extrapolate the defendant’s state of mind. The Circuit rejected the district court’s characterization of Medicaid as a “grand mystery” and “black box,” instead analogizing it to a car: even though “most people could not explain every step turn-key and ignition, the cause-effect relationship is commonly appreciated.” In light of this analogy, a reasonable juror could find, without the aid of expert testimony, that the doctor’s prescription caused a Medicaid claim to be filed.

The Court also rejected as “premature and overbroad” the District Court’s blanket statement that “medical documents typically are not readily understandable by the general public,” thereby requiring expert testimony to explain medical compendia in every case. Instead, the Circuit held that whether such testimony is required turns on a more case-specific analysis as to whether a particular off-label use is supported by one or more compendia. On remand, the Court noted, a more specific analysis may show that the lack of expert testimony is indeed fatal.

While reversing summary judgment, the Court disapproved sternly of the Relator’s “unsavory” litigation generation tactics. The Relator had never treated or even met the patient, but had instead advertised for minor Medicaid patients to “participate in a possible Medicaid fraud suit.” Relator then secured the minor’s medical records by soliciting the minor’s mother to lie to the defendant doctor about their intended use. The Court approved of the District Court’s use of its inherent powers to impose monetary sanctions on Relator and his counsel for their conduct, which the Circuit hoped would dissuade the future use of such tactics.

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29 March 2013

Seventh Circuit Rejects Government’s “Gross Trebling” Approach To Calculating FCA Damages

The Seventh Circuit Court of Appeals issued a decision last week that should assist defendants seeking to reduce their treble damages exposure under the FCA. In U.S. v. Anchor Mortgage, Nos. 10–3122, 10–3342, 10–3423 (7th Cir. Mar. 21, 2013), the Court rejected the “gross trebling” approach to calculating damages advocated by DOJ, in favor of the “net trebling” approach advocated by defendants, which recognizes the value received by the government and excludes that value from the damages calculation.

In the trial court, DOJ prevailed on FCA claims against mortgage lender Anchor Mortgage and its CEO premised on false statements to the U.S. Department of Housing and Urban Development to secure federal guarantees on 11 residential mortgage loans. The lower court calculated single damages by totaling the guarantees the government paid on the 11 loans. The court then trebled that number and added penalties. From the total treble damages amount, the court then subtracted the amount the government already had recovered by selling the properties that secured the loans.

On appeal, the Seventh Circuit dubbed the district court’s approach to calculating FCA damages a “gross trebling” calculation. The DOJ argued that this “gross trebling” approach – its standard approach to calculating FCA damages – is supported by the Supreme Court’s 1976 opinion in U.S. v. Bornstein, 423 U.S. 303, in which the defendant was found liable for violating its government contract by supplying inferior radio kit tubes. DOJ relied on the holding in Bornstein that “the Government’s actual damages are to be doubled before any subtractions are made for compensatory payments previously received by the Government from any source” to support a “gross trebling” damages calculation under the FCA. The Seventh Circuit rejected this reading of Bornstein, holding the quoted language only addressed the question whether third party payments for the tubes should be subtracted before damages were multiplied, not whether the appropriate calculation of single damages was the difference between the price paid and the fair market value of the tubes. On that question, the Seventh Circuit pointed to a footnote in Bornstein directing that “The Government’s actual damages are equal to the difference between the market value of the tubes it received and retained and the market value that the tubes would have had if they had been of the specified quality.”

Thus, citing Bornstein as support, the Seventh Circuit concluded a “net trebling” approach to calculating FCA damages, in which single damages first are calculated based on the difference between the price paid by the government and the value of what the government received. The court noted that this approach has been adopted by the Second, Sixth, D.C., and Federal Circuits, though rejected by the Ninth, and reflects the “norm in civil litigation.” Accordingly, the court reversed the district court’s decision on damages and remanded the case with the instruction to calculate damages using a “net trebling” approach.

The resulting potential reduction in damages to the defendant – illustrated by an example in the court’s opinion – reinforces the importance of this decision to defendants and companies under investigation for FCA violations. For 1 of the 11 loans at issue, the government paid $131,643 on its guarantee, and later sold the property for $68,200. Under the “gross trebling” approach, damages related to this loan were $326,729 (($131,643 x 3) – $68,200). Under the “net trebling” approach, damages would be only $190,329 (($131,643 – $68,200) x 3), a difference of $136,400 and a 40% decrease in damages related to that loan. Thus, it is clear that this decision should have a significant impact on damages in FCA cases and negotiated resolutions.

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21 August 2012

Seventh Circuit Rejects Constructive Knowledge As Basis For FCA Retaliation Claim

In Halasa v. ITT Educational Services, Inc., No. 11-3305 (8/14/12), the Seventh Circuit affirmed the dismissal of the plaintiff’s FCA retaliation claim, finding that he had failed to present an issue of material fact that he was fired “because of” actions protected under the FCA. The undisputed evidence showed that the individuals who made the decision to terminate Halasa’s employment were unaware of his protected conduct. Halasa argued the Seventh Circuit should nevertheless “find causation as a matter of law,” imputing to ITT and its agents any knowledge of the ITT employee to whom Halasa did report potential violations.

The Seventh Circuit rejected this argument, which it said “seriously misunderstands the way liability rules work in the corporate setting.” “Apart from narrow exceptions like the one that has come to be called the ‘cat’s paw’ theory,” the court concluded, “companies are not liable under the False Claims Act for every scrap of information that someone in or outside the chain or responsibility might have.”

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