Posted by: Scott Stein and Christopher Munsey
In an October 29, 2014 opinion in Malhotra v. Steinberg, the Ninth Circuit affirmed the dismissal of an FCA action under the public disclosure bar, holding that information obtained from a deposition taken by the Office of the United States Trustee in a bankruptcy case was publicly disclosed where the relators learned of key facts on which the complaint was based in the deposition, and the relators were “outsiders” to the Trustee’s Office investigation.
The relators, the Malhotras, are a married couple who sought Chapter 11 bankruptcy protection. After meeting their bankruptcy trustee, they quickly came to suspect, and subsequently gathered evidence, that he was working with a real estate agent in a number of cases to sell bankruptcy estate properties for what the relators believed was less than fair value, and that in a number of cases the properties were sold to associates of the trustee who then resold them for a large profit. Based on their findings, the relators suspected, but could not prove, that the trustee was receiving illicit payments for orchestrating the sales.
Relators shared their evidence and suspicions with the Trustee’s Office, which opened an investigation sometime later only after a former employee of the trustee made similar allegations. In connection with the investigation, the Trustee’s Office deposed the real estate agent. The deposition was noticed in the relators’ bankruptcy case, as theirs was the only open case in which the trustee and real estate agent had worked together. The Malhotras attended the deposition, during which the real estate agent admitted that he was hired by the trustee to sell bankruptcy estate property in return for a percentage of the commissions on the sales.
The Malhotras subsequently filed an FCA case, alleging that claims that the trustee presented to the bankruptcy court to receive payment of trustee’s fees were fraudulent because they failed to disclose his arrangement with the real estate agent and his role in the resale of estate properties. The defendants moved to dismiss the complaint for lack of subject matter jurisdiction under the public disclosure bar, arguing that the transactions at issue were disclosed in the Trustee’s Office’s deposition. The district court found that the deposition constituted a public disclosure and that the relators were not original sources of the information underlying the transactions, and dismissed the case for lack of subject matter jurisdiction.
Analyzing the issue under the pre-FERA public disclosure bar, the Ninth Circuit agreed that disclosure in the deposition constituted disclosure “in a criminal, civil, or administrative hearing, in a congressional, administrative, or Government Accounting Office report, hearing, audit, or investigation, or from the news media.” 31 U.S.C. § 3730(e)(4)(A) (2006). Specifically, the court concluded that a deposition taken in connection with a Trustee’s Office’s internal investigation “fits comfortably” within the meaning of “administrative … investigation.” Moreover, the relators did not challenge the district court’s holding that their action was “based upon” transactions disclosed in the deposition, insofar as their allegations were “substantially similar to” (if not actually based upon) facts discovered in the deposition.
As to whether disclosure in the deposition was “public,” the court relied on the framework established in its earlier decision in Seal 1 v. Seal A, 255 F.3d 1154 (9th Cir. 2001). In that case, the court held that the phrase “public disclosure” in the FCA is a term of art, and that disclosure to a single person can constitute “public disclosure” when that person is “an outsider to the investigation.” Disclosure to the public at large is not required, and a public disclosure to one person does not necessarily constitute a public disclosure as to other individuals.
The court found that the Malhotras were outsiders to the Trustee’s Office’s investigation because they were not employed by any of the defendants or by the Trustee’s Office or any related government agency. The court rejected the Malhotras’ argument that, because it was conducted in their bankruptcy case, they were “insiders to the deposition.” The relevant channel of disclosure was an administrative investigation, not an administrative hearing. Accordingly, whether or not the relators were insiders to the deposition was irrelevant. The disclosure was “public” as a result of their status as outsiders to the Trustee’s Office investigation.
The court also rejected the relators’ attempt to distinguish Seal 1 based on the fact that they were unaware of the FCA at the time of the deposition and were not, at that time, seeking to take advantage of the disclosures by filing an action. Under Seal 1 there is no requirement that the relator intend to take advantage of the information by filing an action at the time of the disclosure. All that is required is that the recipient of the disclosure be “an outsider to the investigation who now seeks to profit from it as an FCA relator.”
Turning to whether the relators were “original sources” of the disclosed information, the court found that their knowledge of the information was not “independent.” Their “generalized suspicion” that the trustee was receiving kickbacks from the real estate agent were insufficient to constitute knowledge of the scheme given that they were unaware of any kickbacks actually paid until they attended the deposition. Thus, their actual knowledge of the disclosed transactions, as opposed to their suspicions, was not independent.
A copy of the court’s decision can be found here.
On July 22, 2014, the Ninth Circuit issued an important decision supporting the principle that good faith disputes about ambiguous or disputed interpretations of law should not be actionable under the FCA.
Gonzalez, the relator, alleged that the Medi-Cal billing manual required PPLA to bill Medi-Cal “at cost” for contraceptives, which Gonzalez alleged meant PPLA’s acquisition cost. However, when PPLA submitted bills to Medi-Cal, it billed its “usual and customary rates,” which were what PPLA would charge an average patient for contraceptives – a price higher than PPLA’s acquisition cost. In 1997, the California Department of Healthcare Services (CDHS) wrote to PPLA that claims to Medi-Cal should be made “at cost.” In 1998, PPLA responded stating that its clinics billed at the “usual and customary” rate, not at acquisition cost. In 2004, CDHS conducted an audit of PPLA and found that PPLA had not complied with the billing practices outlined in the billing manual. However, CDHS also wrote to PPLA that “no specific definition of ‘at cost’ is contained in [the billing manual]” and that the agency had been “concerned that, with regard to the definition of ‘at cost,’ conflicting, unclear, or ambiguous misrepresentations have been made to providers.'” For those reasons, CDHS did not seek reimbursement from PPLA. In 2005, Gonzalez, the former CFO of PPLA, filed suit alleging that PPLA violated the federal and California False Claims Acts by overbilling Medi-Cal for contraceptives.
The Ninth Circuit affirmed the dismissal of Gonzalez’s complaint on a motion to dismiss. Even assuming that PPLA’s claims were “false” because PPLA billed its “usual and customary prices” rather than acquisition costs – a question the court did not reach – it held that the exchange of correspondence between PPLA and CDHS “compellingly contradicted” Gonzalez’s allegations that PPLA “knowingly submitted false claims for reimbursement.” “Stated simply,” the court explained, “even if bills sent by Planned Parenthood were false in portraying its costs, one cannot plausibly conclude that there was knowing falsity on the part of Planned Parenthood given the explicit statements addressing this subject made by the State of California through CDHS and the State’s silence after being told what procedures Planned Parenthood was following.” CDHS’s acknowledgement that the guidance on “at cost” was “conflicting, unclear, or ambiguous” was, in the Ninth Circuit’s view, “persuasive in [its] determination that there was no knowing falsity under the FCA.” Furthermore, “Planned Parenthood actively engaged with CDHS officials, who themselves seemed to tacitly approve Planned Parenthood’s billing procedures by ending the correspondence without objection after being told that Planned Parenthood was not billing at acquisition cost but at usual and customary rates.” Accordingly, the Ninth Circuit held, Gonzalez’s allegations of a “knowing” violation of the FCA were implausible under Rule 8(a) and the Supreme Court’s decision in Ashcroft v. Iqbal, 556 U.S. 662 (2009).
The opinion is important for at least two reasons. First, it supports the principle that where the defendant’s interpretation of an ambiguous regulation is objectively reasonable, a “knowing” violation of the FCA cannot be found. The decision is therefore consistent with the Supreme Court’s opinion in Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47 (2007) (holding that a defendant cannot be deemed to have “recklessly” violated a statute’s terms where it’s interpretation was reasonable), and the federal district court opinion in U.S. ex rel. Streck v. Allergan (dismissing FCA claim based on regulatory ambiguity), which we previously wrote about here. Second, while the opinion does not expressly refer to the “government knowledge” doctrine – the argument that the government’s knowledge of the defendant’s conduct negates the element of intent – the opinion effectively affirms dismissal on that basis. The government frequently argues (and many courts have held) that government knowledge is a fact-specific inquiry that makes it inappropriate for consideration on a motion to dismiss. The Gonzalez opinion therefore provides important support for defendants who argue that, in appropriate cases, government knowledge is an issue that can, and should, be addressed through a 12(b)(6) motion.
The opinion in Gonzalez v. Planned Parenthood of Los Angeles can be found here.
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).
In a case of first impression in the Ninth Circuit, the court held in United States ex rel. Hooper v. Lockheed Martin Corp., __ F.3d __, 2012 WL 3124970 (9th Cir. Aug. 2, 2012) that “false estimates, defined to include fraudulent underbidding in which the bid is not what the defendant actually intends to charge, can be a source of liability under the FCA, assuming that the other elements of an FCA claim are met.” (Id. at *9).
The defendant argued that an allegedly false estimate cannot form the basis of FCA liability, because it is an opinion or prediction that cannot be false within the meaning of the FCA. In reversing the district court’s grant of summary judgment, the Ninth Circuit reasoned that an opinion or estimate “carries with it an implied assertion, not only that the speaker knows no facts which would preclude such an opinion, but that he does know facts which justify it.” (Id. (citations and internal quotations omitted)).
In a passage of the opinion somewhat in tension with its holding – that a bid lower than “what the defendant actually intends to charge” can give rise to FCA liability – the court found the district court erred by requiring evidence of the defendant’s wrongful intent. (Id. at *9). In opposing summary judgment, the relator submitted testimony that the defendants’ employees were instructed to lower their cost estimates without regard to actual costs, and that the defendant “was dishonest in the productivity rates that it used to determine the cost.” (Id.). No evidence appears to have been submitted regarding what the defendant intended to charge. Nevertheless, citing the FCA’s definition of “knowing” to include deliberate ignorance and reckless disregard, the court found this evidence sufficient to prevent summary judgment and require a trial on the merits. (Id.).
In support of its ruling, the Ninth Circuit relied on the Supreme Court’s decision in United States ex rel. Marcus v. Hess, 317 U.S. 537 (1943), which the court interpreted as supporting a “‘fraud-in-the-inducement’ theory of FCA liability.” (2012 WL 3124970 at *8). Thus, this decision will likely be cited as support for all types of “fraud-in-the-inducement” theories of FCA liability, including fraudulent underbidding. Precisely when an ultimately inaccurate cost estimate becomes “false or fraudulent,” however, is not clearly answered by Hooper and will no doubt be the subject of further litigation.
In what it characterized as an issue of first impression, the Ninth Circuit recently held that the relator’s share of a recovery under the FCA is taxable as ordinary income, rather than at lower capital gains rates. A copy of the decision in Alderson v. United States, No. 10-56007 (9th Circuit, July 18, 2012) can be found here. Although the Court’s ruling most directly affects relators, the taxability of the relator’s share is a factor that any relator considers in the settlement calculus, and is therefore an issue of interest to the defense bar as well.