On August 28, 2019, the United States filed a brief in opposition to Sutter’s June 14, 2019 motion to dismiss the Department of Justice’s Complaint-in-Intervention in a False Claims Act suit alleging Sutter knowingly submitted and caused the submission of unsupported diagnosis codes for Medicare Advantage Organization (MAO) patients in order to inflate Medicare reimbursements. On the same day, the Relator, Kathy Ormsby, also filed a similar brief in opposition to Sutter’s motion to dismiss. We previously discussed Sutter’s motion to dismiss here and the Department of Justice’s Complaint-in-Intervention here.
On June 14, 2019, Sutter Health (“Sutter”) filed a Motion to Dismiss the Department of Justice’s Complaint-in-Intervention in a False Claims Act suit alleging Sutter knowingly submitted and caused the submission of unsupported diagnoses codes for Medicare Advantage patients in order to inflate Medicare reimbursements. The Department of Justice filed its Complaint-in-Intervention on March 4, 2019, which we previously discussed here.
On March 4, 2019, the Department of Justice filed its Complaint-in-Intervention against Sutter Health (“Sutter”) and its affiliate Palo Alto Medical Foundation (“PAMF”) in a False Claims Act suit alleging that the Defendants knowingly submitted and caused the submission of unsupported diagnosis codes for Medicare Advantage patients in order to increase reimbursements from Medicare. DOJ had previously announced its decision to intervene on December 11, 2018, as we previously discussed here.
On March 22, 2017, the District Court for the Northern District of California dismissed a False Claims Act, 31 U.S.C. §3729 complaint against several hospitals for alleged Medicare, Medicaid, Tricare claims submission schemes. United States ex rel. Cherry Graziosi v. Accretive Health, Inc., et al, No. 13-cv-1194 (N.D. Ill. Mar. 22, 2017).
The relator alleged that each of the Defendant hospitals submitted a claim for payment to federal health insurance programs for hospital admissions. When submitting this form, Relator alleged, the hospital must certify that inpatient admissions were determined to be medically necessary by a licensed physician with personal knowledge of the medical necessity. She alleged that the hospitals submitted forms for reimbursement for inpatient treatment in circumstances where the Emergency or Hospital Staff physicians had previously determined that inpatient treatment was not required. According to Relator, these fraudulent submissions were generated or recommended by Accretive Health, Inc., a consultant.
In Escobar, the Supreme Court held that implied certification liability under the FCA may exist where the following two conditions are met: (1) the claim does not merely request payment, but also makes specific representations about the goods or services provided; and (2) the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading. This has come to be referred to in post-Escobar briefing as the “two-part test.” However, DOJ has been engaged in an aggressive campaign of filing statements of interest in courts throughout the country arguing that the two-part test is not the exclusive means of establishing implied certification liability post-Escobar, seeking to maintain an expansive scope for the implied certification theory. The hook for DOJ’s argument is the statement elsewhere in Escobar that “We need not resolve whether all claims for payment implicitly represent that the billing party is legally entitled to payment.” District courts have split on whether Escobar’s two part test is the exclusive means of establishing implied certification liability.
In one of the first post-Escobar decisions applying the Supreme Court’s guidance on materiality under the False Claims Act, a federal district court in California has concluded that bare-bones allegations that ‘the government would not have paid a claim’ do not satisfy Rule 9(b). The case involves allegations that defendants submitted false claims to federal healthcare programs for diagnostic sleep studies and sleep disorder-related medical devices. After DOJ intervened and filed an intervention complaint, defendants moved to dismiss on several grounds, including on the ground that DOJ’s implied certification claims failed adequately to plead materiality. DOJ’s Intervention Complaint contained bare-bones allegations of materiality.
A district court recently denied a relator’s efforts to translate alleged manipulation of skilled nursing facility (“SNF”) CMS Star Ratings into a claim under the FCA, while allowing the relator to proceed with allegations that the CEO of a SNF chain oversaw a kickback scheme designed to churn business. See U.S. ex rel. Orten v. North Amer. Health Care, Inc., No. 14-cv-02401 (N.D. Cal. Nov. 9, 2015). The case reinforces well-established precedent that FCA suits alleging regulatory violations cannot proceed where the government does not condition payment on complete regulatory compliance. The government’s Statement of Interest arguing that the public disclosure bar was triggered as to certain claims demonstrates the DOJ’s growing wariness of opportunistic behavior by relators seeking to capitalize on pre-existing government investigations to which they did not contribute.
Posted by Jaime L.M. Jones and Brenna Jenny
On Friday, the Northern District of California dismissed with prejudice claims alleging that a failure to obtain supplemental approval for major changes in manufacturing processes created FCA liability. U.S. ex rel. Campie v. Gilead Sciences, Inc., No. 11-0941 (N.D. Cal. June 12, 2015). The court also adopted a narrow reading of “worthless services” in the context of pharmaceutical products. Together, these holdings deal a significant blow to those seeking to premise FCA suits on violations of current Good Manufacturing Practices (“cGMPs”).
Posted by Jaime L.M. Jones and Brenna Jenny
In a remarkable opinion sure to be cited by FCA defendants facing FCA claims premised on alleged regulatory non-compliance, on January 7 the Northern District of California granted defendant Gilead’s motion to dismiss FCA claims premised on alleged violations of current Good Manufacturing Practices regulations (“cGMPs”), holding that fraudulent conduct directed at FDA standing alone cannot render subsequent Medicare or Medicaid reimbursement requests false under the FCA. See U.S. ex rel. Campie v. Gilead Sciences, Inc., No. 11-cv-00941 (N.D. Cal. Jan. 7, 2015). The ruling expands on the reasoning of the Fourth Circuit’s decision last year in Rostholder (as reported here) and reiterates the judiciary’s hesitancy to permit the FCA to displace FDA’s institutional capacity to enforce its own regulatory scheme.
Two former Gilead employees with quality control responsibilities filed a qui tam suit against their previous employer, alleging various violations of cGMP requirements. The relators asserted these regulatory issues gave rise to FCA liability because had FDA been aware of the them it would not have approved the affected drugs or would have withdrawn approval; as a result, relators claimed that all claims for payment submitted to Medicare and Medicaid for these drugs were false under the FCA. The government declined to intervene in the suit but did file a statement of interest on these issues, which the court cites in its opinion.
The court first dispensed with relators’ claim that allegedly false certifications to FDA or other allegedly fraudulent conduct during the drug approval process could give rise to FCA liability. Although FDA’s New Drug Application (“NDA”) form requires manufacturers to certify compliance with cGMP regulations, the court found the fact that manufacturers make this statement to FDA, and not to CMS for the purpose of securing payment, to be critical to the viability of relators’ claims. The court ruled that “FCA liability cannot be based on fraudulent statements made before one regulatory agency and from that implying a certification putatively made to the payor agency where there is neither an express certification nor condition of payment.” As even relators conceded during a hearing, Gilead never made any direct misrepresentations to a payor.
In an attempt to avoid this result, relators had argued in supplemental briefing that FDA served as a “gatekeeper” for CMS, with both entities standing as “two arms of the same federal department,” and thus fraudulent conduct directed toward one arm and a request for payment directed toward another arm could be synthesized so as to have a sufficiently direct nexus. The court disagreed, distinguishing between “Gilead’s non-disclosure and misrepresentations . . . [made] during the FDA approval process” and the “subsequent reimbursement requests to CMS,” and rejecting relators’ invitation to rule that a false statement to one regulatory agency “can form the basis of FCA liability simply because the fraudulently induced action of that agency was part of a causal chain that ultimately led to eligibility for payment from the payor agency.”
In similarly dismissing relators’ claims that Gilead had also made false implied certifications of compliance to CMS, the court then adopted the reasoning of the Fourth Circuit in Rostholder that the mere assertion of drugs being adulterated or misbranded as a result of a manufacturer violating cGMP requirements falls short of articulating a claim under the FCA, because Medicare and Medicaid do not condition reimbursement on compliance with cGMP regulations. Instead, payment is conditioned on a drug receiving FDA approval, which Gilead’s products had undisputedly obtained. Accordingly, the relators’ claims were held to be fundamentally flawed.
The court’s opinion generally addresses the heightened policy concerns generated by the proposition that regulatory non-compliance, particularly within the complex FDA regime, can trigger a cognizable FCA claim. If false statements made during the FDA approval process could serve as the basis for FCA liability, then courts would have to determine whether, but for the fraudulent conduct, the agency would have denied approval of the drug. Delving into the nuances of the FDA approval process, the court explained, would be a task the courts lack the expertise to execute. The court also echoed Rostholder‘s concern with using the FCA to short-circuit FDA’s own enforcement powers. Notably, however, the language and the logic of the Campie court’s opinion sweeps much broader than allegations focused on compliance with FDA regulations, and bear relevance on all FCA claims premised on alleged fraudulent conduct directed at a regulatory agency other than the one which pays the affected claims.
Finally, the court addressed the relators’ alternative theory of FCA liability, namely that the manufacturing defects were so significant they rendered the resulting product “worthless.” As we previously reported here, and as the Campie court observed, the Seventh Circuit recently constrained the viability of FCA suits premised on a theory of “worthless services,” ruling that a product or service’s diminished value must not be simply “worth less,” but rather must be truly “worthless.” Although the government has argued through statements of interest in both this case and Rostholder that some cGMP violations may so affect a drug “that the drug is essentially ‘worthless’ and not eligible for payment by the government,” the court ruled that the Campie relators had not alleged facts meeting the requirements of “the narrow ‘worthless services’ theory.”
The court granted the relators an opportunity to amend their complaint and either articulate a worthless services theory or a direct misrepresentation made during the payment process. We will continue to monitor any developments in this case, which is sure to be cited by defendants facing a broad range of FCA claims based on alleged regulatory non-compliance, and not just by defendants in FCA cases premised on alleged violations of cGMP and other FDA requirements. A copy of the district court’s opinion can be found here.
Earlier this month, a federal district court in California dismissed relators’ retaliation claims because they rested on an unduly expansive interpretation of 31 U.S.C. § 3730(h). Both the plaintiff bringing the claim (a company) and defendants against whom it was asserted (several individuals) did not fall within the statute’s scope, the court held. United States v. Kiewit Pac. Co., No. 12-CV-02698-JST, 2014 WL 1997151, — F. Supp. 2d — (N.D. Cal. May 14, 2014).
The case arose out of a highway expansion project in Los Angeles jointly funded by the United States and the state of California. Kiewit was the primary contractor on the project. Relators were subcontractors—individuals and their respective companies who supplied materials for mechanically stabilized earth (“MSE”) wall panels. After several wall panels failed, investigations ensued and this case followed. Relators alleged that, among other things, Kiewit falsely certified compliance with MSE project specifications in exchange for government funds, and Kiewit and individual Kiewit employees retaliated against relator SSL, LLC (one of the subcontractors).
The court dismissed the retaliation claims with prejudice. First, the court held that relator SSL, LLC, could not bring a retaliation claim because the statute does not extend protection to non-individuals, or “entity plaintiffs.” 2014 WL 1997151, at *10-11. Relator’s argument was a simple textual one: section 3730(h) allows any “employee, contractor, or agent” to sue, and the ordinary meaning of “contractor” covers SSL. But the court held that the entirety of 3730(h) and its legislative history foreclosed SSL’s broad reading. To begin with, the types of relief available to successful plaintiffs under section 3730(h)(2), like back pay and reinstatement, were all “directed to individual plaintiffs, not entities.” Id. And the legislative history confirmed the point: in adding “contractors” and “agents” to the list of potential plaintiffs, Congress made clear that it merely intended to sweep in persons or individuals who were not technically “employees” but who had a contractual or agent relationship with an employer. Id. “Nothing suggest[ed] it was Congress’ intent also to broaden the retaliation entitlement to entity plaintiffs.” Id.
The court took a comparably narrow view of who may be sued under the statute. Prior to 2009, section 3730(h) allowed any employee subject to retaliatory conduct “by his or her employer” to sue. Id. at *11. When Congress amended the provision to include “contractor[s]” and “agent[s]” alongside “employee[s],” it simultaneously did away with the reference to conduct “by his or her employer.” Id. Relator argued that this change—and the plain meaning of the current provision—expanded the class of potential defendants to anyone engaging in retaliatory conduct and therefore authorized claims against individual Kiewit employees. Id. Again, the court disagreed. Because the predominant view before 2009 limited liability to the whistleblower’s employer, the court held that Congress would not have overruled that long line of cases and expanded the scope of False Claims Act liability without saying so. Instead, the reason for the deletion was most likely that the provision could no longer refer only to the whistleblower’s “employer” because it now applied to entities with a contractual or agency relationship with the whistleblower. Id. at *12. The court thus concluded that “the 2009 amendment did not expand liability to individuals such as the individual Defendants named here, e.g., coworkers, supervisors, or corporate officers who are not employers, or who lack a contractor or agency relationship with the plaintiff.” Id.
This decision imposes important limits on retaliation claims and may be looked to in future cases, particularly since the court found no case law addressing whether non-individuals can sue for retaliation, 2014 WL 1997151, at *10, and recognized express disagreement with its interpretation regarding putative defendants, id. at *12 n.5.