Court Rules Corporate Parent Not Liable for Subsidiary’s Alleged FCA Violations

Posted by Scott Stein and Brenna Jenny

On December 8, 2014, a district court in the Southern District of Georgia dismissed FCA claims brought against the corporate parent and affiliates of a hospital, rejecting the government’s attempt to hold these associated corporations liable for the hospital’s alleged reverse false claims violations. See U.S. ex rel. Schaengold v. Mem’l Health, Inc., No. 11-cv-0058 (S.D. Ga. Dec. 8, 2014).

The government intervened as to one count of the relator’s qui tam action, which alleged that defendant Memorial Health, Inc., its wholly-owned subsidiary Memorial Hospital, and a physician group (“MHUP”) wholly-owned by another Memorial Health subsidiary, violated the FCA by failing to timely return overpayments received by Memorial Hospital. According to the relator (the former CEO of Memorial Health and Memorial Hospital), Memorial Health and affiliated entities (collectively, “Memorial System”) employed the physicians of MHUP and paid compensation at levels above fair market value rates. As a result, these compensation arrangements between referring physicians and healthcare entities could not meet the Stark Law’s exception for “bona fide employment relationships,” which requires fair market value compensation. The Stark Law requires any funds received in violation of the law to be refunded within sixty days of collection. Under this theory, by submitting a cost report including services obtained in violation of the Stark Law, yet certifying that the services identified in the report complied with all applicable laws, the hospital concealed an obligation to refund overpayments to the government.

Although this theory of FCA liability is premised on the submission of cost reports, the government and the relator attempted to impute liability on additional corporate entities that did not submit any cost reports for these physicians’ services. Memorial System’s Board of Directors had previously discussed potential fair market value concerns with their compensation arrangements with MHUP. The government argued that because Memorial Health and all other relevant subsidiaries operated as a unitary health system controlled by a centralized management team, which was aware of the alleged Stark Law violations, all of the related entities were liable for the hospital’s submitted claims.

The court rejected the proposition that “merely being a parent, or an associated corporation, of a subsidiary that commits an FCA violation” can be sufficient to support FCA liability for a subsidiary’s violations. Instead, related entities can only be liable if they were directly involved in the submission of claims, or if veil-piercing is appropriate. The court quickly concluded that, although the other entities were involved in arrangements that ultimately culminated in the submission of allegedly false claims to the government, the absence of any allegations that they were directly involved in causing the submission of falsely certified cost reports warranted dismissal. The court also concluded that veil-piercing was inappropriate. Noting that overlapping management generally does not merit veil-piercing, the court ruled that even if all entities could be considered “alter egos,” there as no allegation that failure to pierce the corporate veil would result in injustice. The government was granted twenty days to amend its complaints and replead its claims against the hospital’s affiliated entities.

A copy of the court’s decision is available here.