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22 October 2019

Court Dismisses DOJ Complaint Alleging Improper Auto-Refill and Co-Payment Waiver for Lack of Particularity

On September 30, 2019, a judge in the United States District Court for the Northern District of Illinois granted a motion to dismiss in an intervened FCA qui tam suit, finding that the relators, the United States, and the state of Illinois failed to satisfy Federal Rule of Civil Procedure 9(b)’s heightened pleading requirements for fraud claims. The suit targeted an entity referred to as C&M Specialty Pharmacy (“C&M”), which provides specialized medication for complex medical conditions.

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13 July 2018

Court Holds That Negotiated Settlement of A Contractual Dispute Implicated The Anti-Kickback Statute

On June 7, 2018, a federal judge in Chicago denied motions to dismiss filed by defendants Roche Diagnostics Corporation (“Roche”) and Humana, Inc. (“Humana”) in a qui tam lawsuit alleging that the defendants’ settlement for allegedly overpaid contractual rebates constituted unlawful remuneration under Anti-Kickback Statute. (more…)

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09 July 2018

District Court Dismisses Original Source’s FCA Claims as Barred by Government’s Pursuit of Penalty in Bankruptcy Proceeding

The government action bar provides that a relator may not bring a False Claims Act (FCA) lawsuit “based upon allegations or transactions which are the subject of a civil suit or an administrative civil money penalty proceeding in which the Government is already a party.”  31 U.S.C. § 3730(e)(3) (emphasis added).  Recently, in Schagrin v. LDR Industries, LLC, No. 14 C 9125, 2018 WL 2332252 (N.D. Ill. May 23, 2018), a district court held that the relators’ lawsuit was barred by the “government action bar” because LDR Industries had already been subject to administrative penalties by U.S. Customs for the same alleged conduct. (more…)

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03 July 2015

District Court Holds That Qui Tam Relator Is Entitled To ‘Self-Help’ Discovery: Relator Can Retain Company Documents Even After Termination

Posted by Kristin Graham Koehler and Brian P. Morrissey

Last week, a federal district court addressed a question that often arises in False Claims Act litigation: Can a qui tam relator who files suit against his employer be compelled to return company documents that he possesses in violation of company policy or a confidentiality agreement? In Shmushkovich v. Home Bound Healthcare, Inc., No. 12-C-2924 (N.D. Ill. June 23, 2015), the district court held that the relator was not required to return such documents, so long as they were relevant to his claims.

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10 April 2015

Opinion Dismissing FCA Claims Based on Prior Disclosure to Government Officials Highlights Debate About What Constitutes A “Public Disclosure”

Posted by Scott Stein and Emily Van Wyck

In United States ex rel. Rockey v. Ear Inst. of Chicago, No. 11-cv-07258 (N.D. Ill. Mar. 25, 2015), the relator alleged that her former employer, the Ear Institute of Chicago, regularly submitted false claims to Medicare by submitting claims for services rendered by an audiologist under a physician’s name. Additionally, some of these claims were for services not covered by Medicare including therapeutic services performed by an audiologist or services performed without a physician order. In November 2010, the relator alerted the Ear Institute to this improper billing practice and shortly thereafter, the Ear Institute sent a letter identifying the issue to Wisconsin’s Medicare contractor and explaining that none of these claims resulted in overpayments. The letter did not address claims submitted for services not covered by Medicare. The relator filed suit in October 2011 against the Ear Institute, all of its doctors and audiologists, and its billing contractor. Defendants then moved to dismiss the complaint under the public disclosure bar.

The relator argued that the letter failed to sufficiently disclose all of her claims. The court disagreed with the relator explaining that the letter disclosed all elements necessary to show that defendants violated Medicare regulations and, as such, the letter alerted Medicare to “the likelihood of wrongdoing.” That disclosure, the court held, was sufficient to trigger the public disclosure bar.

The district court’s holding is consistent with Seventh Circuit precedent that disclosures to “a competent public official . . . who has managerial responsibility for the very claims being made” qualify as public disclosures. Glaser v. Wound Care Consultants, Inc., 570 F.3d 907, 909 (7th Cir. 2009). The Seventh Circuit’s view makes sense; there is little reason to reward whistleblowers when the defendant has self-disclosed to a responsible government official prior to the filing of a lawsuit. However, the Seventh Circuit standard does conflict with rulings from other circuits, which hold that a disclosure must be made to the public writ large to qualify under the public disclosure bar. We have written about some of these other decisions here and here.

The court then assessed whether the relator qualified as an original source. The original source provision requires that an individual have “knowledge that is independent of and materially adds to the publicly disclosed allegations.” The court noted that “materially adds” is not defined in the statute and no federal appeals court has interpreted the phrase. The district court therefore applied the “usual definition”—that the relator’s knowledge must have a “natural tendency to influence” or to be “capable of influencing” payment. In arguing that the original source provision applied, the relator claimed that while defendants identified their billing errors in the letter, they did not admit that they knowingly violated Medicare billing regulations. The court disagreed, stating that defendants admitted their billing practices were knowing and intentional. The relator also claimed that she provided detailed examples of fraudulent claims. The court rejected the relator’s proposition that these details materially added to defendants’ “comprehensive mea culpa.” Thus, the relator was not an original source and the public disclosure bar applied.

Even if these claims were not barred by public disclosure, the court found that the claims would still fail because the relator did not adequately allege knowledge, falsity, or materiality. With regard to the remaining claims relating to reimbursement for noncovered services (the claims that were not disclosed in the letter) and the conspiracy and retaliation claims, the court denied defendants’ motion to dismiss.

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

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10 February 2015

Court Upholds Limits On FCA Successor Liability Following Bankruptcy Proceeding Involving An Asset Sale

Posted by Robert J. Conlan and David Schilling

In a recent decision, United States ex rel. Ceas v. Chrysler Group LLC, No. 12-CV-02870 (N.D. Ill. Jan. 28, 2015), a judge in the Northern District of Illinois provided guidance on the issue of successor liability for FCA claims in connection with a corporate asset sale in the bankruptcy context.

On April 30, 2009, Chrysler LLC (“Old Chrysler”) filed a pre-packaged Chapter 11 bankruptcy petition in the U.S. Bankruptcy court for the Southern District of New York. That same day, Old Chrysler agreed to sell to Chrysler Group LLC (“New Chrysler”) substantially all of its assets free and clear of claims and liabilities, except for a defined set of specific liabilities that New Chrysler assumed. The bankruptcy court approved the sale on June 1, 2009. Three years later, relator William Ceas, Jr. filed a complaint under the FCA claiming that Old Chrysler had made false statements to the United States regarding warranties on vehicles it sold to the government in 2004 and 2005. The United States declined to intervene, and Ceas continued to pursue the claims under the FCA’s qui tam provisions. New Chrysler moved to dismiss the complaint, including on the grounds that the Sale Order in the bankruptcy proceeding barred such claims against New Chrysler.

The court acknowledged that bankruptcy courts’ authority to approve a sale of assets free and clear of any claims is “an issue of some disagreement….” Order at 4 n.3. That is, Chapter 11 of the Bankruptcy Code provides only for the debtor’s sale of property “free and clear of any interest in such property.” 11 U.S.C. § 363(f) (emphasis added). Despite the potential for alternate readings, however, the district court was persuaded that the term “interest” in section 363(f) should be construed broadly, to include successor or transferee liability claims. Further, the court concluded, the Sale Order in issue “adopted a broad, inclusive definition of ‘claim,'” both as to timing and subject matter, and – when viewed in light of the Bankruptcy Code’s definition of “claim” – covered FCA and other fraud claims. Order at 4-5. In addition, the district court found, the Sale Order issued by the bankruptcy court affirmatively enjoined future litigation in conflict with the terms that order. Order at 5-6.

Notwithstanding these restrictive terms, the relator argued that his FCA claims were rooted in breach-of-warranty or product-liability claims, which New Chrysler had expressly assumed under the terms of the sale. The court rejected this argument, noting that the relator’s FCA claims did not constitute breach-of-warranty or products-liability claims, and even if they did the relator would not be authorized (under the FCA or otherwise) to pursue such claims on behalf of the government. Order at 7-8. Moreover, even though the relator’s FCA claims were “factually related” to product warranties, the district court refused to construe the language of the transfer agreement so broadly as to provide a “loophole for qui tam plaintiffs to seize upon[,] an unexpected and unwelcomed vulnerability for asset purchasers.” Order at 8.

The relator also argued that, despite the narrow language of the transfer agreement, New Chrysler was nonetheless liable for Old Chrysler’s violations of the FCA as its successor because FCA claims are not dischargeable in bankruptcy. The court agreed that FCA claims are not dischargeable in bankruptcy, see Order at 10 (citing 11 U.S.C. § 1141(d)(6)(A)), but also found that—distinguishing between a reorganization and an asset sale—the relator’s argument “misse[d] the mark” because New Chrysler was not the successor of Old Chrysler:

The elephant in the room is the notable distinction between a bankrupt entity that chooses to restructure and emerge under a traditional chapter 11 reorganization and an entity that elects an asset sale under § 363(f) of the Bankruptcy Code. Had Old Chrysler elected the former path, because the FCA claims (which arose prior to confirmation) cannot be discharged, Plaintiff would likely be entitled to proceed with his claims against the reorganized Old Chrysler today. However, because the bankruptcy court approved a § 363 sale of Old Chrysler’s assets free and clear of any successor claims or interests, Plaintiff’s claims lie solely against a now-defunct, potentially-successorless entity.

Order at 11.

The court acknowledged that, as “one way around this predicament,” the agreement between Old and New Chrysler (and the Sale Order) could have been written to expressly impute FCA liability to the Section 363 purchaser. Order at 11 (citing In re Haven Eldercare, LLC, 2012 WL 1357054, at *6 (Bankr. D. Conn. 2012) (“nothing in this Sale Order shall limit the federal government’s right to pursue or collect any claim for civil fraud under the False Claims Act”)). However, no such provision was made a term of the transfer between Old and New Chrysler. Order at 12 (“[A]bsent any controlling guidance to the contrary, the Court is inclined to uphold the plain language of the Sale Order, absolving New Chrysler of successor liability for all claims not expressly assumed in the [Master Transaction Agreement], including Plaintiff’s FCA claims.”).

The Ceas decision thus provides a useful template for understanding the limited circumstances in which liability for FCA claims might be extinguished in bankruptcy cases. A copy of the district court’s opinion and order can be found here.

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29 August 2014

Court Allows Second FCA Suit Alleging Different Fraudulent Scheme in Connection With The Same Underlying False Claims As A Previously-Settled Suit

Posted by Nicole M. Ryan and Ryan G. Fant

In United States ex. rel. Lisitza v. Par Pharmaceutical Cos., Inc., No. 06 C 06131 (N.D. Ill. July 31, 2014), a federal district court in Illinois rejected a drug manufacturer’s argument that the doctrine of res judicata barred an FCA suit based on many of the same underlying false claims involved in a previously-settled FCA suit. The Court held that res judicata did not apply because the fraudulent schemes alleged in each case were different and there were elements of damage available in the second suit that were not resolved by the first suit.

In 2005, Ven-A-Care, a Florida-based pharmacy, in its capacity as relator, sued Par Pharmaceutical Companies, Inc. (“Par”) and other generic drug manufactures under the FCA, with the case ultimately becoming consolidated as part of a much larger multidistrict litigation, In Re Ven-A-Care Cases, No. 06 CV 11337 (D. Mass.). The suit alleged that Par had manipulated and falsely reported pricing benchmarks so as to cause Medicaid to set higher reimbursement amounts for its drugs than would have been set if Par had published accurate benchmarks. Par ultimately settled these claims in 2011 for $154 million, and the case against it was dismissed.

In 2006, another relator, Bernard Lisitza, filed an FCA suit against Par alleging that Par had engaged in an illegal prescription-switching scheme that substituted its own higher-priced products in place of the specific drug that the doctor had prescribed in order to evade Medicaid price limits on generic drugs.

After the settlement and dismissal of the Ven-A-Care case, Par asserted the affirmative defense of res judicata in the Lisitza case. Par argued that res judicata applied because both lawsuits accused Par of “taking advantage of increased Medicaid reimbursements,” involving the “very same false claims for the very same prescriptions.” Although the Court acknowledged that some of the claims submitted were the same in both cases, it rejected the application of res judicata. It found that were very few common facts between the two complaints regarding “what Par allegedly did—how it defrauded the government.” The Ven-A-Care case accused Par of manipulating price benchmarks, whereas the Lisitza complaint accused it of a prescription-switching scheme. As a result of this difference, the Court determined that the “material factual allegations in the two complaints are simply not the same except at an extreme level of generality” and thus were insufficient to establish res judicata. In particular, the Court noted that in the original case, the damages at issue were the difference between what Medicaid paid and Par’s “inflated” prices, while in the second case, the court held, “the damages might be the entire amount of the reimbursement (less any portion already paid as damages), if the plaintiffs prove that claims for the particular drug forms and dosages at issue should not have been submitted at all because they were not authorized by a physician or were not the most cost-efficient option.” “Par should not have to pay the same damages twice,” the court continued, “but if the plaintiffs prove liability in this case, they will be entitled to damages for false claims that are unique to this case as well as whatever additional damages they can prove are owing on the false claims that were also at issue in Ven-A-Care.”

The Court also rejected Par’s argument that the scope of the release in the Ven-A-Care case covered all false claims submitted within the applicable time period and thus was broad enough to bar the Lisitza complaint. The Court held that the release encompassed only claims “based upon or arising out of” the conduct alleged in the Ven-A-Care complaint regarding false reporting of pricing benchmarks and therefore did not apply in the Lisitza case.

A copy of the opinion can be found here.

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27 September 2013

District Court Clarifies Protections Available to Employers Whose Employees Misappropriate Confidential Information for Use in FCA Suits

Posted by Jonathan F. Cohn and Brian P. Morrissey

Last week, in United States ex rel. Wildhirt v. AARS Forever, Inc., No. 09-C-1215, 2013 WL 5304092 (N.D. Ill. Sept. 19, 2013), a federal district court in Illinois issued an important decision that helps to clarify the rights of employers to bring counterclaims against employees who misappropriate confidential company information and later use that information as the basis of an FCA suit.

The Defendants, two business affiliates, were parties to contracts with the Veterans Administration (“VA”) to provide home health care services and equipment to patients with respiratory illnesses. Two former employees filed a qui tam action against Defendants, alleging, inter alia, that Defendants breached performance requirements under their VA contracts and, thereby, submitted false claims to the VA’s Medicare and Medicaid programs. Litigation on those FCA claims remains pending.

In the meantime, Defendants asserted counterclaims against the Relators. As Defendants’ employees, Relators signed a confidentiality agreement, in which they agreed not to disclose confidential company information to third parties and to indemnify Defendants for any losses arising from their unauthorized disclosures. Id. at *1-*2. Separately, Relators periodically signed internal-reporting agreements, in which they declared that they were responsible to report any “suspect business practices” to Defendants and were “unaware” of any such practices. Id. *3.

In their counterclaims, Defendants alleged that Relators breached the confidentiality agreement by disclosing confidential company information to the VA and the public, and breached the internal-reporting agreements by failing to report the alleged “suspect business practices” that formed the basis of their FCA complaint. Id. at *3-*4. Defendants sought indemnification for damages suffered as a result of Relators’ disclosures, including legal expenses. Id. at *4.

Relators moved to dismiss the counterclaims, arguing that the confidentiality agreement was contrary to public policy, and therefore unenforceable, because it sought to “thwart” important policy interests in the “detection and exposure of potential fraud against the United States.” Id. at *5. The court (Judge Feinerman) refused to dismiss the counterclaims outright on that basis. Joining the conclusion of another district court, the court held that “‘an FCA defendant found liable of FCA violations may not pursue a counterclaim” that has “the equivalent effect of contribution or indemnification.'” Id. at *5 (quoting United States ex rel. Miller v. Bill Harbert Int’l Constr., Inc., 505 F. Supp. 2d 20, 26 (D.D.C. 2007)). But an FCA defendant may pursue counterclaims against the qui tam relator that are “not dependent on a finding that the [FCA] defendant is liable.'” Id.

Applying this rule, the court dismissed Defendants’ counterclaims to the extent they sought indemnification for damages or penalties that may be imposed on them in the FCA suit. Id. But the court held that the counterclaims were otherwise “independent of the FCA claim.” Id. at *6. The court noted the “extremely broad scope of the documents that Relators are alleged to have retained and disclosed,” and ruled that Defendants could pursue counterclaims against Relators for violating the confidentiality agreement to the extent Relators’ “retentions and disclosures went beyond the scope of those necessary to pursue their qui tam suit.” Id. In addition, the court held that Defendants could recover legal expenses from Relators if Defendants prevail on the merits of the FCA suit and persuade the court that Relators’ FCA claims were “frivolously pursued given [Relators’] alleged lack of relevant knowledge of the VA contracts and Defendants’ performance thereunder.” Id. Finally, the court held that Defendants could pursue counterclaims for breach of the internal-reporting agreements if Defendants prevail in the FCA suit and demonstrate a “causal relationship between Relators’ failure to report and their filing of the qui tam action.” Id. at *7.

As this decision demonstrates, employers in highly-regulated industries, in which FCA exposure is an ever-present risk, can obtain at least some protection by requiring employees to sign confidentiality and internal-reporting agreements. At a minimum, these agreements serve as valuable elements of any effective FCA compliance program by emphasizing to employees the importance of properly handling confidential information and promptly reporting potentially unlawful conduct to superiors. In addition, such agreements can serve as a valuable tool in qui tam litigation initiated by former employees and, specifically, may provide a basis for a counterclaim against the relator. Although such agreements cannot insulate employers from liability for actual FCA violations, they can protect against frivolous qui tam suits and unauthorized disclosures of confidential information that are not reasonably necessary to inform the government of potential fraud.

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26 June 2012

Mortgage Lender May Face FCA Liability For False Statements In HUD Applications And Annual Certifications In Connection With Loans That Ultimately Defaulted

Last week, the United States District Court for the Northern District of Illinois denied a motion to dismiss an FCA suit brought by the government against the president of MDR Mortgage Corp., a HUD and FHA loan correspondent. U.S. v. Luce, 2012 U.S. Dist. LEXIS 85095 (N.D. Ill. Jun. 20, 2012). The court held that the government may pursue its claims based on allegations that the defendant falsely certified in HUD residential loan applications (Form 92900-A) and annual verification reports that he had not previously been charged with “making false statements,” a crime for which he was indicted in 2005. In reaching this holding, the court held that the government had alleged that at least some of the loans connected to the false statements had defaulted, causing the government to pay money on the loan insurance policies, and was not required to specify the amount of damages at the pleadings stage. Notably, however, the court rejected the government’s contention that the defendant would be subject to statutory penalties for each of the loans for which false statements were submitted; rather, the court held that the government could only recover penalties as to those loans that resulted in a “claim” on the loan insurance.

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