District Court Refuses To Allow Government To Use CID To Try To Remedy Deficiencies In Complaint

Posted by Douglas Axel and Anand Singh

We previously wrote about a decision in United States v. Kernan Hospital, in which a district court dismissed an FCA complaint brought by DOJ based on the failure to plead with particularity under Rule 9(b). The government’s attempt to remedy its pleading deficiencies has spawned another interesting opinion in the same case. In an opinion issued on November 20, the district court held that the authority to issue a Civil Investigative Demand (“CID”) under the False Claims Act is unavailable to the government after it files a complaint.


On June 3, 2008, the government began investigating Kernan Hospital (“Kernan”) for Medicare fraud. On October 17, 2011, it filed a False Claims Act suit alleging that Kernan had engaged in fraudulent practices respecting Medicare billing.

Kernan filed motions to dismiss based on the government’s failure to state a claim (under Federal Rule of Civil Procedure 12(b)(6)) and failure to plead fraud with sufficient particularity (under Federal Rule of Civil Procedure 9(b)). The court agreed that the government had failed to adequately plead its fraud allegations and dismissed the government’s complaint without prejudice.

Following the court’s dismissal, on August 23, 2012, the government served Kernan with a CID seeking additional documents concerning Kernan’s billing practices. Kernan filed a petition to set aside the CID (“Petition”), asking the Court to set aside the August 23 CID on the grounds that section 3733 of the False Claims Act does not authorize the government to issue CIDs after it has filed a False Claims Act complaint.

The Court’s Analysis and Holdings

The court agreed with Kernan and granted the Petition. Under section 3733 of the False Claims Act, an Attorney General may issue a CID “before commencing a civil proceeding under § 3730(a) or other false claims law.” 31 U.S.C. § 3733(a)(1). Thus, the court recognized that “[s]ection 3733 sets out a prefiling limitation on the use of the civil investigative demand.” United States v. Kernan Hospital, No. RDB-11-2916, 2012 WL 5879133, *4 (D. Md. Nov. 20, 2012). However, “neither the statute nor the case law interpreting it suggests whether that limitation expires after an initial complaint is dismissed.” Id. The government advanced two arguments why the court should deny the Petition, both of which the court rejected.

First, the government argued that section 3733 “inherently deprives the Attorney General of the power to issue a civil investigative demand only if a suit is pending.” Id. (emphasis added). In rejecting this argument, the court explained that the “plain words of the statute does not invite an interpretation of ‘before commencing a civil proceeding’ to include the period after the commencement of a civil proceeding when no suit is pending.” Id. The court also analyzed the legislative history of the False Claims Act and concluded that it “suggest[ed] that when Congress circumscribed the period during which the Government could issue a civil investigative demand to the prefiling stage, it did not mean to provide the Government with that power at any time a suit was not pending.” Id. at *5.

Second, the government argued that the Petition should be denied “based on policy,” because the government was considering filing an amended complaint and the granting of the Petition “would prevent [the government] from obtaining the information it need[ed]” to cure the deficiencies in its pleading, i.e., the government’s failure to plead fraud with particularity and satisfy the requirements of Federal Rule of Civil Procedure 9(b). Kernan, 2012 WL 5897133 at *6. In rejecting this argument, the court explained that the government already had “conducted a thorough investigation and gathered the information it needed to determine whether to file suit,” and therefore, the court was “not persuaded that the Government needs to exercise its section 3733 power before it can sufficiently amend its complaint.” Id. The court also explained that “the civil investigative demand provision and Rule 9(b) are intended to encourage careful behavior when alleging fraudulent conduct,” and therefore its granting of the Petition was “in keeping with the policy goals underlying both section 3733 and Rule 9(b).” Id. at *7.

Based on the court’s ruling, the government is not able to use CIDs to obtain information after it has initiated an action. This may benefit defendants in False Claims Act cases. However, the ruling may counsel the government to issue broader CIDs at the pre-filing stage, which may impose additional burdens on companies and individuals that are potential defendants in such cases.

Court Dismisses Government’s Claims Premised On Violations of Industry Standards Under Rule 9(b)

Posted by Scott Stein and Brad Robertson

It is relatively rare for courts to grant motions to dismiss FCA cases in which the United States has intervened. So we read with interest the recent decision of a federal district court in Maryland, United States v. Kernan Hospital, No. 11-cv-02961 (D. Md. July 30, 2012), in which the court dismissed the government’s complaint on Rule 9(b) grounds for failure to plead with particularity specific false statements submitted to the government and how those statements affected the defendant’s reimbursement.

The government’s complaint alleged that the defendant hospital systematically upcoded patients’ secondary diagnoses in order to make the hospital’s case mix appear more severe. The hospital allegedly had personnel review each patient’s chart after the fact for data consistent with malnutrition. The personnel then returned the chart to the treating physician to prompt him or her to consider including a secondary diagnosis of malnutrition. Hospital coders then entered the ICD-9-CM code for an extreme form of malnutrition known as Kwashiorkor for any malnutrition diagnosis.

The government alleged that it conducted an investigation of the hospital’s coding that concluded that 23% of the cases were inappropriate because the medical evidence in the chart did not justify the diagnosis or contained contradictory, incomplete, or ambiguous information. The government further alleged that the hospital’s conduct, and the resultant 23% error rate, violated “industry norms” and “applicable standards” established by the American Health Information Management Association (AHIMA). The government took the position that the hospital’s “practice of deliberately disregarding this industry standard rendered the coding false and fraudulent.”

The court dismissed the complaint, holding that it failed to link the alleged activity to any specific claims submitted to the government for payment. When pressed at oral argument, counsel for the government identified the hospital’s cost reports as the false claims at issue. However, the court noted, the complaint did not allege what effect the upcoded diagnoses had on cost reports, did not allege that the cost reports that cost reports were submitted to the government, or that the cost reports caused the government to pay for services that were not rendered. Indeed, the government conceded that each alleged “false” secondary diagnosis would not necessarily increase the hospital’s rate of compensation, but did not explain the circumstances in which a false diagnosis would result in falsely increased payments.

Because the government failed to allege any specific claims submitted—”the crucial link between the alleged scheme and ultimate False Claims Act liability”—the court dismissed its claims for failure to satisfy Rule 9(b). As the court explained, “The False Claims Act does not punish a system that might allow false claims to be sent to the government—instead, it punishes actual claims containing objective falsehoods.” (emphasis in original).

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

District Court Dismisses Relator’s FCA Suit Against Bayer For Failure To Satisfy Rule 9(b)

Posted by Kristin Graham Koehler and Meghan Delaney Berroya

In a decision released late last week, Judge Davis of the District Court of Minnesota dismissed the False Claims Act suit brought by a former employee against Bayer Healthcare Pharmaceuticals, Inc., Bayer Corporation and Bayer AG (collectively “Bayer”). See U.S. ex rel. Simpson v. Bayer Healthcare, Case No. 08-5758 (MJD/SRN). The former employee, Laurie Simpson, alleged that Bayer utilized kickbacks and misbranding to cause various government funded health insurance programs, including Medicare and Medicaid, to pay claims for its cholesterol drug, Baycol. Bayer marketed Baycol in the late 1990s and voluntarily withdrew the drug from market in 2001 after its use was linked to Rhabdomyolysis, a rare muscle disorder.

Simpson originally filed her FCA suit against Bayer on October 5, 2006 and was permitted to amend her complaint on two previous occasions. The Court dismissed Simpson’s Second Amended Complaint (“SAC”) with prejudice for failure to satisfy Rule 9(b)’s requirement to plead fraud with specificity. According to the Court: “As Relator has filed three complaints in this case, she will not be given leave to amend.”

Simpson’s case hinged on the theory that the government would not have paid any claims for Baycol had it been aware of the alleged deceptive marketing practices described by Simpson in the SAC. In its opinion, the District Court reaffirmed the Eighth Circuit’s previous holding that “particularized allegations of representative false claims are required to properly assert a claim under the FCA.” (Opinion at 13). In other words, “even where a relator alleges a systematic practice of submitting fraudulent claims, the FCA complaint must nonetheless include representative examples of the alleged fraudulent conduct.” (Opinion at 14).

Simpson’s allegations fell short of Rule 9(b)’s strict requirements in several respects. Simpson failed to allege that particular claims submitted to the government for payment of Baycol contained false information and what specific portion of the claims were false. (Opinion at 11). Moreover, the SAC did not contain any allegations linking the government’s decision to pay for Baycol to any alleged fraud, nor did Simpson allege that Baycol failed to work for all patients. (Opinion at 15). The Court emphasized that a “claim under the FCA focuses on the claims, not the underlying fraudulent activity.” (Opinion at 16). Importantly, the Court reached these conclusions even where relator had included in her SAC examples of patient-level claims and various summaries of payments made by the government for Baycol.

Lawyers from Sidley Austin, including blog post author Kristin Koehler, represented Bayer in its defeat of Simpson’s FCA suit.