D.C. Circuit Splits with Sixth Circuit on Scope of FCA’s First-to-File Bar

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Posted by Robert J. Conlan and Brian P. Morrissey

In a recent decision, the U.S. Court of Appeals for the District of Columbia ruled that a first-filed qui tam complaint need not satisfy the heightened pleading requirements for fraud set forth in Federal Rule of Civil Procedure 9(b) in order to bar subsequent qui tam complaints based on the same material allegations. In so holding, the court rejected the contrary argument put forth by the relator and the United States as amicus curiae, and it created a circuit split with the Sixth Circuit.

In United States ex rel. Batiste v. SLM Corp., reported at 659 F.3d 1204 (D.C. Cir. 2011), slip opinion here, the relator, Sheldon Batiste, alleged that SLM Corp. (commonly known as “Sallie Mae”) defrauded the Federal Government in its administration of student loans by unlawfully putting federally-subsidized student loans into forbearance (thereby causing the Government to pay additional interest and special allowances on such loans), and by filing false certifications with the Government in order to maintain its status as an eligible lender.

More than two years before Batiste filed his complaint, however, another relator had filed a qui tam suit against SLM and one if its wholly-owned subsidiaries. Complt., United States ex rel. Zahara v. SLM Corp., No. 2:05-cv-8020 (C.D. Cal. Nov. 9, 2005). That complaint was ultimately dismissed with prejudice after the relator failed to obtain counsel by a set deadline, Entry Dismissing Action, United States ex rel. Zahara v. SLM Corp., No. 1:06-cv-088 (S.D. Ind. Mar. 12, 2009). The district court in Batiste’s case concluded that this prior qui tam suit was based on the “same material elements of fraud” as Batiste’s complaint. Batiste, 659 F.3d at 1208. Accordingly, the district court dismissed Batiste’s complaint for lack of subject matter jurisdiction under the FCA’s first-to-file bar. Id.; see also 31 U.S.C. § 3730(b)(5) (providing that “no person other than the Government may intervene or bring a related action based on the facts underlying [a] pending action”).

Batiste, supported by the United States as amicus curiae, appealed, arguing that the prior complaint in Zahara did not allege fraud with the particularity necessary to meet Federal Rule of Civil Procedure 9(b)’s heightened pleading standard for fraud claims and, thus, should not have triggered the FCA’s first-to-file bar. The D.C. Circuit rejected that contention, holding that “first filed complaints need not meet the heightened standard of Rule 9(b) to bar later complaints; they must provide only sufficient notice for the government to initiate an investigation into the allegedly fraudulent practices, should it choose to do so.” Batiste, 659 F.3d at 1210.

In reaching this conclusion, the D.C. Circuit expressly declined to follow the Sixth Circuit’s decision in Walburn v. Lockheed Martin Corp., 431 F.3d 966 (6th Cir. 2005). Batiste, 659 F.3d at 1210-11. In Walburn, the Sixth Circuit reasoned that a complaint that fails to satisfy Rule 9(b) should not be given preemptive effect under the FCA’s first-to-file bar because such a complaint, by virtue of its failure to meet the 9(b) standard, is insufficiently precise to provide the Government “adequate notice . . . of the fraud it alleges.” Id. at 973.

Other federal courts are likely to grapple with this same question. As the number of qui tam complaints filed in the federal courts rises and qui tam relators focus special attention on certain industries (including the student loan industry), overlap between complaints is all but inevitable. These courts will be forced to choose between the competing approaches taken by the Sixth and D.C. Circuits, and may ultimately help inform Supreme Court resolution of the current circuit split.

Relator’s Counsel Sanctioned For Mishandling Privileged Documents and Barred from Acting as Counsel Against Company In Future

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Posted by Amy Markopoulos and Kristin Koehler

A recent ruling in the District of Arizona serves as a reminder to defense counsel that they should be sensitive to the possibility that relators are relying on stolen privileged documents to support their claims. Should a company suspect that a relator’s case is founded on privileged documents, the company should act quickly to move for return of the privileged documents. The consequences for relator or his counsel for failing to appropriately handle privileged documents can be serious.

In Frazier v. IASIS Healthcare Corporation, No. 2:05-cv-00766 (D. Ariz. 2012), IASIS Healthcare and Relator’s counsel had engaged in a 4-year battle regarding the return of certain privileged documents that Relator had stolen when he left IASIS in 2004. The relator, Jerre Frazier, had sent these privileged documents to his lawyers, who kept most of the documents in a sealed box. Despite bearing the title “Legal Memo,” relator’s counsel did not seek the court’s opinion as to whether these documents were privileged, and “appeared to play dumb” and feigned ignorance about the documents’ location when IASIS asked for their return. As a result, IASIS moved for the return of the documents and for sanctions against Relator’s counsel.

Relator’s counsel will pay IASIS $1.4 million, representing the amount of legal fees incurred by litigating this specific issue. Counsel is also barred from representing the Relator or any other plaintiff adverse to IASIS.

Serious issues can arise for counsel when relators steal documents – defense counsel needs to be prepared to file a motion should this occur, and relator’s counsel must be careful to appropriately handle privileged documents if relator turns them over.

IASIS and Frazier settled the case in November, six years after Frazier had initially brought his complaint. The government had declined to intervene in this matter.

Relator Attempting to Avoid The Scope of A Release Pleads Himself Out of Court

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Posted by Brad Robertson and Scott Stein

A recent decision explains how one relator, in an effort to plead around a release of FCA claims in favor of his former employer, managed to plead himself right out of court. U.S. ex rel. McNulty v. Reddy Ice Holdings, Inc., No. 08-cv-12728 (E.D. Mich.), December 7, 2011 Slip Op. The relator alleged that his former employer, Arctic Glacier, and two other manufacturers of packaged ice, overcharged the government. These same companies are also currently defending a series of antitrust lawsuits alleging that they conspired to allocate markets. The increased prices resulting from the alleged market allocation form the basis of the relator’s FCA claims in this action.

The plaintiff alleged that he discovered the market allocation conspiracy while employed with Arctic Glacier, and that he was terminated after refusing to participate in the conspiracy. As part of his severance package, he signed a broad release waiving any and all claims against the company for the time period prior to the release.

The defendants moved to dismiss on public disclosure/original source grounds and for failure to plead with sufficient particularity. The relator filed a cross-motion to dismiss Arctic Glacier’s counterclaim that he breached his release agreement. In an attempt to plead around the scope of release, the relator alleged that he learned that the alleged market allocation scheme resulted in overcharges to the United States government from a discussion with a former co-worker only after his termination from Arctic Glacier and after signing the release. Accordingly, he contended that his FCA claims were outside the scope of the release. Ruling on the defendants’ motion to dismiss, the court found the allegations of the discussion with his former co-worker particularly crucial to its 12(b)(6) analysis, as “the only allegations that relate in any way to the FCA claim itself” as opposed to the market allocation conspiracy. The court dismissed the complaint, finding that the allegations of market allocation had been publicly disclosed through the antitrust lawsuits, and that the relator was not an original source of the FCA allegations, as he “was no longer employed by Arctic Glacier at the time and could not possibly have ‘observed’ or ‘learned’ this information firsthand.”

Adding insult to the relator’s injury, the court then proceeded to declare the release that the relator had been attempting to plead around unenforceable, dismissing Arctic Glacier’s counterclaim. Without evidence that the government knew of the claims prior to the execution of the release, the court held, public policy concerns barred enforcement of the agreement as to the FCA claims.

District Court Dismisses False Certification Claim For Failure to Adequately Plead “Condition of Payment”

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By Scott Stein and Erik Ives

In the first in-depth application of the Third Circuit’s decision in United States ex rel. Wilkins v. United Health Group, Inc., No. 10-2747, 2011 WL 2573390 (3d Cir. June 30, 2011)adopting the implied certification theory of liability, the United States District Court for the District of New Jersey dismissed at the pleading stage a relator’s claims under the federal False Claims Act (FCA) for failure adequately to plead that the defendant had violated a condition of payment. See Foglia v. Renal Ventures Management, LLC, No. 09-1552, Slip Op. (D.N.J. Nov. 23, 2011).

The Relator alleged that the Defendant (a dialysis care services company) failed to comply with New Jersey regulations concerning quality of patient care and facility staffing, and Center for Disease Control (CDC) standards concerning reuse of vials of the drug Zemplar. The Relator contended that these violations rendered each claim for payment of the drug legally false under a theory of express and/or implied false certification. The United States declined to intervene in the matter, and after the case was unsealed the defendant filed a motion for partial judgment on the pleadings pursuant to Fed. R. Civ. P. 12(c).

The Court began its analysis by describing the false certification theory, as recently outlined by the Third Circuit in United States ex rel. Wilkins v. United Health Group, Inc., No. 10-2747, 2011 WL 2573390 (3d Cir. June 30, 2011). In doing so, the Court focused on the Third Circuit’s holding that:

‘[T]o plead a claim upon which relief could be granted under a false certification theory, either express or implied, a plaintiff must show that compliance with the regulation which the defendant allegedly violated was a condition of payment from the Government.”

<em&ggt;Foglia, Slip Op. at 24-25 (quoting Wilkins, 2011 WL 2573390 at *11). Applying this condition of payment requirement to Relator’s pleadings under Fed. R. Civ. P. 8(a)(2) (requiring a “short and plain statement” of the claim entitling pleader to relief) and Fed. R. Civ. P. 9(b) (establishing heightened pleading requirements for claims implicating fraud), the Court held that Relator’s “merely conclusory” assertion that compliance with the federal and state regulations in question was a precondition of payment was legally insufficient. The Court explained that Relator’s failure to “cite any rule, regulation, contract, or other facts to demonstrate” this contention required dismissal of Relator’s claim on the pleadings. Foglia, Slip Op. at 25-29.

Court Holds Relator’s Settlement and Release of FCA Claims Unenforceable

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In a recent decision that exemplifies the difficulties in settling a qui tam in which the United States has declined to intervene, a federal district court in Florida recently held that a settlement agreement in which a relator falsely represented that she had not filed any action against the Defendant, and released her qui tam claim, was unenforceable. U.S. ex rel. Scott v Cancio, No. 8:10-cv-50-T-30TGW (M.D. Fla.), November 28, 2011 Slip Op. The plaintiff sued her former employer, a medical practice, for discrimination and retaliation. While the employment case was still pending, the plaintiff filed a qui tam under the False Claims Act (“FCA”) against the same defendant. Three weeks after filing the qui tam under seal, the plaintiff and defendant executed a settlement agreement in connection with the employment case in which the employee represented that she had not filed any “complaint, claim or charge” against the Defendant in any “state or federal court.” The agreement also contained a broad release of any and all claims the plaintiff had against the defendant.

After the qui tam was unsealed and the United States declined to intervene, the defendant moved to dismiss on the ground that the plaintiff was barred by the settlement agreement from pursuing the case. Notably, the United States took no position on the Defendant’s motion to dismiss the case. Yet the court denied the motion to dismiss and held the release unenforceable. The court noted that while in a “typical case, the release would preclude” the qui tam, the FCA provides an “action” under the FCA “may be dismissed only if the court and the Attorney General give written consent to the dismissal and their reasons for consenting,” quoting 31 U.S.C. 3730(b)(1). Acknowledging that several cases have held that pre-filing releases of qui tam actions may be enforceable, the court distinguished those cases on the ground that when the release precedes the filing of a qui tam, there is no “action,” and therefore section 3730(b)(1) is not implicated.

The defendant noted that it was seeking dismissal only of the plaintiff’s relator interest, and not any claims that could be asserted by the United States – which, as noted above, did not oppose the motion to dismiss. But the court held that “the plain language of section 3730(b)(1) requires the Attorney General’s written consent to a qui tam action’s dismissal and does not make a distinction based on whether the dismissal is without prejudice to the Government’s interest.” The court concluded with a bit of cold comfort, noting that the defendant was free to “seek appropriate relief in the separate employment action to set aside the Settlement Agreement it entered into with Scott based on any misrepresentations or fraud on the part of Scott.”

While the Cancio decision is consistent with other cases that have drawn the “pre-filing/post-filing” distinction in evaluating the enforceability of releases of FCA claims, it is a good example of why that distinction reflects both bad law and bad policy. While the statute states that the consent of the Attorney General is required for dismissal of a qui tam, when the government takes no position on – i.e., has not opposed – the motion to dismiss, it is difficult to see why such silence should not be interpreted as consent. Moreover, there are no compelling public policy reasons for linking enforcement of the release to the timing of its execution. Courts that have enforced pre-filing releases of qui tams have done so in situations in which they have emphasized that the United States was otherwise aware of the relator’s allegations, so that enforcement of the release would not raise a concern that evidence of the defendant’s alleged wrongdoing might never come to light. See, e.g., U.S. ex rel. Radcliffe v. Purdue Pharma L.P., 600 F.3d 319 (4th Cir. 2010); U.S. ex rel. Richie v. Lockheed Martin Corp., 558 F.3d 1161 (10th Cir. 2009). Yet when a relator releases a qui tam claim after filing, he already will have apprised the United States of both the specific allegations and the “material evidence” supporting them. 31 U.S.C. 3730(b)(2). Accordingly, the same public policy reasons that support enforcement of settlement agreements and releases in the pre-filing context are equally as strong, if not stronger, in the post-filing context.

First Circuit Rewrites False Claims Act Requirements and Significantly Expands Potential Liability

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In two recent decisions, the Court of Appeals for the First Circuit parted ways with well-established standards applied by other courts for assessing liability under the Federal False Claims Act (FCA) and adopted an approach that may significantly broaden the risk of FCA liability for all companies that contract with or submit claims, or cause others to submit claims, for payment to federal or state governments. These decisions raise a number of practical concerns for companies including increased risk of FCA exposure, increased litigation costs, and a need for greater attention to FCA issues in contract negotiation. The First Circuit’s decisions also create a clear split among the federal circuits, increasing the likelihood of review of these issues by the U.S. Supreme Court.

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