Conflicting Interpretations of Falsity Preclude Knowledge Under FCA, Tenth Circuit Holds

In a victory for government contractors, the U.S. Court of Appeals for the Tenth Circuit held that vendors and their suppliers cannot knowingly submit false claims under the False Claims Act where the knowing falsity is premised on lack of compliance with government regulations that are subject to differing, good-faith interpretations. The case, U.S. ex rel. Smith v. Boeing, No. 14-3247, 2016 WL3244862 (10th Cir. 2016), involved an appeal by relators, three former Boeing employees, of summary judgment for Boeing and Ducommun, Inc.


Fifth Circuit Affirms Dismissal of False Certification Claim For Failure to Plead A Specific Contract Provision or Regulation Violated

In a recent unpublished decision, the Fifth Circuit affirmed without oral argument the dismissal of an FCA implied certification claim for failure to comply with Rule 9(b).  The relators alleged that a defense contractor submitted certifications to the government falsely certifying that they “calibrated the government’s electromagnetic-energy-measuring instruments in accordance with applicable industry standards and specifications.”  The Fifth Circuit emphasized, however, that a false certification theory can succeed only “only when certification is a prerequisite to obtaining payment from the government.”  Because the relators’ complaint failed to identify any specific statute, regulation, or contract provision providing that compliance with the applicable standards, “let alone certification of compliance,” was a prerequisite to the government’s payments, the Fifth Circuit affirmed dismissal of the complaint.  A copy of the Fifth Circuit’s unpublished decision can be found here.

Fifth Circuit Passes On Opportunity To Join Seventh Circuit in Rejecting Implied False Certification Theory

Last month, the Seventh Circuit bucked the trend of several other circuits in expressly rejecting the theory of implied false certification under the FCA.  See  United States v. Sanford-Brown, Limited, No. 14-2506 (7th Cir. June 8, 2015) (opinion here).  The Fifth Circuit recently had an opportunity to decide whether to follow the Seventh Circuit’s lead.  But acknowledging that, “[f]or over a decade, this court has avoided deciding whether to recognize the implied certification theory,” the Fifth Circuit declined – again – to decide the issue.  After concluding that the relator’s allegations would fail to satisfy Rule 9(b) even if the theory was valid, the court once again declined to decide whether the theory should be recognized.  Thus, the opinion provides helpful guidance on the pleading standards applicable to implied certification claims in the Fifth Circuit – assuming the theory is viable in the first instance.


Court Dismisses GMP-based FCA Claims With Prejudice

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”).


Fourth Circuit Recognizes Implied Certification Theory

Posted by Ellyce Cooper and Collin Wedel

On January 8, 2015, in United States ex rel. Badr v. Triple Canopy, Inc., No. 13-2190, — F.3d — (4th Cir. 2015), the U.S. Court of Appeals for the Fourth Circuit revived a False Claims Act suit brought by the U.S. Government and a qui tam relator against security firm Triple Canopy, Inc., explicitly recognizing for the first time the implied certification theory of FCA liability.

The case arose out of a contract between Triple Canopy and the government under which Triple Canopy was to provide security services at an airbase in Iraq. Among several provisions in the contract, each of the security officers that Triple Canopy hired would have to obtain a passing score on a qualifying U.S. Army-grade rifle marksmanship course. In fact, according to the relator, very few guards were capable of meeting this requirement. Nevertheless, Triple Canopy continued to submit monthly invoices to the government for the guards’ services. Triple Canopy allegedly ordered one of its medics, relator Omar Badr, to retroactively falsify marksmanship scorecards for 40 guards. Badr subsequently filed a qui tam suit against Triple Canopy. The government then intervened as to certain counts.

The district court granted Triple Canopy’s motion to dismiss the case, largely on the ground that the defendants had never submitted a demand for payment that contained an objectively false statement. The court reasoned that the Government never alleged that Triple Canopy “invoiced a fraudulent number of guards or billed for a fraudulent sum of money.” Rather, citing Fourth Circuit precedent regarding the “crucial distinction between punitive FCA liability and ordinary breaches of contract,” the court reasoned that the defendant’s actions amounted at most to a breach of contract, not an FCA suit.

Although it affirmed the district court’s dismissal of certain claims, the Fourth Circuit reversed as to the bulk of the plaintiffs’ claims, holding that the district court’s interpretation of the distinction between breach-of-contract suits and FCA suits was too rigid. Instead, after reviewing the relevant circuit opinion and distinguishing its prior precedents, the Fourth Circuit held, “the Government pleads a false claim when it alleges that the contractor, with the requisite scienter, made a request for payment under a contract and withheld information about its noncompliance with material contractual requirements. The pertinent inquiry is whether, through the act of submitting a claim, a payee knowingly and falsely implied that it was entitled to payment.”

In so holding, the Fourth Circuit, for the first time, has expressly endorsed the implied certification of FCA liability, at least in certain circumstances. The Court noted that, since its 1999 opinion in U.S. ex rel. Harrison v. Westinghouse Savannah River Co., 176 F.3d 776 (4th Cir. 1999), “the weight of authority has shifted significantly in favor of recognizing this category of claims at least in some instances. Thus, the opinion states, “[c]ourts [may] infer implied certifications from silence where certification was a prerequisite to the government action sought.” The court noted its awareness of the fact “that this theory is prone to abuse by parties seeking to turn the violation of minor contractual provisions into an FCA action,” and took pains to highlight the “several key distinctions between this case and . . . garden-variety breaches of contract,” including the government’s active intervention and the clear falsehood at issue here (as opposed to vague contract provisions in other cases promising “diligence” or the like). It also clarified its view that the best way to prevent most contract suits from morphing into FCA suits is “strict enforcement of the Act’s materiality and scienter requirements,” which it concluded were readily met in this case.

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

Court Rejects False Statements to FDA Regarding cGMP Compliance as Basis for FCA Liability

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.

Seventh Circuit Limits “Worthless Services” Theory, Heightens The Bar For Public Disclosure

Posted by Scott Stein and Catherine Kim

Several circuit courts have recognized the “worthless services” theory of FCA liability, which allows qui tam relators to assert FCA claims premised on the notion that the defendant received reimbursement for goods or services that were worthless. In a recent case, U.S. ex rel. Absher v. Momence Meadows Nursing Center, Inc., the Seventh Circuit held that assuming the theory is viable in the Seventh Circuit (an issue it declined to decide), it does not apply to situations in which deficient performance of a contract is alleged to have resulted in services “worth less” than what was contracted for. As the court succinctly put it, “[s]ervices that are ‘worth less’ are not ‘worthless.'”

The case was originally filed by two nurses who formerly worked at Momence, alleging that the nursing home knowingly submitted false claims to Medicare and Medicaid by seeking reimbursement for treatment that allegedly failed to comply with standards of care. Although the United States and Illinois declined to intervene, the relators proceeded to trial. The jury reached verdicts against Momence and awarded over $3 million in compensatory damages, which was trebled under the FCA.

On appeal, Momence argued that the district court lacked jurisdiction under the public disclosure bar because the FCA action was based on allegations of non-compliant care that were the subject of previous government reports. The Seventh Circuit, however, continuing its streak of recent opinions narrowing the scope of the public disclosure bar, held that the bar was not implicated because the reports did not disclose “that Momence had the scienter required by the FCA.”

The court then proceeded to assess whether the relators’ claims failed as a matter of law. Although the Seventh Circuit declined to address the viability of a worthless services theory of FCA liability – “a question best saved for another day” – it nevertheless concluded that even if that theory was valid, “[i]t is not enough to offer evidence that the defendant provided services that are worth some amount less than the services paid for.” Because the court concluded that the relators failed to offer evidence establishing that Momence’s services were “truly or effectively ‘worthless[,]'” it held that the worthless services theory could not support the jury’s verdict.

Similarly, the court found that the relators’ evidence in support of the express certification theory was also insufficient because the relators not only failed to put forth evidence of “precisely how many . . . forms contained false certifications[,]” but they also failed to identify “even a roughly approximate number of forms contain[ing] false certifications.” While the court acknowledged the difficulty in producing evidence that supports “even an approximate finding[,] . . . under the FCA, the plaintiff must ‘prove all essential elements of the cause of action . . . by a preponderance of the evidence.'”

Lastly, with respect to the implied certification theory, the court acknowledged that it had not expressly determined whether such theory is recognized in the Seventh Circuit. However, it declined to answer the question here since the realtors did not argue to the jury that the purported implied certifications were conditions of payment, thereby waiving the theory on appeal.

The Seventh Circuit vacated the judgment and remanded the case for judgment to be entered for the defendants. Although the court did not definitively preclude the possibility of a plaintiff prevailing on a worthless services theory in the Seventh Circuit, the reasoning contained in its ruling strongly suggests that such theory, if recognized, would likely be reserved for the most extreme cases.

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

District Court Dismisses Virginia FCA Claim Against Clinical Laboratory Based on Alleged Violation of “Usual and Customary Charge” Requirement

Posted by Ellyce Cooper and Collin Wedel

On May 13, a district court in the Eastern District of Virginia dismissed a healthcare fraud action under the Virginia Fraud Against Taxpayers Act (“VFATA”) against Laboratory Corporation of America (“LabCorp”) alleging that LabCorp routinely charged Medicaid more than its “usual and customary charge” for laboratory services. The district court held that the relators’ allegations about Medicaid overcharges and improper kickbacks for Medicaid referrals could not proceed because relators (i) failed to specify the particulars of a single false claim under Rule 9(b), and (ii) failed to articulate any particular certification defendants made that was false, in violation of Rule 8(a).

The relators—competitors of LabCorp—alleged that each of LabCorp’s Medicaid reimbursement claims was actionably “false” in two ways. First, LabCorp’s charges to Medicaid prices for laboratory services were higher than the lower prices that LabCorp routinely negotiated with individual insurers and physicians, which relators alleged violated Virginia regulations requiring LabCorp to charge Medicaid its “usual and customary” rates. Second, relators alleged that these lower charges offered to individual physicians constituted impermissible kickbacks meant to induce referral of Medicaid business. Relators alleged that these violations had rendered 2,730,814 claims submitted by LabCorp “false.”

With regard to Rule 9(b), the court acknowledged a split between the circuits about whether relators must identify all of the particulars—e.g., the who, what, when, where, how—of at least one representative claim, and noted that the Fourth Circuit had not addressed that issue. Nonetheless, relying heavily on the Fourth Circuit’s decision in U.S. ex rel. Nathan v. Takeda Pharm. N. Am., 707 F.3d 451, 456 (4th Cir. 2013), cert. denied, 134 S. Ct. 1759 (2014) (a decision we previously wrote about here), the court held that relators must allege with particularity the submission of at least one specific claim for payment. The court found that the relators failed to do so.

On an alternative but related ground, the court also dismissed the complaint under Rule 8(a), relying heavily on the difference between certifying legal compliance in order to participate in a program versus to be paid under that program. The court, distinguishing between legal and factual falsity, held that, in this complaint alleging factual falsity, no liability for fraud under a false certification theory can exist unless relators plead the details of what statement defendants made that was actually false. In Hunter, the relators argued that LabCorp could not have participated in the Medicaid program without agreeing to be bound by Virginia regulations, which mandate that providers cannot charge higher prices for Medicaid patients than for non-Medicaid patients. Under this theory, each overpriced claim was made false because LabCorp would not have been able to submit those overpriced claims were it not for its prior agreement to abide by the regulations. The court, however, held that LabCorp’s general agreement to abide by the law in exchange for participating in Medicaid was not an agreement in exchange for Medicaid payment; its agreement was not false when it was made; and, most notably, “a general representation of compliance with all laws lacks the requisite nexus between the subject matter of the certification and the event triggering the loss—i.e., the kickback and overcharge schemes.”

Although this case arose under the VFATA, rather than the federal False Claims Act, the court’s grounding of its opinion in Rules 8(a) and 9(b) offers guidance to companies seeking to defend against similarly allegations of fraud in the Fourth Circuit. This ruling further strengthens the Fourth Circuit’s already stringent pleading standards under Rules 8(a) and 9(b).

Decision Recognizes Expanded Implied Certification Theory Under California False Claims Act

Posted by Kimberly Dunne and Brent Nichols

A recent decision by the California Court of Appeal could significantly expand liability for government contactors under the California False Claims Act (“CFCA”). See San Francisco Unified School Dist. ex rel Contreras v. First Student, Inc., No. A136986, Cal. Court. App. (1st Dist. Mar. 11, 2014). In Contreras, the Court held that a “vendor impliedly certifies compliance with express contractual requirements when it bills a public agency for providing goods or services,” even when the vendor has not expressly represented that it is in contractual compliance. Under the rule articulated in Contreras, once a relator has established a false implied certification, he or she need only show that the false certification was “material” to the government’s payment decision and that the defendant acted with scienter (i.e., knowledge or reckless disregard). This decision represents a substantial departure from jurisprudence holding that a breach of contract in and of itself does not give rise to liability under the federal FCA.

In Contreras, a school district contracted with First Student to provide transportation services. The contract required First Student to use school buses that were in “excellent” condition and complied with federal and state safety regulations, and to conduct regular maintenance inspections in accordance with government regulations. Relators alleged that defendant violated these contractual terms by using buses with low tire treads and worn brake lines, and by failing to perform the required inspections. Over the course of several years, First Student submitted monthly invoices, but notably these invoices did not expressly certify compliance with contractual terms. The school district eventually became aware of some maintenance problems, but ultimately renewed its contract with First Student and the State did not intervene in the suit. The trial court granted First Student’s motion for summary judgment, finding that there was no triable issue as to materiality because the district was aware of the issues and still renewed its contract.

The Court of Appeal reversed. After making clear that CFCA should be given “the broadest possible construction,” the Court found that each of First Student’s invoices impliedly certified compliance with contractual terms and that the non-compliance was material because the “alleged falsities were material as a matter of common sense.” The Court rejected defendant’s argument that the invoices could not be material because the district renewed its contract with First Student after learning of the issues. Instead, the Court’s materiality analysis “focused on the potential effect of the false statement when made, not on the actual effect of the false statement when discovered.” Here, even though the district paid First Student’s invoices and renewed its contract, the Court found there was a factual dispute as to whether the implied false certifications—at the time they were made—would have had a “natural tendency” to influence the district’s payment decision.

Overall, this decision blurs the line between breach of contract and CFCA liability, and suggests that a mere knowing breach of a material contractual term may form the basis of a CFCA claim.

Sidley lawyers publish article, Circuit Court Affirms High Pleading Standard For “Induced” False Claims Qui Tam Actions, as part of Washington Legal Foundation’s Counsel’s Advisory series

Posted by Kristin Graham Koehler and Brian P. Morrissey

Sidley lawyers Kristin Graham Koehler and Brian Morrissey have authored an article as a part of the Washington Legal Foundation’s Counsel’s Advisory series, entitled “Circuit Court Affirms High Pleading Standard For ‘Induced’ False Claims Qui Tam Actions.” The article examines the First Circuit’s recent ruling in United States ex rel. Ge v. Takeda Pharmaceutical Co., 737 F.3d 116 (1st Cir. 2013), a closely-watched case in which the relator alleged that a pharmaceutical manufacturer violated the FCA by failing adequately to comply with the FDA’s adverse-event reporting rules for pharmaceutical products. The First Circuit punted on the key issue that drew so much attention to the case, declining to decide whether a violation of FDA’s adverse-event reporting rules can be the basis for FCA liability. The Court nonetheless used the case as an opportunity to reemphasize the important principle that a qui tam relator cannot rely on a mere inference that false claims “necessarily follow” from a defendant’s alleged violation of a federal law or regulation; the relator must present specific “factual or statistical evidence” to justify that inference. Holding that the relator failed to carry that burden, the First Circuit affirmed dismissal of the case on Rule 9(b) grounds.

The article is available for download on the Washington Legal Foundation’s website: