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…)

Fourth Circuit Affirms Defense Summary Judgment Based on Government Declarations

As we previously discussed here, the government’s continued payment despite knowledge of contractual or regulatory noncompliance has become a powerful defense argument post-Escobar.  The Fourth Circuit recently affirmed summary judgment in favor of government contractors after they obtained declarations from responsible government officials that undercut the relator’s theories of liability.  See United States ex rel. Searle v. DRS C3 & Aviation Co., No. 15-2442 (4th Cir. Feb. 23, 2017).


Hitting Reset, District Court Raises the Bar for Public Disclosure Defense

On October 6, 2015, the U.S. District Court for the District of Columbia allowed relator Stephen Shea to refile his case against Verizon in order to avoid the False Claims Act’s first-to-file bar.  See U.S. ex rel. Shea v. Verizon Business Network Services et al., No. 09-1050-GK (D.D.C. Oct. 6, 2015).  By allowing Shea to refile, the District Court took an important stance on the FCA’s public disclosure bar that may make it more difficult for future defendants to advance the bar.


9th Circuit Affirms Dismissal of FCA Claim As “Implausible” Where Defendant Disclosed Its Disputed Billing Methodology To The Government

On July 22, 2014, the Ninth Circuit issued an important decision supporting the principle that good faith disputes about ambiguous or disputed interpretations of law should not be actionable under the FCA.

Gonzalez, the relator, alleged that the Medi-Cal billing manual required PPLA to bill Medi-Cal “at cost” for contraceptives, which Gonzalez alleged meant PPLA’s acquisition cost. However, when PPLA submitted bills to Medi-Cal, it billed its “usual and customary rates,” which were what PPLA would charge an average patient for contraceptives – a price higher than PPLA’s acquisition cost. In 1997, the California Department of Healthcare Services (CDHS) wrote to PPLA that claims to Medi-Cal should be made “at cost.” In 1998, PPLA responded stating that its clinics billed at the “usual and customary” rate, not at acquisition cost. In 2004, CDHS conducted an audit of PPLA and found that PPLA had not complied with the billing practices outlined in the billing manual. However, CDHS also wrote to PPLA that “no specific definition of ‘at cost’ is contained in [the billing manual]” and that the agency had been “concerned that, with regard to the definition of ‘at cost,’ conflicting, unclear, or ambiguous misrepresentations have been made to providers.'” For those reasons, CDHS did not seek reimbursement from PPLA. In 2005, Gonzalez, the former CFO of PPLA, filed suit alleging that PPLA violated the federal and California False Claims Acts by overbilling Medi-Cal for contraceptives.

The Ninth Circuit affirmed the dismissal of Gonzalez’s complaint on a motion to dismiss. Even assuming that PPLA’s claims were “false” because PPLA billed its “usual and customary prices” rather than acquisition costs – a question the court did not reach – it held that the exchange of correspondence between PPLA and CDHS “compellingly contradicted” Gonzalez’s allegations that PPLA “knowingly submitted false claims for reimbursement.” “Stated simply,” the court explained, “even if bills sent by Planned Parenthood were false in portraying its costs, one cannot plausibly conclude that there was knowing falsity on the part of Planned Parenthood given the explicit statements addressing this subject made by the State of California through CDHS and the State’s silence after being told what procedures Planned Parenthood was following.” CDHS’s acknowledgement that the guidance on “at cost” was “conflicting, unclear, or ambiguous” was, in the Ninth Circuit’s view, “persuasive in [its] determination that there was no knowing falsity under the FCA.” Furthermore, “Planned Parenthood actively engaged with CDHS officials, who themselves seemed to tacitly approve Planned Parenthood’s billing procedures by ending the correspondence without objection after being told that Planned Parenthood was not billing at acquisition cost but at usual and customary rates.” Accordingly, the Ninth Circuit held, Gonzalez’s allegations of a “knowing” violation of the FCA were implausible under Rule 8(a) and the Supreme Court’s decision in Ashcroft v. Iqbal, 556 U.S. 662 (2009).

The opinion is important for at least two reasons. First, it supports the principle that where the defendant’s interpretation of an ambiguous regulation is objectively reasonable, a “knowing” violation of the FCA cannot be found. The decision is therefore consistent with the Supreme Court’s opinion in Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47 (2007) (holding that a defendant cannot be deemed to have “recklessly” violated a statute’s terms where it’s interpretation was reasonable), and the federal district court opinion in U.S. ex rel. Streck v. Allergan (dismissing FCA claim based on regulatory ambiguity), which we previously wrote about here. Second, while the opinion does not expressly refer to the “government knowledge” doctrine – the argument that the government’s knowledge of the defendant’s conduct negates the element of intent – the opinion effectively affirms dismissal on that basis. The government frequently argues (and many courts have held) that government knowledge is a fact-specific inquiry that makes it inappropriate for consideration on a motion to dismiss. The Gonzalez opinion therefore provides important support for defendants who argue that, in appropriate cases, government knowledge is an issue that can, and should, be addressed through a 12(b)(6) motion.

The opinion in Gonzalez v. Planned Parenthood of Los Angeles can be found here.

FEMA Cannot Hide Behind Touhy Regulations to Avoid FCA Deposition

Posted by Gordon Todd and Marisa West

In a recent decision, the Eastern District of Louisiana compelled the Federal Emergency Management Agency (“FEMA”) to produce a witness for deposition in a qui tam False Claims Act suit despite the agency’s Touhy regulations. Williams v. C. Martin Company Inc., et al., No. 07-6592, 2014 U.S. Dist. LEXIS 91802 (E.D. La. July 7, 2014). The Williams decision may have broad implications for Defendants seeking to discover evidence from Federal agencies in defending against FCA claims.

Robyn Williams filed an FCA suit against Medley Jarvis Defendants (“MJI”) and C. Martin Defendants (“CMC”), relating to contracts FEMA had awarded to CMC. The Supreme Court has held that government agencies may establish regulations to regulate the disclosure of documents and testimony during litigation. U.S. ex rel. Touhy v. Ragen, 340 U.S. 462, 468 (1951). On December 4, 2012, MJI filed a Touhy request with FEMA seeking documents related to the contracts. Over one year later and following litigation over the paucity of FEMA’s initial document production, FEMA produced 26,000 pages of documents responsive to MJI’s request on April 21, 2014. The documents were produced pursuant to a protective order filed with the district court.

On May 22, 2014, CMC noticed a Rule 30(b)(6) deposition of FEMA to discuss topics pertaining to FEMA’s production. FEMA invoked its Touhy regulations to avoid the deposition and CMC moved to compel. FEMA argued that sovereign immunity requires litigants to follow Administrative Procedures Act (“APA”) procedures to challenge its decision to withhold a witness for deposition. The district court found first that it had jurisdiction to review the agency’s decision because “sovereign immunity does not insulate a federal agency from complying with a Rule 45 subpoena.” Id. at *12 (quoting In re Vioxx Products Liability Litigation, 235 F.R.D. 334, 343 (E.D. La. 2006) (internal quotation marks omitted)). The court then held that FEMA’s refusal to comply with the subpoena had been arbitrary and capricious because it failed to set forth a satisfactory explanation for its refusal to comply with the deposition subpoena. Id. at *16. The district court granted the motion to compel and ordered the deposition. Williams v. C. Martin Company Inc., et al., No. 07-6592, 2014 U.S. Dist. LEXIS 91802, at *6-9 (E.D. La. July 7, 2014).

The Williams decision streamlines FCA defendants’ ability to compel Agency testimony in an FCA action by removing the need to file a separate APA challenge. If adopted more generally, this decision may rein in one avenue by which Government agencies avoid producing relevant materials in FCA cases.

UPDATED: When Does The Government Have To Preserve Documents In An FCA Case?

Anyone who has defended a False Claims Act case knows the importance of taking appropriate steps to ensure that relevant documents are preserved when litigation becomes reasonably foreseeable. A recent federal court decision emphasized that the United States has real preservation obligations of its own, rejecting the government’s position that litigation of a False Claims Act case is not reasonably foreseeable even after the filing of a qui tam complaint.

The relator had filed his complaint in 2005. In early 2006, the United States issued a subpoena to the defendants in which it instructed them to preserve documents. The investigation continued over several years, and the parties engaged in settlement discussions through September 2008. In February 2009, the United States filed a Notice of Intervention. The United States did not issue any litigation hold to any relevant federal agencies until after it intervened.

The opinion is worth reading in its entirety, but we note here that one of the more unusual arguments the United States made is that it does not have a duty to take steps to preserve documents relevant to any of the thousands of cases filed in the name, and on behalf, of the United States, unless and until the United States intervenes in the case. DOJ argued that the filing of a qui tam does not make litigation “reasonably foreseeable” – the typically standard for determining when preservation efforts must begin – because “the filing of a qui tam matter does not necessarily result in litigation against the named defendants. In fact, only a small percentage of the filed qui tam matters result in litigation.” This argument is odd, to say the least. The filing of a False Claims Act complaint does not just make litigation “reasonably foreseeable” – it signals actual litigation, at least as to the United States and the relator. (The same cannot be said of the defendant, given that the complaint is filed under seal). Moreover, the government cites no support for the claim that “only a small percentage of the filed qui tam matters result in litigation,” even accepting the implicit and highly questionable claim that the filing of a complaint against a defendant does not by itself qualify as “litigation.”

The court rejected the government’s argument that the United States had no duty to preserve documents prior to the date of intervention. It dismissed out of hand the Government’s claim “that it did not and could not have reasonably anticipated litigation and therefore had no duty to issue a litigation hold until the very day it received permission from the DOJ to proceed with intervention and filed its Notice of Intervention on February 20, 2009.” At a bare minimum, the court noted that the latest that litigation was reasonably foreseeable was when authority to intervene was requested. But on the facts before it, the court held that litigation was reasonably foreseeable no later than when the Defendants rejected the Government’s settlement offer in September 2008. It so holding, the court rejected the Government’s argument “that because there was continuing dialogue with the Defendants [regarding settlement] there was no duty to preserve documents or issue a litigation hold until the Notice of Intervention was actually filed,” stating that the Government’s position “is contrary to law and would in effect do away with the duty to preserve documents and issue a litigation hold pre-litigation, let alone when litigation can be ‘reasonably anticipated’ or is ‘imminent.'” Concluding that the government’s litigation hold notices were untimely, the government failed to take reasonable steps to ensure that even the untimely notices were complied with, and relevant documents likely had been destroyed, the magistrate judge found a waiver of privilege with respect to various categories of documents and awarded the defendants their attorneys’ fees.

The opinion does not directly address the issue of the government’s preservation obligations in that vast majority of qui tam cases in which it does not intervene. But the logical extension of the government’s argument that it has no obligation to preserve documents in cases in which it is a party until it decides to intervene is that the government has no obligation to preserve documents at all in the vast majority of cases in which the government does not intervene. But clearly that cannot be the case; such a position would give the government free rein to intentionally destroy evidence detrimental to relators’ claims and/or helpful to defendants, which would raise obvious due process concerns. For now, this recent decision stands as a reminder that if the government decides not to take reasonable measures to preserve documents while it decides whether to intervene, it will not be relieved of the consequences of its decision based on the argument that it had no preservation obligations prior to intervention.

UPDATE: On October 3, the district judge overruled all of the Government’s objections to the magistrate judge’s rulings and affirmed the magistrate judge’s finding of spoliation and the sanctions that the magistrate judge imposed. A copy of the district court’s order can be found here.