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Knowledge/Scienter

24 June 2016

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.

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11 January 2016

Supreme Court Calls For Views of SG Regarding the Collective Knowledge Doctrine, Violation of Seal Requirements

Continuing a trend of recent attention to significant False Claims Act issues that have divided the courts of appeals, the Supreme Court this morning invited the views of the Solicitor General in a case that implicates two such issues—(1) dismissal for violation of the seal requirement and (2) the so-called collective knowledge theory of scienter.  The specific Questions Presented in the cert petition are:

I.  What standard governs the decision whether to dismiss a relator’s claim for violation of the FCA’s seal requirement, 31 U.S.C. § 3730(b)(2)?

II.  Whether and under what standard a corporation or other organization may be deemed to have “knowingly” presented a false claim, or used or made a false record, in violation of section 3729(a) of the FCA based on the purported collective knowledge or imputed ill intent of employees other than the employee who made the decision to present the claim or record found to be false, where (i) the employee submitting the claim or record independently made the decision to present the claim or record in good faith after reviewing the available information and (ii) there was no causal nexus between the submission of the false claim or record and the purported collective knowledge or imputed ill intent of those other employees?

The petition is here, and amicus briefs filed in support of cert can be accessed here, here, and here.

The Solicitor General will likely file a brief in time for the Court to reconsider the petition before the summer recess at the end of June, and the invitation itself means that the Court is already taking a hard look at the petition.  This is another case to watch closely.

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30 November 2015

D.C. Circuit Rejects FCA Liability Based on Objectively Reasonable Construction of Ambiguous Contract Term

On November 24, 2015, the D.C. Circuit held in United States ex rel. Purcell v. MWI Corp. that representations made to the Government cannot be false when based on an objectively reasonable construction of a contract and in the absence of clear, contrary guidance from the Government.

The United States sued MWI Corp. on a false certification theory arising out of a $74.2 million loan from the Import-Export Bank to Nigeria for the importation and purchase of water pumps.  As part of the financing, the bank had required MWI to certify that it had paid only “regular commissions” to the sales agent.  Some years later, the relator filed suit alleging MWI had paid “non-regular commissions,” pointing to $28 million MWI had paid to its long-term Nigerian sales agent, approximately 30% of the total loan value.  The United States intervened.

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23 October 2015

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.

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06 July 2015

District Court Refuses to Reconsider Bifurcation of Trial between Proof of Falsity and Other FCA Elements

Posted by Kristin Graham Koehler, Monica Groat, and Marina Romani (Summer Associate)

As we have previously discussed on this blog, a court in the Northern District of Alabama last month granted AseraCare’s motion to bifurcate its trial. On June 25, 2015, the court refused the Government’s request to reconsider that decision.

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29 May 2015

Over Government’s Objection, District Court Permits Bifurcation of Trial Between Proof of Falsity and Other FCA Elements

Posted by Scott Stein and Brenna Jenny

A court in the Northern District of Alabama recently granted defendant AseraCare’s motion to bifurcate its trial, limiting the government in the first phase to proving the element of falsity as to its sample of claims.

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13 October 2014

Federal District Court Holds That FCA Defendant Waived Attorney-Client Privilege By Pleading Good-Faith Compliance With the Act

Posted by Jonathan F. Cohn and Brian P. Morrissey

A federal district court in Georgia has ordered a defendant in a False Claims Act case to produce attorney-client privileged communications to the qui tam relator. See United States ex rel. Barker v. Columbus Regional Healthcare System, Inc., No. 4:12-cv-108 (CDL), 2014 WL 4287744 (M.D. Ga. Aug. 29, 2014). The court ruled that the defendant, Columbus Regional Healthcare System, impliedly waived the privilege by pleading in its answer that it did not knowingly violate the FCA and indicating that it would offer evidence at trial that it believed its conduct was lawful.

The relator alleged that Columbus Regional violated the FCA, the Anti-Kickback Statute, 42 U.S.C. § 1320a-7b, and the Stark Law, 42 U.S.C. § 1395nn, when it purchased a cancer treatment center for more than fair market value and, separately, when it entered into remuneration agreements with another cancer treatment center that were not commercially reasonable. The relator alleged that all of these transactions were unlawfully designed to induce the treatment centers to refer patients to Columbus Regional.

In response, Columbus Regional argued that “it believed its conduct was lawful,” and that it planned to “offer evidence at trial” establishing that good faith belief. Columbus Regional, 2014 WL 4287744, *2.

Relying on the Eleventh Circuit’s decision in Cox v. Administrator U.S. Steel & Carnegie, et al., 17 F.3d 1386 (11th Cir. 1994), the district court held that Columbus Regional’s defense waived privilege over communications between Columbus Regional and its attorneys regarding the transactions, Columbus Regional, 2014 WL 4287744, *2. The court reasoned that “when a defendant affirmatively asserts a good faith belief that its conduct was lawful, it injects the issue of its knowledge of the law into the case and thereby waives the attorney-client privilege.” Id. The court reached this conclusion despite acknowledging that Columbus Regional had not asserted an “advice-of-counsel” defense—i.e., Columbus Regional did not argue that legally-privileged advice was the basis for its good-faith belief that its transactions were lawful. Id.

Notably, the district court suggested that Columbus Regional could have preserved the privilege if it had merely “denied” the allegations of wrongful intent “‘without affirmatively asserting that it believed its [conduct] was legal.'” Id. *4. But, since Columbus Regional “intend[ed] to explain fully why its conduct was not knowingly and intentionally unlawful,” the court determined that the privilege had been waived. Id.

It remains to be seen whether other courts will find the district court’s ruling persuasive. In the meantime, however, FCA defendants should be aware that specifically pleading a belief that challenged conduct was lawful may trigger a dispute over whether such a defense waives privilege. Defendants seeking to protect themselves from such an attack should note that, even under the Columbus Regional rationale, defendants who merely deny wrongful intent—without “affirmatively” asserting a good-faith belief that their conduct was lawful—do not waive the privilege.

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04 September 2014

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.

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26 August 2014

Court Rejects “Swapping” Claims, Rejects Claim That “Below Cost” Discounting Violates the Anti-Kickback Statute

Posted by Scott Stein and Brenna Jenny

The Southern District of Ohio recently granted defendants’ motion to dismiss in a FCA case based on alleged violations of the Anti-Kickback Statute (“AKS”) through “swapping.” Swapping allegations can take a variety of forms; here, relator claimed that defendant Mobilex (a provider of mobile, on-site x-ray services to Skilled Nursing Facilities (“SNFs”) and long-term care facilities) deeply discounted its services for Part A beneficiaries while charging higher rates to services for Part B beneficiaries. Because Mobilex’s clients are reimbursed on a per diem basis for the x-rays provided to Part A beneficiaries, the facilities allegedly received remuneration in the form of pocketing the extra discount on Part A services. This remuneration, according to relator, was intended to induce facilities to refer to Mobilex the opportunity to provide x-rays to Part B residents as well, at non-discounted prices.

After more than two years of seeking extensions of time, the United States declined to intervene. The relator moved forward, premising his swapping theory on the argument that Mobilex priced its Part A services below cost. Relator insisted the only appropriate measure of cost was “fully loaded costs,” which includes not only variable expenses, but fixed costs and overhead. There was no direct evidence of an intent to induce referrals through discounted prices. Instead, relator argued that Mobilex was deliberately ignorant to the fact that its Part A services were priced below cost.

In rejecting the relator’s theory of liability, the court relied heavily on an opinion we previously described here, in which a relator’s efforts to box a court into rigidly defining a single standard for calculating whether discounts are “below cost” fell equally flat. First, the court refused to find that Mobilex “knowingly” violated the AKS, ruling that even “arbitrary prices set ‘with intentional disregard for costs’ do not establish inducement” under the AKS. Slip Op. at 10. Second, relator failed even more fundamentally to show that Mobilex’s discounting violated the AKS. Relator had little response to Mobilex’s explanation that its prices were above Fair Market Value (“FMV”), other than to criticize FMV as a metric for analyzing discounts. Although relator cited as dispositive several Health and Human Services, Office of Inspector General (“OIG”) Advisory Opinions describing below cost discounts (often equated to below fully loaded costs) as “suspect,” the court reiterated that, under Supreme Court precedent, agency opinion letters are not entitled to deference, and furthermore, whether OIG further investigates “suspect” discounting practices does not render them per se illegal. The court concluded not only is a “fully loaded costs” analysis not required to determine whether discounting practices violate the AKS, but obligating such an approach would lead to absurd results, e.g., a corporate entity’s headquarters could alter overhead costs only tangentially related to the services at issue, which could nonetheless rework a contract’s fully loaded costs, significantly impacting the calculus of whether ongoing discount arrangements were legal.

Case law regarding the types of discounting practices that will be deemed to have violated the AKS has been sparse, and the OIG’s guidance has been consistently limited. This opinion adds support for the approach that where there is evidence a business’s costs meet at least one rational standard, such as FMV, a plaintiff should not be able to argue that the failure to meet a different standard establishes a violation of the AKS.

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

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25 July 2014

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.

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