A. Brian Albritton at the False Claims Act and Qui Tam Law blog recently posted “Defendant’s Breach of Ambiguous Government Contract Prevents Court from Finding the Defendant Knowingly Submitted a False Claim for Payment.” In the post, he analyzes the recent Third Circuit opinion in U.S. Department of Transportation ex rel Arnold v. CMC Engineering, Inc., et al., __ Fed. Appx.__, 2014 WL 2442945 (3rd Cir. June 2, 2014). In that case, the court dismissed an FCA action after holding that the contract defendant allegedly violated was so ambiguous that any violation could not have been “knowing.” The holding in this case is consistent with those on which we have previously reported (here and here) in which courts have held that ambiguity in allegedly violated regulations precludes a finding of a “knowing” submission of a false claim.
A federal district court in Illinois has held that a trial is necessary to determine whether a pharmacy took sufficient steps to prevent gift cards and loyalty rewards from being provided to government health plan (GHP) beneficiaries. The suit, filed by a Kmart pharmacist, alleges that Kmart offered coupons redeemable for gift cards for consumers who switched their prescriptions to Kmart pharmacies, and operated a loyalty program whereby customers could earn points for spending money at Kmart which could be redeemed for merchandise. Kmart’s policies expressly prohibited the provision of coupons and gift cards to beneficiaries of government programs and prohibited coupons from being used to pay for any prescriptions covered by government programs. Notwithstanding those policies, Kmart issued over 76,000 gift cards in the same transaction as a purchase of a prescription drug by a GHP beneficiary between November 2007 and May 2013. The relator alleged, and the Court concluded, that the provision of these incentives violated the Anti-Kickback Statute. However, Kmart contended that it did not “knowingly” violate the AKS.
In November 2009, Kmart developed an automatic flag system that allowed pharmacists to identify a GHP beneficiary who was ineligible for a gift card or coupon, providing for the first time an automated way for Kmart to “flag” customers who were GHP beneficiaries and thereby prevent them from being offered or utilizing prohibited incentives. Prior to November 2009, Kmart pharmacists could determine whether a customer was a GHP beneficiary through various manual checks, such as reviewing the customer’s health insurance card. However, the relator submitted declarations and deposition testimony from Kmart pharmacists to argue that, prior to implementation of the automated system, there was no reliable way of identifying GHP beneficiaries. That evidence, the Court held, was sufficient to create a triable issue of fact as to whether Kmart’s alleged violation of the AKS prior to November 2009 was “knowing.” “If it is true that Kmart did have all the information it needed to identify GHP beneficiaries for its pharmacy employees, but failed to have an adequate system in [place that allowed them to identify these beneficiaries,” the court held, “then this may be sufficiently reckless to yield False Claims Act liability.”
The November 20 opinion in U.S. ex rel. Yarberry v. Sears Holdings Corporation, et al., Case No. 09-CV-588-MJR-PMF, can be accessed here.
Posted by Jaime Jones and Brenna Jenny
The Eighth Circuit Court of Appeals recently reaffirmed that mere regulatory noncompliance, standing alone, is not sufficient to establish False Claims Act liability for claims submitted to Medicare. Rather, the court held, a relator must allege facts tying a defendant’s alleged conduct to Medicare’s expectations regarding material conditions of payment. See United States ex rel. Ketroser v. Mayo Found., No. 12-3206 (8th Cir. Sept. 4, 2013).
In the Ketroser case, relators alleged that the defendant violated the FCA when it submitted one written report, rather than two, as part of a pathology analysis incorporating a two-stage testing process. According to relators, because the CPT codes for the tests were both included in a section of the Medicare Codebook that required “reporting,” Medicare expected Mayo, to create two separate written reports. Mayo responded that it created a written report of the first test, and more broadly “reported” the results of the second test through oral communications between physicians and supplemental written comments as needed.
The court affirmed the district court’s dismissal of the claim based on relators’ failure to submit any “specific evidence” that Medicare considered separate written reports to be a material condition of payment. In this regard, the court joined other Circuits, including the Second, Fifth, Sixth, Seventh, and Ninth, in holding that pleading a “claim of regulatory noncompliance” does not satisfy FCA pleading requirements.
Furthermore, the court suggested that even if Medicare had expected a separate written report as a condition of payment, the Codebook’s “reporting” requirement was ambiguous, and Mayo’s reasonable interpretation negated any inference that Mayo had “knowingly” submitted a false claim. As other courts have held (see related posts here and here), the Eighth Circuit reiterated that where a defendant’s “interpretation of the applicable law is a reasonable” one, relators fail to plead the requisite scienter under the FCA.
Posted by Gordon Todd and Jeff Beelaert
In Watson v. King-Vassel, No. 12-3671 (7th Cir. Aug. 28, 2013), the Seventh Circuit had stern words for a relator’s unsavory litigation tactics, but also declined to endorse a rule mandating expert testimony on certain issues in every case.
The Relator, Dr. Watson, alleged that defendant Dr. King-Vassel’s off-label prescription of psychotropic drugs to a minor caused the submission of false claims to the Medicaid program. The defendant sought summary judgment because, inter alia, Relator had failed to adduce any expert testimony, including to explain how Medicaid claims are submitted, to prove that by prescribing off-label the defendant knowingly caused the submission. The district court granted summary judgment, holding that expert testimony would be required to explain whether defendant actually caused the claims to be filed, and also holding that expert testimony would be required to explain pharmaceutical data including information in medical compendia, i.e., whether a submitted claim was false.
The Seventh Circuit reversed. As to the first issue, the Court held that expert testimony was not required to prove either how the Medicaid system works, or the defendant doctor’s knowledge regarding the submissions. Instead, a relator need only show that the defendant “had reason to know of facts that would lead a reasonable person to realize that she was causing the submission of a false claim,” or that she “failed to make a reasonable and prudent inquiry into that possibility.” The minor’s mother had testified that she had provided defendant with the minor’s Medicaid billing information and had never paid for the services out-of-pocket. This, the Circuit held, was sufficient for a reasonable juror to extrapolate the defendant’s state of mind. The Circuit rejected the district court’s characterization of Medicaid as a “grand mystery” and “black box,” instead analogizing it to a car: even though “most people could not explain every step turn-key and ignition, the cause-effect relationship is commonly appreciated.” In light of this analogy, a reasonable juror could find, without the aid of expert testimony, that the doctor’s prescription caused a Medicaid claim to be filed.
The Court also rejected as “premature and overbroad” the District Court’s blanket statement that “medical documents typically are not readily understandable by the general public,” thereby requiring expert testimony to explain medical compendia in every case. Instead, the Circuit held that whether such testimony is required turns on a more case-specific analysis as to whether a particular off-label use is supported by one or more compendia. On remand, the Court noted, a more specific analysis may show that the lack of expert testimony is indeed fatal.
While reversing summary judgment, the Court disapproved sternly of the Relator’s “unsavory” litigation generation tactics. The Relator had never treated or even met the patient, but had instead advertised for minor Medicaid patients to “participate in a possible Medicaid fraud suit.” Relator then secured the minor’s medical records by soliciting the minor’s mother to lie to the defendant doctor about their intended use. The Court approved of the District Court’s use of its inherent powers to impose monetary sanctions on Relator and his counsel for their conduct, which the Circuit hoped would dissuade the future use of such tactics.
Posted by Scott Stein and Nirav Shah
A recurring issue in FCA cases based on alleged violations of complex statutory or regulatory requirements is the extent to which, as a practical matter, “regulatory ambiguity” is a viable response to the argument that defendants knowingly submitted false claims to the government. We were encouraged when, this past summer, a Pennsylvania district court dismissed FCA claims against a variety of pharmaceutical manufacturers because the relator failed to show that the defendants acted knowingly or recklessly in light of regulatory ambiguity on a complicated price reporting issue. See U.S. ex rel. Streck v. Allergan, et al., No. 08-5135, 2012 WL 259379 (E.D. Pa. Jul. 3, 2012).
A recent decision from the Sixth Circuit provides additional support for this argument. In United States ex rel. Williams v. Renal Care Group, Inc., No. 11-5779, 2012 WL 4748104 (6th Cir. Oct. 5, 2012), the Court reversed a district court’s grant of summary judgment in favor of the government and ordered summary judgment in favor of the defendant, concluding that the defendants’ good-faith efforts to “sort through ambiguous regulations” precluded the government from meeting the knowledge requirement of the FCA.
The United States alleged that defendant, Renal Care Group, Inc. (“RCG”), formed a wholly-owned subsidiary, Renal Care Group Supply Company (“RCGSC”), for the sole purpose of taking advantage of a higher Medicare payment rate. This rate was available only to certain patients and payable only to specific entities—namely, those that were not “renal dialysis facilities.” Op. at 15. The government alleged that in light of overlapping officers, shared office space, and, concurrent financial management, RCGSC was a sham alter-ego of RCG, making claims submitted by RCGSC ineligible for payment and therefore false. Op. at 6.
The core issue on which liability turned was “the degree of ‘separateness’ demanded under the pertinent Medicare statutory provisions and regulations in order for a supplier to be deemed ‘not a provider of services [or] a renal dialysis facility.'” Op. at 23. The Court first addressed this question in the context of whether the claims submitted were “false.” The government contended that the regulations at issue prohibited a subsidiary (here, RCGSC) from receiving Medicare reimbursement, meaning that claims for services that it rendered were false. The Court disagreed with the Government’s position, concluding that the neither the statute nor regulations was clear on this issue. Given that regulatory scheme was intended “to ensure that home dialysis patients could engage in cost comparisons,” there was no reason that Congress would have barred a wholly-owned subsidiary from being eligible for reimbursement. Op. at 15.
But turning to the issue of “knowledge,” the Court concluded that given the complex regulatory backdrop and the defendants’ diligence in attempting to comply with the letter of the law, the defendants could not possibly be deemed to have “knowingly” violated the FCA. The Court credited the defendants’ diligence in attempting to determine whether its reimbursement arrangement passed legal muster. Op. at 18. Indeed, defendants engaged legal counsel had attempted to obtain some degree of assurance from the government by submitting a letter requesting confirmation of the legality of the defendants’ corporate arrangement (though no response to the letter was received). Defendants also openly disclosed the corporate structure to the government in various regulatory filings. Taken together, these factors showed that the defendants did not act in “reckless disregard” of the truth of falsity of their claims, but rather made, transparent, good-faith efforts to ensure their approach was lawful.
Another aspect of the Court’s opinion is worth noting. As in many FCA cases, the plaintiff(here, the United States) sought to cast aspersions on the defendants by emphasizing that RGC created RCGSC solely out of a desire to increase profits by taking advantage of certain reimbursement advantages. The opinion noted that the government “focuse[d], somewhat obsessively,” on this assertion to argue that claims submitted by RCGSC were ipso facto false. The Court properly rejected the government’s attempt to suggest that a defendant’s desire to generate profit from participating in federal healthcare programs is, in and of itself, an indicator of fraud, stating “Why a business ought to be punished solely for seeking to maximize profits escapes us.” Op. at 9. As the Court’s comment recognizes, the desire of a for-profit company to maximize profits is irrelevant to the question of whether the means it uses to generate profits is lawful. The fact that the defendants set up a separate corporation in which to enroll certain dialysis patients to garner more Medicare revenue could not, without more, establish any intent or knowledge to commit fraud.
In Halasa v. ITT Educational Services, Inc., No. 11-3305 (8/14/12), the Seventh Circuit affirmed the dismissal of the plaintiff’s FCA retaliation claim, finding that he had failed to present an issue of material fact that he was fired “because of” actions protected under the FCA. The undisputed evidence showed that the individuals who made the decision to terminate Halasa’s employment were unaware of his protected conduct. Halasa argued the Seventh Circuit should nevertheless “find causation as a matter of law,” imputing to ITT and its agents any knowledge of the ITT employee to whom Halasa did report potential violations.
The Seventh Circuit rejected this argument, which it said “seriously misunderstands the way liability rules work in the corporate setting.” “Apart from narrow exceptions like the one that has come to be called the ‘cat’s paw’ theory,” the court concluded, “companies are not liable under the False Claims Act for every scrap of information that someone in or outside the chain or responsibility might have.”
In a case of first impression in the Ninth Circuit, the court held in United States ex rel. Hooper v. Lockheed Martin Corp., __ F.3d __, 2012 WL 3124970 (9th Cir. Aug. 2, 2012) that “false estimates, defined to include fraudulent underbidding in which the bid is not what the defendant actually intends to charge, can be a source of liability under the FCA, assuming that the other elements of an FCA claim are met.” (Id. at *9).
The defendant argued that an allegedly false estimate cannot form the basis of FCA liability, because it is an opinion or prediction that cannot be false within the meaning of the FCA. In reversing the district court’s grant of summary judgment, the Ninth Circuit reasoned that an opinion or estimate “carries with it an implied assertion, not only that the speaker knows no facts which would preclude such an opinion, but that he does know facts which justify it.” (Id. (citations and internal quotations omitted)).
In a passage of the opinion somewhat in tension with its holding – that a bid lower than “what the defendant actually intends to charge” can give rise to FCA liability – the court found the district court erred by requiring evidence of the defendant’s wrongful intent. (Id. at *9). In opposing summary judgment, the relator submitted testimony that the defendants’ employees were instructed to lower their cost estimates without regard to actual costs, and that the defendant “was dishonest in the productivity rates that it used to determine the cost.” (Id.). No evidence appears to have been submitted regarding what the defendant intended to charge. Nevertheless, citing the FCA’s definition of “knowing” to include deliberate ignorance and reckless disregard, the court found this evidence sufficient to prevent summary judgment and require a trial on the merits. (Id.).
In support of its ruling, the Ninth Circuit relied on the Supreme Court’s decision in United States ex rel. Marcus v. Hess, 317 U.S. 537 (1943), which the court interpreted as supporting a “‘fraud-in-the-inducement’ theory of FCA liability.” (2012 WL 3124970 at *8). Thus, this decision will likely be cited as support for all types of “fraud-in-the-inducement” theories of FCA liability, including fraudulent underbidding. Precisely when an ultimately inaccurate cost estimate becomes “false or fraudulent,” however, is not clearly answered by Hooper and will no doubt be the subject of further litigation.
In Grand Acadian v. United States, — Fed. Cl. –, 2012 WL 1882831 (May 23, 2012), the government filed its usual trio of fraud-related counterclaims against the plaintiff contractor, Grand Acadian, Inc., pursuant to the FCA, the Forfeiture of Fraudulent Claims Act, and the fraud provision of the Contract Disputes Act (CDA). Grand Acadian’s suit against the government arose from a cancelled construction project on property the government had leased from Grand Acadian to serve as a location for emergency housing for victims of Hurricanes Katrina and Rita. Following the government’s termination of the lease, Grand Acadian submitted an approximately $2.8 million settlement proposal to the government. When the parties failed to reach an agreement, Grand Acadian submitted two certified CDA claims to the contracting officer – seeking $5.7 million in an initial claim and $5.75 million in a second, revised claim – for alleged necessary repairs and restoration of the property. Grand Acadian provided no supporting documentation for its first claim; similarly, the revised claim contained no explanation regarding why Grand Acadian’s certified claim cost to replace soil was twice as high as the cost in the settlement proposal.
The government’s fraud counterclaims were based primarily on alleged misrepresentations of material fact in Grand Acadian’s CDA claims concerning the pre-lease conditions of the property. With respect to each of the alleged misrepresentations, the Court of Federal Claims (COFC) held that the government failed to “supply proof sufficient to carry the government’s evidentiary burden.” For example, with respect to the pre-lease condition of the property’s trees, the court credited the testimony of the contractor’s president, who had “estimated – but did not count – the number of trees standing” on the property in question. The COFC agreed with the plaintiff that the company’s estimate “even if inaccurate – was not unreasonable.” Although the COFC entered judgment for the government on Grand Acadian’s claims, the COFC also rejected all of the government’s counterclaims, explaining that “the government has not carried its burden to establish the requisite mental state” with regard to the plaintiff’s CDA claims. This case demonstrates that while a contractor certainly can get into trouble for submitting baseless “estimates” – see, e.g., Daewoo Engineering and Const. Co., Ltd. v. United States, 557 F.3d 1332 (Fed. Cir. 2009) –the COFC will hold the government to its burden of proof, so that contractors need not fear utilizing reasonable, good faith estimates to calculate claimed damages.
In a decision released yesterday, Judge Robreno of the Eastern District of Pennsylvania dismissed all FCA claims against nine pharmaceutical manufacturers pursuant to Rule 8(a), finding that relator had failed to plead any evidence they acted knowingly or recklessly in light of regulatory ambiguity. U.S. ex rel. Streck v. Allergan, et al., No. 08-5135 (E.D.P.A. Jul. 3, 2012). Relator’s claims against those defendants were based on allegations that they had improperly calculated Average Manufacturer Price (“AMP”) by including certain price increases that triggered credits owed by wholesalers in the calculation of service fees owed to those wholesalers, which fees were in turn excluded from the manufacturers’ calculation of AMP as “bona fide service fees.” Relying on Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47 (2007), Robreno held that due to the lack of any statutory or regulatory guidance regarding price appreciation credits and the calculation of AMP, relator was required but had failed to plead facts to show that defendants’ interpretation of those regulations was unreasonable. The court found that the conduct of those manufacturers was “not unreasonable, let alone reckless,” and dismissed all claims against them with prejudice as to the relator.
The court also dismissed in part the claims against another group of four manufacturers. These “discount defendants” were alleged to have included service fees paid to wholesalers as discounts in their calculations of AMP. While the court dismissed all claims against the discount defendants for conduct prior to 2007, it allowed later claims to proceed based on regulatory developments occurring in 2007.
This decision, like the Supreme Court’s decision in Christopher v. SmithKlineBeecham Corp., recently reported on this blog, should give relators’ counsel and the government pause when considering FCA claims based on alleged violations of ambiguous statutes or regulations.
Sidley represented three of the defendants against whom all claims were dismissed in the litigation.
On March 23, 2012, DOJ issued a press release, announcing that Lockheed Martin has agreed to pay $15,850,000 to settle allegations under the False Claims Act that the government was overcharged as a result of a seven-year pricing scheme by Tools & Metals Inc. (TMI), a subcontractor that sold perishable tools to Lockheed Martin for use on military aircraft. In the civil claims the government brought against Lockheed, the government alleged that “Lockheed Martin acted recklessly by failing to adequately oversee TMI’s charging practices and by mishandling information revealing these practices.” Because so many FCA claims are fact-driven, we reviewed the government’s complaint for details related to Lockheed Martin’s alleged recklessness.
In its complaint, the government alleged, in part, that Lockheed Martin violated three provisions of the federal False Claims Act, 31 U.S.C. §§3729(a)(1), (a)(2), and (a)(7). (The compliant, which was filed in November 2007, predates 2009 revisions to the statute that correspond to the current 31 U.S.C. §3729(a)(1)(A); 31 U.S.C. §3729(a)(1)(B); and 31 U.S.C. §3729(a)(1)(G), respectively.) All three provisions require that false claims be made “knowingly.” Under the FCA, the terms “knowing” and “knowingly” mean that “a person, with respect to information, (i) has actual knowledge of the information; (ii) acts in deliberate ignorance of the truth or falsity of the information; or (iii) acts in reckless disregard of the truth or falsity of the information.” 31 U.S.C. §3729(b)(1)(A). For each of the FCA claims, the government alleged generally that “Lockheed acted knowingly in connection with the falsity of its claims for payment, [Forward Pricing Rate Agreement] (FPRA) cost proposals, FPRA’s and certifications of final, year-end manufacturing overhead costs, among other Lockheed omissions and submissions.”
By way of background, the government alleged that Tools & Metals, Inc. (TMI) and Lockheed executed a five year, sole source, integrated supply contract for TMI to supply perishable tools (the Master Agreement). Lockheed allegedly knew that the cost of tools to be purchased by Lockheed would be passed on, in whole or in part, to the United States under Lockheed’s contracts with government agencies. TMI inflated its reported costs, which Lockheed paid. In August 2005, TMI admitted to Lockheed that TMI had intentionally inflated its costs in the total amount of $17.735 million since January 1, 1998. Lockheed’s own subsequent calculations indicated that TMI had unlawfully inflated costs to the tune of $18.9 million.
The crux of the recklessness allegation is the government’s claim that Lockheed Martin could have and should have prevented TMI’s practice of unlawfully inflating its costs but failed to do so. The Master Agreement gave Lockheed’s buyer extensive audit rights to inspect TMI’s books and records. Nonetheless, while the Master Agreement was in effect, according to the government, Lockheed agreed to a severely restricted review of TMI costs. Although Lockheed’s buyer audited TMI twice a year, the audits were allegedly predictable and superficial , with TMI allegedly pre-selecting the small, predetermined number of hard copy vendor invoices that Lockheed’s buyer reviewed. The government also alleged that occasionally TMI provided altered invoices. The government claimed that Lockheed never inspected TMI’s actual books and records or its financial reports until late 2004 – and then only when TMI and Lockheed had learned that a federal prosecutor was investigating TMI’s costs. The government also claimed that Lockheed did not contact any of TMI’ s suppliers to verify the costs that TMI had reported to Lockheed even though Lockheed had purchased perishable tools from many of these suppliers before TMI and Lockheed’s Mater Agreement. Lockheed allegedly never requested audit assistance from DoD’s Defense Contract Audit Agency. Instead, Lockheed allegedly repeatedly used the same auditor, who had a long relationship with TMI. The government also alleged that several of Lockheed’s manufacturing managers had complained about price gouging by TMI.
In sum, the government’s case for recklessness was based on Lockheed’s alleged lack of oversight of TMI, such that Lockheed allegedly knowingly created false records and presented false claims to the United States for payment or approval.