Original Source

13 July 2015

Ninth Circuit Abrogates Precedent To Loosen Original Source Requirement

Posted by Scott Stein and Paul Belonick

On July 7, 2015, the Ninth Circuit Court of Appeals announced its decision in two consolidated False Claims Act cases, U.S. ex rel. Hartpence v. Kinetic Concepts, Inc. (12-55396) and U.S. ex rel. Godecke v. Kinetic Concepts, Inc. (12-56117), and expressly abrogated the Ninth Circuit requirement that the relator have had a “hand in the [public] disclosure” to qualify as an original source, first announced by the Circuit in U.S. ex rel. Wang v. FMC Corp., 975 F. 2d 1412 (9th Cir. 1992).


18 May 2015

District Court Dismisses Legal Aid Group’s Qui Tam Action Against Mortgage Lender On Public Disclosure Bar Grounds

Posted by Jonathan Cohn and Brian Morrissey

On May 12, a federal district court dismissed what the New York Times had described as an “innovativequi tam suit against U.S. Bank, N.A., alleging that the lender had submitted over $2.3 billion in false claims for FHA insurance payments. United States v. U.S. Bank, N.A., No. 3:13-cv-704 (N.D. Oh. May 12, 2015). In an unusual step, the suit was brought by a legal aid group, Advocates for Basic Legal Equality, Inc. (“ABLE”), rather than by an individual relator.


10 April 2015

Opinion Dismissing FCA Claims Based on Prior Disclosure to Government Officials Highlights Debate About What Constitutes A “Public Disclosure”

Posted by Scott Stein and Emily Van Wyck

In United States ex rel. Rockey v. Ear Inst. of Chicago, No. 11-cv-07258 (N.D. Ill. Mar. 25, 2015), the relator alleged that her former employer, the Ear Institute of Chicago, regularly submitted false claims to Medicare by submitting claims for services rendered by an audiologist under a physician’s name. Additionally, some of these claims were for services not covered by Medicare including therapeutic services performed by an audiologist or services performed without a physician order. In November 2010, the relator alerted the Ear Institute to this improper billing practice and shortly thereafter, the Ear Institute sent a letter identifying the issue to Wisconsin’s Medicare contractor and explaining that none of these claims resulted in overpayments. The letter did not address claims submitted for services not covered by Medicare. The relator filed suit in October 2011 against the Ear Institute, all of its doctors and audiologists, and its billing contractor. Defendants then moved to dismiss the complaint under the public disclosure bar.

The relator argued that the letter failed to sufficiently disclose all of her claims. The court disagreed with the relator explaining that the letter disclosed all elements necessary to show that defendants violated Medicare regulations and, as such, the letter alerted Medicare to “the likelihood of wrongdoing.” That disclosure, the court held, was sufficient to trigger the public disclosure bar.

The district court’s holding is consistent with Seventh Circuit precedent that disclosures to “a competent public official . . . who has managerial responsibility for the very claims being made” qualify as public disclosures. Glaser v. Wound Care Consultants, Inc., 570 F.3d 907, 909 (7th Cir. 2009). The Seventh Circuit’s view makes sense; there is little reason to reward whistleblowers when the defendant has self-disclosed to a responsible government official prior to the filing of a lawsuit. However, the Seventh Circuit standard does conflict with rulings from other circuits, which hold that a disclosure must be made to the public writ large to qualify under the public disclosure bar. We have written about some of these other decisions here and here.

The court then assessed whether the relator qualified as an original source. The original source provision requires that an individual have “knowledge that is independent of and materially adds to the publicly disclosed allegations.” The court noted that “materially adds” is not defined in the statute and no federal appeals court has interpreted the phrase. The district court therefore applied the “usual definition”—that the relator’s knowledge must have a “natural tendency to influence” or to be “capable of influencing” payment. In arguing that the original source provision applied, the relator claimed that while defendants identified their billing errors in the letter, they did not admit that they knowingly violated Medicare billing regulations. The court disagreed, stating that defendants admitted their billing practices were knowing and intentional. The relator also claimed that she provided detailed examples of fraudulent claims. The court rejected the relator’s proposition that these details materially added to defendants’ “comprehensive mea culpa.” Thus, the relator was not an original source and the public disclosure bar applied.

Even if these claims were not barred by public disclosure, the court found that the claims would still fail because the relator did not adequately allege knowledge, falsity, or materiality. With regard to the remaining claims relating to reimbursement for noncovered services (the claims that were not disclosed in the letter) and the conspiracy and retaliation claims, the court denied defendants’ motion to dismiss.

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

13 March 2015

Federal District Court Holds That Former Employee Qualifies As “Original Source” Of Allegations Regarding Company Conduct That Occurred After His Departure

Posted by Kristin Graham Koehler and Brian Morrissey

A federal district court in Pennsylvania recently held that a former employee of Novartis Pharmaceutical Corporation was an original source of allegations regarding company conduct that occurred after his termination, and that he could overcome the FCA’s public disclosure bar on that ground. See United States ex rel. Galmines v. Novartis Pharmaceuticals Corp., No. 06-3213, 2015 WL 851837 (E.D. Pa. Feb. 27, 2015).

Donald Galmines, a Novartis senior sales consultant, filed a qui tam complaint two months after leaving the company in 2006. Galmines alleged that Novartis violated the FCA by promoting the eczema treatment Elidel for various off-label uses. The complaint remained under seal for over four years. Ultimately, the United States did not intervene, and Galmines proceeded with the litigation.

A dispute between the parties emerged as to whether Galmines could obtain discovery regarding conduct that occurred after he filed his complaint. The district court ruled that, to obtain such discovery, Galmines would be required to specifically allege that the fraudulent scheme continued past the date his complaint was filed.

Galmines sought leave to file a fourth amended complaint to add these new allegations. Novartis opposed the amendments on various grounds, including that the new allegations were prohibited by the public disclosure bar. By that time, the district court already had decided that, although Galmines’ allegations regarding conduct that occurred during his employment were based on public disclosures, Galmines overcame the public disclosure bar because he qualified as an “original source” of those allegations. See 31 U.S.C. § 3730(e)(4)(A). Galmines’ motion to amend his complaint required the court to decide whether Galmines could be an original source of allegations regarding conduct that occurred after his departure, and without his independent knowledge. Finding “little law on point” and acknowledging that it was “a close question,” the Court held that Galmines was an original source of the new allegations because they were based on Galmines’ assertion that the same “underlying scheme” he observed during his employment “continu[ed]” after he left. 2015 WL 851837, *3.

Rejecting Novartis’s counterarguments, the district court refused to “read a strict time limitation into the original source exception, such that a relator’s status as an original source begins and ends strictly when her direct and independent knowledge begins and ends.” Id. The district court acknowledged that Third Circuit precedent requires a qui tam relator to have “direct and independent knowledge” of the “most critical elements” of an alleged fraud. United States ex rel. PBT v. Housing Auth., 186 F.3d 376, 388–89 (3d Cir. 1999). But the court ruled that “[t]he precise start and end dates of a fraudulent scheme are not ‘critical elements'” of an FCA claim. 2015 WL 851837, at *3 (emphasis added). Rather, in the court’s view, the “precise duration of a fraudulent scheme goes not to liability but to damages—and not even to the existence of damages, but to the quantum.” Id. The court reasoned further that “[b]arring the relator . . . from bringing a claim for the entire fraudulent scheme would not comport with common sense, the general principles of law, or the . . . False Claims Act,” including the first-to-file requirement, which allows only the first relator to bring a qui tam suit regarding the scheme.

The district court’s ruling conflicts with the District of Massachusetts’ decision in United States ex rel. Duxbury v. Ortho Biotech Prods., L.P., No. 03-12189, 2010 WL 3810858 (D. Mass. Sept. 27, 2010), which held that a relator could only serve as an original source for the period of time he was employed by the defendant. Id. at *2–3. The court in Galmines recognized this conflict, but found “the line drawn in Duxbury . . . untenable.” 2015 WL 851837, at *5. According to Galmines, once a relator qualifies as an “original source for a fraudulent scheme,” he or she should be permitted to “pursue the full extent of that fraudulent scheme,” even those portions of the scheme that occurred after his or her direct and independent knowledge ceased. Id.

As the district court’s opinion notes (and as we have discussed previously), the law on this issue is still developing. However, if Galmines’ approach prevails over Duxbury, it could substantially impact qui tam defendants in litigation with former employees. By conferring “original source” status on relators for allegations that continue past their employment, Galmines entitles relators to significantly more discovery—and, potentially, greater damages—than the Duxbury approach would allow.

09 March 2015

District Courts Split Over Whether Relators Can be Original Sources of Claims Based on Misconduct Occurring After Employment Termination

Posted by Jaime L.M. Jones and Brenna Jenny

On March 4, 2015, the Central District of Illinois granted a defendant hospital’s motion to dismiss FCA claims based on “upcoding” allegations, holding the relator was not an original source of certain allegations and finding his remaining allegations insufficient to satisfy the requirements of Rule 9(b). U.S. ex rel. Gravett v. The Methodist Med. Ctr of Ill., No. 12-1008 (C.D. Ill. Mar. 4, 2015). In reaching its decision the court rejected relator’s argument that he could be the original source of allegations based on conduct that occurred after he left defendant’s employ, breaking with recent precedent out of the Eastern District of Pennsylvania. See U.S. ex rel Galmines v. Novartis Pharma. Corp., No. 06-cv-03213 (Feb. 27, 2015).

The relator in U.S. ex rel Gravett worked as an emergency room physician at Methodist Medical Center until January 1, 2007. According to his allegations, Methodist Medical Center employed coding software that it knew had a tendency to inflate the otherwise applicable CPT codes for physician and hospital services to codes associated with higher reimbursement. As a result, the relator alleged the submission of false claims for patients treated during the period 2006-2011. The defendant moved to dismiss relator’s claims under the public disclosure bar, arguing that it had disclosed the essential elements of the alleged fraud to the U.S. Attorney’s Office in the course of a government investigation beginning in 2010. Following Seventh Circuit precedent, the court held that relator’s allegations were publicly disclosed before proceeding to assess whether the relator qualified as an original source of those allegations. The court held that relator could not have direct knowledge of any alleged upcoding that occurred after his employment ended. As such, he could not be an original source of those allegations, which were barred.

The Central District of Illinois’ refusal to consider allegations of misconduct occurring after the relator’s employment was terminated stands in contrast to a recent order by the Eastern District of Pennsylvania in U.S. ex rel Galmines v. Novartis Pharma. Corp. Under an earlier ruling, the relator’s allegations—that during the time of his employment at Novartis, the company engaged in off-label marketing and entered into kickback arrangements with respect to the drug Elidel—had been deemed publicly disclosed. Nonetheless, the court concluded that the relator was an original source of those allegations. The relator subsequently moved to amend his complaint to extend the time period of the alleged misconduct past the termination of his employment. The court granted the motion, ruling that relators may “pursue the entire fraudulent scheme for which they have direct and independent knowledge of the operative substantive facts,” without limitation to the “specific time periods for which they have direct and independent knowledge.” The court viewed this conclusion as mandated by how the public disclosure and first-to-file rules have been interpreted. In particular, the court was concerned that constraining a relator to the time period of his direct involvement could create situations in which no relator could bring a lawsuit for a particular time period of a fraud. For example, this could arise where an original source who was the first to file lacked direct knowledge of a later portion of the scheme, but would-be relators with direct knowledge as to this later period would be barred from filing a suit under the first-to-file rule. The Galmines court further ruled that because the relator had sufficiently alleged a course of conduct continuing past his misconduct, he could amend his complaint and obtain discovery for conduct occurring after he filed earlier iterations of his complaint.

In contrast to the claims arising from conduct after his termination, the Gravett court held the relator was the original source of allegations related to upcoding he observed during his employment. As to that alleged upcoding, the court ruled that despite his direct knowledge relator failed to include any particulars regarding the false claims, such as invoices or requests for payment to a federal healthcare program that resulted from the alleged upcoding. Under well-established precedent, relators advancing upcoding allegations are only entitled to a relaxation of Rule 9(b)’s requirement to plead specific information of at least one submitted false claim if they are “in a special position of personal knowledge or involvement in the billing practices of the defendant that affords some indicia of reliability to the allegations.” The Gravett court determined that as a former emergency room physician, the relator was only involved in the delivery of care, and he lacked “first hand knowledge of Defendants’ actual billing practices, submission of claims for payment, or receipt of payments from the Government payors.” Absent actual involvement in claims or billing practices, the relator was effectively relying on “rumor or innuendo.” Thus, the court dismissed relator’s remaining claims pursuant to Rule 9(b).

A copy of the opinion in U.S. ex rel. Gravett v. The Methodist Med. Ctr of Ill., No. 12-1008 (C.D. Ill. Mar. 4, 2015) can be found here.

A copy of the opinion in U.S. ex rel Galmines v. Novartis Pharma. Corp., No. 06-cv-03213 (Feb. 27, 2015) can be found here.

25 February 2015

Third Circuit Deems Pharmacist’s Assessment Of Publicly Available Data Insufficient To Qualify Him As An Original Source

Posted by Jaime L.M. Jones and Jessica Rothenberg

In a recent decision, the Third Circuit provided additional guidance on the scope of the original source exception to the FCA’s public disclosure bar. In U.S. ex rel. Morgan v. Express Scripts, Inc., the court affirmed the dismissal of a qui tam suit based on allegations – widely covered in numerous lawsuits and media reports – that defendants artificially inflated Average Wholesale Prices (“AWPs”) for brand-name drugs. Relator David Morgan, a pharmacist, was never employed by any of the defendants and learned of the alleged scheme to inflate AWPs only through his review and comparison of two publicly available price listings. The court explained that knowledge gained through reviewing files—which was the full extent of Morgan’s “diligence” that led to his discovery of the price inflation—is not sufficient to demonstrate the “direct and independent knowledge” that is required to qualify as an original source. The court went on to note that Morgan’s general knowledge of the pharmaceutical industry, although it may have informed his review of the publicly available information, also was not enough to rescue his claims under the original source exception. The court then applied the familiar two step analysis under the public disclosure bar and found that Morgan’s allegations of a price inflation scheme were (1) disclosed in the news media, previously filed lawsuits, and a Congressional report, and (2) based on those public disclosures. In this connection, the court noted that the mere fact that Morgan calculated specific “markups” tied to the allegedly inflated AWPs was not sufficient to “remove his allegations from the public disclosure realm.” Thus, and since Morgan was not the original source of the allegations in his complaint, the court affirmed the district court’s dismissal of his claims for lack of subject matter jurisdiction under the pre-FERA version of the public disclosure bar.

A copy of the Third Circuit’s opinion in U.S. ex rel. Morgan v. Express Scripts, Inc., No. 14-1029 (3d Cir. 2015) can be found here.

05 December 2014

Ninth Circuit Agrees to Consider En Banc Whether to Loosen Original Source Requirement

On December 3, the Ninth Circuit ordered rehearing en banc in two consolidated False Claims Act cases addressing the FCA’s “original source” exception to the public disclosure bar. The district court dismissed the relators’ complaints on the ground (in part) that their claims were based on publicly disclosed information, and that the relators were not original sources. The district court, relying on the Ninth Circuit’s opinion in U.S. ex rel. Wang v. FMC Corp., 975 F. 2d 1412 (9th Cir. 1992), held that to qualify as an original source, the relator must have “played a part in publicly disclosing the allegations and information on which their suits were based.” The relators argue that this “hand in the disclosure” requirement was abrogated by the Supreme Court’s decision in Rockwell Int’l Corp., v. United States, 549 U.S. 457 (2007), in which the Court stated that the information about which the relator must have “direct and independent knowledge” to qualify as an original source is the information on which his or her claims are based. Relators contend that Rockwell abrogates Wang’s requirement that original source status be linked to the public disclosures at issue, i.e., that so long as a relator has direct and independent knowledge of the information on which his or her claims are based, it is irrelevant that the relator played no role in the public disclosure of those allegations. It is this issue which the Ninth Circuit is posed to consider en banc. If the Court concludes that Wang is no longer good law, it will be easier for relators to establish original source status in the Ninth Circuit.

The cases are US ex rel. Hartpence v. Kinetic Concepts, Inc. (12-55396) and US ex rel. Godecke v. Kinetic Concepts, Inc. (12-56117). The matter is scheduled to be reargued during the week of March 16, 2015.

31 October 2014

Ninth Circuit Affirms Dismissal Under Public Disclosure Bar, Confirms Disclosure to Public at Large Not Necessarily Required

Posted by: Scott Stein and Christopher Munsey

In an October 29, 2014 opinion in Malhotra v. Steinberg, the Ninth Circuit affirmed the dismissal of an FCA action under the public disclosure bar, holding that information obtained from a deposition taken by the Office of the United States Trustee in a bankruptcy case was publicly disclosed where the relators learned of key facts on which the complaint was based in the deposition, and the relators were “outsiders” to the Trustee’s Office investigation.

The relators, the Malhotras, are a married couple who sought Chapter 11 bankruptcy protection. After meeting their bankruptcy trustee, they quickly came to suspect, and subsequently gathered evidence, that he was working with a real estate agent in a number of cases to sell bankruptcy estate properties for what the relators believed was less than fair value, and that in a number of cases the properties were sold to associates of the trustee who then resold them for a large profit. Based on their findings, the relators suspected, but could not prove, that the trustee was receiving illicit payments for orchestrating the sales.

Relators shared their evidence and suspicions with the Trustee’s Office, which opened an investigation sometime later only after a former employee of the trustee made similar allegations. In connection with the investigation, the Trustee’s Office deposed the real estate agent. The deposition was noticed in the relators’ bankruptcy case, as theirs was the only open case in which the trustee and real estate agent had worked together. The Malhotras attended the deposition, during which the real estate agent admitted that he was hired by the trustee to sell bankruptcy estate property in return for a percentage of the commissions on the sales.

The Malhotras subsequently filed an FCA case, alleging that claims that the trustee presented to the bankruptcy court to receive payment of trustee’s fees were fraudulent because they failed to disclose his arrangement with the real estate agent and his role in the resale of estate properties. The defendants moved to dismiss the complaint for lack of subject matter jurisdiction under the public disclosure bar, arguing that the transactions at issue were disclosed in the Trustee’s Office’s deposition. The district court found that the deposition constituted a public disclosure and that the relators were not original sources of the information underlying the transactions, and dismissed the case for lack of subject matter jurisdiction.

Analyzing the issue under the pre-FERA public disclosure bar, the Ninth Circuit agreed that disclosure in the deposition constituted disclosure “in a criminal, civil, or administrative hearing, in a congressional, administrative, or Government Accounting Office report, hearing, audit, or investigation, or from the news media.” 31 U.S.C. § 3730(e)(4)(A) (2006). Specifically, the court concluded that a deposition taken in connection with a Trustee’s Office’s internal investigation “fits comfortably” within the meaning of “administrative … investigation.” Moreover, the relators did not challenge the district court’s holding that their action was “based upon” transactions disclosed in the deposition, insofar as their allegations were “substantially similar to” (if not actually based upon) facts discovered in the deposition.

As to whether disclosure in the deposition was “public,” the court relied on the framework established in its earlier decision in Seal 1 v. Seal A, 255 F.3d 1154 (9th Cir. 2001). In that case, the court held that the phrase “public disclosure” in the FCA is a term of art, and that disclosure to a single person can constitute “public disclosure” when that person is “an outsider to the investigation.” Disclosure to the public at large is not required, and a public disclosure to one person does not necessarily constitute a public disclosure as to other individuals.

The court found that the Malhotras were outsiders to the Trustee’s Office’s investigation because they were not employed by any of the defendants or by the Trustee’s Office or any related government agency. The court rejected the Malhotras’ argument that, because it was conducted in their bankruptcy case, they were “insiders to the deposition.” The relevant channel of disclosure was an administrative investigation, not an administrative hearing. Accordingly, whether or not the relators were insiders to the deposition was irrelevant. The disclosure was “public” as a result of their status as outsiders to the Trustee’s Office investigation.

The court also rejected the relators’ attempt to distinguish Seal 1 based on the fact that they were unaware of the FCA at the time of the deposition and were not, at that time, seeking to take advantage of the disclosures by filing an action. Under Seal 1 there is no requirement that the relator intend to take advantage of the information by filing an action at the time of the disclosure. All that is required is that the recipient of the disclosure be “an outsider to the investigation who now seeks to profit from it as an FCA relator.”

Turning to whether the relators were “original sources” of the disclosed information, the court found that their knowledge of the information was not “independent.” Their “generalized suspicion” that the trustee was receiving kickbacks from the real estate agent were insufficient to constitute knowledge of the scheme given that they were unaware of any kickbacks actually paid until they attended the deposition. Thus, their actual knowledge of the disclosed transactions, as opposed to their suspicions, was not independent.

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

27 October 2014

Sidley Obtains Third Circuit Victory on Original Source Ruling

Posted by Scott D. Stein and Jessica Rothenberg

On October 20, the Third Circuit affirmed the dismissal of a qui tam suit on the ground that a relator whose knowledge was based on review of documents and discussions with other company employees did not have “direct and independent knowledge” such that he satisfied the original source exception to the pre-PPACA public disclosure bar. The relator, a former employee of Medco (a pharmacy benefit management company), alleged that two pharmaceutical manufacturers violated the FCA by (1) misreporting their average and best prices for drugs sold to government health programs, and (2) improperly inducing health plans managed by Medco to favor their drugs. The relator claimed to have learned of defendants’ alleged fraud while a senior executive at Medco, during which time he met with representatives of the defendant manufacturers to negotiate agreements, and reviewed and discussed with colleagues agreements with defendants and other internal Medco documents.

The Third Circuit agreed with the district court that to qualify as an original source, “a relator must have direct and independent knowledge of either . . . the alleged fraud, or both . . . the false and true set of facts.” The court determined that relator’s knowledge, which allegedly “came from reviewing documents and discussing them with colleagues who participated in the underlying events,” was not “direct and independent,” and did not satisfy the original source exception. And although relator had direct and independent knowledge of defendants’ business strategies and certain payments to Medco and government health plans, he did not have knowledge of kickbacks, inaccurate best-price reports, or any false claims submitted by defendants. The court determined that the relator “substitutes experience-based belief that misconduct was occurring for the requisite direct and independent knowledge,” which “is plainly insufficient to qualify as an original source under the FCA.” Mark Haddad of Sidley Austin argued the appeal in the Third Circuit for AstraZeneca. A copy of the Third Circuit’s precedential opinion in United States ex rel. Schumann v. AstraZeneca Pharmaceuticals L.P., et al., No. 13-1489 (3d Cir. Oct. 20, 2014) can be found here.

18 August 2014

8th Circuit Affirms Dismissal of FCA Claim, Offering Guidance on the Application of the Public Disclosure Bar

Posted by Scott Stein and Joe Dosch

On August 7, 2014, the Eighth Circuit affirmed the dismissal of a qui tam False Claims Act suit, and in doing so offered helpful guidance regarding the proper application of the public disclosure bar (while highlighting an open issue regarding public disclosure). The court also addressed whether consideration of materials outside of the pleadings automatically requires the court to treat a motion to dismiss on public disclosure grounds as a motion for summary judgment.

Dr. Lonnie Paulos, the relator, alleged that Stryker Corporation and I-Flow Corporation caused false claims to be submitted to federal healthcare programs by fraudulently marketing and failing to disclose material information regarding their pain pump products. Paulos alleged that the defendants marketed pain pumps for placement in joint spaces, while failing to disclose information about the dangers of using pain pumps in joint spaces and falsely indicating that pain pumps were FDA-approved for use in joint spaces. Paulos further alleged that Stryker and I-Flow caused the submission of false claims by misleading healthcare providers about the use of pain pumps in joint spaces. Paulos alleged that he and another physician colleague were among the first to identify the dangers of placement of pain pumps in joint spaces, and that he warned one of the defendant manufacturers of the possible connection between placement of pain pumps in joint spaces and a painful condition called chondrolysis. The district court (Western District of Missouri) granted defendants’ motion to dismiss pursuant to 31 U.S.C. § 3730(e)(4)(A), agreeing that Paulos’ allegations had already been publicly disclosed in various studies and media reports, and that Paulos was not an “original source” of the information underlying his claims.

On appeal, Paulos contended that despite the numerous medical reports, FDA reports, and federal regulatory disclosures relating to the use of defendants’ pain pumps in joint spaces, those materials did not disclose certain of his specific allegations, such as that “surgeons were not being told that the devices could cause joint damage,” “surgeons were told the devices were approved for use,” and “the devices were being marketed off label.” Paulos attempted to distinguish these claims from the public disclosures by arguing that these allegations established defendants’ scienter. The Eighth Circuit rejected this argument, finding that the publicly disclosed reports did in fact “implicate the companies’ knowledge of the pain pumps’ connection to chondrolysis and the lack of FDA approval.”

The district court had agreed with Paulos that the public disclosures did not demonstrate that healthcare providers submitted claims involving the pain pumps to federal healthcare programs. Nevertheless, it concluded that Paulos’ allegations regarding the submission of false claims merely “add[ed] some color” and did not distinguish Paulos’ allegations from the public disclosures because “any doctor or hospital seeking payment from these federal programs would be submitting a false claim for payment.” The Eighth Circuit noted this aspect of the district court’s ruling, referencing its prior decision in U.S. ex rel. Hixson v. Health Mgmt. Sys., Inc., 613 F.3d 1186, 1188 (8th Cir. 2010) in which the court held that “a relator’s claim cannot be ‘based upon . . . public disclosure of allegations or transactions’ where the public disclosure fails to reveal ‘the false claims itself.'” However, because Paulos did not challenge that aspect of the district court’s reasoning, the Eighth Circuit expressly declined to consider whether Hixson remains good law.

Paulos also contended that he was an original source of the fraud allegations, because he had independent knowledge of the connection between pain pumps and chondrolysis, and he had firsthand knowledge of Stryker’s knowledge. Paulos focused on his assertion that he was among the first to identify the link between pain pumps and chondrolysis. However, the Eighth Circuit concluded that a relator is not an original source simply because he discovered or suspected the alleged fraud first. The court found that the key facts upon which Paulos’ claims were based were in fact disclosed in the prior public disclosures, and his personal knowledge about the link between pain pumps and chondrolysis failed to “materially add[ ] to the publicly disclosed allegations or transactions.” Paulos also argued that he materially added to the scienter allegations by pointing to his communications with a Stryker executive in 2005 raising concerns about the use of certain anesthetics in pain pumps. However, because these communications made no reference to the placement of pain pumps in joint spaces—the key issue in his complaint—the Court held that it did not materially add to the publicly disclosed allegations.

Finally, Paulos raised a procedural challenge to the district court’s ruling, arguing that the district court improperly considered materials outside the pleadings without converting the motion to a motion for summary judgment. The court rejected this argument on two grounds. First, the court noted that when ruling on a Rule 12(b)(6) motion to dismiss, the court “may [still] consider ‘matters incorporated by reference or integral to the claim, items subject to judicial notice, [and] matters of public record.” Furthermore, the court noted that because the FCA “requires a court to dismiss a claim based on public disclosure, a court necessarily considers the alleged public documents in its dismissal.” Accordingly the court rejected Paulos’ contention that the district court erred in failing to convert the motion to dismiss to one for summary judgment.

The Paulos decision provides useful guidance regarding the scope of the public disclosure bar. However, the decision leaves open the question of whether the public disclosure bar applies in the Eighth Circuit when the public disclosures do not explicitly disclose the false claims at issue. The decision also confirms that district courts may continue to consider public disclosure materials beyond the allegations of the complaint, without converting the motion into one for summary judgment.

Connie Trela of Sidley Austin argued the appeal before the Eighth Circuit on behalf of I-Flow. A copy of the court’s opinion can be found here.

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