Posted by Scott Stein and Brenna Jenny
A district court in the Southern District of Florida recently denied motions to dismiss filed by a Medicare Advantage (“MA”) plan and MA providers in a case alleging upcoding through fraudulent diagnosing. See United States ex rel. Graves v. Plaza Med. Ctrs. Corp., No. 10-cv-23382 (S.D. Fla. July 6, 2015). The case is one of a growing number of qui tam cases in the Medicare Advantage sphere, mirroring heightened congressional pressure on CMS and DOJ to take steps to combat Medicare Advantage fraud (as previously reported here).
Posted by Scott Stein and Bevin Seifert
On May 19, 2015, a federal district court in the Northern District of Georgia dismissed kickback allegations against Laboratory Corporation of America and Laboratory Corporation of America Holdings (“LabCorp”), holding that the allegations fell short of the particularity required by Rule 9(b). The relators—competitors of LabCorp—alleged that LabCorp’s pricing practices violated Georgia’s state false claims act and were independently unlawful under the Anti-Kickback Statute, 42 U.S.C. § 1320a-7b(b)(2)(A). Relators alleged that LabCorp violated the AKS by providing “deeply discounted” prices to customers to induce them to refer (or “pull-through”) large volumes of Medicaid and other business. The court found, however, that relators failed to allege those claims with particularity because they did not identify a single improper referral to a physician, nor a specific Medicaid claim resulting from such referral. Moreover, the court held that relators failed to identify a specific kickback, finding that allegations of specific discounts alone were insufficient to establish a referral or claim resulting from such referral. Having disposed of the federal AKS claims, the court declined to exercise supplemental jurisdiction over plaintiffs’ state law claims and, therefore, remanded the remaining claims to the State Court of Fulton County, Georgia. A copy of the court’s decision can be found here.
Posted by Jaime L.M. Jones and Brenna Jenny
A court in the Eastern District of Pennsylvania recently ruled that, despite a relator’s publication during an employment retaliation suit of allegations relating to the defendant’s alleged off-label promotion and payment of kickbacks, such allegations were not publicly disclosed, nor was the relator’s execution of a release of liability effective. U.S. ex rel. Gohil v. Sanofi-Aventis U.S. Inc., No. 02-cv-02964 (E.D. Pa. Mar. 30, 2015). This case demonstrates the way policy arguments regarding a perceived congressional intent in favor of private enforcement of the FCA can impact legal arguments in FCA litigation.
The court first considered whether the relator’s claims had previously been publicly disclosed. The relator, a former sales representative employed by the defendant, filed a qui tam suit a month before resigning his position with the defendant in June 2002. Upon resigning, he filed a wrongful termination action pursuant to New Jersey’s Conscientious Employee Protection Act (“CEPA”). While the government weighed whether to intervene, the parties in the CEPA action engaged in discovery. They ultimately settled—with the relator signing a broad release of liability—and the qui tam suit was subsequently unsealed, with the government declining to intervene. The defendant argued that the relator’s Statement of Facts (“SoF”) in the CEPA action constituted disclosure through a “civil hearing,” thereby triggering application of the public disclosure bar. The court ruled that although the SoF “exhaustively details” the alleged off-label promotion of defendant’s cancer drug Taxotere, and corresponding payment of kickbacks, the SoF was not “substantially similar” to the relator’s complaint because the SoF did not state that any provider had submitted a claim to a federal healthcare program (“FHCP”). Accordingly, the court reasoned that the allegedly fraudulent transactions were not previously disclosed, and inferring the allegation of fraud “would impermissibly broaden the scope of the public disclosure bar and restrict private enforcement of the FCA.” The defendant has since filed a motion for reconsideration, arguing that where submission of false claims to the government is a “logical and obvious consequence” of an alleged scheme, all essential elements of the FCA claim are publicly disclosed.
The court next determined whether the relator had nonetheless waived his right to prosecute the qui tam suit through his settlement and release of liability in the CEPA action. Although the Third Circuit Court of Appeals has yet to rule on whether relators can unilaterally settle a qui tam suit post-filing, all of the courts of appeal to consider the issue have held that, based on the statutory language of the FCA, the government’s written consent is a prerequisite. In contrast, several courts of appeal have held that a pre-filing release can wipe out a would-be relator’s attempt to file a later qui tam suit, so long as the release covers the allegations in the suit and there are no countervailing public policy considerations. Consistent with the prevailing approach to post-filing releases, the Gohil court ruled that the relator’s release had no effect on the litigation. The defendant responded by suggesting that the release be effective as to the relator, but that the claims be dismissed without prejudice to the government’s ability to intervene. The court declined to adopt this approach, again invoking the “clear congressional intent of encouraging private enforcement of the FCA.”
As to the merits of the relator’s claims, the court first ruled that, even under the Third Circuit’s more lenient “reliable indicia” standard to the submission of false claims—in place of pleading the details of particular false claims submitted—the off-label promotion allegations did not meet Rule 9(b)’s requirements. This was so because all of the off-label uses related to medically accepted indications, which would have been eligible for government reimbursement. However, the court denied the defendant’s motion to dismiss the kickback allegations, holding that certifying compliance with the AKS is a precondition to payment by the FHCPs and that the relator had provided sufficient examples of kickbacks allegedly offered to providers. Finally, the court refused to dismiss the relator’s conspiracy count, ruling that a conspiracy between the defendant and providers could easily be inferred from examples of kickbacks supposedly paid by the defendant, followed by the recipient physician’s increase in Taxotere prescriptions.
A copy of the court’s opinion can be found here.
Posted by Scott Stein and Brenna Jenny
On March 27, 2015, a federal court in the Southern District of Ohio granted in part and denied in part a motion to dismiss a qui tam suit alleging that Bristol-Myers Squibb Co. (“BMS”) and Otsuka America Pharmaceutical (“Otsuka”) had promoted Abilify for off-label uses and violated the AKS through grants, speaker, and similar programs offered to physicians. See United States ex rel. Ibanez v. Bristol-Myers Squibb Co., No. 11-cv-00029 (S.D. Ohio Mar. 27, 2015). The court’s ruling reiterates that regardless of the particularly with which a scheme is pled, complaints will be dismissed if they fail to, at a minimum, include particular allegations that support a strong inference that a false claim was submitted. However, the court’s partial denial of the motion to dismiss also demonstrates the weight of the expanded protections relators now enjoy when bringing retaliation claims under the FERA-amended definition of protected conduct.
Both BMS and Otsuka previously executed Corporate Integrity Agreements (“CIAs”) relating to alleged off-label promotion of an anti-depressant, Abilify. Relators asserted that both companies violated their CIAs by subsequently promoting Abilify for off-label uses, including for pediatric and geriatric patients, and for offering physicians kickbacks to write off-label prescriptions for Abilify. Relators asserted they could rely on a “relaxed” pleading standard referenced but never applied by the Sixth Circuit Court of Appeals, under which they need not present any samples of false claims actually submitted, so long as they pled a strong inference of such submissions.
The defendants contested that such a standard was appropriate, yet the court ruled that the dispute was moot, because relators failed even to meet the lower pleading standard. In particular, while relators alleged that defendants’ off-label promotion and kickbacks caused physicians to write prescriptions for off-label uses of Abilify, the complaint failed to support a strong-inference that the patients who received those prescriptions participated in federal health care programs, that the patients actually filled the off-label prescriptions, and that an entity submitted claims for reimbursement to the government for those prescriptions.
Relators had argued that they further fell within the ambit of dicta in United States ex rel. Bledsoe v. Community Health Systems, Inc., 501 F.3d 493 (6th Cir. 2007), where the Sixth Circuit left open the possibility that a relaxed pleading standard would be appropriate “where a relator demonstrates that he cannot allege the specifics of actual false claims that in all likelihood exist, and the reason that the relator cannot produce such allegations is not attributable to the conduct of the relator.” According to the relators, they were precluded from identifying specific false claims because such information regarding claims for payment caused to be submitted by BMS and Otsuka lay in the exclusive possession and control of the defendants, pharmacies, and federal and state payors. The court characterized the Sixth Circuit’s dicta as “so broadly worded that [it] could undermine the purpose of the particularity rule,” and refused to allow it to “swallow the existing and well-settled rules for FCA pleading.”
Nonetheless, the court denied defendants’ motion to dismiss the relators’ retaliation claims. The FERA amendments to the FCA expanded protection over lawful acts “in furtherance of an action under [the FCA]” to also protect “other efforts to stop [one] or more violations of [the FCA].” Thus, whereas protected conduct prior to the FERA amendments was generally limited to actions that could lead to a FCA suit, the court noted that post-FERA, employees need only “report alleged misconduct up the chain of command in order to engage in FCA-protected activity.” Because relators had pled that they reported compliance concerns to their management, the court found this standard to be met.
A copy of the court’s opinion can be found here.
As we previously reported, the Supreme Court last year declined an invitation to resolve a circuit split regarding how much detail about particularized false claims must be pleaded in an FCA case in order to satisfy Rule 9(b)’s particularity requirement. A new cert petition filed this month asks the Court to take up the issue this term. Last year, in an opinion we wrote about here, the 11th Circuit affirmed in part and overruled in part the dismissal of an FCA complaint under Rule 9(b). The court held that while the relator had not pleaded, and was not required to plead facts regarding specific false claims, he had pleaded other facts that provided sufficient “indicia of reliability” with respect to his claims based on conduct allegedly occurring during his employment by the defendants. By contrast, the court held, the relator had failed to plead sufficient “indicia of reliability” that the conduct continued after his employment ended, and therefore affirmed the dismissal of the post-employment claims. It is the latter ruling with which the cert petition, filed by the relator, takes issue. The question presented in the cert petition is “[w] hether, under Rule 9(b), it is sufficient for a relator under the False Claims Act to plead “particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted” to the government, or whether Rule 9(b)’s particularity requirement precludes the drawing of reasonable inferences that claims were actually submitted”
In the petition considered last year, the Supreme Court requested the Solicitor General’s views. The SG’s brief, while recognizing a circuit split, encouraged the Court to deny cert, and the Court did just that. It remains to be seen whether the Solicitor General will, or will be asked to by the Court, weigh in on the petition. In any event, we will continue to monitor this case and report on important developments.
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.
On October 30, 2014, the Eleventh Circuit issued a 41-page unpublished opinion affirming in part the dismissal of an FCA complaint under Rule 9(b), holding that the relator failed to plead sufficient “indicia of reliability” with respect to his claims based on conduct allegedly occurring after his employment by the defendants ended.
The relator, Mastej, was the former CEO of defendant Naples Hospital, which was owned by defendant Health Management Associates. Mastej alleged that the defendants had improper financial relationships with ten physicians, and as a result falsely certified their compliance with the Stark and Anti-Kickback Statutes on interim claim forms for patients of the physicians, and in the hospitals’ cost reports. While the relator alleged the details of the alleged payments with detail, he did not allege details of specific false claims. In evaluating the relator’s allegations, the Eleventh Circuit began by reciting certain established principles: that the submission of a false claim must be pleaded with particularity, that “Rule 9(b) ‘does not permit a False Claims Act plaintiff merely to describe a private scheme in detail but then to allege simply and without any stated reason for his belief that claims requesting illegal payments must have been submitted, were likely submitted or should have been submitted to the Government,’ and that “some indicia of reliability must be given in the complaint to support the allegation of an actual false claim for payment being made to the Government.” “[W]hether the allegations of a complaint contain sufficient indicia of reliability to satisfy Rule 9(b)” is evaluated “on a case-by-case basis.” Furthermore, the court explained, “[p]roviding exact billing data—name, date, amount, and services rendered—or attaching a representative sample claim is one way a complaint can establish the necessary indicia of reliability that a false claim was actually submitted,” but “there is no per se rule that an FCA complaint must provide exact billing data or attach a representative sample claim.” With regard to the “other means” of showing the required indicia of reliability, the court noted that while “there are no bright-line rules. . . a relator with direct, first-hand knowledge of the defendants’ submission of false claims gained through her employment with the defendants may have a sufficient basis for asserting that the defendants actually submitted false claims.” “By contrast,” the court continued, “a plaintiff-relator without first-hand knowledge of the defendants’ billing practices is unlikely to have a sufficient basis for such an allegation.”
Turning to the specific allegations of this case, the court acknowledged that Mastej had not alleged details concerning even a single specific “false claim” relating to any patient treated by one of the physicians alleged to have had an improper financial relationship with the defendants. “Rather than submit examples or a representative false interim claim,” the panel noted, “Mastej’s complaint focuses on his personal knowledge gained in his roles and duties as Vice President of Defendant HMA for six years until February 2007 and as CEO of the Collier Boulevard campus from February 2007 until October 2007. Mastej states that his personal ‘knowledge of Defendants’ practices and actions [was] gained by his own efforts as an employee of Defendants and their affiliates, including serving as Chief Executive Officer for a hospital owned by [Defendant] Naples HMA.'” The court held that taking all of the allegations into account, “Mastej’s complaint contains sufficient indicia of reliability for his personal knowledge that the Defendants actually submitted interim claims to Medicare for patients referred to the Medical Center as part of the on-call incentive scheme during 2007.” Given his position at the time and his alleged participation in meetings in which the illegal conduct was discussed, the panel concluded that Mastej “has sufficiently articulated how he allegedly gained his direct, first-hand knowledge of the Defendants’ submission of false interim claims to the government and the government’s payment of such claims.”
In addition to relying on Mastej’s “insider” status, the court also pointed to the nature of the fraud allegations at issue. “[T]he type of fraud alleged here does not depend as much on the particularized medical or billing content of any given claim form. In other FCA cases, the allegation is that a defendant’s Medicare claim contained a false statement because the claim sought reimbursement for particular medical services never rendered to the patient, or for medical services that were unnecessary, overcharged, or miscoded, or for improper prescriptions, or for services not covered by Medicare. In those types of cases, representative claims with particularized medical and billing content matter more, because the falsity of the claim depends largely on the details contained within the claim form—such as the type of medical services rendered, the billing code or codes used on the claim form, and what amount was charged on the claim form for the medical services.” In this case, by contrast, the falsity of the claims turned upon referral activity with which Mastej claimed personally to be familiar.
Nevertheless, the Court concluded that Mastej’s complaint failed to satisfy Rule 9(b) with respect to allegations of illegal conduct after his employment ended in October 2007. “After his employment ended, Mastej was no longer privy to information about the Defendants’ business practices, Medicare patients, referrals of patients, the billing of services to Medicare, or revenue from Medicare reimbursements. The indicia of reliability that existed while Mastej served as Vice President and then CEO disappeared when he left the Defendants’ employment in October 2007.” The panel specifically stated that this holding did “not suggest, much less hold, that a qui tam plaintiff-relator can never base his case on false claims submitted after he left a defendant’s employ.” Rather, the court simply concluded that in the particular context of this case, Mastej’s allegations failed to provide “the required indicia of reliability for his general allegation” that false claims were submitted after his employment ended “because the reliability of Mastej’s general allegation derives from his highly significant employment roles and duties during 2007.” “Removed from this vantage point and from his access to critical billing and revenue information, Mastej has articulated no factual basis for his assertion that the particular doctors continued to refer patients or that the Defendants submitted interim claims for such patients after Mastej left—other than speculation that claims ‘must have been submitted, were likely submitted or should have been submitted to the Government.'”
A copy of the court’s opinion in U.S. ex rel. Mastej v. Health Management Associates, Inc., can be found here. While – as the court expressly notes – the case does not stand for the blanket proposition that relators cannot plead claims based on post-employment conduct, it does provide support for the view that such allegations must be based on more than simply an argument that conduct that occurred at one point in time likely continued indefinitely into the future.
Posted by Jaime L.M. Jones and Brenna Jenny
Although relators and the government have long leveraged statistical inferences to estimate damages in FCA cases, in two recent opinions, courts have permitted the extension of these approaches to efforts to establish FCA liability. This is a troubling signal for defendants because, particularly when utilized in conjunction with the lower pleading standard of certain circuits, these decisions will make it easier for FCA plaintiffs to fend off a motion to dismiss.
On September 29, 2014, the District of Tennessee significantly expanded the role of statistical sampling in FCA litigation, when it ruled that extrapolation from a small sample can be used not merely to calculate damages, but to establish liability. In U.S. ex rel. Martin v. Life Care Centers of America, Inc., the government alleged that Life Care Centers, which owns a chain of skilled nursing facilities, pressured therapists to overstate the amount and intensity of therapy residents required, resulting in higher daily per diem payments under Medicare Part A. The government did not present the court with any specific examples of patients who received medically unnecessary therapy. Instead, the government sought to select a random sample of 400 Medicare beneficiaries who received high-intensity therapy, examine their medical records to determine whether they any of this therapy was medically unnecessary, and then extrapolate any findings of unnecessary services received by these 400 patients across 54,396 patient admissions, comprising 154,621 claims, to ascertain the number of false claims the defendant submitted.
The defendant strongly disagreed that this novel statistical application could establish falsity or materiality in this case, arguing that the unique nature of each patient’s condition requires an individual assessment of medical necessity, thereby precluding extrapolation. This is particularly so because the per diem payments received by skilled nursing facilities hinge on a patient’s Resource Utilization Group (“RUG”) classification, and even if a portion of a patient’s therapy were medically unnecessary, a patient could remain in the same RUG based on the balance of the necessary portion of his therapy.
The court acknowledged the distinction between using extrapolation to establish damages after liability has already been proven, and using extrapolation to establish liability in the first instance. However, after assessing the case law marshaled by both sides, the court found all to be inapposite and, left to decide the matter in a perceived vacuum, the court determined that the fraud-fighting goals of the FCA would be stymied if the court sided with the defendants and effectively required a “claim-by-claim review” in every FCA suit. The court reasoned that if “Congress intended to preclude statistical sampling from being used in this context, it has had ample opportunity to have that intention reflected in the language of the FCA.” Furthermore, the court viewed defendants as sufficiently protected from specious statistics through other sturdy safeguards, such as the opportunity to cross-examine opposing expert witnesses.
A recent decision in U.S. ex rel. Greenfield v. Medco Health Systems, Inc., demonstrates how reliance on statistical inferences, in conjunction with adoption of the more lenient pleading standard, can resuscitate a qui tam suit that may otherwise struggle to survive a motion to dismiss. The relator alleged that defendants—providers of specialty pharmacy services and hemophilia therapy management programs—tied their charitable donations to hemophilia foundations to the recipients’ patient referrals back to the defendants. In addition, defendants allegedly gave gifts to patients, including Medicare and Medicaid beneficiaries, in order to encourage them to continue to use their services. The court dismissed the second amended complaint without prejudice, ruling that it failed to show that any of defendants’ charitable contributions were tied to federal funds. Indeed because the recipients of the donations used the funds to purchase insurance for financially needy patients, the court ruled that the alleged quid pro quo scheme “demonstrate[s] that defendants’ contributions were used by [the foundations] to avoid the need to avail themselves of any federal benefits program.” The court also concluded the “plaintiff’s math (and his corresponding assumption that federal funds are implicated) is too attenuated and derivative to state a viable claim under the heightened Rule 9(b) standard.”
The relator’s Third Amended Complaint still relied on statistical inferences. For example, the relator concluded that because nationwide, 6% of hemophilia patients are Medicare beneficiaries and one-third are Medicaid beneficiaries, 6% of defendants’ 401 hemophilia patients in New Jersey (24 patients) must be Medicare beneficiaries and 33% (133 patients) must be Medicaid beneficiaries. The relator’s estimates were either widely off—defendants had 53 patients in New Jersey who were Medicaid beneficiaries—or completely unsubstantiated—relator could only show the number of defendants’ Medicare beneficiaries (149) nationwide. Moreover, the relator could not point to any of these Medicare or Medicaid beneficiaries as having received inappropriate gifts from the defendants.
However, the Third Amended Complaint survived defendants’ motion to dismiss in no small part because in the intervening time period, as we previously reported, the Third Circuit Court of Appeals sided with the First, Fifth, Seventh, and Ninth Circuits in adopting a less restrictive pleading standard satisfied by “indicia that lead to a strong inference that claims were actually submitted,” rather than by representative samples of allegedly false claims submitted. The new standard transformed the plaintiff’s “attenuated and derivative math” into “plausible statistical inferences” that adequately pled a “a strong inference that claims were actually submitted for reimbursement for these illegally procured patient prescriptions from federal funds.”
As the Martin court observed, there is little pre-existing case law in this area, and the extent to which statistical sampling can evolve into a tool for establishing FCA liability is a topic we will continue to monitor.
As we previously reported, on March 31, 2014 the Supreme Court denied certiorari in response to a petition seeking to resolve a Circuit split concerning the application of Rule 9(b) in FCA cases. U.S. ex rel. Noah Nathan v. Takeda Pharms. N. Am., Inc., 134 S. Ct. 1759 (2014). Last Friday, the Third Circuit weighed in on the issue, adopting the less restrictive approach. See U.S. ex rel. Foglia v. Renal Ventures Mgmt., LLC, 2014 U.S. App. LEXIS 10549 (3d Cir. June 6, 2014); see also U.S. ex rel. Foglia v. Renal Ventures Mgmt., LLC, 2014 U.S. App. LEXIS 10726 (3d Cir. June 10, 2014) (notice of amended opinion).
Rule 9(b) requires that, “[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.” The Circuits differ on what a qui tam relator or the government must allege at the pleading stage of an FCA case to satisfy the particularity standard. The Fourth, Sixth, Eighth and Eleventh Circuits, the Foglia court noted, apply a strict standard and generally require that the plaintiff allege at least representative examples of the purportedly false or fraudulent claims submitted for payment. See, e.g., U.S. ex rel. Bledsoe v. Cmty. Health Sys., Inc., 501 F.3d 493, 510 (6th Cir. 2007). The First, Fifth and Ninth Circuits, the Foglia court observed, have permitted FCA claims to proceed on the basis of allegations providing “reliable indicia that lead to a strong inference that claims were actually submitted.” See, e.g., U.S. ex rel. Grubbs v. Kanneganti, 565 F.3d 180, 190 (5th Cir. 2009).
In Foglia, the relator alleged that the defendant, Renal, had harvested and re-used leftover portions of an injectable medication without following HHS procedures, and had charged Medicare as though it had been using new vials of the medication with each patient. As evidence to support his claim that Renal had defrauded Medicare, the relator alleged that Renal’s inventory logs for a particular period showed that it was using between 29 and 35 vials of the medication per day, when it would have required 50 vials if it had been using new vials with each patient. See U.S. App. LEXIS at *9-13. The district court held that these allegations, which did not identify any purportedly false claim for payment, failed under Rule 9(b).
The Third Circuit disagreed and reversed. First, the Foglia court discussed the Circuit split on the pleading standard and sided with the less restrictive approach. The court stated “it is hard to reconcile the text of the FCA, which does not require that the exact content of the false claims in question be shown, with the ‘representative samples’ standard favored by the Fourth, Sixth, Eighth and Eleventh Circuits.” Id. at *6-7. The Foglia court also cited as support for its interpretation the Solicitor General’s amicus curiae brief filed in connection with the petition for a writ of certiorari in the Rule 9(b) case the Supreme Court recently declined to hear. In that brief, the Foglia court observed, the Solicitor General stated that the United States believes the more rigid pleading standard is “‘unsupported by Rule 9(b) and undermines the FCA’s effectiveness as a tool to combat fraud against the United States.'” Id. at 7 (citing Brief for the United States as Amicus Curiae at 10-11, Noah Nathan, 134 S. Ct. 1759).
After adopting the less demanding pleading standard, the Foglia court, while acknowledging that the case before it was “close,” went on to find that what it characterized as the relator’s “hypothesis” passed muster under Rule 9(b). The court accepted the allegations that Renal used fewer vials of the medication per day than it would if each had been used with a single patient, as well as the allegations that Renal did not follow HHS procedures to harvest unused medication from previously used vials. The court stated that the relator had shown “an opportunity for the sort of fraud alleged,” and had “give[n] Renal notice of the charges against it, as is required by Rule 9(b).” Id. at * 13. The court also observed, as further support for its conclusion, “that Renal, and only Renal, has access to the documents that could easily prove the claim one way or another – the full billing records for the time under consideration.” Id.
The chasm between the two camps of Circuits on the Rule 9(b) issue has been sharply delineated for some time. The Third Circuit’s opinion in Foglia further highlights the need for the Supreme Court finally to resolve the dispute and set forth clear guidance as to how Rule 9(b) applies to FCA claims.
On May 13, a district court in the Eastern District of Virginia dismissed a healthcare fraud action under the Virginia Fraud Against Taxpayers Act (“VFATA”) against Laboratory Corporation of America (“LabCorp”) alleging that LabCorp routinely charged Medicaid more than its “usual and customary charge” for laboratory services. The district court held that the relators’ allegations about Medicaid overcharges and improper kickbacks for Medicaid referrals could not proceed because relators (i) failed to specify the particulars of a single false claim under Rule 9(b), and (ii) failed to articulate any particular certification defendants made that was false, in violation of Rule 8(a).
The relators—competitors of LabCorp—alleged that each of LabCorp’s Medicaid reimbursement claims was actionably “false” in two ways. First, LabCorp’s charges to Medicaid prices for laboratory services were higher than the lower prices that LabCorp routinely negotiated with individual insurers and physicians, which relators alleged violated Virginia regulations requiring LabCorp to charge Medicaid its “usual and customary” rates. Second, relators alleged that these lower charges offered to individual physicians constituted impermissible kickbacks meant to induce referral of Medicaid business. Relators alleged that these violations had rendered 2,730,814 claims submitted by LabCorp “false.”
With regard to Rule 9(b), the court acknowledged a split between the circuits about whether relators must identify all of the particulars—e.g., the who, what, when, where, how—of at least one representative claim, and noted that the Fourth Circuit had not addressed that issue. Nonetheless, relying heavily on the Fourth Circuit’s decision in U.S. ex rel. Nathan v. Takeda Pharm. N. Am., 707 F.3d 451, 456 (4th Cir. 2013), cert. denied, 134 S. Ct. 1759 (2014) (a decision we previously wrote about here), the court held that relators must allege with particularity the submission of at least one specific claim for payment. The court found that the relators failed to do so.
On an alternative but related ground, the court also dismissed the complaint under Rule 8(a), relying heavily on the difference between certifying legal compliance in order to participate in a program versus to be paid under that program. The court, distinguishing between legal and factual falsity, held that, in this complaint alleging factual falsity, no liability for fraud under a false certification theory can exist unless relators plead the details of what statement defendants made that was actually false. In Hunter, the relators argued that LabCorp could not have participated in the Medicaid program without agreeing to be bound by Virginia regulations, which mandate that providers cannot charge higher prices for Medicaid patients than for non-Medicaid patients. Under this theory, each overpriced claim was made false because LabCorp would not have been able to submit those overpriced claims were it not for its prior agreement to abide by the regulations. The court, however, held that LabCorp’s general agreement to abide by the law in exchange for participating in Medicaid was not an agreement in exchange for Medicaid payment; its agreement was not false when it was made; and, most notably, “a general representation of compliance with all laws lacks the requisite nexus between the subject matter of the certification and the event triggering the loss—i.e., the kickback and overcharge schemes.”
Although this case arose under the VFATA, rather than the federal False Claims Act, the court’s grounding of its opinion in Rules 8(a) and 9(b) offers guidance to companies seeking to defend against similarly allegations of fraud in the Fourth Circuit. This ruling further strengthens the Fourth Circuit’s already stringent pleading standards under Rules 8(a) and 9(b).