05 April 2012

Fourth Circuit Vacates and Remands Jury Verdict on Stark Violations in FCA Case

Posted by Matthew Solomson and Donielle McCutcheon

The Federal Physician Self-Referral Law, commonly referred to as the Stark Law, rarely forms the basis of a False Claims Act (“FCA”) action, and FCA actions almost never go to trial. Last week, however, the Fourth Circuit reviewed such a case when the court vacated and remanded a district court judgment, predicated on alleged Stark Law violations, in favor of the government. The Fourth Circuit held that the judgment violated the defendant’s Seventh Amendment right to a jury trial. U.S. ex rel. Drakeford v. Tuomey Healthcare System, Inc., No. 10-1819, 2012 U.S. App. LEXIS 6444, at *3 (4th Cir. Mar. 30, 2012).

The qui tam action, in which the government subsequently intervened, was originally filed in September 2007, and alleged that the defendant healthcare system, Tuomey, entered into compensation arrangements with certain physicians that violated the Stark Law because the compensation paid to the physicians “took into account the volume or value of the physicians’ referrals to Tuomey.” The government further alleged that Tuomey knowingly presented false claims for payment to Medicare and Medicaid that arose out of these prohibited referrals, in violation of the FCA. In addition to the FCA claims, the government asserted claims for equitable relief.

In March 2010, a jury returned a verdict finding that Tuomey did not violate the FCA, but responded affirmatively to a special interrogatory asking whether Tuomey violated the Stark Law. Ruling on post-trial motions, the district court judge granted a motion filed by the United States and: (i) set aside the jury verdict; (ii) ordered a new trial on the FCA claim; and (iii) based on the jury’s response to the special interrogatory finding a Stark Law violation, entered a $44.9 million judgment (plus interest) in favor of the government on its equitable claims.

On appeal, the Fourth Circuit held that, because the FCA claim was based on an alleged violation of the Stark Law, the district court’s decision to grant a new trial “on the whole issue of the [FCA],” rendered the jury’s special interrogatory on the Stark Law issue a legal nullity because the court had set aside the original jury verdict, which included the special interrogatory response. As a result, when the district court granted the government equitable relief, the district court impermissibly resolved an issue on which Tuomey was entitled to (another) jury trial, thereby effectively depriving Tuomey of its Seventh Amendment right to a jury trial.

The Court of Appeals further instructed that, if on remand, the jury finds that the contracts at issue violated the Stark Law, the jury must determine the number and value of the claims Tuomey presented to Medicare for payment of the facility fee, or technical component, for the services. Notably, this instruction diverges from the Stark Law guidance which disallows payment for all services furnished pursuant to a prohibited referral.

The Fourth Circuit also addressed several issues regarding the underlying Stark Law allegations that it deemed “legal” and likely to be an issue on remand, while one judge, in a concurring opinion, criticized the court’s decision as advisory in nature. Specifically, the majority concluded that (i) there were “referrals,” as such term is defined under the Stark Law, by the physicians to Tuomey; and (ii) the Stark Law guidance clearly contemplates arrangements such as those at issue in this litigation, and, as a result, the jury must decide whether the contracts, on their face, took into account the value or volume of anticipated referrals in violation of the Stark Law fair market value standard.

From a Stark Law perspective, the “advisory” portions of this opinion provide important insight into the Fourth Circuit’s views on Stark Law violations. More broadly, the ongoing litigation may yet provide further legal developments regarding FCA liability, particularly in the context of the Stark Law.

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