Recent Developments In False Claim Act Law


Teresa A Luna

Teresa Luna - 2014

Spragins, Barnett & Cobb, PLC; Jackson, Tennessee

Cases that have recently come to the attention of the U.S. Supreme Court:

Two cases that had divided the lower courts made their way to the Supreme Court in 2013. The Court denied cert in one of the cases at the insistence of the Solicitor General and the other case is still pending.

1. Fourth Circuit Case: Nathan v. Takeda Pharmaceuticals North America, Inc. 707 F.3d 451 (4th Cir. 2013). Cert was denied by the Supreme Court.

Issue: The "Presentment" Pleading Issue. Whether a False Claim Act claim can be alleged "with particularity" absent specific facts that a false claim was actually "presented" to the government.

Facts: Nathan, a sales manager for a pharmaceutical company, alleged that Takeda caused false claims to be presented to the government for payment under Medicare. Nathan was specifically saying that two of Takeda's marketing practices brought about the "presentations:" 1) marketing to doctors who normally wouldn't treat patients having conditions for which the drug had been approved, and 2) marketing too high a dose of the drug. However, the Complaint was alleging the existence of a fraudulent scheme rather than specific false claims.

Fourth Circuit Decision: The decision made clear that the presentment of a false claim must be made by the defendant directly to the government. It also made clear that the claim must be pled with particularity under Rule 9(b) with facts alleging that specific false claims were actually presented to the government for payment.
Nathan had argued to the Fourth Circuit for a relaxed pleading standard saying that alleging the existence of a "fraudulent scheme" was enough. Takeda had argued that Rule 9(b) requires a heightened pleading standard and the Court sided with Takeda. The Court found that the gatekeeping functions were necessary so as to give notice to defendants, stop suits in which facts are only learned later in discovery, and protect defendants from frivolous suits that would hurt their reputations.

The Split Among Circuits: The Fourth Circuit joined the Sixth, Eighth, and Eleventh Circuits' strict approach to FCA pleadings - that Rule 9(b) requires dismissal of a complaint unless it identifies at least one specific false claim that was submitted to the government. The First, Fifth, Seventh, and Ninth Circuits hold it sufficient to allege a fraudulent scheme that reliably supports an inference that false claims were submitted.

Solicitor General's position: After being invited by the Supreme Court to weigh in on the case, the Solicitor General urged the Supreme Court to wait for a case on this issue that would be outcome-determinative, as this case required dismissal under any pleading standard.

U.S. Supreme Court action: cert denied, March 31, 2014.

2. Fourth Circuit Case: United States ex rel. Carter v. Halliburton Co., 710 F.3d 171 (4th Cir. 2013). [Kellogg Brown & Root Services, Inc. v. United States ex rel. Carter].

Issues: 1) Whether the Wartime Suspension of Limitations Act tolls the statute of limitations for civil FCA cases, even ones in which the government has not intervened, and 2) whether the first-to-file bar applies once the earlier-filed case is no longer pending.

Fourth Circuit Decision: 1) The Court held that the WSLA did apply to toll the statute of limitations in certain civil FCA cases. 2) It also held that the dismissal of the first-filed complaints revived the Carterrelator's claim. The implication of the WSLA ruling is that the statute of limitations is suspended for claims of fraud against the government, from at least 2002 to some not yet determined point in the future - when the conflicts in Iraq and Afghanistan are formally terminated.

The Split Among Circuits: With regard to the first-to-file issue, the Fifth and Ninth Circuits apply a plain meaning of the word "pending" and hold that the first-to-file bar is a way of distinguishing between first-filed actions and subsequent actions. The Seventh Circuit is of the same opinion as the Fourth.

Solicitor General's Opinion: After being invited by the Supreme Court to weigh in on the case, the Solicitor General filed its brief on May 27, 2014 urging the Court to deny cert.

RECENT CASES OF NOTE:

1. Are the 2010 Amendments to the FCA retroactive? United States ex rel. May v. Purdue Pharma L.P., 737 F.3d 908 (4th Cir. 2013).

In 2010 Congress amended the FCA with regard to the public disclosure bar. The Supreme Court has previously held that these amendments may not be applied retroactively to cases filed before the statute's effective date. In May, the Fourth Circuit addressed whether the amendment applies to a case filed after the effective date of the amendment but where the conduct occurred before that same date. The Court found that even though the 2010 amendment had retroactive effect, its public disclosure bar could not be applied in this case. In other words, if the conduct occurred before the amendment, the amendment does not apply.

When does a public disclosure bar an FCA claim? Monoghan v. Henry Phipps Plaza West, Inc.,531 Fed. Appx 127 (2 nd Cir. 2013).

If the "critical elements" of the fraudulent transaction have been placed in the public domain prior to filing, the public disclosure bar can be triggered.

3. What is considered an "alternate remedy" for the government to pursue? United States ex rel. Fredrick Newell v. City of St. Paul, Minnesota, 728 F.3d 791 (8th Cir. 2013).

The U.S. agreed with the City of St. Paul that it would not intervene in a qui tam case against the City as part of a deal in which the City agreed to resolve a fair housing case. The relator was not part of the agreement. The relator then argued that he should be able to maintain his own action against the City. However, the Eighth Circuit held that he was blocked by the public disclosure bar.

The FCA provides that the government may elect to pursue its claim through any alternate remedy available to it, leaving the relator with the same rights in that alternate proceeding that he would have had with the U.S. intervening. The Court held that the United States did not pursue an "alternate remedy," as that term is defined by the FCA. Therefore, the relator had no rights to a portion of any proceeds the government might recover.

4. How specific do allegations have to be pled under Rule 9? United States ex rel. Ge v. Takeda Pharmaceutical Co., Ltd., 737 F.3d 116 (1st Cir. 2013). The First Circuit affirmed the district court's decision that a relator's complaint should be dismissed for failure to identify specific claims presented to the government for reimbursement. Takeda, the relator, was alleging that Takeda was not properly disclosing to the FDA the risks associated with some of its drugs and that this caused false claims by both patients and physicians to be submitted to Medicare and Medicaid. The Court found that the relator made no effort to identify who specifically had submitted these claims and other details such as times, amounts, and circumstances. Therefore, the Court affirmed the district court's dismissal of the case under Rule 9(b).

5. Can a case dismissed under Rule 9 still serve as a first-to-file case? United States ex rel. Heineman-Guta v. Guidant Corp., 718 F.3d 28 (1st Cir. 2013).
The First Circuit held that a complaint that fails to satisfy Rule 9(b) may still trigger the FCA's first-to-file bar. In other words, even though a complaint was dismissed for procedural reasons, it can still serve as the case that was the first-to-file. [Note that the 6th Circuit has held otherwise and the Circuits appear to be split on this issue.]

6.Does the Excessive Fines Clause apply to the FCA? United States ex rel. Bunk v. Gosselin World Wide Moving, N.V., 741 F.3d 390 (4 th Cir. 2013).
The Court acknowledged that the Excessive Fines Clause applies to the FCA. It held that a court has discretion to accept a penalty of less than what the FCA statutorily prescribes to avoid a violation of the Excessive Fines Clause.

7. What must be pled in a false certification FCA case? United States ex rel. Steury v. Cardinal Health, Inc.,735 F. 3d 202 (5 th Cir. 2013). The relator alleged that Cardinal had sold defective medical devices to the VA and that this violated the "warrant of merchantability" portion of the contract between the VA and Cardinal. The Court affirmed the district court's dismissal of the case and held that false certification claims are cognizable only when a contractor's compliance with the certification at issue is a prerequisite for payment. In this case, the relator had failed to allege in the Complaint that the contractual merchantability provision was a condition without which the government would not have paid Cardinal.

8. Are regulatory violations enough to trigger an FCA claim? United States ex rel. Hobbs v. MedQuest Associates, Inc., 711 F.3d 707 (6 th Cir. 2013).
The Sixth Circuit reversed the district court's grant of summary judgment against the defendants because the Medicare violations at issue were not conditions of payment. The key point in this decision is that the FCA is not to be used to enforce compliance with regulatory schemes. Only when regulatory requirements are prerequisites for payment by the government would an FCA claim be triggered. The Court explained its ruling by saying that MedQuest's regulatory violations were not the type that would have influenced CMS's decision to pay on the claims.

9. For treble damages, is the gross or the net trebled? United States v. Anchor Mortgage Corp., 711 F.3d 745 (7th Cir. 2013). The Seventh Circuit reversed the district court's manner in which it trebled the damages in a bench trial. The district court had trebled the total amount the government paid to lenders (in other words, it trebled the gross). The Seventh Circuit decided to follow the Second, Sixth, and D.C. Circuits and apply a "net trebling" method. (defendant friendly method). The net trebling method first subtracts the amount the government obtains by mitigating its damages or obtains in other ways.

This case involved a brokerage company and its CEO who had provided false information with regard to FHA mortgage loan guarantees. The district court had trebled the total amount the government had paid to lenders instead of first subtracting away the amounts the government had realized from selling off the properties that secured the loans.

10. Under the fraud-in-the-inducement theory, does the relator still have to show specific claims are fraudulent? In re Baycol Products Litigation, 732 F.3d 869 (8th Cir. 2013).

A Bayer Healthcare employee brought this FCA lawsuit against Bayer for alleged misrepresentations concerning the side effects of Baycol, a cholesterol-lowering drug. The relator alleged that Bayer was fraudulently causing Medicare to reimburse the cost of Baycol prescriptions and also fraudulently inducing the Department of Defense to enter into contracts for the purchase of Baycol. The district court dismissed both claims for Rule 9(b) violations because the complaint was not specific enough as to the specific claims for payment submitted to the government.

The Eighth Circuit affirmed the district court's decision as to the Medicare claim but reversed as to the Department of Defense claim. The Court's holding explained that claims under a fraud-in-the-inducement theory realistically focus on the fraudulent statements that induced the government to enter into the contract at the very beginning. Therefore, under a fraud-in-the-inducement theory, later claims for payment do not have to be false if they are under a contract that was originally induced by fraud.

11. If a defendant's misinterpretation of regulations is reasonable, does it get a pass under FCA?United States ex rel. Ketroser v. Mayo Foundation, 729 F.3d 825 (8th Cir. 2013).

The Eighth Circuit affirmed the district court's dismissal of the case because the claimed violations of Medicare regulations were based on reasonable interpretations of the regulations and compliance with the regulations was not a material condition of payment.

12. How lenient are courts in deciding the relators' portion of settlement funds under the FCA?United States ex rel. Roberts v. Accenture, LLP, 707 F.3d 1011 (8th Cir. 2013).

After the government settled the qui tam suit, it objected to the relators' sharing in a certain part of the settlement funds. The government argued that this part of the settlement was only generally related to the relators' complaint. However, The Eighth Circuit affirmed the district court's ruling regarding the relators' entitlement to a share of the argued part of the settlement funds. The case seems to signal a strong pro-relator stance on awards for filing FCA claims.

13. Can a state employee be sued in his individual capacity under the FCA?United States ex rel. Jones v. University of Utah Health Sciences Center, 2013 U.S. Dist. LEXIS 137797 (D.Utah 2013).

Although this is a district court case, it seems to be of importance as it may provide a way around previous case law holding that states and state agencies are not persons under the FCA. The district court found that although the defendant medical doctor could not be sued in his official capacity, he could be sued individually for the exact same conduct.

Can a defendant prevent an FCA claim against it by preemptively filing a state court complaint?United States ex rel. Estate of Cunningham v. Millennium Labs of Cal., 713 F.3d 662 (1st Cir. 2013).

After Defendant Millennium learned that the relator was speaking out about Millennium's fraudulent practices, it filed a state court defamation and contractual interference case against the relator five days before the relator filed his qui tam complaint. Millennium then moved to dismiss the relator's qui tam case arguing the public disclosure bar. The district court granted the motion to dismiss. The First Circuit partially affirmed. It held that some of the allegations in the qui tam case were substantially similar to the state court case, but others were not. Of importance, the First Circuit acknowledged that a company could potentially sanitize itself from a qui tam action by preemptively filing its own action.

15. How far is too far for a General Counsel to go in pursuing a qui tam against his employer?United States v. Fair Laboratory Practices Assocs. V. Quest Diagnostics, Inc., 734 F.3d 154 (2nd Cir. 2013).

In this case the former General Counsel for a medical diagnostic provider brought a qui tam action against his former employer. The Court found that the former General Counsel, as a relator, violated State ethics rules when he disclosed more of the defendant's confidential information than was necessary in pursuit of the fraud claim. Dismissal was granted and affirmed on ethical grounds.

16. Opposite rulings regarding the public disclosure bar. United States ex rel Zizic v. Q2Administrators, LLC,728 F.3d 228 (3 rd Cir. 2013).

A relator who was a former CEO of a durable medical equipment company that was submitting claims to Medicare for reimbursement of its device. Two Medicare contractors kept denying these claims for payment and the relator's company went into bankruptcy. During the bankruptcy proceeding, the relator learned in discovery that the review contractors had denied the claims without any meaningful review. The relator filed his FCA claim based on this newly found information. The claim was that the contractors had submitted claims/bills to HHS for payment of review services that it did not render. The Third Circuit affirmed the dismissal of the complaint based on the public disclosure bar.

Leveski v. ITT Educ. Servs., Inc., 719 F.3d 818 (7th Cir. 2013).

However, in this Seventh Circuit case, the Court found the public disclosure doctrine did not bar claims based on information obtained from a previous action. The relator was one of many former employees who had been contacted by a lawyer's investigator as to whether she wanted to file suit against her former employer, ITT. As other employees had filed previous suits against ITT for violations of the incentive compensation regulations, the Court had to decide whether this case should be dismissed based on the public disclosure bar. Although the district court dismissed the case, the Seventh Circuit reversed, finding that dismissal on these grounds made the public disclosure inquiry at too high a level of generality. The relator had pled different details about how the incentive compensation regulations were violated.

17. What is considered "protected activity" so as to trigger a retaliation claim under the FCA? Gynn v. EDO Corp., 710 F.3d 209 (4 th Cir. 2013).

The FCA also protects employees who "whistleblow" against their employers. Such an employee can bring a retaliation claim under the FCA if he engages in "protected activity" of which his employer knew and if adverse action was taken against him by the employer. The Fourth Circuit affirmed dismissal of this employee's case because the violations the employee was alleging the employer committed were not severe enough to trigger FCA liability. Therefore, it wasn't protected activity to complain against them.

Thomas v. ITT Educ. Servs. Inc., 2013 WL 1189230 (5th Cir. 2013).
The Fifth Circuit defined "protected activity" as "one motivated by a concern regarding fraud against the government." But, the Court rejected the retaliation claim because the plaintiff had failed to allege that she informed anyone that the actions were illegal/fraudulent or establish that she sought to pursue a qui tam action.