FCA Alert

The Evolution of the False Claims Act and Anti-Kickback Allegations

Antonia F. Giuliana — Tue, 27 Mar 2012 09:39:58 -0500

Here is a copy of the Kickbacks & False Claims Act presentation that I prepared for ACI's conference on Fraud and Abuse in the Sale and Marketing of Drugs being held today and tomorrow in New York. The presentation slides include:

A discussion of how the legal standards applicable to the Anti-Kickback Statute and the False Claims Act have changed over time. (Slide Nos. 3-8)

The evolution of kickback allegations in FCA Cases. (Slide Nos. 9-11)

A case example: United States ex rel. Jamison v. McKesson Corp. et al., Civil Action No. 2:08-cv-214 (N.D. Mississippi). (Slides 12-21)

Appendix A: Implied Certification Cases

Appendix B: A chart summarizing the evolution of kickback allegations (1995-2009). (Slides 26-33)

D. Mass. Dismisses FCA Claims Against Drug Manufacturer and Distributor

Antonia F. Giuliana — Thu, 08 Mar 2012 13:51:14 -0500

A recent case in the District of Massachusetts provides a good illustration of the application of the False Claims Act’s public disclosure and first-to-file bars in health care fraud cases. See United States ex rel. Bartz v. Ortho-McNeil Pharmaceutical, Inc. et al., Civil Action No. 11-10316 (D. Mass. March 2, 2012). In 2005, the relator, a former sales compensation manager for a drug manufacturer, filed a qui tam suit pursuant to the False Claims Act against the manufacturer, a distributor, and various related entities. The amended complaint asserts three broad categories of alleged fraudulent conduct – the manipulation of Medicaid rebate amounts, false reporting of AMP and best price for certain drugs, and the payment of kickbacks to nursing home drug purchasers. At the core of the relator’s allegations is the claim that the defendant pharmaceutical distributor took kickbacks from the manufacturer as an inducement to purchase the anti-psychotic medication Risperdal Consta. In 2008, the United States declined to intervene. As of the date of the court’s opinion, no State had moved to intervene.

The defendants moved to dismiss the amended complaint pursuant to the public disclosure and first-to-file bars of the FCA. Defendants characterized the relator’s amended complaint as a “hotchpotch of stale allegations that were previously presented in dozens of complaints and other public disclosures.” Defendants included a lengthy list of prior lawsuits and various news articles and government reports making similar allegations. The court held that as a matter of law, the information in these previously filed complaints and news reports are “public disclosures” for purposes of the barring rule of the FCA:

A comparison of these disclosures with the allegations made by Bartz demonstrates that all of the “essential elements” of Bartz’s claims – the allegedly false AMP and Best Price arising from free goods and hidden discounts and the “kickbacks” in the form of discounts and payment of administrative fees to promote particular pharmaceutical products—were in the public domain prior to Bartz’s various Complaints through the AWP Litigation, the Massachusetts Litigation, the LaCorte, Pauly, Montana, City of New York, and Commonwealth of Pennsylvania lawsuits, and general news reporting. Although these materials did not specifically reference the ASP and non-FAMP reporting, their allegations regarding AWPs, WACs, AMPs, and Best Prices were more than sufficient to place the government on notice of J&J’s alleged reporting fraud.

The court rejected the relator’s claim that the public disclosure bar should not apply because he provided additional information and analysis in his allegations:

Regardless of the value to the government of these elaborations on what was already known, the public disclosure bar’s focus is on notice and not detail. Allowing such a suit would allow potential qui tam plaintiffs to avoid the public disclosure bar by pleading their complaints with more and more detailed factual allegations slightly different from more general allegations already publicly disclosed. Given that the purpose of the qui tam action is to prosecute fraud of which the government is unaware, such a result would not advance Congress’ purpose and would only multiply the number of parasitic qui tam actions pursued by plaintiffs.

The court also rejected the relator’s assertion that the public disclosure bar did not apply because he was an “original source.” The complaint alleges, in relevant part, that “the allegations set forth in the Complaint are based upon the direct and independent knowledge of the relator, a former insider of the J&J defendants….This lawsuit is based solely on information and knowledge obtained by Relator in his position as a J&J insider.” The court concluded that relator failed to demonstrate that he was an original source because the complaint did not provide any supporting details that would corroborate his status as an original source, but rather parroted the statutory language.

Alternatively, the court held that the suit was precluded by the FCA’s first-to-file bar because the “identicality of elements with the prior-filed complaints is fatal to Bartz’s claims.”

Arkansas District Court Denies DOJ's Motion To Dismiss After Government Settled With Defendant

Sung W. Kim — Wed, 15 Feb 2012 10:44:59 -0500

In United States ex rel. Rille v. Sun Microsystems, Inc., Civil Action No. 04-CV-00986 (E.D. Ark. Jan. 30. 2012), an Arkansas district court denied the motions to dismiss brought by the Department of Justice (DOJ) and the defendant against the relators, although the DOJ and defendant already settled the underlying claims brought by the relators.

The case arises out of a series of General Services Administration (GSA) contracts awarded by the government to defendant Sun Microsystems, Inc. (“Sun”) in the late 1990s and early 2000s for the provision of computer server and software services. The lawsuit alleged that defendant paid “alliance benefits” and other kickbacks to third-party consultants in order to improperly procure GSA contract awards, and failed to disclose material pricing information or discounts throughout the negotiation and performance of a GSA contract. The relators filed their original complaint in September 2004. The DOJ eventually intervened in 2007. Unbeknownst to the relators, the GSA had already initiated a parallel investigation of the defendant and several articles were published at around this time revealing audit-related conversations between the GSA and Sun.

In early 2011, the DOJ and Sun entered into a settlement agreement, under which Sun agreed to pay $4 million to settle an anti-kickback claim and another $42 million to settle a deceptive pricing claim brought by the relators on behalf of the government. The relators were unable to agree with the DOJ on the amount of the relators’ share and remained in dispute with defendant as to the attorneys’ fees and costs. Thus, the DOJ stipulated to the dismissal of its case against Sun with prejudice, but agreed that the court shall retain jurisdiction to determine the relators’ share as well as the relators’ attorney fees and costs. Shortly after the court granted the dismissal pursuant to its stipulation, however, the DOJ moved to dismiss the relators’ deceptive pricing claim based on the public disclosure bar and the GSA’s parallel investigation of Sun. Sun joined in the motion and further moved to dismiss the relators’ anti-kickback claim on similar grounds.

The Arkansas district court observed that the publications and the GSA investigation failed to reveal the “critical elements of fraud” required to invoke the public disclosure bar in the Eighth Circuit. The court also observed that the relators were an original source given their prior employment with one of the “allied” third-party consultants that received the improper kickbacks from Sun. This case is instructive in that the government’s interest may not always be aligned with that of the relator.

Which Public Disclosure Bar Applies?

Antonia F. Giuliana — Thu, 02 Feb 2012 16:55:45 -0500

A recent case from the District of Massachusetts raises an interesting question under the False Claims Act’s public disclosure bar. See United States ex rel. Estate of Cunningham v. Millennium Laboratories of California, Civil Action No. 09-12209 (D. Mass. Jan. 30, 2012). The defendant Millennium Laboratories provides drug testing services to physicians who treat chronic pain conditions and need to closely monitor their patients’ drug use. The relator Robert Cunningham was a compliance officer for Calloway Laboratories, a competitor of Millennium. On December 29, 2009, Cunningham filed a qui tam complaint in the District Massachusetts against Millennium, alleging that the company was encouraging physicians to use incorrect billing codes to charge Medicaid, Medicare and other government funded health care programs in connection with initial drug screens the physicians performed in their offices.

Five days earlier, on December 24, 2009, Millennium commenced a defamation lawsuit against Calloway in California state court, alleging that several Calloway executives were contacting Millennium’s customers and informing them that Millennium’s billing practices allowed it to bill insurance companies and the government twice for the same service. Millennium annexed several examples of these communications to its defamation complaint. Cunningham passed away in December 2010. Cunningham’s estate took over the qui tam lawsuit and filed an amended complaint on February 25, 2011. The government declined to intervene.

Millenium moved to dismiss the qui tam complaint on three grounds: for lack of subject matter jurisdiction pursuant to the FCA’s public disclosure bar, failure to plead fraud with particularity under Rule 9(b), and failure to state a claim under Rule 12(b)(6). Because jurisdiction is a threshold matter, the court addressed the public disclosure bar issue first.

Under the pre-PPACA version of the public disclosure bar (i.e., the version that existed prior to March 23, 2010), a previous public disclosure could have occurred in either a federal or state case or hearing to trigger the FCA’s public disclosure bar. Under the post-PPACA version, previous public disclosures in state court proceedings no longer trigger the public disclosure bar.

As you would expect, the parties disagreed as to which version of the public disclosure bar should apply to the case. Defendant Millennium argued that the pre-PPACA public disclosure bar should apply because that is the version that was in effect at the time the relator filed his original qui tam complaint. Under this view, the state defamation suit would qualify as a prior public disclosure. The relator argued that the post-PPACA public disclosure bar should apply because, according to the relator, it is retroactive. Under this interpretation, the state defamation suit would not qualify as a prior public disclosure.

The court agreed with Millennium and held that the pre-PPACA public disclosure bar applied because “the court must decide whether there was jurisdiction over Relator’s FCA claim under the public disclosure bar as it existed at the time Robert Cunningham filed the original Complaint in this suit.” The court held that the California state suit qualifies as a prior public disclosure and dismissed the action:

Although the situation is atypical, the California suit undoubtedly qualifies as a prior public disclosure under the FCA as it existed at the time Robert Cunningham filed the original Complaint in this case. In the complaint in the California suit, Millennium describes its billing practice and argues that Calloway has misrepresented it as fraudulent….The public disclosure of allegations of fraud can occur when a plaintiff brings a defamation suit alleging that the defendant has represented plaintiff’s actions to be fraudulent. This interpretation of the FCA’s jurisdictional requirement furthers the policy that underlies the public disclosure bar. When a company like Millennium brings a defamation suit against accusations of fraud, it is not working to conceal its interpretation of the law. Rather, it is voluntarily bringing to light the actions that it took. Additionally, it is not insulating itself from potential liability in a lawsuit brought by the United States government. In such a case, a relator is not necessary to “rout out the fraud” and a qui tam suit should be denied if the circumstances fulfill the other prongs of the public disclosure bar.

Federal False Claims Act Recoveries Cross The $30 Billion Mark

Antonia F. Giuliana — Mon, 09 Jan 2012 11:27:32 -0500

According to new statistics released by the Department of Justice, the U.S. government recovered $30.3 billion pursuant to the federal False Claims Act between 1987 and 2011. In the fiscal year ending September 30, 2011, 762 new FCA cases were initiated, consisting of 638 qui tam actions and 124 cases initiated by the United States without the aid of a relator.

More FCA cases were commenced in 2011 than ever before and recoveries amounted to $3.03 billion in 2011, slightly less than the $3.09 recovered in 2010. Of the $3.03 billion recovered in 2011:

$2.64 billion was recovered in matters in which the government intervened;
$148 million was recovered in cases in which the government declined intervention; and
$241 million was recovered in actions initiated by the United States.

As mentioned previously here, it is expected that FCA recoveries will reach a staggering $9 billion in 2012, due in large part to several possible settlements with pharmaceutical manufacturers hovering near, or exceeding, a billion dollars. Last week, it was reported that a one billion dollar settlement had been reached between a drug manufacturer and the U.S. attorney’s office in Philadelphia concerning the marketing practices for a former blockbuster antipsychotic drug.

HEAT Releases Provider Compliance Training Video On The False Claims Act

Antonia F. Giuliana — Wed, 04 Jan 2012 10:10:00 -0500

The Health Care Fraud Prevention & Enforcement Action Team (known as "HEAT") has produced a series of 11 short training videos covering high priority compliance topics. The third training video discusses the False Claims Act. Here are links to the video and transcript.

The other training videos released so far discuss (1) the OIG's exclusion authorities and the effects of exclusion; (2) the federal Anti-Kickback Statute; (3) and the federal Physician Self-Referral Law. New episodes are released at the beginning of each week on the OIG's website and should continue to run through mid-February.

More Federal Qui Tam Cases Filed In 2011 Than Ever Before

Antonia F. Giuliana — Mon, 19 Dec 2011 17:13:39 -0500

According to a press release issued today by the Department of Justice, 638 new whisteblower complaints under the qui tam provisions of the federal False Claims Act were filed under seal in fiscal year 2011, representing a peak in such filings over prior years. The DOJ reports that it recovered more than $3 billion under the FCA in 2011, of which $2.8 billion was generated from qui tam actions.

As has been typical in recent years, FCA matters involving the health care and pharmaceutical industries were the largest source of recoveries in 2011. The DOJ recovered $2.4 billion in health care matters, of which $2.2 billion was obtained from pharmaceutical companies.

Other sources of recoveries include consumer-related financial fraud cases and non-war related procurement cases, which accounted for nearly $358 million in FCA recoveries in 2011. The DOJ also recovered $89.3 million under the FCA in connection with the wars in Southwest Asia in 2011.

Looking ahead, it is likely that federal FCA recoveries will be even larger in 2012. One commentator has suggested that it is possible that FCA recoveries will reach $9 billion in 2012, due, in large part, to several possible settlements with pharmaceutical manufacturers hovering near, or exceeding, the billion dollar mark.

D.C. Circuit Issues Opinion on First-To-File Bar

Sung W. Kim — Tue, 29 Nov 2011 15:40:03 -0500

The U.S. Court of Appeals for the District of Columbia in United States ex rel. Batiste v. SLM Corporation, Civil Action No. 10-7140 (D.C. Cir. Nov. 4, 2011) affirmed the dismissal of a relator’s complaint based on an application of the first-to-file bar of the FCA. The first-to-file rule provides that “no person other than the Government may intervene or bring a related action based on the facts underlying the pending action.” In so holding, the court also ruled, as a matter of first impression in the D.C. Circuit, that first-filed qui tam complaints need not satisfy the heightened pleading requirements for fraud in order to bar subsequent qui tam complaints. The United States did not intervene but supported the relator’s position as amicus curiae.

The relator in this case alleged that SLM (also known as “Sallie Mae”) unlawfully placed student loans into forbearance, which in turn caused the government to pay greater interest and allowances on those loans. The relator was a senior loan advisor at a New Jersey-based subsidiary of SLM. Just two years prior, an employee of a Nevada subsidiary of SLM filed a qui tam complaint that, according to the court, alleged sufficiently similar material elements of fraud against SLM. Even though the relevant time period differed in some respects and allegations arose from activities occurring at different subsidiaries or offices, the court found a sufficient overlap because the alleged fraudulent scheme began at roughly the same time in 2004 and was alleged to be a nationwide scheme. In short, the court found both complaints sufficient to “equip the government to investigate SLM’s allegedly fraudulent forbearance practices nationwide.”

The relator argued that the first-filed qui tam lawsuit was not a “pending action” because the first-filed complaint did not meet the Rule 9(b) heightened pleading requirements. The court rejected this argument and ruled that the first-filed provision is triggered when the complaint provides the government with sufficient information to launch a fraud investigation. To hold otherwise would “create a strange judicial dynamic, potentially requiring one district court to determine the sufficiency of a complaint filed in another district court.” The D.C. Circuit Court’s decision creates a circuit split as the Sixth Circuit Court of Appeals held the opposite. See Walburn v. Lockheed Martin Corp., 431 F.3d 966 (6^th Cir. 2005) .

For-Profit Home Health Care Companies Targeted By Senate Finance Committee

Michael J. Maloney — Mon, 31 Oct 2011 12:09:16 -0500

The Senate Finance Committee recently released a report describing the Committee’s findings based on an investigation into Amedisys, LHC Group, Gentiva, and Almost Family, four of the largest publicly-traded home health care companies. See Report part I and part II. The Committee alleges that home health care companies “gamed” the Medicare reimbursement system for therapy visits to the homes of eligible Medicare beneficiaries.

Until January 2008, Medicare paid $2,200 for up to nine home therapy visits. When a tenth home therapy visit was made, Medicare would pay home health care providers an additional $2,200. According to CMS, prior to 2008, 10-13 visits were the most prevalent number of visits. The Committee’s report claims that Amedisys, LHC Group, and Gentiva “encouraged therapists to target the most profitable number of therapy visits, even when patient need alone may not have justified such patterns.”

Under new rules that took effect in 2008, therapy thresholds were set at 6, 14, and 20 visits. The Committee's Report alleges that during each 60-day period, home health agencies would receive “substantially higher payout[s]” for episodes in which the number of visits reached these new thresholds. The Committee’s report alleges: “Home health agencies rapidly altered their treatment patterns to match the new system, producing what [the Medicare Payment Advisory Commission] called ‘the swiftest one-year change in therapy utilization since [the prospective payment system] was implemented.’” The number of episodes near the old thresholds allegedly dropped approximately 28 percent while the number of episodes near the new thresholds increased by as much as 30 percent.

The Committee’s report is the latest development in an investigation of the home health care industry that began shortly after the Wall Street Journal published an article in April 2010 stating that Amedisys’ therapy visit reimbursement claims “cluster[ed]” around the ten visit threshold. In May 2010, the Senate Finance Committee requested documents from each company identified in the Wall Street Journal article. The Department of Justice issued a CID to Amedisys later that year. As we mentioned in our October 7, 2010 post, the issuance of a CID means that an investigation under the False Claims Act is in progress.

Amedisys and Gentiva deny the allegations in the Senate Report. See Amedisys Press Release and Gentiva Press Release. Almost Family also denies any wrongdoing and points out that the Committee’s report found that “none of the documents provided to the committee by Almost Family show that executives ever pushed therapists to target thresholds or to pursue more profitable clinical regimens.” See Almost Family Press Release. LHC Group entered into a settlement with the Government for $65 million, but did not admit any wrongdoing. See LHC Group Press Release Regarding Senate Report and LHC Group Press Release Regarding the Settlement.

Par Files Complaint Against the Government Claiming that FDA's Off-Label Marketing Regulations Violate the First Amendment

Cliff Katz — Thu, 27 Oct 2011 10:59:53 -0500

Par filed a Complaint for Declaratory and Injunctive Relief against the United States, the U.S. Food & Drug Administration (FDA), the Commissioner of the FDA, and the Secretary of the Department of Health & Human Services seeking a declaratory judgment that the application of FDA off-label marketing regulations to Par’s marketing of Magace® ES violates the First Amendment. Par believes that those regulations unlawfully prevent it from engaging in truthful speech regarding approved uses of Magace® ES with healthcare providers that may prescribe the drug for off-label uses. There is no dispute that physicians are legally permitted to prescribe a drug for off-label uses. Moreover, Par alleges that Magace® ES is prescribed more often for off-label uses. However, as Par notes, the Government has prosecuted manufacturers under the federal False Claims Act for marketing a drug in settings where it was likely to be prescribed for off-label uses. For example, the Government brought actions against Eli Lilly in connection with its marketing of Zyprexa and Pharmacia regarding its marketing of Bextra. Presently, Par believes it is under investigation for its sales and marketing practices of Magace® ES as it received a subpoena in March 2009. (Click here for our prior post regarding potential FCA exposure based on allegations of off-label marketing.) Par alleges: “The ongoing threat of prosecution for alleged ‘off-label promotion’ based on Par’s truthful and non-misleading speech to healthcare professionals concerning the FDA-approved use of Par’s FDA-approved prescription drug currently chills Par’s speech.”

Par alleges that the FDA's “intended use” regulations of 21 C.F.R. §§ 201.100 and 201.128 are broad enough to reach a manufacturer’s speech “concerning exclusively the FDA-approved, on-label uses of a prescription drug” if the speech occurs “in a setting where physicians exercising independent medical judgment prescribe the drug off-label.” In such a situation, a manufacturer would be required to provide “adequate directions” on the labeling for the off-label use, which of course is impermissible (since only information regarding FDA-approved uses may be on the labeling). Par claims that the FDA regulations create a Catch-22 for a manufacturer that speaks about an on-label use to a medical provider that prescribes the drug for an off-label use: “[Changing the drug’s labeling to add directions for the off-label use violates the Act’s criminal ‘new drug’ rule, but based on the government’s view of the FDA’s ‘intended use’ regulations, not changing the labeling to add those directions violates the Act’s ‘misbranding’ rule.”

Par states that this Catch-22 prevents it from marketing Magace® ES, which is approved for treating loss of appetite, malnutrition, and weight loss in patients with AIDS, called “AIDS-related wasting.” Par contends that, while the drug is prescribed for AIDS-related wasting, the majority of the prescriptions are for off-label uses, frequently for geriatric and cancer patients. Par seeks a declaratory judgment that would allow it to market Magace® ES for on-label uses in long-term care and oncology settings where Par knows that physicians may prescribe it for off-label uses.

Update: Relators Run the Risk that Complaints in Voluntarily Dismissed Cases May Be Unsealed

Cliff Katz — Fri, 21 Oct 2011 15:15:54 -0500

Earlier this week we reported on a case in the U.S. District Court for the District of Columbia in which the court unsealed a relator's complaint after the relator voluntarily dismissed it, holding that "the rationale behind sealing FCA cases is to allow the United States ample time to investigate the allegations, and the FCA does not contain any language that suggests the purpose of sealing a case is to protect the relator’s identity.” See United States ex rel. Durham Prospect Waterproofing, Inc., Civil Action No. 10-1946, 2011 WL 4793236 (D.D.C. Oct. 4, 2011). Click here for our post on the Durham case. A few days ago, the District of Kansas similarly denied a relator's request to seal the complaint, holding that the "public's strong interest in access to court documents outweighed the relator's interest in keeping her identity secret. See United States ex rel. Danner v. Quality Health Care Inc., No. 11-4026, 2011 WL 4971453 (D. Kan. Oct. 18, 2011).

The relator, Mary Danner, a former Clinical Director at Quality Health Care Inc., alleged that her former employer submitted claims to Medicare for medically unnecessary services, submitted upcoded claims, and submitted claims for services not actually provided. The Government investigated the claims and chose not to intervene. The court then unsealed the complaint to allow the relator to serve the defendants and litigate the action. Instead, the relator moved to voluntarily dismiss the action and restore the seal. The relator claimed that public availability of the complaint "(1) will impair her ability to continue investigating and developing facts to support the alleged claims, and (2) may impair her ability to obtain employment and negatively impact her health."

The court rejected the relator's arguments and denied the motion to seal the complaint. The court reasoned: (1) "Relator's concern about continuing her private investigation misconstrues the purpose of the sealing provisions in the FCA. The FCA requires the complaint to be filed under seal to protect the government's investigation—not relator's private investigation." (2) "Relator also argues that public accessibility may impair her ability to obtain employment and negatively impact her health…But relator knew, or should have known, when she filed her qui tam complaint that most likely her identity would eventually be revealed. There is nothing in the FCA that requires permanently sealing the complaint."

Relators Run the Risk that Complaints in Voluntarily Dismissed FCA Cases May Be Unsealed

Cliff Katz — Wed, 19 Oct 2011 13:01:18 -0500

The False Claims Act provides that private persons who bring actions on behalf of the U.S. Government, called relators, file their complaints under seal. This means that a defendant, which is frequently a present or former employer of the relator, will not have access to the complaint or even know that a complaint has been filed, unless the Government chooses to disclose the lawsuit or the court unseals the complaint. However, the FCA does not contemplate that a complaint will remain under seal forever. In United States ex rel. Durham Prospect Waterproofing, Inc., Civil Action No. 10-1946, 2011 WL 4793236 (D.D.C. Oct. 4, 2011), the relator, Thomas Durham, filed a qui tam complaint under seal against his present employer, Prospect Waterproofing, Inc. The Government investigated the allegations and chose not to intervene in the lawsuit. Subsequently, the relator voluntarily dismissed his complaint. Fearing retaliation from his employer, the relator asked the court to maintain the seal permanently. The Government, by contrast, requested that the complaint, the relator’s voluntary dismissal and the Government’s consent to the voluntary dismissal be unsealed. The U.S. District Court for the District of Columbia agreed with the Government and ordered that the pleadings be unsealed.

The relator’s core argument for maintaining the seal was that he feared that his employer would retaliate upon discovery of the complaint. The District Court rejected this argument, stating that “the rationale behind sealing FCA cases is to allow the United States ample time to investigate the allegations, and the FCA does not contain any language that suggests the purpose of sealing a case is to protect the relator’s identity.” The court further reasoned:

There are, moreover, potential policy concerns if relators are allowed to keep FCA cases permanently under seal due to fear of employer retaliation. First, these retaliation concerns are “similar to those of the many other employees who bring suits against their employers or former employers for various reasons” and therefore should not merit special protection in qui tam actions. In addition, when bringing suit under the FCA, Relator “concluded that these risks were worth taking if the Government would intervene. Having assumed the risk that the Government might not intervene, [R]elator cannot cherry pick the portions of the FCA that suit [him].” (quoting United States ex rel. Littlewood v. King Pharmaceuticals, Inc., 2011 WL 3805607, at *8-9 (D. Md. Aug. 29, 2011)).

NJ Appellate Court Holds that NJ False Claims Act Cannot Reach Conduct Occurring Before March 2008

Cliff Katz — Wed, 12 Oct 2011 14:31:00 -0500

The New Jersey Appellate Division for the Superior Court, Mercer County, recently held that the New Jersey False Claims Act, N.J.S.A. 2A:32C–1 to –15 and N.J.S.A. 2A:32C–17 to –18, which was enacted on January 1, 2008 and made effective on March 13, 2008, does not apply retroactively to allegedly false claims submitted prior to the statute’s effective date. See State of New Jersey ex rel. State ex rel. Hayling v. Correctional Medical Services, Inc., --- A.3d ----, Case No. A-5575-09T2, 2011 WL 4770453 (N.J.Super.A.D., Oct 11, 2011).

In Correctional Medical Services, the relator, Leslie A. Hayling, accused Correctional Medical Services’s subcontractor, AllCare Dental Group, of submitting false claims relating to a period which the court held to be before the NJ FCA became effective on March 13, 2008. Quoting the New Jersey Supreme Court case, Gibbons v. Gibbons, 86 N.J. 515, 521–22 (1981), the Appellate Division stated:

It is a fundamental principle of jurisprudence that retroactive application of new laws involves a high risk of being unfair. There is general consensus among all people that notice or warning of the rules that are to be applied to determine their affairs should be given in advance of the actions whose effects are to be judged by them. The hackneyed maxim that everyone is held to know the law, itself a principle of dubious wisdom, nevertheless presupposes that the law is at least susceptible of being known. But this is not possible as to law which has not been made.

The Appellate Division further held that no exception applied in Correctional Medical Services, finding the legislative intent clear: “In the present case, the fact that the Legislature postponed the Act's effective date provides clear evidence that it envisioned only prospective application.”

Amgen Seeks Supreme Court Review of Implied Certification Theory of Liability Under the False Claims Act

Cliff Katz — Thu, 06 Oct 2011 10:33:23 -0500

The U.S. Courts of Appeals have been wrestling with the reach of the False Claims Act when the actual claim submitted to the government is not “factually false.” Some courts have adopted a framework in which a claim that is true on its face can be considered “legally false” where a party somehow involved in the goods and services provided failed to comply with certain statutory, regulatory or contractual obligations, despite never expressly certifying that it did comply with these obligations. This is called the “implied certification” theory of liability. In its Petition for a Writ of Certiorari to the U.S. Supreme Court, Amgen contends that “[t]he Circuits have applied a dizzying array of different tests in deciding whether claims like this qualify as ‘false or fraudulent’ within the meaning of the FCA.”

In its Writ, Amgen describes some of the varying positions taken by the Circuits regarding the implied certification theory of liability:

1st Circuit: dispensing with the “certification” framework, and holding that liability can be premised on failure to comply with a contractual, regulatory or statutory obligation whenever the government could theoretically reject a claim for non-compliance. See New York ex rel. Westmoreland et al. v. Amgen, Inc. et al., 2011 WL 2937420 (1st Cir. July 22, 2011); United States ex rel. Hutcheson et al. v. Blackstone Medical, Inc., 2011 WL 2150191 (1st Cir. June 1, 2011). For further details on the First Circuit decisions, click here, here, and here.

7th, 4th, and 5th Circuits: have taken positions that are incompatible with an implied certification theory. See United States ex rel. Yannacopoulos v. General Dynamics, 2011 WL 3084932, at *3 n.4. (7th Cir. July 26, 2011); Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 786-87 n.8 (4th Cir. 1999); United States ex rel. Marcy v. Rowan Cos., 520 F.3d 384, 389 (5th Cir. 2008).

2nd, 3rd, and 8th Circuits: implied certification theory limited to where there is a statute or regulation that is a condition of payment. See Mikes v. Straus, 274 F.3d 687 (2d Cir. 2001); United States ex rel. Wilkins v. United Health Group, Inc., 2011 WL 2573380, at *9 (3d Cir. June 30, 2011); United States ex rel. Vigil v. Nelnet, Inc., 639 F.3d 791, 795–96 (8th Cir. 2011).

11th Circuit: implied certification theory can be based on either a condition of payment or a condition of participation in the federal program. See McNutt ex rel. United States v. Haleyville Medical Supplies, Inc., 423 F.3d 1256, 1259 (11th Cir. 2005).

D.C. Circuit: holding that a violation of a contractual obligation that was “material” to the government’s obligation to pay a claim can form the basis for FCA liability. See United States v. Science Applications Int’l Corp., 626 F.3d 1257, 1261 (D.C. Cir. 2010).

Amgen posed the following two questions to the U.S. Supreme Court:

Whether a claim can be deemed “false or fraudulent” within the meaning of the FCA because the claimant violated a statutory, regulatory or contractual obligation and, at the time the claim was submitted, the government payor could have but was not required to deny the claim on that ground.
Whether the draconian provisions of the FCA can be used to enforce compliance with statutes, regulations, contractual obligations, or other program requirements, even though no statute, regulation or contractual provision expressly conditions payment on compliance with those obligations.

In particular, at issue in the Amgen case is whether a violation of the Anti-Kickback Statute (AKS) can form the basis for liability under the FCA prior to the amendments to the FCA made by the 2010 Patient Protection and Affordable Care Act. The First Circuit has held that compliance with the AKS is a precondition of payment of Medicare claims, and a violation of the AKS can cause factually true claims to be false and form the basis for liability under the FCA – whether or not the providers expressly certified compliance with the AKS. The First Circuit has further held that liability can also be based on “a precondition of being entitled to payment,” i.e., violations of statutory, regulatory or contractual obligations which would give the government agency discretion to decline payment on the basis of the violation.

The 2010 Patient Protection and Affordable Care Act amended the FCA to specifically provide that a violation of the AKS causes the claim to be false under the FCA. These amendments, however, are not retroactive, and so, the issue before the Supreme Court will be relevant to hundreds of FCA cases.

A CLE About The Lauren Stevens Case

Antonia F. Giuliana — Mon, 26 Sep 2011 14:18:25 -0500

If you are looking for an informative discussion about the Lauren Stevens case (which we reported on earlier here), I recommend ordering a copy of the ABA’s teleconference "After United States v. Lauren Stevens - The Potential for Criminal liability during Government investigations - What an in-house counsel needs to know," which was held earlier today. The panelists include The Honorable Roger W. Titus, the federal judge who presided over the Stevens case (and who dismissed the action mid-trial on a Rule 29 motion); Assistant United States Attorney Sara Bloom of the United States Attorney’s Office for the District of Massachusetts, who prosecuted the action; and Bill Hassler, a member of Stevens’ defense team. During the teleconference, a couple of interesting facts came up. First, the Stevens jurors applauded when Judge Titus informed them in private that he had dismissed the case and indicated that they would have gone the same way had the case gotten to them. Second, when asked whether it was true that the U.S. Attorney for the District of Maryland refused to sign the Stevens indictment, no panelist wished to comment, but all panelists agreed that the Maryland U.S. Attorney did not sign either of the two indictments against Stevens. For further commentary about the Stevens case, click here and here.

False Claims Act Developments

Antonia F. Giuliana — Thu, 22 Sep 2011 16:51:29 -0500

To learn more about recent developments in False Claims Act litigation and the measures companies may take to reduce FCA exposure, please see the two publications below:

Compliance Programs: An Answer to the Risks Posed by the False Claims Act, originally published in the August 2011 issue of Metropolitan Corporate Counsel.

Litigating False Claims Act Cases in the First Circuit Post-Blackstone and Amgen, originally published in the August 29, 2011 issue of Bloomberg Law Reports.

Third Circuit Affirms Dismissal of Relators' FCA Action Against Educational Institution and Awards Attorneys' Fees Against Relator for Filing a Frivolous Appeal

Cliff Katz — Tue, 20 Sep 2011 16:35:20 -0500

Relators, Mary Beth Pilecki-Simko and Tom Giunta, sued The Chubb Institute (“TCI”) and TCI’s corporate parents, The Chubb Corporation (“TCC”) and High-Tech Institute, Inc., alleging that TCI made misrepresentations to the Department of Education to obtain student financial aid in the form of loans and grants from the federal government. The District Court dismissed the case with prejudice because relators failed to plead their claims with particularity as required by Rule 9(b) and denied relators’ motion for reconsideration. The Third Circuit affirmed, holding that conclusory allegations of scienter fail to even satisfy the more lenient standard of Fed R. Civ. P. 8(a). Additionally, the Third Circuit ordered relators to pay TCC attorneys’ fees and costs because relators included TCC as a party to the appeal but failed to challenge any of the District Court’s rulings regarding the sufficiency of the veil-piercing and successor liability allegations directed at TCC. See United States ex rel. Pilecki-Simko v. The Chubb Institute, Case No. 10-3907, 2011 WL 3890975 (3rd Cir. Sept. 6, 2011).

Relators based their theory of liability against TCI on an implied false certification theory. TCI allegedly falsely certified compliance with the Program Participation Agreement that educational institutions are required to enter into to receive federal subsidies under Title IV of the Higher Education Act. Among the requirements in the Agreement, TCI certified that it did not provide incentive compensation based on success in securing enrollments.

Relators argued that Rule 9(b) did not apply to their claims, an argument which the Third Circuit found “implausible.” Nonetheless, the Third Circuit never needed to decide this issue because it held the complaint failed to satisfy even the basic pleading standards of Rule 8(a). Under Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009), relators were required to plead a “plausible” claim. As the Third Circuit explained:

A complaint satisfies the plausibility standard when the factual pleadings “allow[ ] the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” This standard requires that plaintiff allege “more than a sheer possibility that a defendant has acted unlawfully.” “[A] plaintiff's obligation to provide the ‘grounds' of his ‘entitle[ment] to relief’ requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” (internal citations to Iqbal and Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) omitted).

The relators' allegations that TCI acted “knowingly” were merely “conclusory allegations” stating that TCI knew the claims were false because the students were not eligible for financial aid due to TCI’s incentive compensation. Relators failed to allege any facts to indicate that TCI “knowingly” submitted false claims, such as whether TCI documented or was aware of any violations of the Program Participation Agreement.

9th Circuit Applies Iqbal's Plausibility Requirement to FCA Case

Cliff Katz — Tue, 20 Sep 2011 16:25:22 -0500

Mary Cafasso, a former employee of General Dynamics C4 Systems (“GDC4”), brought a False Claims Act case against her former employer after her job was eliminated following corporate restructuring. The 9th Circuit affirmed the District Court’s dismissal of Cafasso’s claims and the granting of summary judgment in favor of GDC4 on its counterclaim for breach of a confidentiality agreement. The Court held that, in addition to meeting the heightened pleading standard of Rule 9(b) of the Federal Rules of Civil Procedure, an FCA complaint must also “state a plausible claim for relief” pursuant to Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949-50 (2009). See United States ex rel. Cafasso v. General Dynamics C4 Systems, Inc., 637 F.3d 1047 (9th Cir. 2011).

GDC4 is a technology company that services the military. Cafasso alleged that GDC4 is a participant in the Advanced Telecommunications & Information Distribution Research Program (“ATIRP”), which grants the government certain rights to inventions developed in performance of the military contracts. Cafasso claimed that GDC4 failed to disclose new inventions to the government. Before her termination, Cafasso copied almost eleven gigabytes of data from GDC4 computers.

The 9th Circuit affirmed the dismissal of Cafasso’s claims under Rules 8(a) and 9(b). As the Court stated:

Because Rule 8(a) requires the pleading of a plausible claim, Iqbal, 129 S. Ct. at 1949-50, we hold that claims of fraud or mistake--including FCA claims--must, in addition to pleading with particularity, also plead plausible allegations. That is, the pleading must state “enough fact[s] to raise a reasonable expectation that discovery will reveal evidence of [the misconduct alleged].” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 556, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007).

Cafasso’s complaint was not “sufficiently particularized and plausible” because she did not allege an actual false claim. “An actual false claim is the sine qua non of an FCA violation.” The Court found that Cafasso’s allegations, if true, might rise to the level of breach of contract, but not a false or fraudulent claim for payment. Breach of contract or allegations of “unsavory conduct” cannot, by themselves, form the basis for an FCA claim.

Cafasso admitted that she breached her confidentiality agreement with GDC4 by taking files from GDC4’s computers, but asked the Court to adopt a public policy exception that would allow relators to disclose such information in furtherance of an FCA action. The Court declined to do so under the circumstances of this case due to the “vast and indiscriminate appropriation of GDC4’s files,” but left open the possibility in other cases. As the Court stated:

Although we see some merit in the public policy exception that Cafasso proposes, we need not decide whether to adopt it here. Even were we to adopt such an exception, it would not cover Cafasso's conduct given her vast and indiscriminate appropriation of GDC4S files. Cafasso copied nearly eleven gigabytes of data--tens of thousands of pages… Swept up in this unselective taking of documents were attorney-client privileged communications, trade secrets belonging to GDC4S and other contractors, internal research and development information, sensitive government information, and at least one patent application that the Patent Office had placed under a secrecy order…Were we to adopt a public policy exception to confidentiality agreements to protect relators--a matter we reserve for another day--those asserting its protection would need to justify why removal of the documents was reasonably necessary to pursue an FCA claim.

Update: Iowa District Court Holds FERA Is Not Retroactive in U.S. v. Hawley

Cliff Katz — Wed, 24 Aug 2011 14:29:11 -0500

In two prior posts, we reported on a case which an insurance company was deemed subject to liability under the False Claims Act even when it did not directly submit claims to the federal government. See United States v. Hawley, No. 08-2992, 2010 WL 3292710 (8th Cir. Aug. 23, 2010) and click here and here for the prior posts. In the most recent opinion in the Hawley case, the District Court held that the Fraud Enforcement and Recovery Act (FERA) amendments did not apply retroactively in Hawley, and such retroactive application would violate the Ex Post Facto clause of the United States Constitution. See United States v. Hawley, No. C 06–4087–MWB, 2011 WL 3295419 (N.D.Iowa Aug. 1, 2011).

Hawley, an insurance agent, was alleged to have caused farmers to submit false claims to North Central Crop Insurance, Inc., a private insurance company, which then submitted claims for reimbursement to the Federal Crop Insurance Corporation (FCIC), established pursuant to federal statute. The Government argued that, since the FCIC was approving and paying claims, the FCA reached Hawley’s conduct. The Eighth Circuit held that there was a genuine issue of material fact as to whether the Government had claims under Sections 3729(a)(2) and (a)(3) of the FCA prior to the 2009 amendments of the Fraud Enforcement and Recovery Act (FERA). Prior to FERA, these provisions provided for liability where the defendant “intended that the false record or statement be material to the Government’s decision to pay or approve the false claim.” See Allison Engine co. v. United States ex rel. Sanders, 128 S. Ct. 2123 (2008). The Eighth Circuit did not decide whether FERA, which modified these provisions of the FCA, was retroactive to the claims in Hawley.

FERA eliminated the requirement that a false statement be made “to get a false or fraudulent claim paid or approved by the Government.” See 31 U.S.C. § 3729(a)(1)(B). FERA provides for liability where the false statement is material to a false or fraudulent claim. FERA further states that these amendments “shall take effect as if enacted on June 7, 2008, and apply to all claims under the False Claims Act (31 U.S.C. 3729 et seq.) that are pending on or after that date.” In dispute was the meaning of the term “claims”. Hawley argued that “claims” refers to claims submitted to the Government for payment, which in this case were prior to June 7, 2008. The Government, by contrast, argues that “claims” refers to when the case was filed, which was subsequent to June 7, 2008. The court agreed with Hawley, relying on United States ex rel. Burroughs v. Central Ark. Development Council, 2010 WL 1542532 (E.D.Ark.2010). Additionally, the District Court held that application of FERA retroactively would violate the Ex Post Facto clause of the United States Constitution because, though the FCA is a civil statute, the sanctions (treble damages and penalties) make the statute punitive in nature.

7th Circuit Affirms Dismissal of False Claims Act Claims Against General Dynamics and Lockheed Martin

Michael J. Maloney — Wed, 24 Aug 2011 14:16:39 -0500

In United States ex rel. Yannacopoulos v. General Dynamics, et al., No. 09-3037, the 7^th Circuit affirmed summary judgment dismissal of a case alleging that General Dynamics and Lockheed Martin submitted false claims to the United States for payment in connection with a contract to manufacture and sell F-16 fighter jets and related parts and services to the government of Greece.

The relator’s primary claims arose from General Dynamics’s submission of claims for payment relating to the Hellenic Business Development and Investment Company, a Greek company created by General Dynamics and in which the government of Greece was a minority shareholder. The fighter jet contract with Greece required General Dynamics to create this new company and capitalize it with $50 million dollars. The company’s stated purpose was to provide venture capital to companies in Greece. However, after fifteen years, the company was to be dissolved with all assets up to $50 million and 50% of assets in excess of that amount reverting to the government of Greece.

The relator alleged that General Dynamics violated the False Claims Act by billing the United States for the $50 million used to capitalize the new company. The relator argued that passing these costs on to the United States violated a provision of the contract requiring General Dynamics to “confirm[] that the material for which payment is requested are United States source end products”, among other provisions. In connection with the submission of requests for payment to the United States, General Dynamics certified its compliance with this and other provisions of the contract.

The lower court, however, rejected the relator’s argument and granted summary judgment dismissing the relator’s claims relating to the Hellenic Business Development and Investment Company. The 7^th Circuit affirmed, holding that the source end product restriction applied only to “material” to be provided under the contract. The 7^th Circuit held that “material”, as used in the contract, included only physical items or substances such as jet engines or spare parts. The relator’s arguments based on other terms of the contract requiring the U.S. origin of products or goods failed for similar reasons.

The relator alternatively argued that requests for payments relating to the Hellenic Business Development and Investment Company violated a provision of the contract preventing General Dynamics from using government funds to purchase services from non-U.S. contractors or individuals not resident in the U.S. The lower court rejected this claim as well. The 7^th Circuit affirmed, reasoning that General Dynamics’s expenditure of funds on stock in the new company failed to qualify as the purchase of services.