The FCA Insider

The FCA Insider

Insights and updates on False Claims Act Litigation

Uncategorized

Supreme Court Hands Down Opinion in Universal Health Services v. Escobar

The Supreme Court handed down its much-anticipated opinion in Universal Health Services, Inc. v. United States ex rel. Escobar et al. yesterday—a case addressing the viability of the implied certification theory in FCA litigation.  Justice Thomas, writing on behalf of a unanimous Court, found that the implied certification theory can in fact serve as a basis for FCA liability where a defendant has misleadingly failed to disclose its noncompliance with material statutory, regulatory, or contractual obligations.

The Court first addressed whether Universal Health Services, Inc. (“Universal Health”) impliedly certified that it had complied with Massachusetts Medicaid regulations by submitting claims for payment. Although the Court concluded that it did, the holding is narrowly drafted.  The Court held that the act of submitting a claim for payment is an actionable misrepresentation where two conditions are satisfied: (i) in addition to requesting payment, the claim also makes specific representations about the goods or services provided; and (ii) the failure to disclose noncompliance with material statutory, regulatory, or contractual requirements renders the representations “misleading half-truths.”  The Court expressly declined to address “whether all claims for payment implicitly represent that the billing party is legally entitled to payment.”

As discussed in a previous article, Escobar is a qui tam case in which two relators allege that Universal Health submitted claims for reimbursement that failed to disclose violations of Massachusetts Medicaid regulations governing the qualifications and supervision requirements for staff at a mental health facility.  The Court determined that when Universal Health submitted reimbursement claims for mental health services using certain payment codes, “anyone would [wrongly] conclude that Universal Health complied with core state Medicaid requirements regarding the qualifications and licensing requirements of its staff members.”  By submitting claims for payment without disclosing the alleged violations, the Court found that Universal Health’s claims constituted actionable misrepresentations.

Although many will be disappointed that the Court did not reject the implied certification theory, the Court’s limited ruling gives defendants room to argue that not all claims for payment implicitly represent compliance with statutory, regulatory, and contractual requirements. The Court looked to the common law to determine when nondisclosure constitutes an actionable misrepresentation, which is typically a fact-dependent, case-by-case inquiry.  The Court’s limited ruling leaves a lot of work left to be done in the lower courts and is sure to generate significant litigation.  Given that most jurisdictions had already adopted the implied certification theory, however, the Court’s limited ruling can be seen as a silver lining.

The second question the Court addressed was whether the implied certification theory is limited to instances where compliance with a statute, regulation, or contractual provision was a condition of payment. Most lower courts had adopted this bright-line rule to prevent nearly unchecked liability under the FCA for minor regulatory violations and contractual breaches.  The Court addressed this issue solely as a question of materiality, and concluded that “[w]hether a provision is labeled a condition of payment is relevant to but not dispositive of the materiality inquiry.”

In a bid to give some teeth to the materiality standard, the Court called the FCA’s materiality standard “rigorous” and “demanding” and reiterated that the FCA is not to be used as “an all-purpose antifraud statute.” The Court again turned to the common law, suggesting that materiality should be measured by whether noncompliance with a regulatory violation would influence the government’s decision to pay a claim.  The Court’s holding on this point was less precise, but it did reject the government’s argument that noncompliance with a regulatory violation is material simply because the government would be entitled to refuse payment.  Additionally, the Court appeared to suggest that defendants must have knowledge that noncompliance would be material.

From a litigation perspective, Escobar has swept away years of precedent on the bright-line rule.  Despite the Court’s effort to bolster materiality as a defense in implied certification cases, the loss of the bright-line rule will make it more difficult for defendants to win motions to dismiss.  The Court addressed this problem in a footnote, arguing that the pleading standards require the government and relators to plead facts to support their allegations of materiality.  No doubt the pleading standards will be an avenue to attack materiality on a motion to dismiss, but the Court may be overly optimistic.  Materiality is generally a mixed question of law and fact, meaning trial courts will be reluctant to dismiss a case before discovery.  As a result many cases that would have previously been dismissed will now go through expensive discovery.

The authors acknowledge and thank Erin Dine, a rising 3rd year law student at Loyola University Chicago School of Law, for her help and support in the preparation of this post.

Uncategorized

Number of Medically Unnecessary False Claims Cases Likely to Diminish

The DOJ recently intervened in a lawsuit against Prime Healthcare Services, Inc., and its subsidiaries (“Prime”).  The lawsuit alleges that Prime submitted claims for medically unnecessary services and routinely pressured its staff to exaggerate Medicare beneficiaries illnesses in order to increase the number of inpatient admissions and billed for services as inpatient admissions that should have been classified as outpatient or observation stays.

Over the past several years, there has been a surge in the number of FCA cases based on the submission of claims for medically unnecessary services. This uptick is based in large part on the prevalence and increased recognition of the implied certification theory—the legal theory under which medically unnecessary claims are most commonly brought.  As discussed in our previous article, the implied certification theory is based on the concept that every time a payee submits a claim to the government it has impliedly certified compliance with all contractual, statutory, and regulatory obligations, and therefore, is entitled to payment.  As previously mentioned, the United States Supreme Court recently heard oral argument in Universal Health Services v. U.S. ex rel. Escobar, a case challenging the validity of the implied certification theory.  We anticipate a ruling in Escobar in the upcoming weeks and expect that its holding will have a dramatic impact on the FCA landscape.

And while the Court’s ruling in Escobar could curtail the viability of medically unnecessary claims going forward, there is evidence suggesting that volume-based medically unnecessary FCA claims will diminish for independent reasons; namely, healthcare providers have become more incentivized to focus on the value-rather than the volume-of claims submitted for reimbursement.  Starting most notably with the Affordable Care Act’s implementation of accountable care organizations (“ACOs”), legislators and the healthcare industry as a whole have moved towards value-based, high quality care.  ACOs participating in Medicare’s Shared Savings Program (“MSSP”) have the opportunity to receive a portion of the savings the ACO generates by lowering the total cost of healthcare of its Medicare beneficiaries.  Consequently, these providers are less incentivized to submit false claims based on an excessive amount of services rendered.

These incentives can eliminate waste and serve to negate the implied presumption in FCA complaints that providers seek to produce a high volume of services and patients.  The complaint against Prime argues an alleged internal pressure to generate inpatient admissions and high-costing claims.  But even Prime has shifted its internal pressure to value, rather than volume, by implementing an ACO and participating in the MSSP – instituting a type of internal compliance department focused on eliminating wasteful spending.  Although the DOJ’s invention has received attention, the Court’s ruling in Escobar and providers’ new financial incentives could cause the current plethora of medically unnecessary FCA cases to diminish.

The author acknowledges and thanks Erin Dine, a rising 3rd year law student at Loyola University Chicago School of Law, for her help and support in the preparation of this post.

FCA Litigation

Seventh Circuit Finds that Pharmacy Discount Programs Are Not Exempt from the Definition of “Usual and Customary”

Created in 2006, Medicare Part D is a government program that subsidizes the cost of prescription drugs to Medicare beneficiaries. The program is run through “Plan Sponsors” – private entities that receive a fixed monthly payment from the Center for Medicare and Medicaid Services (“CMS”) and subcontract with Pharmacy Benefit Managers to provide prescription drug benefits to eligible Part D members.  While CMS does not directly pay or reimburse prescriptions, it does require participating pharmacies to charge Part D members no more than the provider’s “usual and customary charges to the general public.”  42 C.F.R. § 447.512(b)(2).  The “usual and customary” price is “the price an out-of-network pharmacy or a physician’s office charges a customer who does not have any form of prescription drug coverage for a covered part D drug.”  24 C.F.R. § 423.100.

In United States ex rel. Garbe v. Kmart Corporation, No. 15-1502, 2016 WL 3031099 (May 27, 2016), the Seventh Circuit evaluated Kmart’s alleged practice of charging its cash customers (i.e. customers with no insurance) significantly reduced prices as compared to its customers who have insurance.  James Garbe, a pharmacist who began working at a Kmart pharmacy in 2007, was the whistleblower who commenced the qui tam lawsuit on July 12, 2008.

Mr. Garbe contended that Kmart had a policy of setting “discount” prices for cash customers who enrolled in one of Kmart’s discount programs, while charging higher rates to insured customers.  The purported purpose of this practice was “to drive as much profit as possible out of [third-party payor] programs.”  This allegedly created a substantial pricing discrepancy in which insured individuals, including Part D participants, were charged significantly more for prescription drugs than the prices charged to Kmart’s cash customers.  Mr. Garbe allegedly discovered the issue when he was picking up personal prescriptions at a competing pharmacy and noticed that the competitor was charging his Part D insurer far less than Kmart charged for the same prescription.

The Seventh Circuit evaluated whether Kmart’s discount program for cash customers represented its usual and customary charges to the general public.  Kmart argued that its discount members “belong to a particular group” or “organization” and are, therefore, not members of the general public.  Kmart argued that the prices charged to such customers for prescription drugs could not constitute Kmart’s usual and customary charges to the general public.  The Seventh Circuit disagreed:

Saying that someone is a member of a “particular” organization, however, does not make it so. We are given no reason to think that there was any meaningful selectivity for the people who joined Kmart’s programs, and thus that they could be distinguished from the “general public.” . . . Even if the prices were offered only to members of its “discount programs” – and it is disputed whether this was the case – the programs themselves were offered to the general public.

The Seventh Circuit’s ruling is instructive for retail pharmacies who must consider that their discount programs will be considered in determining their “usual and customary” pricing, rather than being an exception to such pricing.

Uncategorized

Tenth Circuit Elaborates Upon FCA’s Materiality Requirement

The FCA’s implied certification theory is based on the concept that every time a payee submits a claim to the government it has impliedly certified compliance with all contractual, statutory, and regulatory obligations, and therefore, is entitled to payment. While the courts are currently divided on whether implied certification is a valid theory of liability, the courts that have endorsed this theory have distinguished between violations that are conditions of participation (where the penalty for a violation could be exclusion from a government program) and conditions of payment (where the penalty would be nonpayment of the claim) and have found that only the latter are actionable under the FCA.  These courts have also almost uniformly held that such a violation must be material to the government’s decision to pay the claim.  However, “materiality” is an amorphous concept under the FCA and courts have applied different standards and relied upon various sources of evidence in determining whether a payee’s violation was material.

In United States ex rel. Thomas v. Black & Veatch Special Projects Corp., the Tenth Circuit elaborated upon the materiality standard in an implied certification dispute between a government contractor and its former employees.  Defendant – an engineering and construction firm – was awarded a government contract to build facilities and distribute electricity in Kandahar, Afghanistan.  Pursuant to the contract, defendant was required to obtain visas and work permits from the Afghan government. The relators – former employees of the defendant – discovered copies of forged documents that had been submitted to the Afghan government as part of the defendant’s visa application process.  The relators reported their discovery to a supervisor, and two days later provided copies of the forged documents to the OIG.

Shortly thereafter, the defendant met with the OIG to discuss the forged documents, requested copies of all documents it had submitted to the Afghan government, launched an internal investigation to determine who created the forged documents, and had a third-party perform a forensic analysis of its computers.  The defendant also kept the OIG updated with any findings.  In response, the government never took any adverse action against the defendant and continued to make payments to the defendant in full.  In fact, the government amended the contract to provide the defendant with additional work.

In its motion for summary judgment, the defendant argued that the government’s awareness of its violations and subsequent failure to take any adverse action or reduction in payment evidenced that the defendant’s violation of the contract’s visa provisions was nonmaterial, and therefore, it was not liable under the FCA.  The district court agreed and granted summary judgment in favor of the defendant.

The Tenth Circuit affirmed, and in doing so provided guidance on the materiality standard.  Specifically, the court explained that “an FCA plaintiff may establish materiality by demonstrating that the defendant violated a contractual provision that undercut the purpose of the contract” or if the defendant has only violated minor contractual provision, “by coming forward with evidence indicating that, despite the tangential nature of the violation, it may have persuaded the government not to pay the defendant.” The court quickly dismissed the notion that the submission of forged documents undercut the purpose of the contract.  Turning to the latter option, the Tenth Circuit reasoned that because the government had made payment to the defendant (and in fact given the defendant more work), it was evident that the submission of forged documents was not material to the government’s decision to make payment, and therefore, the relators did not have an actionable claim under the FCA.  In so holding, the Tenth Circuit also expressly rejected the relators’ argument that the government’s knowledge and actions are irrelevant to the materiality analysis.

Thomas is a useful case for the FCA defense bar as it provides a detailed analysis of the “materiality” requirement and provides further support for the argument that the government’s knowledge of the defendant’s conduct serves as a valid defense to an FCA action.

FCA Litigation

Supreme Court Hears Arguments Regarding the Implied Certification Theory

On April 19, 2016, the United States Supreme Court heard oral arguments in the case of Universal Health Services v. U.S. ex rel. Escobar.  The Universal Health Services case was brought by two relators whose child had been seeing a counselor at UHS and who came to learn that the counselor was not licensed.  The relators’ child ultimately had serious health complications and a fatal seizure and the relators pursued this False Claims litigation and argued that UHS had violated the FCA by billing for services that were not provided by licensed professionals.

The arguments before the Supreme Court are particularly notable because it is expected that the Supreme Court will provide guidance on the “implied certification” theory of liability under the FCA.  The “implied certification” theory is distinct from the typical “express certification” theory under the False Claims Act.  An express certification claim is based on the submission of an actually false claim to the Government — i.e. the claim itself contains false or fraudulent statements.  The “implied certification” theory focuses on the general compliance with applicable regulations that is expected of persons and entities who submit claims to the Government.  The theory provides that by virtue of participating in Government programs (such as Medicare), it is implied that the participant is complying with all applicable regulations, with a failure to so comply giving rise to FCA liability.

The Universal Health Services case was initially dismissed by the district court, but was reversed by the First Circuit on appeal.  The First Circuit’s opinion recognized the implied certification doctrine and furthered the existing Circuit split regarding the applicability of an implied certification of liability under the FCA.  The First Circuit, along with the Fourth Circuit and DC Circuit and others, have adopted the implied certification theory.  However, it has not been universally adopted, with the Seventh Circuit recently rejecting the application of the implied certification theory.

The Supreme Court has not previously clarified whether the implied certification theory is valid and its ruling in the Universal Health Services case should provide clarity in this critical area of FCA litigation.

Uncategorized

Fifth Circuit Provides Guidance on Who Has Standing to Pursue an FCA Retaliation Claim

In United States ex rel. Bias v. Tangipahoa Parish School Bd., — F.3d —-, 2016 WL 906227 (5th Cir. 2016), the Fifth Circuit provided guidance on the scope of individuals with standing to bring an FCA retaliation claim under 31 U.S.C. §  3730(h).  In reversing the lower court’s dismissal, the circuit court explained that liability under § 3730(h) extends to defendants “by whom plaintiffs are employed, with whom they contract, or for whom they are agents,” and found that a school board could be liable under § 3730(h) even where the plaintiff was employed by a different entity because the complaint alleged the existence of an agency-like relationship between the plaintiff and school board.

Bias was employed by the Marine Corps and worked as an instructor for the JROTC program at Amite High School. Foster, a teacher at Amite High, worked with Bias and was a faculty adviser for the school’s cross-country team.  In 2009, Foster attempted to use JROTC funds to pay for expenses associated with the cross-country team.  Bias reported the conduct to Amite High’s principal, Stant, who assured Bias that JROTC funds would not be utilized.  Bias subsequently discovered that Stant approved the use of JROTC funds to pay for the trip.  Sometime thereafter, Bias reported a second misappropriation of JROTC funds to his JROTC Regional Director.  Unsurprisingly, Bias’s relationship with Stant and Foster deteriorated and the Marine Corps attempted to transfer Bias to another school district.

Thereafter, Bias filed suit against Foster, Stant, and the school board alleging, in relevant part, an FCA retaliation claim under 31 U.S.C. § 3730(h). Bias contended that Foster and Stant hindered and disrupted his ability to carry out the JROTC program and had caused his transfer.   The district court dismissed this claim, holding that only the Marine Corps (Bias’s employer) could have retaliated against him, and that the defendants’ conduct could not have been the cause of the purported retaliatory actions.

In reversing, the Fifth Circuit examined the pleading requirements and statutory history for a claim under 31 U.S.C. § 3730(h). The court explained that to survive a motion to dismiss, a FCA retaliation plaintiff must show that: (1) he engaged in a protected activity; (2) was retaliated against because of the protected activity; and (3) his employer, contractor, or principal knew about the protected activity.  The circuit court’s analysis focused on this last element—whether the required statutory relationship existed between Bias and the school board.

The Fifth Circuit first noted that § 3730(h) was amended in 2009 and expanded the scope of culpable and aggrieved parties beyond the employer-employee relationship to also include the contractor-contractee and principal-agent relationships. The Fifth Circuit found, therefore, that liability under § 3730(h) extends to defendants “by whom plaintiffs are employed, with whom they contract, or for whom they are agents.”  The court found that while the relationship between Bias and the school board was unclear, the fact that he was allegedly supervised by Stant, performed teacher-like functions, and participated in meetings with school officials sufficiently pled the existence of an agency type relationship between himself and the school board.  Furthermore, the court found that Foster’s and Stant’s attempts to undermine Bias’s ability to perform his job constituted retaliatory acts.

Bias serves as a useful interpretation of the potential far-reaching scope of § 3730(h) since its most recent amendments.  While FCA retaliation claims typically arise in the employer-employee relationship, Bias illustrates that courts are willing to get creative when it comes to establishing a statutorily protected relationship under the FCA.

 

Defense Arguments

7th Circ. May Be Willing To End FCA Circuit Split

The False Claims Act’s “public disclosure bar” calls for dismissal of complaints by qui tam plaintiffs (or “relators”) whose allegations have already been publicly disclosed. The primary aim of the bar is preventing parasitic suits based on public information. Courts generally agree that disclosure to the government alone does not count as disclosure to the “public” for purposes of the bar.

The Seventh Circuit, however, has been a standout since a 1999 decision and is the lone circuit taking the opposite view in a circuit split over the issue. But a recent decision suggests it is open to siding with its sister circuits on the issue and thus ending the circuit split.

Background

The initial False Claims Act — enacted in 1863, during the Civil War, to combat fraud and abuse in government contracting — did not include any bars on relators’ sources of information. It also did not require relators to provide new information to bring suit. In the 1930s and ’40s, relators began filing “parasitic” suits that merely copied information uncovered in government investigations, primarily pulling allegations from criminal indictments.

To counteract these copycat suits, Congress amended the act in 1943. The primary change was the addition of an absolute bar against jurisdiction over suits based upon information already known by the government. This “government-knowledge bar” served its purpose, but it also ended up preventing legitimate private suits.

For a number of reasons, major changes were made to the act in 1986. Relevant here, the changes included replacing the overly restrictive government-knowledge bar with a bar to jurisdiction over suits based upon publicly disclosed information — a “public disclosure bar.” This new bar sought to balance the tension between preventing parasitic suits and still encouraging private individuals to come forward with information about fraud and abuse involving government funds.

Congress again amended the public disclosure bar in 2010. The changes included the addition of a provision giving the federal government the power to veto a public disclosure bar dismissal by opposing it.

Recent Seventh Circuit Decision

Under the current public disclosure bar, seven circuits subscribe to the view that Congress’ use of “public” in the statutory language means an act of disclosure to the general public outside of the government.

The only circuit taking a different view is the Seventh. It agrees with the obvious conclusion that disclosure to the general public at large satisfies the requirement. But it also holds that disclosure to a competent government official qualifies as public disclosure, a view it has expressed in several prior decisions. In particular, it considers internal government administrative reports and investigations to be sufficient to demonstrate disclosure to the public.

On Feb. 29, 2016, the Seventh Circuit affirmed dismissal of a False Claims Act case because the plaintiff’s allegations had already been publicly disclosed through an audit report made available online to the general public. This result itself is not particularly interesting or unique, as it relies on the first, obvious category of disclosure to the general public.

But before the court considered this obvious disclosure and reached its conclusion, it reviewed its prior holdings that disclosure to the government alone satisfies the “public” requirement. It then assessed whether a different disclosure in the case — a federal agency investigation and resulting letter to the subject of the investigation — was sufficient. It found that, under its precedent, a letter from the federal agency describing its “in-depth review” was “placed in the public domain” when it was sent to the subject.

Interestingly, the court then acknowledged and fully outlined the other circuits’ views that disclosure to the government alone does not satisfy the “public” requirement. It noted, “There is significant force in the position of the other circuits.” It next expressed that, if the government letter disclosure were the only one before the court, respect for the other circuits would have warranted “in-depth reconsideration of our precedent.” Ultimately, it declined to address the issue further and relied on the obvious general public disclosure alone to satisfy the “public” requirement.

Implications

Although the Seventh Circuit did not end up reversing its prior holdings, its decision serves as an open invitation to challenge the standard in district court cases within the circuit and on appeal. And the full voice the court gave to its sister circuits’ view, its acknowledgement of the “significant force” of that view, and its suggestion that “in-depth reconsideration” would be warranted, all indicate that the court may be open to joining the other circuits and ending the split over this issue.

This development will embolden False Claims Act plaintiffs in the Seventh Circuit, who will feel confident pressing claims in spite of ample government review simply because the government’s efforts have not been disclosed to the general public.

Ultimately, when the Seventh Circuit confronts this issue again, the court should strongly consider upholding its precedent. Interpreting government disclosures as “public” is consistent with the public disclosure bar’s primary purpose of discouraging opportunistic suits by plaintiffs leeching off already known information. And, unlike the repealed government-knowledge bar that stymied even legitimate whistleblower cases, the original source exception to the current public disclosure bar protects and encourages those with valuable, new information to come forward even if some of their allegations have already been disclosed to the government or the general public. Moreover, under the post-2010 public disclosure bar, if the government wants a case to continue, it is now empowered to veto a public disclosure bar dismissal by simply opposing it.

If the Seventh Circuit does follow its sister circuits, the issue will be settled for the judicial branch, absent an appeal to the U.S. Supreme Court or another circuit taking a stand. In that case, it will be up to Congress to decide if the current application of the bar still serves the purposes of the act. If not, it may be time to amend the act once again.

Petition for Rehearing En Banc

As it turns out, the Seventh Circuit already has an opportunity to reconsider its prior holdings. On March 14, 2016, in the case discussed above, the relator petitioned the Seventh Circuit for a rehearing en banc of its decision. The petition provides three separate reasons for the rehearing. The first two target the court’s holdings regarding the general public disclosure. Applicable here, the third applies to the government letter disclosure, arguing that the court’s holding that it was sufficient under its precedent conflicted with decisions of seven other circuits.

It is unlikely the Seventh Circuit will view this third reason alone as sufficient for a rehearing. In its decision, the court took the time to explore the view of the other circuits and acknowledged the resulting need for a reconsideration of its prior holdings. But it explicitly stated that it did not need to do so at that time because it did not rely on the government letter disclosure — and instead relied solely on the general public disclosure — to satisfy the “public” requirement of the bar.

The case is Cause of Action v. Chicago Transit Authority, No. 15-1143, 2016 WL 767345 (7th Cir. Feb. 29, 2016).

FCA Litigation, FCA Statistics

Relators Recover Over $1 Billion in Non-Intervened Cases in Fiscal Year 2015

In fiscal year 2015, more than $1 Billion of the Government’s False Claims Act (FCA) recovery was derived from cases in which the Government declined to intervene. This significant recovery far exceeds the typical, annual recovery that is obtained by relators without Government intervention.

During the past decade, the Government has intervened in approximately 20-24% of the qui tam filings.  Despite intervening in less than a quarter of the cases that are filed by relators, the Government has consistently derived more than 90% of its total annual recovery from cases in which it intervenes.  The 2015 recovery by relators in cases in which the Government declined intervention represented more than 30% of the Government’s total FCA recovery in 2015, which far exceeds the Government’s typical recovery from cases in which it declines intervention.

This result deviates dramatically from past years and it remains to be seen as to whether it was an aberration or an indication of a shift in trends. However, there are some potential explanations for this exceptional result.  First, approximately 40% of the relator-driven recovery ($450 million) was derived from one FCA case that was settled by DaVita.  Second, relators are pursuing increasingly novel theories of FCA liability.  Third, the FCA relator bar continues to develop and is a well-organized, talented group of attorneys.  These attorneys typically pursue cases vigorously on behalf of their clients even if the Government declines to intervene.

It will be interesting to review these results in the coming years to determine if fiscal year 2015 was an aberration or the start of a trend.

Uncategorized

The Olympus Debacle: Why Internal Whistleblowing is a Good Thing for Compliance

The U.S. Department of Justice announced last week that Olympus Corporation of the Americas (OCA) agreed to pay $646 million to resolve three cases relating to its longstanding practice to bribe doctors and hospitals in the U.S. and abroad. The company entered deferred prosecution agreements (DPA) related to violations of the Anti-Kickback Statute (AKS) and Foreign Corrupt Practices Act (FCPA).  It also settled a qui tam complaint filed by the company’s former chief compliance officer (CCO) John Slowik.  The government awarded Slowik $51 million for blowing the whistle on the underlying issues in these cases.  The OCA matters remind us of the importance of internal whistleblowing in compliance.

 

Overview of the Resolutions

OCA is the largest distributor of endoscopes and other medical devices in the U.S. In one case, DOJ charged it with criminal conspiracy to violate the AKS.  According to DOJ’s press release, OCA admitted it “won new business and rewarded sales by giving doctors and hospitals kickbacks, including consulting payments, foreign travel, lavish meals, millions of dollars in grants and free endoscopes.”  The kickbacks “helped OCA obtain more than $600 million in sales and realize gross profits of more than $230 million.”  As part of the DPA, OCA agreed to pay $312.4 million in criminal penalties.  It must also invest heavily in its training and compliance programs.  Among other things, the DPA requires OCA to enhance and maintain its compliance program by creating a whistleblower hotline and website, requiring its CEO and board to certify compliance annually, and forfeiting compensation if executives engage in wrongdoing or fail to promote compliance.

In another case, DOJ charged OCA’s subsidiary Olympus Latin America Inc. (OLA) with FCPA violations in connection with bribes paid to government officials throughout Central and South America. From 2006 through most of 2011, OLA provided “cash, money transfers, personal grants, personal travel and free or heavily discounted equipment” to doctors at government-owned healthcare facilities in exchange for increased medical equipment sales.  According to DOJ, OLA paid nearly $3 million in bribes, resulting in sales that generated more than $7.5 million in profits.  OLA paid $22.8 million in criminal penalties to resolve the FCPA matter.

The last case involved federal and state false claims allegations based on the qui tam complaint filed by Slowik.  Slowik’s complaint provided many firsthand details of the fraud at the company.  It detailed how the company provided free medical equipment to doctors and made cash payments of up to $100,000 per year (or more) to doctors.  It also explained how the company gave annual “grants” worth hundreds of thousands of dollars to programs based solely on sales potential.  The company also funded all-expense paid luxury holidays for doctors and their spouses.  OCA agreed to pay $310.8 million to settle the False Claims Act charges.

 

The Need for Open Doors, Anti-Retaliation Policies and Whistleblower Hotlines

Slowik worked for OCA for 18 years. Most recently, he served as its first CCO starting in February 2009.  According to his lawyers in one news report, Slowik “boldly put aside self-interest and took swift action to let the truth be known” when he discovered that OCA’s business success relied heavily upon bribery.  “He immediately put Olympus’s top brass on notice of the full nature and scope of the company’s non-compliance with the US Anti-Kickback Statute and international anti-bribery laws.”  Nevertheless, management resisted Slowik’s attempts to enhance the company’s compliance efforts.  Ultimately, the company ousted Slowik in 2010.

The Olympus resolutions and Slowik’s history with the company highlight the importance of internal whistleblowing in compliance. How often internal whistleblowing mechanisms are used is one possible data point for measuring success in any compliance program.  In fact, if internal reporting happens on a regular basis, it is very likely a sign that a company has a thriving compliance culture built around open doors, free communication, and no fears of retaliation.  Companies must ensure they have internal reporting mechanisms that are available and working.

Companies must also appropriately handle reports of wrongdoing once they are made. Essentially, they must document and address all reports—no matter how minor or incomprehensible they may seem—with the appropriate level of scrutiny.  They need to write procedures that clearly outline exactly what needs to happen and when.  Investigation teams should be deployed to uncover the underlying causes and issues associated with the alleged misconduct.  And companies must ensure that remedial measures are available and put into practice when wrongdoing is discovered and responsible parties are identified.

Simply put, internal whistleblowers are a sign of a healthy compliance program. The Olympus resolutions remind us how ignoring this key attribute of compliance can lead to troubles down the road.

Defense Arguments, FCA Litigation

Third Circuit Ruling Reflects the Narrowed Scope of the Public Disclosure Bar under the Affordable Care Act

The public disclosure bar is a statutorily created hurdle that plaintiffs must cross to successfully maintain a False Claims Act suit. The principle was originally enacted to prevent individuals from filing “parasitic” False Claims Act (FCA) lawsuits that were not based on their independent knowledge.

The public disclosure bar has undergone several statutory changes during the history of the FCA, including, most recently, as part of the Patient Protection and Affordable Care Act (“PPACA”) in 2010. The new public disclosure bar states:

The court shall dismiss an action or claim under this section, unless opposed by the Government, if substantially the same allegations or transactions as alleged in the action were publicly disclosed-
(i) in a Federal criminal, civil, or administrative hearing in which the Government or its agent is a party;
(ii) in a congressional, Government Acccountability Office, or other Federal report, hearing, audit or investigation; or
(iii) from the news media,
unless the action is brought by the Attorney General or the person bringing the action is an original source of the information.

 31 U.S.C. § 3730(e)(4)(A) (2012).

The PPACA amendments also expanded the definition of an original source:

For purposes of this paragraph, “original source” means an individual who either (i) prior to public disclosure under subsection (e)(4)(A), has voluntarily disclosed to the Government the information on which allegations or transactions in a claim are based, or (2) who has knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions, and who has voluntarily provided the information to the Government before filing an action under this section.

31 U.S.C. § 3730(e)(4)(B) (2012).

As demonstrated by a recent Third Circuit opinion, these amendments will have a profound effect on FCA litigants. U.S. ex rel. Moore & Co., P.A. v. Majestic Blue Fisheries, LLC began as a wrongful death action that was brought against two defendants after a shipwreck resulted in the death of the ship’s captain. During discovery, Moore learned that the defendants may have defrauded the government by falsely certifying that they were LLCs controlled by U.S. citizens with fishing vessels commanded by U.S. captains; in reality, the vessels at issue were actually controlled by a South Korean tuna company and were under the command of Korean fishing masters.

The district court dismissed the FCA action under the public disclosure bar, noting that two different news articles, as well as information that the attorneys had obtained from the government through Freedom of Information Act (“FOIA”) requests, showed that the transaction setting forth the alleged fraud was publicly disclosed. Moreover, the district court held that Moore was not an original source “because the information that it had obtained through discovery in the wrongful death action did not constitute ‘independent knowledge’” because it was “in the ‘public domain’ and was not ‘obscure.’”

While the Third Circuit agreed that the pre-PPACA public disclosure bar would have barred Moore’s FCA action, it held that the PPACA’s new definition of “original source” did not preclude the lawsuit. First, while the pre-PPACA language defined an “original source” as having “direct and independent knowledge of the information on which the allegations are based,” the new language requires only “knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions.” According to the Third Circuit:

This definition therefore states that a relator’s knowledge must be independent of, and materially add to, not all information readily available in the public domain, but, rather, only information revealed through a public disclosure source in § 3730(e)(4)(A). Indeed, the text plainly requires courts to compare the relator’s knowledge with the information that was disclosed through the public disclosure sources enumerated in § 3730(e)(4)(A).

Thus, the Third Circuit concluded, because Moore gained information “through discovery in the wrongful death action as to how [the defendants] established and controlled the LLCs,” Moore possessed knowledge that is “independent of…the publicly disclosed allegations or transactions.”

While the defendants contended that the information Moore obtained through the wrongful death action simply provided additional immaterial details to the publicly disclosed fraudulently scheme, the Third Circuit disagreed. Noting that Federal Rule of Civil Procedure 9(b) requires plaintiffs alleging fraud to provide the “who, what, when, where and how of the events at issue,” the Third Circuit held:

[A] relator materially adds to the publicly disclosed allegation or transaction of fraud when it contributes information – distinct from what was publicly disclosed – that adds in a significant way to the essential factual background: “the who, what, when, where and how of the events at issue.”

Under this framework, the Third Circuit concluded that the law firm was an “original source” because “the information that Moore acquired from discovery in the wrongful death action added significant details to the essential factual background of the fraud – the who, what, when, where, and how of the alleged fraud – that were not publicly disclosed.” Accordingly, the district court’s dismissal was reversed.

The Third Circuit’s ruling illustrates the new landscape under the post-PPACA public disclosure bar. Defendants in FCA actions will have to carefully assess the time period of the claims at issue to determine the applicable version of the public disclosure bar and will have to further tailor their public disclosure bar arguments to address the applicable factors.