The FCA Insider

The FCA Insider

Insights and updates on False Claims Act Litigation


HHS “Sprints” Toward New AKS Safe Harbors and Penalty Exceptions

The U.S. Department of Health and Human Services (HHS) has launched its “Regulatory Sprint to Coordinated Care” to accelerate the healthcare system’s transformation to a value-based system rewarding coordinated care. This “regulatory sprint” focuses on identifying regulatory provisions that may act as unnecessary obstacles to coordinated care and issuing guidance to address such obstacles.

Specifically, the HHS Office of the Inspector General (OIG) requested industry input on Aug. 27 to “identify ways in which it might modify or add new safe harbors to the Anti-Kickback Statute [(AKS)] and exceptions to the beneficiary inducements Civil Monetary Penalty (CMP) definition of ‘remuneration’ in order to foster arrangements that would promote care coordination and advance the delivery of value-based care, while also protecting against harm caused by fraud and abuse.” To this end, HHS may issue guidance and revise regulations to address such obstacles and to encourage and incentivize coordinated care in response to this request for information.

This is not the first HHS request for information under this “regulatory sprint.” On June 25, 2018, the Centers for Medicare & Medicaid Services (CMS) published a request for information seeking industry input regarding the physician self-referral law, commonly known as the Stark Law. The strict liability Stark Law prohibits a physician from referring certain Medicare- and Medicaid-designated health services to an entity where that physician or his or her family has a financial relationship, absent an exception. This relationship could include certain value-based or care coordination arrangements. CMS sought comments to revise or add exceptions or redefine terminology of the Stark Law to structure arrangements between parties that participate in alternative payment models or other novel financial arrangements. In this June request, CMS presented 20 topics for comment.

The latest OIG request for information seeks input from the public on ways it might modify or add new safe harbors to the AKS and exceptions to the beneficiary inducements CMP definition of remuneration. The AKS is a broad criminal prohibition against the offer or exchange of anything of value to induce or reward the referral of federal healthcare program business. Similarly, the CMP law acts as a catch-all as it authorizes the OIG to impose civil monetary penalties (and other remedies) for various types of fraud and abuse under the Medicare and Medicaid programs, including beneficiary inducement. As both laws have broad language, OIG has issued safe harbors and exceptions to protect certain relationships that do not pose a high risk of fraud or abuse. In this request for information, the OIG again considers this balance between risks to federal programs with acceptable provider relationships. In particular, OIG seeks input on the following topics:

  1. Promoting Care Coordination and Value-Based Care

OIG requests information about potential arrangements the industry is interested in pursuing, such as care coordination, value-based arrangements, alternative payment models, arrangements involving innovative technology, and other novel financial arrangements that may implicate the AKS or beneficiary inducements CMP. OIG wants to gain a better understanding of the structure and terms of such agreements and requested that stakeholders identify additional AKS safe harbors or exceptions to the definition of “remuneration” under the beneficiary inducements CMP that may be necessary to protect such arrangements.

  1. Beneficiary Engagement (Beneficiary Inducements and Cost-Sharing Obligations)

OIG requests industry input regarding the types of incentives providers, suppliers and others are interested in providing to engage beneficiaries to improve their care. OIG wants to understand how providing such incentives would contribute to or improve quality of care, care coordination and patient engagement, and whether the types of entities that furnish the incentives matter from an effectiveness and program integrity perspective.

In addition, OIG seeks input about how reducing beneficiary cost-sharing obligations might improve care delivery, enhance value-based arrangements and promote quality of care.

  1. Current Fraud and Abuse Waivers

OIG solicits feedback on the current waivers developed for the purposes of testing models by the Center for Medicare and Medicaid Innovation and carrying out the Medicare Shared Savings Program. These waivers have been specific to these limited programs to date and would not apply to other relationships the providers have for other third-party payor programs. OIG hopes to gain insight about what waiver structures work well and whether any waiver requirements are particularly burdensome.

  1. Cybersecurity-Related Items and Services

OIG is aware of the industry’s interest in donating or subsidizing cybersecurity-related items and services to providers and others with whom they share information. It seeks information about the types of cybersecurity-related items or services entities wish to donate or subsidize, and how existing fraud and abuse laws may pose barriers to such arrangements. Under current law, CMS and OIG allow certain health information and electronic health record donations and support, but this would go beyond to an ongoing related service.

  1. Accountable Care Organization (ACO) Beneficiary Incentive Program

Section 50341(b) of the Bipartisan Budget Act of 2018 states that “illegal remuneration” under the AKS does not include “an incentive payment made to a Medicare fee-for-service beneficiary by an ACO under an ACO Beneficiary Incentive Program” but allowed OIG to add other conditions on such payment.  For the purposes of implementing this new statutory exception, OIG requests input regarding what, if any, “other conditions” a regulatory safe harbor should include as additional program protections or safeguards.

  1. Telehealth

Section 50302(c) of the Bipartisan Budget Act of 2018 creates a new exception to the definition of “remuneration” in the beneficiary inducements CMP. This exception applies to “telehealth technologies” provided on or after Jan. 1, 2019, to an individual with end-stage renal disease (ESRD) who is receiving home dialysis for which payment is being made under Medicare Part B. The exception stipulates that (i) the telehealth technologies not be offered as part of any advertisement or solicitation; (ii) the telehealth technologies be provided for the purpose of furnishing telehealth services related to the patient’s ESRD; and (iii) that the technologies meet any other requirements mandated by OIG.

For the purposes of this exception, OIG requests input on how “telehealth technologies” should be defined as well as examples of telehealth technologies that may be used to furnish telehealth services related to a beneficiary’s ESRD.

  1. The Intersection of the AKS and the Stark Law

Lastly, OIG requests feedback regarding specific circumstances in which (i) exceptions to the Stark Law and safe harbors to the AKS should align for purposes of accelerating the transformation to a value-based system; and (ii) where exceptions to the Stark Law should not have a corresponding AKS safe harbor. As mentioned above, the Stark Law is a strict liability statute while the AKS is a criminal statute requiring intent. Thus, OIG and CMS historically have considered each other’s respective guidance but have not adopted it by default in their respective rulemaking. That said, OIG clarifies here that they want to reconsider certain areas of overlap in the care coordination space and asks that commentators re-comment with respect to this request if they provided CMS comments earlier this year.

*          *          *          *          *

HHS recognizes that reimbursement is shifting away from fee-for-service to value-based and care coordination models. Through this OIG request for information and the previous CMS request, HHS appears to also recognize that the current fraud and abuse rules may need updating for this shift.

The public can comment until 5 p.m. (ET) on Oct. 26, 2018. We would welcome the opportunity to work with you on submitting ideas to OIG. If you wish to submit comments, please contact a McGuireWoods attorney.

Defense Arguments, FCA Litigation

Eleventh Circuit Expands the Divide on the FCA’s Statute of Limitations

The FCA’s statute of limitations, 31 U.S.C. § 3731(b), has been a source of confusion and disagreement amongst the courts and litigants for years. The disagreement is focused primarily on whether a relator in a non-intervened case can take advantage of the three-year government knowledge/ten-year lookback provision under subsection (b)(2) or whether the relator is limited to the six-year limitation in subsection (b)(1). The majority of courts have held that the relator is bound by the latter provision, and cannot take advantage of the 10-year lookback period in cases where the government has declined to intervene.

This split was recently expanded by the 11th Circuit, which found in U.S. ex rel. Hunt v. Cochise Consultancy, Inc., 887 F.3d 1081 (11th Cir. 2018) that a relator could take advantage of the longer statute of limitations period in subsection (b)(2) even where the government has declined to intervene.

Hunt involved an allegedly fraudulent award of a government defense subcontract for the clearing of excess munitions in Iraq that were left by retreating or defeated forces. While the underlying allegations are sordid – including assertions that a blind military officer was allegedly deceived into signing the wrong contract – the salient allegations are as follows: Defendant Parsons was awarded a government contract to clear excess munitions and sought subcontractors to provide the attendant security services. The contract was initially awarded to ArmorGroup, but this selection was overridden through the efforts of an officer who had allegedly been bribed to award the contract to Defendant Cochise – the purveyor of the bribes. From February 2006 to September 2006, Cochise performed the subcontracting services.[1] The relator – who worked for Parsons – informed the government about the scheme in 2010, but waited until November 27, 2013 to file his claims under the FCA.

The government declined intervention and the defendants subsequently moved to dismiss on statute of limitations grounds, arguing that the claims were untimely under the six-year provision in subsection (b)(1). The district court agreed with defendants and dismissed the action.

On appeal, the Eleventh Circuit reversed, holding that while the claims were facially barred under subsection (b)(1), the relator could rely upon the longer statute of limitations period in subsection (b)(2) despite the government having declined to intervene. The defendants argued that allowing the relator to rely on subsection (b)(2) would lead to absurd results as the limitations period is triggered by the knowledge of the government, which is not a party to the litigation in a declined case. The court rejected this argument, reasoning that in the “unique context” of an FCA action the government remains the real party in interest and retains control over the action. The court explained that the government stands to obtain the majority of the recovery even in declined cases, is allowed to intervene at a later date upon a showing of good cause, and remains actively involved in the case by receiving filings and discovery.

The court also reasoned that nothing in the text of subsection (b)(2) indicates that it is inapplicable where the government has declined to intervene. Furthermore, the court found that its conclusion was bolstered by the absence of legislative history indicating that subsection (b)(2) is inapplicable where the government has declined intervention.

In so holding, the Eleventh Circuit recognized that its decision was at odds with decisions from the Fourth and Tenth Circuits, but rejected these holdings, arguing that these appellate decisions were not persuasive because they failed to account for the “unique role the United States plays even in a non-intervened qui tam case.”

The Cochise opinion crystallizes the circuit split that exists in connection with the FCA’s statute of limitations in non-intervened cases. This divide is particularly notable in light of the importance of the statute of limitations as both a potential defense and as a means to cut off liability as to dated claims. This is an issue that should ultimately be resolved by the Supreme Court (or by a statutory amendment to clarify the statute of limitations), but, in the interim, it bears monitoring this area of law carefully and being cognizant of the applicable authority in the jurisdiction in which a case is pending.

[1] Cochise’s services were limited to seven months because the bribed officer was rotated out of Iraq in September 2006 after which the contract bidding was reopened and awarded to ArmorGroup.

FCA Litigation

Healogics Settles False Claims Case Involving Allegations of Medically Unnecessary Procedures

The United States Attorney’s Office for the Middle District of Florida recently settled a False Claims Act case against Healogics, Inc. (“Healogics”) in which it was alleged that Healogics had knowingly billed Medicare for medically unnecessary and unreasonable hyperbaric oxygen therapy (“HBO therapy”). Under the settlement, Healogics agreed to pay $17.5 million, plus an additional $5.01 that is dependent upon certain financial contingencies. The settlement also provides for a whistleblower share of up to $4,276,000. Healogics also entered into Corporate Integrity Agreement (“CIA”) with the OIG. Pursuant to the five-year CIA, Healogics is subject to both a claims review and a systems review, which are to be performed by an Independent Review Organization.

Healogics manages almost 700 hospital-based wound care centers across the country. The litigation centered around HBO therapy, in which the entire body is exposed to oxygen under increased atmospheric pressure. HBO therapy can be used to treat certain types of chronic wounds.

The allegations against Healogics stemmed from two separate lawsuits: one filed by relator James Wilcox, a former Healogics employee, and a separate lawsuit filed by Dr. Benjamin Van Raalte, Dr. Michael Cascio, and John Murtaugh, who were respectively physicians and a program director who had worked at Healogics-affiliated wound care centers. The relators alleged that, from 2012 to 2015, Healogics knowingly submitted, or caused the submission of, false claims to Medicare for medically unnecessary or unreasonable HBO therapy.

In a Third Amended Complaint that was filed in May 2016, there were allegations of multiple representative instances in which false claims for HBO therapy were purportedly submitted to the government for reimbursement. It was also alleged that patients were subjected to unnecessary procedures, and that “The Healogics Way” – the company’s mission statement for its employees – actually “meant, among other things, fraudulently upcoding debridements, falsifying HBOT eligibility in order to bill for unnecessary but expensive treatments, and requiring all patients to undergo unnecessary testing called transcutaneous oxygen measurement or TCOM.” See United States ex. rel. Van Raalte, et al. v. Healogics, Inc., 14-CV-283 (M.D. Fla. 2014). Notably, the litigation brought by Mr. Wilcox, United States ex rel. Wilcox v. Healogics, Inc., et al., 15-CV-1510 (M.D. Fla. 2015), involved similar accusations against Healogics.

This litigation provides an example of the Government’s focus on cases involving allegations of medially unnecessary treatments being provided to patients. The Government often demonstrates particular interest in such cases both because of the potential financial harm to the public fisc, but also because of the risk of patient harm from patients being exposed to unnecessary medical treatments. The case emphasizes the importance of providers offering medically necessary treatment, and of making individualized decisions about patient care that are tied to the specific circumstances of each particular patient.


Civil and Criminal Fraud and Abuse Penalties Increase and Stark Law Changes

The Bipartisan Budget Act of 2018 (the Act) continues to ratchet up penalties for fraud and abuse violations under the Medicare and Medicaid programs. The Act doubles statutory civil fines and quadruples some criminal fines, including for actions brought under the Anti-Kickback Statute (AKS). It also increases maximum jail time. On the other hand, cognizant of the strict liability nature of the Stark Law, the Act codifies certain regulatory protections.

On February 9, 2018, Congress passed the Act by a vote of 240-186 in the House, and 71-28 in the Senate. President Trump signed it into law the same day. The Act funds the government through March 2018 with a two-year budget deal, and increases federal funding for discretionary programs.

For healthcare, this increased funding for federally qualified health centers and certain research and public health initiatives. Amongst other reforms, the Act also continued funding the Children’s Health Insurance Program through 2027, extended a number of Medicare payment provisions (often called the “Medicare Extenders”), and repealed Medicare therapy caps. It also gave Congress another chance to address the healthcare fraud and abuse statutes and regulations. Several of the more noteworthy amendments to these statutes and regulations are addressed below:

  1. Increasing Civil and Criminal Penalties.

Congress doubled the statutory civil fines for certain AKS and Civil Monetary Penalty Law (CMPL) violations. The CMPL operates as a catch-all of sorts as it authorizes the Office of Inspector General to impose civil monetary penalties (and other remedies) for various types of fraud and abuse under the Medicare and Medicaid programs. The Act included a number of adjustments for certain fines. For instance, $10,000 fines increased to $20,000, $15,000-$30,000 and $50,000-$100,000. Notably, many of these increases are not as dramatic as they seem as the prior budget act had mandated inflationary adjustments, and therefore, the amount of the fines had increased in the interim. Under this clarified framework, the increases actually average approximately: $15,000-$20,000, $22,000-$30,000, and between $55,000 and $74,000-$100,000. On the whole, the increase is closer to a 33%-50% than the doubling provided in the statute.

The Act also ramped up certain criminal penalties under the AKS. The AKS is an intent-based statute, prohibiting remuneration to induce or reward referrals. Violations can include fines, jail time and False Claims Act liability (the latter of which was not addressed by the Act). The Act increased criminal penalties from no more than a $25,000 fine to a maximum $100,000 fine, and increased the maximum incarceration period from five years to ten years. These penalties became effective upon enactment of the Act.

  1. Codification of Stark Law Changes.

Section 50404 of the Act also codifies three technical fixes to the Stark Law with respect to writing and signature requirements and holdover arrangements previously addressed in regulations. Commonly known as the Stark Law, the Physician Self-Referral Law, located at 42 U.S.C. § 1395nn, and its regulations at 42 C.F.R. § 411.350 et seq., prohibits a physician from referring a patient for Medicare- and Medicaid-designated health services to an entity where that physician or his or her family has a financial relationship, absent an exception. Because the Stark Law is a strict liability statute, meeting the very technical exceptions is critical as violations can lead to False Claims Act liability and recoupment obligations. Over time, the industry has heavily criticized the technical nature of the Stark Law and policymakers have taken note. Indeed, Centers for Medicare and Medicaid Services (CMS) Administrator Seema Verma recently stated that an inter-agency review would consider reducing Stark Law burdens.

Despite passage, the technical Stark Law reality is not changing significantly. The first change codifies that the writing requirement shall be “satisfied by such means as determined by the Secretary, which can consist of a collection of documents, including contemporaneous documents evidencing the course of conduct between the parties involved.” This change comes directly from a statement of CMS’s existing policy with respect to the exceptions with a writing requirement. See 80 Fed. Reg. 71315.

Changes to the signature requirement and holdover arrangements are similarly lacking significant change. In 2015, when CMS revised Stark Law regulations, we wrote that “under the personal service arrangement and lease exceptions . . . CMS is considering an indefinite holdover period [as long as] the holdover [is] on the same terms and conditions as the original agreement.” This adopted regulatory language (see 42 C.F.R. 411.357(a), (b), (d)) finds its way directly into the Act. Similarly, CMS adopted language around signatures in 42 C.F.R. § 411.353(g) that provides a 90-day period of temporary noncompliance. This same period and same language is codified by the Act.

Overall, policymakers continue to attack healthcare fraud and abuse concerns by ratcheting up punishments for violations. Healthcare providers need to continue to ensure compliance to avoid significant penalties. At the same time, Stark Law changes to modernize and remove technical concerns, largely implements shifts that were already recognized in the regulations. If it is the start of further reforms — as could be suggested through the actions of other members of Congress, Administrator Verma, and others — this could be good news. However, if changes amount to little other than a way for policymakers to declare victory over the technical Stark Law, healthcare providers may be disappointed.

The authors of this legal alert are happy to further discuss the implications and potential ramifications from the Bipartisan Budget Act.


DOJ Memorandum Sets Out FCA Dismissal Factors

A January 10 internal memorandum from the director of the fraud section of the DOJ’s civil division commercial litigation branch, which has recently become public, sets out the factors the government should consider in dismissing False Claims Act (FCA) cases in which it has declined to intervene, and may suggest a greater possibility that the DOJ will seek to dismiss such cases.  The memo also provides defense counsel reacting to a government investigation related to a qui tam complaint with a roadmap for arguing for non-intervention and dismissal.The FCA gives the government authority to dismiss an action brought by a qui tam relator over the objection of the relator, as long as the court provides the relator an opportunity to be heard.  42 U.S.C. § 3730(c)(2)(A).  The memo notes that the DOJ has rarely used this provision when it has declined to intervene in qui tam cases and instead allowed relators to proceed with lawsuits.  Going forward, the memo instructs government attorneys, when they make a decision not to intervene, to also consider whether dismissal is appropriate.The memo describes several reasons the government may want to dismiss qui tam actions, including that monitoring of cases requires government resources and that weak cases can result in law that harms the government’s own enforcement.  Accordingly, the memo sets out several factors for government attorneys to consider when evaluating whether to dismiss a qui tam action:

  • Whether the complaint is facially lacking in merit for either legal or factual reasons.
  • Whether the qui tam complaint duplicates a preexisting government investigation and adds no new information to the investigation.
  • Whether the action interferes with agency policies or programs. The government specifically notes that dismissal may be appropriate when “an action is both lacking in merit and raises the risk of significant economic harm that could cause a critical supplier to exit the government program or industry.”
  • Whether the action interferes with the government’s efforts to control its own litigation.
  • Whether the action implicates classified information or national security interests.
  • Whether the expected gain from allowing the litigation exceeds the expected cost to the government.
  • Whether the relator has made “egregious procedural errors” that frustrate the ability of the government to litigate the case.

The memorandum should be of great interest to any company or in-house counsel involved in areas, such as healthcare and government contracting, where the risk of FCA claims is high.  The memo provides guidelines for the types of arguments that the government attorney must consider in deciding whether to dismiss, and also presumably in determining whether to intervene in the first instance.  The memo also suggests that the initial stages of a government investigation, before the intervention decision, will be of even more importance to defendants who have the opportunity not only to avoid government intervention but also to have the government affirmatively aid the defendant by dismissing the action and saving the defendant the costs and burdens of litigating the claim against the relator.  Defendants facing FCA claims and their counsel should take into account the factors set out in the memo as they strategize a response to government inquiries connected to qui tam complaints.

This post initially appeared on the McGuireWoods blog Subject to Inquiry.

FCA Litigation, Investigations

Former DOJ Prosecutor Pleads Guilty After Attempting to Sell Sealed False Claims Act Cases to the Target Defendants

A former prosecutor for the United States Department of Justice has pled guilty to attempting to sell sealed False Claims cases to the defendants in those cases and to transporting stolen goods across state lines. Jeffrey Wertkin was a DOJ prosecutor who had entered private practice with Akin Gump Strauss Hauer & Feld. Mr. Wertkin was arrested by the FBI in January 2017 in a California hotel, wearing a disguise, while attempting to sell a sealed federal complaint to a Silicon Valley technology company for $310,000. The company had contacted the FBI after Mr. Wertkin had contacted a high-ranking employee of the tech company to set up the meeting.

Pursuant to a recent press release issued by the Department of Justice, Wertkin’s plan involved accumulating sealed whistleblower fraud cases during his last month working at the DOJ. He then removed copies of the complaints when he left the DOJ. Apparently, Mr. Wertkin sought to have copies of these secret, high-stakes cases to not only sell to the defendants targeted in the cases—so as to give them an advance look at the pending complaint—but as a way to lock-in new clients for his defense services. As stated by Mr. Wertkin in his Plea Agreement: “I began secretly reviewing and collecting complaints to identify clients to solicit for business when I was in practice and, thereby, to make myself more successful at Akin Gump.”

Mr. Wertkin pled guilty to two counts of obstructing justice and one count of interstate transportation of stolen property. Mr. Wertkin’s sentencing is scheduled to take place in March 2018. He is expected to meet with the DOJ to provide it with further information as to how he was able to remove the case files.

Mr. Wertkin had worked in the DOJ from October 2010 until April 2016. Notably, Mr. Wertkin was co-counsel in a complex, $200 million FCA case against AseraCare, a Texas-based, for-profit hospice provider. As discussed in a prior article, the case involving AseraCare was a noteworthy FCA case involving statistical sampling in which a jury verdict for the Government was set aside.

Damages, FCA Statistics

DOJ Recovers More Than $3.7 Million From FCA Cases in 2017

The United States Department of Justice has issued a press release announcing that it recovered more than $3.7 Billion from False Claims Act (FCA) cases during fiscal year 2017 (October 1, 2016 through September 30, 2017).  This recovery marks a decline from the $4.7 Billion that the DOJ recovered in fiscal year 2016, but it is the sixth consecutive year in which the Government’s FCA recoveries have exceeded $3.5 Billion.

Once again, the healthcare industry was responsible for the majority of the Government’s FCA recoveries, with $2.4 Billion coming from the healthcare industry (including hospitals, physicians, laboratories, drug companies, and pharmacies).  The DOJ has now recovered more than $2 Billion from the healthcare industry in each of the past 8 years.

The mortgage and housing industry was another substantial target with more than $543 Million of the DOJ’s recoveries coming from the mortgage and housing industry.

Whistleblowers were involved in a significant number of the cases that led to these Government recoveries.  FCA whistleblowers filed 669 claims in fiscal 2017, which is a slight decrease from the 702 qui tam lawsuits that were filed in fiscal year 2016.  However, the Government recovered $3.4 Billion from cases that were initiated as qui tam lawsuits, which is an increase over the $2.9 Billion that the Government recovered from such cases in fiscal year 2016.

The significant recoveries that are being obtained by the DOJ annually, particularly in the healthcare industry, provide a reminder of the importance of emphasizing compliance and accuracy in the submission of claims to the Government.


Pleading with Particularity: Sixth Circuit Upholds Stringent Pleading Requirements in FCA Cases

In an effort to avoid transforming the FCA into “an all-purpose antifraud statute,” the Sixth Circuit recently reaffirmed that relators must plead a connection between the alleged fraud and an actual claim made to the government.  The Sixth Circuit’s decision in United States ex rel. Ibanez v. Bristol-Myers Squibb confirms the long-held rule that absent very limited circumstances, FCA claims must be pled with particularity.

In Ibanez, former sales representatives for the defendant brought a qui tam FCA action alleging that the defendant engaged in a “complex, nationwide wide scheme” to improperly promote the antipsychotic drug, Abilify.  The relators’ claims involved a long chain of causal links, which led to the eventual submission of false claims to the government.  However, the relators failed to identify a representative claim, which ultimately led to the district court granting the defendant’s motion to dismiss and denying the relators’ motion to amend.  In reaching this holding, the district court reasoned that the relators failed to satisfy Rule 9(b)’s pleading requirements—specifically, identifying a representative false claim that was actually submitted to the government and pleading the existence of such a false claim.

On appeal, relators encouraged the Sixth Circuit to apply the more “relaxed” exception to Rule 9(b)’s pleading requirements, which was the approach taken in United States ex rel. Prather v. Brookdale Senior Living Cmtys., Inc.  In Prather, the Sixth Circuit made an exception to the usual, stringent pleading standard when “a relator alleges specific personal knowledge that relates to billing practices” and supports a “strong inference that a [false] claim was submitted.”

Even when construing the complaint in the light most favorable to the plaintiff, the Sixth Circuit affirmed the district court’s dismissal and declined to extend the more relaxed standard to the facts at hand.  The Sixth Circuit noted that the Prather personal knowledge exception applies in extremely limited circumstances; in fact, the only time the Sixth Circuit ever applied the personal knowledge exception to FCA pleading requirements was in Prather itself.  The Sixth Circuit reasoned that although the relators alleged knowledge of a complex scheme related to the promotion of Abilify, they lacked the “specific personal knowledge” required to apply the more relaxed, Prather exception.  Accordingly, because the relators failed to identify a representative claim with specificity as to each necessary component of the alleged scheme, they failed to satisfy Rule 9(b)’s pleading requirements.  The Sixth Circuit ultimately concluded that allowing the relators’ claims to succeed would, in essence, allow them to ‘“avoid the specificity requirements of Rule 9(b) by relying upon the complexity of the edifice which [they] created.”’

Ibanez reaffirms that even if it is foreseeable that an action resulted in FCA liability, it is not enough for relators to show that a violation was likely—relators must instead plead the existence of such a false claim.  Courts will likely apply the reasoning set forth in Ibanez in future FCA claims that involve complex fraudulent schemes, providing defendants accused of FCA fraud violations with the same protections as in other fraudulent circumstances and, potentially, making it more difficult for whistle blowers to succeed in certain FCA claims.

Defense Arguments, FCA Litigation

Ninth Circuit’s Application of the FCA’s Government-Action Bar Provides Finality to Defendants

The FCA contains several provisions that are aimed at discouraging “parasitic” or duplicative qui tam actions. One such provision, known as the “government-action bar,” prohibits relators from bring a qui tam action “based upon allegations or transactions which are the subject of a civil suit . . . in which the Government is already a party.” 31 U.S.C. § 3730(e)(3). In United States ex rel. Bennett v. Biotronik, Inc., — F.3d —-, No. 16-15919, 2017 WL 5907900 (9th Cir. Dec. 1, 2017), the Ninth Circuit offered a broad but sensible interpretation of the government-action bar, finding that it applied to claims that the Government declined to pursue in a prior qui tam action.

On December 31, 2009, Brian Sant filed a qui tam action against Biotronik, a medical device supplier. Sant alleged, among other things, that Biotronik bribed physicians with extravagant dinners, expensive sports and theater tickets, travel, and “paid, but useless, speaking engagements;” created “advisory boards” to funnel illegal payments to physicians; and used “sham clinical studies to provide kickbacks” for physicians who prescribed Biotronik’s products. The United Stated investigated Sant’s claims for almost four years. On May 14, 2014, the U.S. reached a settlement with Sant and Biotronik on “certain covered conduct.” Importantly, the settlement did not include the alleged sham clinical studies, and those claims were dismissed from the case without prejudice.

Only three months after Sant’s complaint was filed, Bennett, a former Biotronik product manager, filed a qui tam action that paralleled Sant’s claims. Bennett’s complaint provided additional details regarding the “uncovered conduct” from Sant’s complaint, including the alleged sham clinical studies, though it did not contain any new claims. Biotronik filed a motion to dismiss, asserting, among other things, the government-action bar. The district court dismissed the action, and Bennett appealed.

Bennett first argued that the government-action bar should not apply when the action in which the U.S. was a party has concluded. In support, Bennett noted that § 3730(e)(3) only bars cases “in which the Government is already a party,” and the U.S. was no longer a “party” in the Sant action because it had settled. The Ninth Circuit dismissed this argument, finding that such an interpretation was inconsistent the Federal Rules of Civil Procedure and the language in the FCA’s public disclosure bar, 31 U.S.C. § 3730(e)(4). The court concluded, “we presume the phrase ‘is a party’ has consistent meaning, and that once a party to an action, the Government remains a party to that action, regardless of the action’s conclusion.” Id. at *5.

Bennett also argued that that even if the government-action bar precludes similar actions after the original action concludes, the U.S. “declined party status” with respect to the alleged sham clinical studies, so he should be permitted to proceed on those claims because they were dismissed without prejudice. The Ninth Circuit disagreed. First, the Ninth Circuit noted that nothing in the FCA allows for the Government to intervene in certain parts of an action but not others. See 31 U.S.C. § 3730(b)(2). Reinforcing this principle, the U.S. Supreme Court has held that the Government becomes a party in a qui tam action when is has “exercised its right to intervene in the case.” Eisenstein v. City of New York, 556 U.S. 928, 931 (2009). Because the Government remained a party to the Sant action, and because the Government cannot have “partially” intervened, the Ninth Circuit concluded that Bennett’s lawsuit was barred by the government-action bar.

The Ninth Circuit’s interpretation of the government-action bar prohibits additional relators from raising the same claims in subsequent qui tam actions when the Government has intervened in the original action, regardless of the claims that the Government opts to pursue. This approach will help provide defendants with finality in cases in which the Government decides to intervene.


Seventh Circuit Looks to “Separate the Wheat from the Chaff” by Adopting a New FCA Causation Test

In United States v. Luce, the Seventh Circuit overturned a two-decade precedent by holding that proximate causation, and not “but for” causation, was the proper standard to employ in FCA cases.  In so holding, the Seventh Circuit undid the 25-year circuit split it had created through use of “but for” causation in FCA cases.

In Luce, the defendant was the founder and president of MDR Mortgage Corp., a mortgage lending business.  MDR sought to participate in the Fair Housing Act (FHA)’s insurance program, which requires mortgagees annually certify that that none of its owners, officers, and/or employees were currently, or had previously been, involved “in a proceeding and/or investigation that could result, or has resulted in a criminal conviction, debarment, limited denial of participation, suspension, or civil money penalty by a federal, state, or local government.”  Luce had been indicted in 2005 for fraud and obstruction of justice, but nevertheless certified on behalf of MDR that it was in compliance with the FHA program requirements.  In 2008, MDR notified the federal government of Luce’s prior indictment.

Pursuant to this finding, the United States brought an FCA action against Luce alleging that he defrauded the federal government by falsely certifying that he had no criminal history so that MDR could participate in the FHA’s insurance program.  As part of his defense to these allegations, Luce argued that the Seventh Circuit should adopt a more rigorous causation standard in accordance with the Supreme Court’s decision in Universal Health Services, Inc. v. United States ex rel. Escobar and other federal circuit case law.

The Seventh Circuit first adopted the “but for” causation standard for FCA cases in United States v. First National Bank of Cicero, 957 F.2d 1362 (7th Cir. 1992).  In Cicero, the court reasoned that 31 U.S.C. § 3729(a)(1)’s language that the government could recover treble the damages it sustained “because of” the defendant’s fraudulent acts justified a broad and inclusive “but-for” causation test.  Luce argued that the court should overrule Cicero and apply common-law fraud principles’ more stringent causation standard to assess a defendant’s liability.

Though the 2016 Escobar opinion does not directly address causation, the opinion does emphasize the importance of applying common-law fraud principles to FCA cases (i.e., the application of the proximate causation test).  The Luce court followed this direction and overruled Cicero.

For 25 years, the Seventh Circuit acted as an outlier in its use of the but-for causation standard for FCA cases.  In overruling this precedent and employing the proximate causation standard for FCA cases, the Seventh Circuit stated:  “The proximate causation standard ‘separates the wheat from the chaff,” allowing FCA claims to proceed against parties who can fairly be said to have caused a claim to be presented to the government, while winnowing out those claims with only attenuated links between the defendants’ specific actions and the presentation of the false claim.”

As new and expansive FCA theories continue to appear, the Luce opinion demonstrates an attempt to keep claims within the FCA’s intended parameters.  Prior to the Luce decision, the Seventh Circuit was an attractive venue for FCA relators given its lenient and broad but-for causation standard. But now, FCA relators will have to allege and set forth enough facts to prove the more stringent proximate causation standard to survive motion practice.  FCA defendants will undoubtedly rely heavily upon Luce to curtail the ever-expanding and novel theories of liability under the FCA.

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