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.
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.
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.
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.
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.
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.
On September 11, 2017, in United States and State of Nevada ex rel. Welch v. My Left Foot Children’s Therapy, LLC, the Ninth Circuit held that an arbitration agreement between an employee-relator and her former employer was not broad enough to cover the Relator’s whistleblower claims under the FCA. This opinion raises questions as to whether FCA claims can be subject to arbitration agreements to which the government is not a party.
In Welch, the Relator alleged that the Defendant violated the FCA by presenting fraudulent claims to federal health care programs. The Relator filed suit in the U.S District Court for the District of Nevada, but the Defendant moved to compel arbitration under the Federal Arbitration Act, arguing that the parties had entered into a valid and binding employment contract that included an arbitration provision that would apply to the FCA claims. Pursuant to the contract, the Relator had agreed to binding arbitration to resolve all claims that the Relator may have against the Defendant or that the Defendant may have against the Relator, including those “arising from, related to, or having any relationship or connection whatsoever . . . with the [Defendant].” The Agreement also provided that all disputes based on “any other state or federal law or regulation” were included within the scope of the contract.
Upon hearing the parties’ arguments as to whether arbitration should be compelled, the District Court found that it is the government (regardless of whether it intervenes), and not the whistleblower, who owns the underlying fraud claim in FCA cases. Accordingly, the District Court denied the Defendant’s motion to compel arbitration, reasoning that the Agreement did not extend to the government. The Defendant appealed that ruling.
On appeal, the Ninth Circuit engaged in a textual analysis of the contract and ultimately upheld the District Court’s decision. In analyzing the contract, the Ninth Circuit explained that the FCA claims did not fall within the scope of the arbitration provision because the FCA claims were neither claims that the Defendant had against the Relator nor claims that the Relator had against the Defendant; rather, the FCA claims belonged to the government. The Ninth Circuit reasoned that although the FCA grants a whistleblower the right to bring a claim on the government’s behalf, ultimately, the underlying fraud claims that are being asserted belong to the government.
Notably, the Ninth Circuit noted in dicta that the parties could have drafted a broader agreement that would have covered ‘“any lawsuits brought or filed by the employee whatsoever . . . including those brought on behalf of another party.”’ It remains to be seen if such an arbitration provision would be upheld in the context of an FCA action, but, at a minimum, the Ninth Circuit’s opinion did not foreclose that possibility with an appropriately drafted arbitration selection provision.
Earlier this month, we covered the Spectocor action which involved an executive and his company’s agreement to pay $10.56M of a $13.45M total settlement to resolve allegations involving medically unnecessary Medicare reimbursements. In another stark reminder that the Department of Justice has increased its focus on individual liability for corporate executives, as per the directive of the Yates Memo, the Government recently entered into to two more significant settlements with individuals accused of violating of the False Claims Act.
The first noteworthy settlement – involving The Hartford Dispensary – involved a total of $627,000 split between a corporation and its former CEO to resolve allegations that the CEO’s substance abuse treatment center made false representations and false certifications to the government that it had a medical director as required by federal and state law.
The second noteworthy settlement – involving Southeast Orthopedic Specialists – was settled by the agreement that a former CFO and COO would be personally accountable in the sum of $100,000 for allegations that he knew or should have known that medically unnecessary and unreasonable services were billed to federal healthcare programs. Commenting on this settlement, an OIG special agent announced that the government will “relentlessly seek to hold corporate officers who defraud the Medicare program personally accountable,” and that it will continue to “pursue company executives who misrepresent services to boost profits.”
The DOJ emphasizes that settlements like these are part of its increasing “focus on identifying specific individuals who participate or further financial fraud” as part of the government’s priority to hold individuals accountable for corporate malfeasance. We will continue to update this blog as the DOJ announces settlements in which individuals are personally being held financially responsible for alleged violations of the False Claims Act.
On Sept. 6, 2017, the Centers for Medicare and Medicaid Services (CMS) issued an advanced copy of guidance to state survey agency directors that is intended to clarify how to determine whether a hospital seeking Medicare certification, or going through a continuing certification survey, is “primarily engaged in providing inpatient services” under the Social Security Act. The following sets forth a brief history of the inpatient engagement issue and key takeaways from the new guidance, which takes effect immediately.
The term “hospital,” for purposes of the Social Security Act, means an institution which, among other things “is primarily engaged in providing, by or under the supervision of physicians, to inpatients (A) diagnostic services and therapeutic services for medical diagnosis, treatment, and care of injured, disabled, or sick persons, or (B) rehabilitation services for the rehabilitation of injured, disabled, or sick persons.” 42 U.S.C. 1398x(e). Historically, CMS has engaged in a series of de-certification actions as a result of a hospital’s alleged failure to be “primarily engaged” in providing services to inpatients, although the manner in which CMS interprets and enforces this requirement has varied. Prior to this new guidance, the only attempt by CMS of which we are aware to formally and publicly identify how the “primarily engaged” requirement would apply, was in the form of a 2008 memo that states, in part:
In the absence of other clearly persuasive data, CMS renders a determination regarding hospital status based on the proportion of inpatient beds to all other beds. At the request of the applicant CMS may examine other factors in addition to bed ratio. The agency recognizes that the “51%” test may not be dispositive in all cases. However, we consider the burden of proof (to demonstrate that inpatient care is the primary health care service) to reside with the applicant, and consider the burden to increase substantially as the ratio of inpatient to other beds decreases.
The CMS memo specifically targeted provider-based off-campus emergency departments and hospitals specializing in the provision of emergency services, but its application has been applied more broadly. Further, CMS has continued to interpret compliance with the “primarily engaged” definition on a case-by-case basis, and not all CMS survey offices have used the 51 percent bed count as the applicable standard. This has led to significant uncertainty in the industry.
The new guidance, which amends Appendix A of the State Operations Manual that survey agencies are instructed to follow when conducting the hospital survey and certification process, provides new insight into CMS’ thinking on inpatient engagement. It identifies two key factors that surveyors should consider: (1) average length of stay (ALOS), and (2) average daily census (ADC). However, much like the CMS memo, there is still significant room for interpretation.
Initially in the new guidance, CMS explained that “generally, a patient is considered an inpatient if formally admitted as an inpatient with the expectation that he or she will require hospital care that is expected to span at least two midnights.” Thus, CMS instructs surveyors that an ALOS of two midnights will be one of the benchmarks considered for hospital certification. Further, because the Social Security Act refers to the provision of care to “inpatients” (plural), CMS stated that “hospitals must have at least two inpatients at the time of the survey in order for surveyors to conduct the survey.” If a hospital does not have at least two inpatients at the time of a survey, a survey will not be conducted at that time, and an initial review of the hospital’s admission data will be performed to determine if the hospital has had an ADC of at least two and an ALOS of at least two midnights over the last 12 months. If such review shows that the ADC and ALOS are each two or more, a second survey will be attempted at a later date. However, if the hospital does not have a minimum ADC of two inpatients and an ALOS of two over the preceding 12 months, “the facility is most likely not primarily engaged in providing care to inpatients and the CMS Regional Office must look at other factors to determine whether a second survey should be attempted.”
Surveyors are further instructed in the new guidance on other factors they should consider in determining whether to (1) conduct a second survey, or (2) recommend denial of an initial applicant or termination of a current provider agreement. These factors include but are not limited to the following:
- The number of provider-based off-campus emergency departments (EDs). An unusually large number of off-campus EDs may suggest that a facility is not primarily engaged in inpatient care and instead is primarily engaged in providing outpatient emergency services.
- The number of inpatient beds in relation to the size of the facility and services offered. For example, a facility with only four inpatient beds, but six to eight operating rooms, 20 emergency department bays and a 10-bed ambulatory surgery outpatient department most likely is not primarily engaged in inpatient care.
- The volume of outpatient surgical procedures, compared to inpatient surgical procedures.
- If the facility considers itself to be a “surgical” hospital, are procedures mostly outpatient? Does the information indicate that surgeries are routinely scheduled early in the week, and does it appear this admission pattern results in all or most patients being discharged prior to the weekend (i.e., that the facility routinely operates in a manner where its designated “inpatient beds” are not in use on weekends)?
- Patterns and trends in the ADC by the day of the week. For example, does the ADC consistently drop to zero on Saturdays and Sundays? This would suggest that the facility is not consistently and primarily engaged in providing care to inpatients.
- Staffing patterns. A review of staffing schedules should demonstrate that nurses, pharmacists, physicians, etc., are scheduled to support 24/7 inpatient care, versus staffing patterns for the support of outpatient operations.
- How does the facility advertise itself to the community? Is it advertised as a “specialty” hospital or “emergency” hospital? Does the name of the facility include terms like “clinic” or “center,” as opposed to “hospital”?
CMS instructs its surveyors to consider all of the above factors (and potentially others) to determine whether a facility is truly operating as a hospital for Medicare purposes, rather than making a determination “based on a single factor, such as failing to have two inpatients at the time of a survey.” Accordingly, a hospital’s failure to satisfy the ALOS and ADC tests should not necessarily result in the denial of certification or de-certification. However, a hospital with historical ALOS and ADC below two should carefully review the other considerations outlined above, review internal data to ascertain its level of risk based on those considerations, and consider adjusting its operations accordingly. Further, hospitals should monitor the manner in which the new guidance is implemented by the applicable survey agency, given the amount of latitude CMS has provided to surveyors to examine the totality of circumstances when addressing the inpatient engagement issue.
McGuireWoods already helps hospitals both engage in self-analysis to evaluate their performance generally in relation to the “primarily engaged” requirement and to respond to CMS inquiries of compliance on this topic. Moving forward, our lawyers are well-positioned to assist hospitals with the evaluation of their compliance efforts in light of the new guidance and assist should any survey or certification issues arise. If you have any questions regarding the new guidance, please contact Amber Walsh or Jake Cilek.