The FCA Insider

The FCA Insider

Insights and updates on False Claims Act Litigation

FCA Litigation

Another Circuit Weighs in on the Standard for Evaluating Government Motions to Dismiss False Claims Act Actions

In a recent opinion, the U.S. Court of Appeals for the Third Circuit weighed in on what standard to apply in reviewing government motions to dismiss False Claims Act (FCA) actions.  As discussed in detail in a July 2021 Law360 article titled “Tide Is Turning Against FCA Case Dismissals,” a three-way circuit split has developed regarding the standard governing a government motion to dismiss a whistleblower’s non-intervened qui tam case, but the varying approaches in the courts may be less important to the viability of government dismissals than the actions of the executive and legislative branches.[1]

These government motions to dismiss are referred to as “(c)(2)(A) motions” in reference to the relevant provision of the FCA that authorizes the government to move to dismiss a qui tam complaint over the relator’s objection.  The FCA, however, does not provide a substantive standard for evaluating such motions.  Three judicial approaches to considering such dismissals have emerged: (1) the U.S. Court of Appeals for the Ninth Circuit adopted a rational relation test requiring the government to put forward a valid government purpose and demonstrate a connection between that purpose and dismissal;[2] (2) the U.S. Court of Appeals for the D.C. Circuit concluded that the government has “an unfettered right to dismiss an action,” and that its decision to do so is virtually unreviewable;[3] and (3) the U.S. Court of Appeals for the Seventh Circuit held in U.S. ex rel. CIMZNHCA v. UCB, Inc. that the voluntary dismissal standard in Federal Rule of Civil Procedure 41(a) provides the standard for (c)(2)(A) dismissals.[4]  During its last term, the Supreme Court decided not to review an appeal of the Seventh Circuit’s CIMZNHCA decision, leaving in place the three-way circuit split regarding the appropriate standard for evaluating (c)(2)(A) dismissal motions.

Recently, in Polansky v. Executive Health Resources Inc., the U.S. Court of Appeals for the Third Circuit weighed in on what standard to apply and joined the Seventh Circuit’s “middle of the road” approach that is deferential to the government while providing for some level of meaningful judicial review of (c)(2)(A) dismissal motions.  In that case, relator Dr. Jesse Polansky filed a qui tam action in 2012 alleging that Executive Health Resources Inc., a physician advisory company, was causing hospitals to bill the government for inpatient stays that were not “reasonable and necessary” for diagnosis or treatment.[5] For the next two years, Polansky’s complaint remained under seal while the government conducted its own investigation, ultimately deciding it would not participate in the case.[6] Over the next several years, the parties and the district court invested considerable time and resources in litigating the case.[7]  Then, in February 2019, despite Polansky’s objection, the government notified the parties that it intended to dismiss the entire action pursuant to its (c)(2)(A) dismissal authority.[8]  The district court granted the government’s motion to dismiss, recognizing the circuit split and concluding that the government met its burden under any of the three standards.[9]

On appeal, the Third Circuit addressed three questions: (1) whether the FCA requires the government to intervene in order to seek a (c)(2)(A) dismissal, either at the outset of the case or at a later date; (2) what standard governs (c)(2)(A) motions to dismiss; and (3) whether the district court’s grant of dismissal was a reasonable exercise of its discretion.[10]

Considering the first question, after analyzing the language and context of the FCA statute, the Third Circuit agreed with the Seventh Circuit, finding that under § 3730(c), the government must intervene before it can move to dismiss, but that it can seek leave to intervene at any point in the litigation upon a showing of “good cause.”[11]  As the Third Circuit noted, “showing ‘good cause’ is neither a burdensome nor unfamiliar obligation. . . [rather,] [i]t is a ‘uniquely flexible and capacious concept,’ meaning simply a ‘legally sufficient reason. . .’”[12]

Turning to the governing standard, the Third Circuit again concurred with the Seventh Circuit and concluded that Rule 41, which establishes different standards for evaluating a motion to dismiss depending on the procedural posture of the case, provides the applicable standard for granting (c)(2)(A) dismissals.[13]  Specifically, if the (c)(2)(A) motion to dismiss is filed before the defendant files an answer or summary judgment motion, “the plaintiff may dismiss an action without a court order simply by filing a notice of dismissal.”[14]  Those dismissals are subject only to the constitutional bar on arbitrary government action.[15]  However, if the defendant has filed a responsive pleading, then “an action may be dismissed at the plaintiff’s request only by court order, on terms that the court considers proper.”[16]  That review of propriety, the court noted, “as a practical matter . . . may well converge” with the evaluation of whether the government has “good cause” to intervene pursuant to § 3730(c)(3).[17]

Having clarified the applicable standard, the Third Circuit affirmed the district court’s dismissal of the qui tam action, holding (1) that although the government did not formally file a motion to intervene, it could construe the government’s motion to dismiss as including a motion to intervene based on “good cause”; and (2) that the district court did not abuse its discretion in concluding that the government’s motion was “proper,” and so had satisfied Rule 41(a)’s standards for dismissal.[18]

As explained in the above referenced article, while the Supreme Court’s decision to decline review of the Seventh Circuit’s decision in CIMZNHCA and the Third Circuit’s Polansky decision (and its fairly easily satisfied requirements that the government’s motion to intervene is based on “good cause” and dismissal is “proper”) appear to be favorable outcomes for potential defendants, the Biden administration’s leanings toward a more pro-whistleblower and pro-enforcement stance and bipartisan congressional support for reigning in government dismissals of qui tam suits is likely to ultimately lead to the government filing fewer (c)(2)(A) motions to dismiss.[19]  That said, given the Third Circuit’s recent decision in Polansky (of note, the Polansky appeal was briefed and argued before the change in administration), as well as the fact that the DOJ’s “Granston Memo” (directing prosecutors to consider the importance of (c)(2)(A) dismissals to weed out nonmeritorious cases) has not been formally superseded, (c)(2)(A) dismissals remain a potentially helpful tool for defendants in FCA cases.

[1] Michael Podberesky, John Moran & Cassie Burns, Tide Is Turning Against FCA Case Dismissals, Law360 (July 28, 2021) https://www.law360.com/articles/1405490/tide-is-turning-against-fca-case-dismissals.

[2] U.S. ex rel. Sequoia Orange Co. v. Baird-Neece Packing Corp., 151 F.3d 1139, 1145 (9th Cir. 1998).

[3] Swift v. U.S., 318 F.3d 250, 252 (D.C. Cir. 2003).

[4] U.S. ex rel. CIMZNHCA v. UCB, Inc., 970 F.3d 835, 849 (7th Cir. 2020).

[5] Polansky v. Exec. Health Res. Inc., No. 19-3810, 2021 U.S. App. LEXIS 32304, at *4-5 (3d Cir. Oct. 28, 2021).

[6] Id. at *5.

[7] Id.

[8] Id. at *6.

[9] Id. at *7.

[10] Id. at *8.

[11] Id. at *11.

[12] Id. at *16-17.

[13] Id. at *18.

[14] Id. at *19 (internal quotations omitted).

[15] Id. at *21.

[16] Id. at *19-20 (emphasis added).

[17] Id. at *20 n.14.

[18] Id. at *26-28.

[19] Tide Is Turning Against FCA Case Dismissals, supra note 1.

DOJ

Gleanings From DOJ’s 2021 Healthcare Takedown Announcement

On Sept. 17, the U.S. Department of Justice released the results of its 2021 Healthcare Takedown — an annual announcement aggregating months of investigations and indictments across the country involving fraud in the healthcare and life sciences industries.

Read on for details and analysis of criminal charges against 138 defendants, including 42 medical professionals, related to schemes involving about $1.4 billion in alleged losses to federal healthcare programs.

FCA Litigation

Federal Court Permits Government Intervention in FCA Case After Seven Years After Finding “Good Cause”

The Western District of New York recently allowed the government to intervene in an FCA action brought months after the government’s initial notice of declination and more than seven years after the government initiated its investigation. U.S. ex rel. Teresa Ross v. Indep. Health Corp., et al., 12-cv-299, 2021 WL 3492917 (W.D.N.Y. Aug. 9, 2021). While the Government’s motion was filed more than seven years after the FCA action was initially filed under seal, the court allowed the Government to intervene, finding that it had satisfied each of the factors required to demonstrate “good cause” for intervening at a later date.

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Attorney-Client Privilege

Fifth Circuit Orders Return of Privileged Property After Government Seizure

The Fifth Circuit recently reversed a district court’s dismissal of a motion to return property after the government’s seizure of protected attorney-client information in Harbor Healthcare Sys., L.P. v. United States, 5 F.4th 593 (July 15, 2021).   Harbor Healthcare System, L.P. (“Harbor”) was the subject of two qui tam lawsuits—filed in 2014 and 2016—alleging violations of the False Claims Act (“FCA”).  The Civil Division of the Department of Justice shared the allegations in the qui tam actions with its prosecutors to investigate possible criminal activity.  Prosecutors obtained warrants authorizing it to search Harbor locations and offices and seize twenty-two broad categories of documents as well as smart phones, iPads, and other mobile electronic devices.  Harbor asserted that the materials seized by the government contained a wealth of information protected by the attorney-client privilege, and that the government did not inform the magistrate judges who authorized the search warrants that the government had seized privileged material from Harbor.

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Anti-Kickback Statute, FCA Litigation

District Court Embraces Expansive View of “Referrals” to include Accessing Records

In Stop Illinois Health Care Fraud, LLC v. Sayeed, No. 12-CV-09306, 2021 WL 2331338 (N.D. Ill. June 8, 2021), an Illinois district court issued an order after a recent bench trial finding that the defendants violated the False Claims Act (FCA), Illinois False Claims Act (IFCA), and the Anti-Kickback Statute (AKS) when they paid a community care organization for access to the organization’s raw client data, and then used that data to solicit clients for Medicare reimbursed healthcare services. Although this arrangement consisted of no direct referrals, the district court – following the 7th Circuit’s instructions on remand – held that such arrangements constitute prohibited, indirect referrals under what the court called a “file access theory.” Under this theory, the district court found that AKS liability attached because the payments were intended as remuneration for access to records that leads to the solicitation of additional healthcare services. This case is important as it illustrates once again how broadly the government and courts define “referral” in the AKS context.

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Defense Arguments, DOJ, FCA Defenses, FCA Litigation

Tide Is Turning Against FCA Case Dismissals

According to a July 28 article in Law360 by McGuireWoods lawyers Michael J. Podberesky, John S. Moran, Todd R. Steggerda, David Pivnick and Cassandra M. Burns, the U.S. Supreme Court’s recent decision declining to review an appeal of a Seventh Circuit case that could have resolved a three-way circuit split regarding the proper standard for deciding government motions to dismiss whistleblower suits is a Pyrrhic victory for potential defendants, given bipartisan pressure in the Senate and from the White House to reign in such dismissals.

Regulatory

New Georgia Statute Prohibits Patient Brokering for Substance Abuse Providers

A new Georgia anti-kickback statute seeks to halt a recently identified pattern of substance abuse treatment centers seeking patient referrals from healthcare providers in exchange for fees.

Read on for details about this law, which prohibits such “patient brokering.” Violations may result in criminal liability, including potential imprisonment.

DOJ, OIG, Regulatory

Increasing OIG and DOJ Telehealth Fraud Enforcement Likely on Horizon

Three McGuireWoods’ attorneys, partners Andrea Lee Linna and Michael Podberesky, and associate Amanda Ray, have co-authored an article on the likely forthcoming increase in OIG and DOJ telehealth fraud enforcement that was published in the July issue of Compliance Today.   The article examines recent enforcement actions against individuals alleged to have committed telehealth fraud as well as Office of Inspector General and Medicare Payment Advisory Commission pronouncements on telehealth oversight and reimbursement policies, respectively.  The article concludes with a list of telehealth compliance best practices that providers should consider adopting to decrease the risk of facing OIG or DOJ scrutiny of telehealth claims.  Questions about the article or about how to reduce the risks associated with telehealth claims should be directed to the authors.

Defense Arguments, FCA Defenses

Sixth Circuit Affirms Dismissed FCA Case against Walmart involving Opiate Prescription Allegations

U.S. 6th Circuit Court Room with LogoThe U.S. Court of Appeals for the Sixth Circuit dismissed a relator-pharmacist’s False Claim Act (FCA) case, holding that the pharmacist claims, largely based on a stolen Medical Expenses Summary, lacked merit. In U.S. ex. rel. Sheoran v. Wal-Mart Stores East, Case No. 20-2128 (6th Cir. June 4, 2021), the court dismissed all claims brought by a pharmacist against his former employer Walmart, including alleged violations of the FCA, the Michigan Medicaid False Claims Act (MMFCA), and the retaliation provisions of the FCA.  The opinion contains several key insights about the pleading standard required for FCA claims.

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Damages

District Court Greenlights Potential Pro Tanto FCA Liability Offset

On June 18, 2021, the United States District Court for the District of Columbia certified an interlocutory appeal in favor of Honeywell in a case involving FCA common liability. The appeal will concern the question of whether the court properly calculated Honeywell’s common damages liability in the case; Honeywell argued that its liability should be calculated using the pro tanto method, while the United States argued that the proportionate share method applies. Because the Government has already obtained more in settlements from the other defendants than it could obtain from Honeywell, if the pro tanto method applies, Honeywell would owe $0 after offsets to its common damages. By contrast, under the proportionate share method, the court would calculate Honeywell’s comparative liability, which could amount to millions.

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