The FCA Insider

The FCA Insider

Insights and updates on False Claims Act Litigation


The Yates Memo: A Reminder that Executives are Vulnerable Too

The 2015 Yates Memo continues to impact federal prosecutions as the Department of Justice continues to seek accountability from individuals responsible for corporate wrongdoings. As the two year anniversary of the Yates Memo approaches, recent FCA litigation exemplifies the Yates Memo’s intentions.

For example, on June 26, 2017, the DOJ reminded us once again that business executives may be financially responsible for claims made under the False Claims Act (FCA) against their companies. This reminder comes by way of a $13.45M settlement involving cardiac monitoring companies and one of its executives. The case involved AMI Monitoring Inc. aka Spectocor, its owner, Joseph Bogdan, Medi-Lynx Cardiac Monitoring LLC, and Medicalgorithmics SA, the current majority owner of Medi-Lynx Cardiac Monitoring LLC. The settlement’s terms require Spectocor and its owner, Joseph Bogdan, pay $10.56 million and Medi-Lynx and Medicalgorithmics pay $2.89 million. The case is United States ex rel. John Doe v. Spectocor Enterprise Services, LLC, et al., Case No. 14-1387 (KSH) (D. N.J.) (filed under seal).

This settlement is a reminder for business owners and executives: Financial responsibility under the False Claims Act can reach beyond the corporate entity and into an executive’s own pockets.

Initially litigated as a qui tam action until government intervention, Spectocor involved a Pocket ECG capable of performing three types of cardiac monitoring services, each with a different reimbursement rate. Allegedly, the enrollment process—which was purposed to determine the appropriate monitoring service for the patient—prescribed the service that had the highest reimbursement rate covered by the patient’s insurance. The DoJ argued that this led to unnecessary services and thus increased Medicare reimbursements to the defendants. Commenting on this settlement, the Acting U.S. Attorney William E. Fitzpatrick for the District of New Jersey suggested that he will keep a watchful eye for other examples of “[s]ophisticated medical technology” being used to “fraudulently increase medical bills.”

Spectocor is not the first FCA case to require a business executive contribute financially to resolve an FCA action and it certainly will not be the last. The DoJ continues to follow the 2015 Yates Memo’s directive and continues to hold individuals accountable for corporate wrongdoing.  Business executives should heed Spectocor as yet another example of the Yates Memo’s policy in action. Accordingly, business executives have yet another reason to proactively monitor their business’ operations to ensure full compliance with federal laws such as the False Claims Act.


Recent Privilege Decision Raises Questions for Internal Investigations

A recent federal district court case raises significant issues regarding privilege that should be on the radar of any in-house or outside counsel conducting an internal investigation with the goal of producing a public report. As discussed in a recent Privilege Points, the investigation at issue was conducted for the Washington Metropolitan Area Transit Authority (WMATA) and focused on evaluating its business practices and the standard of conduct for its directors. As part of the investigation, the law firm conducted more than 30 interviews and created 51 interview memoranda, all of them marked as work product. The law firm created an investigative report of its findings and the WMATA board publically released the report.

In civil litigation related to the investigation, plaintiffs sought production of the interview memoranda. The court’s decision, Banneker Ventures, LLC v. Graham, 2017 U.S. Dist. LEXIS 74155 (D.D.C. May 16, 2017), held that WMATA had waived privilege as to the subject matter of the memoranda by publically releasing the report. A key point of the decision was that the final report had extensively cited to the interview memoranda, referencing many of the memoranda multiple times. The court also focused on the fact that WMATA had tried to use the final report as part of its defense to the civil litigation and that as a matter of fairness it could not then refuse to disclose the underlying memoranda.

The decision, if followed by other courts, raises significant questions regarding internal investigations and suggests several best practices for organizations considering beginning internal investigations:
• Have a clear understanding of the goals of an investigation from the onset including whether a public report will be desirable.
• Generate interview memoranda and other documents with the understanding that they may become public if there is a public report.
• When drafting a public report, consider whether a report with less specific detail or more general statements could accomplish the same goal while being more likely to preserve privilege.
• Consider releasing only an executive summary or a report drafted specifically to be a high-level description of findings.
• Consider avoiding citation to or detailed discussion of confidential underlying documents.

Most importantly, when determining whether to publically release a report of an investigation, any organization should be aware of the likelihood that such a release will waive privilege, and consider the potential implications for civil litigation and government investigations.


Ninth Circuit Ruling Weakens Materiality Standard under the FCA

Last year in Universal Health Services, Inc. v. United States ex rel. Escobar et al. (discussed on this blog), the Supreme Court reminded litigants that the False Claims Act “is not an all-purpose antifraud statute.” In that case, the Court expanded upon the FCA’s materiality standard, calling it both “rigorous” and “demanding.” How demanding that standard would be in practice, however, depended on the lower courts. Earlier this month, a Ninth Circuit panel issued an opinion that appeared to relax that demanding standard.

In United States ex rel. Campie v. Gilead Sciences, relators alleged that Gilead lied to the FDA to secure approval to manufacture three anti-retroviral drugs using certain facilities in China and Canada. (Relators also alleged that Gilead manufactured the drugs in these facilities before getting FDA approval and falsified records to conceal the fact.) Gilead later submitted requests for payment for these drugs through a number of federal programs, each of which makes FDA approval a precondition for payment. Relators argued that the FDA would not have approved these drugs but for Gilead’s misrepresentations. Thus, they argued that Gilead made false claims when it sought payment for FDA-approved drugs. Gilead countered that, in fact, many of the issues it allegedly misrepresented to secure FDA approval became known to the FDA in the years after approval. Despite this knowledge, the FDA never withdrew its approval.

The Ninth Circuit reiterated Escobar’s materiality standard and observed that “[r]elators thus face an uphill battle in alleging materiality.” Nonetheless, the panel found that standard met. It equated Gilead’s submissions to the FDA seeking approval with actionable false claims. Finding that the misrepresentations to the FDA could have impacted the approval decision, the court concluded that those misrepresentations could therefore have affected the government’s decision to pay. The panel also rejected Gilead’s government knowledge defense of materiality, finding that issue to be a factual one. It observed that there could be many reasons why the FDA declined to withdraw its approval after learning of problems. At its core, the decision’s animating concern is preventing FDA approval from being used “as a shield against liability for fraud.”

This decision reduces the rigor of Escobarmateriality analysis, allowing the relators to claim a more attenuated connection between the materiality of false statements and the government’s decision to pay. As a result, it substantially increases the opportunities to bring FCA claims under a “fraud-on-the-agency” theory. Late last year, the First Circuit rejected this theory of liability, in part because it found that under Escobar, the fraudulent representation must itself be material to the decision to pay. It thus rejected a fraud-on-the-agency theory of liability. Should more courts follow the approach in Gilead, however, FCA defendants in regulated industries may find themselves increasingly re-litigating agency proceedings in FCA cases.


Appellate Court Holds that the First-to-File Bar is Not Jurisdictional

On April 4, 2017, in United States ex rel. Hayes v. Allstate Ins. Co., 853 F.3d 80 (2nd Cir. 2017), the Second Circuit joined the D.C. Court of Appeals in holding that the first-to-file bar is not jurisdictional, and therefore, that a court is not deprived of subject matter jurisdiction upon a first-to-file bar finding.

Generally speaking, the first-to-file rule, 31 U.S.C. § 3730(b)(5), prohibits an individual from bringing a qui tam action if there is already another pending action based on the same facts.  The courts agree that the first-to-file bar “functions both to eliminate parasitic plaintiffs who piggyback off the claims of a prior relator, and to encourage legitimate relators to file quickly by protecting the spoils of the first to bring a claim.” In re Nat. Gas Royalties Qui Tam Litigation, 566 F.3d 956 (10th Cir. 2009) (citing Grynberg v. Koch Gateway Pipeline Co., 390 F.3d 1276, 1279 (10th Cir.2004); Wisconsin v. Amgen, Inc., 516 F.3d 530, 532 (7th Cir.2008); Campbell v. Redding Med. Center, 421 F.3d 817, 821 (9th Cir.2005)). As the Hayes court recognized, however, courts disagree on whether the first-to-file bar is jurisdictional. Compare United States ex rel. Branch Consultants v. Allstate Ins. Co., 560 F.3d 371 (5th Cir. 2009) (holding that the first-to-file bar is jurisdictional), with United States ex rel. Heath v. AT&T, 791 F.3d 112 (D.C. Cir. 2015) (holding that first-to-file bar is not jurisdictional).

In concluding that the first-to-file bar is not jurisdictional, the Hayes court cited to guidance from the Supreme Court that jurisdictional bars should be employed only where Congress “has clearly stated that the rule is jurisdictional” and that in the absence of such a clear statement, the statutory restrictions should be seen as “nonjurisdictional in nature.”  853 F.3d at 86 (quoting Sebelius v. Auburn Reg’l Med. Ctr., 568 U.S. 145 (2013)).  Relying on this principle, the Hayes court reasoned that 31 U.S.C. § 3730(b)(5) does not reference jurisdiction or speak in jurisdictional terms; instead, it provides only who may bring a qui tam action and when such an action can be brought.  The Hayes court then contrasted the absence of jurisdictional language in Section 3730(b)(5) against the explicit invocations of jurisdiction in Sections 3730(e)(1) and 3730(e)(2)(A) to conclude that the first-to-file bar is not jurisdictional.

While the Hayes court found that the first-to-file bar is not jurisdictional in the Second Circuit, it should be made clear that Hayes does not inhibit or significantly weaken the first-to-file defense.  Instead, it simply means that a first-to-file bar claim goes to the merits of whether the relator stated a claim.  While this impacts how and when the first-to-file bar defense can be raised, it will not change the fact that relators are barred from filing related FCA actions based on the same facts of an already pending case.

Damages, FCA Litigation

Government Increases Civil Monetary Penalties Again

The Department of Justice has announced new, increased civil penalties that are applicable under the False Claims Act (FCA). The new range of FCA penalties is from $10,957 to $21,916.  These increased statutory penalties reflect a continuing, inflation-based increase to the available statutory penalties.

This marks the second year in a row in which the applicable penalties under the FCA have been increased. The statutory penalties under the FCA had long been set in a range between $5,500 and $11,000, in addition to treble damages, attorneys’ fees, and costs.  Last year, the Government increased the statutory penalties to reflect inflation during the time period in which the penalties had remain unchanged.  The 2016 increase saw the range of statutory penalties increase to a range of $10,781 through $21,563.  These statutory penalties remain in addition to, and not instead of, treble damages, attorneys’ fees, and costs.

The new penalties were calculated using an applicable inflation factor of 1.01636. The new penalties are applicable only to violations that took place after November 2, 2015, and where the penalties are incurred after February 3, 2017.

These new penalties reflect the Government’s commitment to increasing the statutory penalties to track inflation. After the many years without increases, the Government is committed to its new trend of annual increases.  These increased penalties demonstrate the continued need to be accurate in submitting claims to the Government and to ensure that compliance is prioritized.


Successor Liability and the False Claims Act

The Fourth Circuit recently provided guidance on a successor entity’s liability under the False Claims Act in United States ex rel. Bunk v. Government Logistics N.V., 642 F.3d 261 (4th Cir. 2016).  Bunk involved a bid-rigging scheme between freight operators who had submitted inflated bids to the Department of Defense.  The Gosselin Group and its CEO, Marc Smet, were at the center of the scheme.  Starting in 2001, Smet and the Gosselin Group began conspiring with other entities to increase the prices that the DOD paid to the freight operators.

Smet and the Gosselin Group were subsequently indicted, and in 2004, the Gosselin Group pled guilty to conspiracy to defraud the Government and conspiracy to restrain trade.  In 2006, after the criminal proceedings had concluded, the Government informed Smet and the Gosselin Group that two qui tam actions concerning the same bid-rigging scheme had been filed back in 2002.  After learning about the existence of the qui tam actions, the Gosselin Group entered into a series of transactions with the newly created Government Logistics whereby Gosselin Group transferred its business with the DOD to GovLog.  GovLog’s principals were all employees of Gosselin Group or one of its subsidiaries and GovLog paid nothing to the Gosselin Group in exchange for the transfer of business.  Instead, GovLog agreed to transfer a percentage of future net revenues to the Gosselin Group.

After learning of the transfer, the relators amended their complaint to add GovLog as a defendant, alleging that GovLog was liable as the Gosselin Group’s successor because the transaction was a sham and done solely to defraud the relators. GovLog argued that it could not be held liable as a successor under any recognized legal theory and that the relators’ fraudulent transaction allegations were entirely speculative.  The district court agreed with GovLog and entered summary judgment in its favor.

On appeal, the Fourth Circuit first explained the general rule that a corporation that acquires the assets of another corporation does not also acquire its liabilities. The Court went on to explain, however, that there are several well-defined exceptions to this rule, including where the transaction is fraudulent.  In holding that summary judgment was inappropriate, the Fourth Circuit found that the transaction was “adorned with several of the badges of fraud” as there was evidence of inadequate consideration, the transaction allowed for the Gosselin Group to retain benefits as it was to be paid from GovLog’s net revenues, and the transaction was commenced in response to Smet learning about the pending qui tam actions.

The Bunk decision provides an instructive analysis on the contours of successor liability in the FCA context.  As the Bunk court explained, while the default rule remains that an entity acquiring the assets of another company does not also take on the seller company’s liabilities, the transaction must be legitimate and cannot be done in an attempt to escape liability or damages under the FCA.

FCA Litigation, Implied Certification

First Circuit Finds that the Allegations in Escobar Satisfy the Supreme Court’s Materiality Requirements

The United States Supreme Court’s landmark decision in Escobar, which we have discussed previously, upheld the use of the implied certification theory where the implied certification of statutory/regulatory compliance is material to the government’s decision to pay the claims at issue. See generally Universal Health Servs., Inc. v. United States and Commonwealth of Mass. ex rel. Escobar, 136 S. Ct. 1989 (2016) (“Escobar I”).  After setting forth this standard, the Supreme Court remanded Escobar to the First Circuit “for consideration of whether [Relators] have sufficiently pleaded a False Claims Act violation.”  In United States ex rel. Escobar v. Universal Health Servs., Inc., 2016 WL 687650 (1st Cir. Nov. 22, 2016) (“Escobar II”), the First Circuit applied the Supreme Court’s framework and determined that the relators had adequately alleged an FCA violation.

The Escobar relators alleged that Universal Health Services, Inc. (“UHS”) sought reimbursement for mental health services provided by practitioners who did not meet the regulatory requirements for training, supervision, and/or credentials under Massachusetts’ Medicaid program (MassHealth).  The First Circuit found that UHS’s alleged misrepresentations were material for three reasons:

  1. The relators alleged that compliance with MassHealth regulations was a condition of payment. The Court in Escobar I noted that this was a “relevant,” though “not dispositive,” factor when determining materiality.
  2. The First Circuit held that MassHealth’s licensing, credentialing, and supervision regulations “go to the ‘very essence of the bargain’” between MassHealth and its contracted providers. Thus, the First Circuit concluded that UHS’s requests for reimbursement for services rendered by providers who were not properly licensed or did not have the proper supervision “would be ‘sufficiently important to influence the behavior’ of the government in deciding whether to pay the claims.”
  3. While defendants argued that the government’s continued payment of UHS claims was “strong evidence” of non-materiality, the First Circuit declined to dismiss the Second Amended Complaint because (1) the Massachusetts Department of Public Health likely did not learn the extent of the regulatory violations until after the original complaint was filed, and (2) the pleadings did not suggest that MassHealth, which is the entity that was paying the claims at issue, had knowledge of the violations at the time of payment.

The First Circuit noted that discovery may establish MassHealth’s knowledge of UHS’s noncompliance with the pertinent regulations during the time period that it was paying the relevant claims, which would affect the court’s evaluation of materiality. However, because the case was at the pleadings stage, the First Circuit concluded that UHS’s alleged representations were material and the relators were entitled to proceed with their FCA claims.

Damages, FCA Statistics

DOJ Recovers More Than $4.7 Billion from False Claims Cases in 2016

The United States Department of Justice has issued a press release announcing that it has recovered over $4.7 Billion from cases brought under the False Claims Act (FCA) during fiscal year 2016.  Fiscal year 2016 ran from October 1, 2015 through September 30, 2016.  The recovery of more than $4.7 Billion is the Government’s third highest annual recovery, though it still trailed behind the record $5.69 Billion that was recovered in fiscal year 2014.  This also marks the fifth consecutive year that the Government has recovered at least $3.5 Billion from FCA cases.  The Government has recovered a staggering $31.3 Billion from FCA cases during the time period since fiscal year 2014.

The healthcare industry was responsible for the majority of the Government’s FCA recoveries, with $2.5 Billion coming from the healthcare industry.  Significantly, the DOJ also noted that the announced recoveries include only money that was recovered by the federal government, and does not include state recoveries that may have arisen out of the same cases (or other cases) during 2016.  The recoveries in the healthcare sector came largely from drug companies, medical device companies, hospitals, physicians, laboratories, and nursing homes.

The financial industry was responsible for most of the remaining recoveries, with $1.7 Billion of the Government’s recoveries in fiscal 2016 coming from the financial industry.  A substantial portion of this amount pertaining to federally insured residential mortgages.

Once again, whistleblowers were involved in many of the cases that led to these Government recoveries.  FCA whistleblowers filed 702 claims in fiscal 2016, which is a substantial increase over the 632 filings in fiscal 2015.  In fiscal 2016, the Government recovered $2.9 Billion from cases that were initiated by whistleblowers.

These significant numbers in terms of recoveries and the number of qui tam filings provide a meaningful reminder of the need to emphasize compliance and accuracy in the submission of claims to the Government.

Implied Certification

On Remand, the Seventh Circuit Applies Escobar’s Materiality Standard

At the end of last month, the Seventh Circuit issued its opinion on remand in United States v. Sanford-Brown, Ltd., No. 14-2506, — F.3d —-, 2016 WL 6205746 (7th Cir. Oct. 24, 2016) (“Sanford II”).  The court once again granted summary judgment for the defendants, holding that the relator’s FCA action failed under the implied certification theory of liability articulated by the Supreme Court last term in Universal Health Services v. United States ex rel. Escobar, 136 S.Ct. 1989 (2016).

In Sanford, the defendant was a for-profit college located in Milwaukee and the relator was a former employee.  To receive federal funding, the defendant was required to enter into a government contract pursuant to which it agreed to comply with a “panoply of statutory, regulatory, and contractual requirements.”  United States v. Sanford-Brown, Ltd., 788 F.3d 696, 701 (7th Cir. 2015) (“Sanford I”).  The relator filed a qui tam action alleging that the defendants violated a number of federal regulations concerning the payment of bonuses to employees involved in recruiting and complying with certain educational standards. Id.

Sanford I generated a considerable amount of attention as the Seventh Circuit became the first appellate court to outright reject the implied certification theory.  The opinion created a circuit split, which was resolved by Escobar where the Supreme Court ruled that the implied certification theory of liability is actionable under the FCA provided two conditions are satisfied: (1) “the claim does not merely request payment, but also makes specific representations about the goods or services provided,” and (2) “the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths.”  Escobar, 136 S.Ct. at 2001.  Shortly after Escobar was handed down, the Supreme Court granted cert in Sanford, vacated the judgment and remanded for further consideration in light of Escobar.

On remand, the Seventh Circuit found that the relator could not satisfy either of the conditions set forth in Escobar.  First, the court found that the relator had failed to provide any evidence that the defendant made false or misleading representations in connection with its claims for payment.  Second, the court found that the relator could not establish that the defendant’s purported regulatory violations were material to the government’s decision to issue payment.  Building on this latter point, the court quoted from Escobar in explaining that the materiality standard is “rigorous” and “demanding” and that the relator’s claim failed because, at best, he had simply shown that the defendant’s noncompliance would have entitled the government to decline payment.

As we wrote when Escobar was first handed down, the Supreme Court’s focus on the materiality standard constituted a marked turn away from years of FCA case law and left the courts with significant discretion in determining the standard’s contours.  Sanford is helpful in that it cleanly applies the exacting standard for addressing implied certification claims post-Escobar and illustrates the principle that FCA liability will not be found where the violation merely provides the government with the option to decline payment.


Can a Relator Plead with Particularity without Alleging that a Patient’s Bill was Submitted to the Government?

The Seventh Circuit says yes. Early this month, the Seventh Circuit reversed and remanded a district court’s holding that a qui tam Relator failed to properly plead a False Claims Act suit where the Complaint did not allege that the defendants sent a claim to the government. In reversing the District Court for the Eastern District of Wisconsin, the Seventh Circuit held that “a plaintiff does not need to present, or even include allegations about, a specific document or bill that the defendants submitted to the government.” U.S. ex rel. Presser v. Acacia Mental Health Clinic, LLC, No. 14-2804, 2016 WL 4555648 (7th Cir. 2016) (citing United States ex rel. Lusby v. Rolls-Royce Corp., 570 F.3d 849 (7th Cir. 2009)).

The Court’s decision was based on the fact that the Relator, a nurse practitioner, did not have “regular access to medical bills” causing the Court to “not see how [the Relator] would have been able to plead more facts pertaining to the billing process.” Id. at *5. And so the Court determined that “an inference is enough” under Fed. R. Civ. P.’s 9(b)’s requirement to plead fraud claims with particularity.

The Relator’s factual pleadings – which were determined to be particular “enough” to make a sufficient “inference” – were mere allegations that the defendant billed Medicare, based on the fact that the defendant told the Relator that “almost all of [the] patients were ‘on Title 19’ and that they dealt with Medicare” coupled with the plausible allegation that an illegal billing practice, upcoding, was applied to all patients. Id.

Hospital and billing administrators should beware of Presser v. Acacia as a reminder to create and enforce carefully crafted coding procedures. Presser demonstrates the unpredictability of civil pleading post-Iqbal and Twombly which problematically promotes not “more clarity and less litigation, but to less clarity and more litigation.” Id. at *11 (Hamilton, J., concurring in part and dissenting in part). Judge Hamilton’s dicta should additionally alert hospital and billing administrators towards stricter billing compliance to avoid False Claims Act litigation as he suggests “[t]he best approach is to let the plaintiff try her best, and then to be liberal in allowing amendments once the court has indicated what is necessary.” Id.

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