The FCA Insider

The FCA Insider

Insights and updates on False Claims Act Litigation


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.


DOJ Announces Will Appeal Loss in AseraCare, Triggering Issues on Battle of the Experts, Statistical Sampling, and Bifurcation

$200 million and pivotal legal precedent are at stake in the False Claims Act (“FCA”) case against AseraCare, Inc. (“AseraCare”), a for-profit hospice chain that was alleged to have fraudulently submitted claims that falsely certified hospice eligibility for patients who were not terminally ill. In May 2016, the United States Department of Justice (“DOJ”) announced that it will appeal three orders accompanying its stunning loss to AseraCare: the judge’s decision to split the case into two parts, an opinion granting AseraCare a new trial, and a summary judgment award to AseraCare.

The AseraCare case instantly became a noteworthy case that initially derived attention after the district court allowed the DOJ to use statistical sampling to prove liability, contradicting historical precedent that only permitted statistical sampling to prove damages. The new sampling practice allowed the DOJ to extract, from a pool of 2,181 patients, records and payments of a sample size of 124 patients.  The DOJ then scrutinized the records that incorporated “ineligible patients” and extrapolated the payments to a larger universe of claims, rooting its FCA suit and the $200 million claim for damages on that evidence.

The DOJ’s first appeal resolves around the United States District Judge Karon O. Bowdre’s unprecedented move in June 2015 to bifurcate the trial – requiring the parties to try the FCA’s elements of falsity and scienter in two different trials. Though splitting a FCA into two separate trials has never occurred in the FCA’s 150-year history, Judge Bowdre divided the case against AseraCare as a way to remove any juror prejudice that could taint the case.

During the first trial deciphering the “falsity” element, the jury found that 104 of the 121 (three claims were removed from consideration) were objectively false. But Judge Bowdre granted AseraCare a new trial after concluding that the jury instructions that incorporated the wrong legal standard of “falsity” were a “reversible error.”   Consequently, the second order that the DOJ will appeal is the district court’s ordering of a new trial regarding the instructions on “falsity.”

The third and final order on appeal is the district court’s grant of summary judgment in favor of AseraCare. Judge Bowdre introduced her memorandum opinion granting AseraCare’s motion for summary judgment with an appropriate quote from Pascal stating that “[c]ontradiction is not a sign of falsity, nor the lack of contradiction the sign of truth.”  Judge Bowdre concluded that dismissal was warranted because the Federal government could not prove fraud merely by presenting one medical expert’s disagreement with AseraCare’s diagnoses of terminal illness.  The conflicting medical expert opinions and differences in clinical judgment were considered not enough to establish the FCA’s objective “falsity” element.

The first sentence in Judge Bowdre’s opinion granting AseraCare a new trial in 2015 was that “[FCA] cases have been particularly hot.” And this FCA “heat wave” will continue to rise throughout 2016 and into 2017.  In accordance with a prior article discussing the likely demise of medically unnecessary false claims cases, the AseraCare case could also affect various FCA theories rooted on claims for medically unnecessary services.

Further, the DOJ’s announcement to appeal three district court orders in the AseraCare case comes just one month after the Supreme Court released its unanimous opinion in Universal Health Services, Inc. v. United States ex rel. Escobar, discussed in a prior article, sustaining the implied false certification theory and rejecting the distinction between conditions of payment and conditions of participation.  This case currently presents a significant “win” for the defense bar and it will be particularly interesting to track how the Eleventh Circuit incorporates the Escobar opinion into its analysis of the AseraCare case.

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