FCA Alert : Lawyers & Attorneys for Whistleblower, False Claims Act & Qui Tam Defense : Kelley Drye & Warren LLP

The False Claims Act does not define what types of claims are “false.” Consequently, one of the key battles at the motion to dismiss stage in FCA litigation is whether the conduct alleged by the plaintiff can give rise to a “false” claim as a matter of law. For the past decade, courts addressing this issue have held that the FCA recognizes two categories of actionable false claims – factually false claims and legally false claims. Courts have also recognized that there are at least two subcategories of legally false claims – express certification claims and implied certification claims. A factually false claim is one that involves an incorrect description of goods or services provided or a request for reimbursement for goods or services never provided. A legally false claim is one that is not factually false (i.e., not false on its face), but is false for an extrinsic legal, regulatory or contractual reason; for example, by incorrectly certifying compliance (either expressly or impliedly) with a statute, regulation, or contractual obligation that is a prerequisite to government payment.

In a pair of recent cases, the First Circuit held that this categorical framework for determining falsity is too restrictive and rejected it. See United States ex rel. Hutcheson et al. v. Blackstone Medical, Inc., 2011 WL 2150191 (1st Cir. June 1, 2011); New York ex rel. Westmoreland et al. v. Amgen, Inc. et al., 2011 WL 2937420 (1st Cir. July 22, 2011). In doing so, the First Circuit observed that “[t]he text of the FCA does not refer to ‘factually false’ or ‘legally false’ claims, nor does it refer to ‘express certification’ or ‘implied certification.” Blackstone, at *7. The First Circuit reasoned that “[j]udicially-created categories sometimes can help carry out a statute’s requirements, but they can also create artificial barriers that obscure and distort those requirements.” Blackstone, at *7. According to the First Circuit, “in enacting the FCA, ‘Congress wrote expansively, meaning to reach all types of fraud, without qualification, that might result in financial loss to the Government.’” Blackstone, at *12. 

In the First Circuit’s view, the appropriate test to determine falsity under the FCA is a “fact-intensive” and “context-specific” inquiry into whether the claims presented to the government misrepresented that there had been compliance with a material precondition of payment recognized by the particular government program at issue. Amgen, at *6; Blackstone at *13.  In Blackstone, which involved the federal FCA, the First Circuit applied this new falsity test to claims allegedly tainted by kickbacks under the federal Medicare program. In Amgen, which involved analogous state FCAs in New York, Massachusetts, California, Georgia, Illinois, Indiana, and New Mexico, the First Circuit applied the new test to allegedly kickback tainted claims under the state Medicaid programs in those seven states.

This week, we are publishing a series a posts discussing the First Circuit’s recent Blackstone and Amgen decisions. Parts II and III will examine the application of the First Circuit’s new falsity test to the claims at issue in the Blackstone and Amgen cases. Part IV will explore the potential consequences of the First Circuit’s new falsity test and will suggest measures companies may want to consider to minimize FCA exposure. Part V will discuss why, and how, the U.S. Supreme Court should resolve the circuit split created by the First Circuit.

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Amgen alleged that government lawyers violated Rule 4.2 of the New York Code of Professional Responsibility by communicating with present and former Amgen employees in connection with a grand jury proceeding and False Claims Act qui tam litigation.  Amgen sought a protective order to require the government to comply with Rule 4.2, referred to as the “no-contact rule,” which provides that a lawyer may not communicate with the opposing party when it knows it is represented by counsel.  The District Court denied the motion, holding that the court did not have jurisdiction to grant Amgen relief, but even if it did, Amgen’s motion failed on the merits because Amgen and the United States cannot be considered “parties” in the same “matter” as required by Rule 4.2 and the government was “authorized by law” to contact Amgen’s employees.  See In re Amgen Inc., Case No. 10-MC-0249 (E.D.N.Y. April 6, 2011) (Magistrate Judge’s Report & Recommendation), 2011 WL 2418815 (E.D.N.Y. June 14, 2011) (District Court’s order adopting Magistrate Judge’s Report & Recommendation in its entirety).

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Relator, Linda Nicholson, brought a False Claims Act lawsuit against a retired psychologist, a non-profit shelter for adolescent children, and a family-owned pharmacy for allegedly submitting claims to Medicaid for the drug Celexa which were not eligible for reimbursement because the drug was allegedly intended for off-label use.  The Government moved to dismiss the case because the potential recovery was not large enough to justify the resources needed to litigate the case.  The U.S. District Court in the Northern District of Illinois granted the Government’s motion.  See United States ex rel. Nicholson v. Spigelman, Case No. 10 C 3361, 2011 WL 2683161 (N.D. Ill. July 8, 2011).

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In a False Claims Act case against United Health Group and its subsidiaries, alleging violations of Medicare marketing regulations and the Anti-Kickback Statute, 42 U.S.C. § 1320a-7b ("AKS"), the Third Circuit joined with the Second, Sixth, Ninth, Tenth, Eleventh, and District of Columbia Circuits in recognizing that there can be implied false certification liability under the FCA.  United States ex rel. Wilkins v. United Health Group, Inc., Case No. 10-2747, 2011 WL 2573380 (3^rd Cir. June 30, 2011).  The Court did, however, acknowledge that the First Circuit recently rejected the judicially created categories of express and implied false certification in U.S. ex rel. Hutcheson v. Blackstone Med. Inc., 2011 WL 2150191, at *7 (1st Cir. June 1, 2011), and that the Fourth Circuit found the theory "questionable" in Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 786 n. 8 (4th Cir.1999)).  The Third Circuit also joined with courts that require that implied certification with a statute or regulation be a condition of payment, as opposed to merely a condition of participation in a federal program, such as Medicare.  In doing so, the Court upheld the District Court's dismissal of claims based on implied certification of Medicare marketing regulations, but reversed the dismissal of claims based on violations of the AKS. 

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According to Justice Department press releases, the United States has collected over $30 million in False Claims Act settlements over the past several years from companies alleged to have violated the Buy American Act (BAA) and the Trade Agreements Act (TAA). 

The BAA was enacted in 1933 and modified by the TAA in 1979.  The BAA and TAA generally require that materials used in the construction of public works or goods sold under government procurement contracts be made in the United States or certain TAA-designated countries. TAA-designated countries include those nations that enjoy reciprocal trade agreements with the U.S., such as Canada or Japan, and least developed countries, such as Afghanistan or Somalia.

The defendants in these lawsuits are alleged to have made false claims for payment by selling to the government products, such as office supplies, construction materials, fixtures, navigation equipment, and furniture, manufactured in China or other non-designated foreign countries.  Earlier this year, a U.S. District Court for the Central District of California joined the First Circuit Court of Appeals and a D.C. District Court in permitting FCA claims to proceed on a theory based on alleged violations of the BAA or TAA.

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