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

Relators, Mary Beth Pilecki-Simko and Tom Giunta, sued The Chubb Institute (“TCI”) and TCI’s corporate parents, The Chubb Corporation (“TCC”) and High-Tech Institute, Inc., alleging that TCI made misrepresentations to the Department of Education to obtain student financial aid in the form of loans and grants from the federal government.  The District Court dismissed the case with prejudice because relators failed to plead their claims with particularity as required by Rule 9(b) and denied relators’ motion for reconsideration.  The Third Circuit affirmed, holding that conclusory allegations of scienter fail to even satisfy the more lenient standard of Fed R. Civ. P. 8(a).  Additionally, the Third Circuit ordered relators to pay TCC attorneys’ fees and costs because relators included TCC as a party to the appeal but failed to challenge any of the District Court’s rulings regarding the sufficiency of the veil-piercing and successor liability allegations directed at TCC.  See United States ex rel. Pilecki-Simko v. The Chubb Institute, Case No. 10-3907, 2011 WL 3890975 (3rd Cir. Sept. 6, 2011).

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Mary Cafasso, a former employee of General Dynamics C4 Systems (“GDC4”), brought a False Claims Act case against her former employer after her job was eliminated following corporate restructuring.  The 9th Circuit affirmed the District Court’s dismissal of Cafasso’s claims and the granting of summary judgment in favor of GDC4 on its counterclaim for breach of a confidentiality agreement.  The Court held that, in addition to meeting the heightened pleading standard of Rule 9(b) of the Federal Rules of Civil Procedure, an FCA complaint must also “state a plausible claim for relief” pursuant to Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949-50 (2009).  See United States ex rel. Cafasso v. General Dynamics C4 Systems, Inc., 637 F.3d 1047 (9th Cir. 2011).

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Former senior engineer at Lockheed Martin Corp., Darrol Olsen, filed a False Claims Act lawsuit against Lockheed, alleging that Lockheed used inferior and defective coatings on F22 aircraft.  The coatings are allegedly critical for the F22s stealth capability. The U.S. Air Force purchased 648 of these F-22s from Lockheed at a cost of about $87 billion. The Government did not intervene in the lawsuit, and the district court dismissed the complaint because Olsen failed to plead the claims with the particularity required by Rule 9(b) of the Federal Rules of Civil Procedure. The 11th Circuit affirmed the district court’s opinion. See United States ex rel. a.k.a. SEAL 1 v. Lockheed Martin Corp., Case No. 10-14763, 2011 WL 2150052 (11^th Cir. June 1, 2011).

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In United States ex rel. King v. DSE, Inc., et al., No. 8:08-cv-02416-SDM-EAJ (M.D. Fla. May 17, 2011), the Middle District Court of Florida denied various defense contractors’ motions to dismiss for failure to plead fraud with particularity.  The defendant contractors are weapons manufacturers retained by the government for the supply of grenades.  The relator, a former quality control manager for one of the defendants, alleged that defendants failed to follow proper quality control procedures and shipped defective grenades that failed to meet contract specifications.  Defendants contended that the relator failed to allege the dates and amounts of the false billing or payments, and that relator’s claims were spurious because he worked for only one of the defendants and for only several months at most. 

Nevertheless, the court found that allegations of improper quality control procedures against the contractors were sufficient in this case to satisfy FCA’s heightened pleading requirements.  In so holding, the court distinguished the case from the healthcare fraud context where an FCA plaintiff must allege with particularity a claim or bill for payment submitted to the government.  As the court stated, “in the medical context the harm to the government arises from the act of billing” whereas improper quality control procedures and defective military equipment “distinctly harm the government entirely distinct from any financial impact.”

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On May 5, 2011, the Eight Circuit Court of Appeals in United States ex rel. Vigil v. Nelnet, Inc., et al., 2011 WL 1675418 (8th Cir. 2011), affirmed the dismissal of federal False Claims Act claims by a relator against private institutional lenders participating in the Federal Family Education Loan Program (FFELP) for failing to state a claim and to plead fraud with particularity.  The relator was a former loan advisor for Nelnet, a loan service company specializing in student loans, and the primary defendant was Nelnet, with two major banks joined as alleged participants in a conspiracy to submit false claims.  The government did not intervene.

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The topic of discussion this week is United States ex rel. Blundell v. Dialysis Clinic, Inc., No. 5:09-cv-00710 (N.D.N.Y. Jan. 19, 2011) , a qui tam action against a dialysis treatment center based on alleged quality of care issues that was recently dismissed pursuant to Rules 9(b) and 12(b)(6). In the Dialysis Clinic case, the relator, a nurse who had been employed by the center, alleged that the center violated certain state and federal standards and regulatory requirements by, e.g., failing to provide adequate staffing, using unqualified personnel, permitting personal care technicians to perform nursing functions, and failing to adequately train employees to handle emergency situations. The relator further claimed that these alleged deficiencies compromised patient care for beneficiaries under the Medicare, Medicaid, and Veterans’ Administration programs. The relator alleged violations of the False Claims Act based on worthless services and false certification theories of liability. The government declined to intervene. The defendant moved to dismiss.

Today, we discuss the portions of the court’s opinion that addressed the defendant’s successful motion to dismiss under Rules 9(b) and 12(b)(6).

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Last month, a court in the Northern District of New York dismissed a qui tam action against a dialysis treatment center based on alleged quality of care issues. See United States ex rel. Blundell v. Dialysis Clinic, Inc., No. 5:09-cv-00710 (N.D.N.Y. Jan. 19, 2011). In the Dialysis Clinic case, the relator, a nurse who had been employed by the center, alleged that the center violated certain state and federal standards and regulatory requirements by, e.g., failing to provide adequate staffing, using unqualified personnel, permitting personal care technicians to perform nursing functions, and failing to adequately train employees to handle emergency situations. The relator further claimed that these alleged deficiencies compromised patient care for beneficiaries under the Medicare, Medicaid, and Veterans’ Administration programs. The relator alleged violations of the False Claims Act based on worthless services and false certification theories of liability.

In 1996, the U.S. Attorney’s Office for the Eastern District of Pennsylvania filed the first action seeking to establish FCA liability for substandard patient care in United States v. GMS Management-Tucker, Inc. et al., No. 96-1271 (E.D. Pa. 1996). The government alleged that the Tucker nursing home provided inadequate nutritional and wound care to three residents. The case settled for $600,000 before any court decisions were issued addressing the viability of the government’s novel theory of FCA liability. In 1998, the same U.S. Attorney’s Office obtained settlements from several other Pennsylvania nursing homes based on similar quality of care allegations. See United States v. Chester Care, No. 98-cv-139 (E.D. Pa.); United States v. City of Philadelphia, No. 96-cv-4253 (E.D. Pa.). As with the Tucker settlement, these settlements were reached before any court addressed the merits of the government’s theory of FCA liability.

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On January 12, 2011, a district court in the Eastern District of Virginia dismissed a qui tam action which involved claims that a private commercial lender authorized to make post-secondary education loans pursuant to the Federal Family Education Loan Program violated the False Claims Act. In United States ex rel. Jones v. Collegiate Funding Services, Inc., et al., Civ. Action No. 3:07-cv-290 (E.D.Va.), relators, former employees in the telemarketing departments of defendants, first alleged that defendants violated the Higher Education Act’s anti-inducement provisions by entering into unlawful preferred-lender agreements with colleges and universities and agreeing to undertake those institutions’ obligations to provide personalized exit loan counseling to graduates. The court dismissed these claims for lack of subject matter jurisdiction based on the prior public disclosure bar.

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On January 11, 2011, a District of Columbia district court dismissed with prejudice a False Claims Act case against a government contractor under Rule 9(b) in a relator-only action. See United States ex rel. Folliard v. Hewlard-Packard Co., Civil No. 07-1969 (D.D.C.). The Relator, a former HP sales rep that sold information technology products and services to federal agencies, alleged that HP sold non-conforming products to the government. Specifically, the Relator alleged that HP's contract with the United States was covered by the Trade Agreements Act, which generally prohibits the United States government from purchasing products that originated in non-designated countries. The Relator contended that, in 2007, he identified 38 HP products that were incorrectly identified as originating in a designated country, when, in fact, the products were from China, a non-designated country. The Relator further alleged that each time HP listed these products on the website for the government contract in 2007, 2008, and 2009, HP knowingly made a material false statement, causing, in turn, the submission of a false claim each time one of the misidentified products was purchased by the United States government.

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Last week we reported on the denial of Orthofix’s motion to dismiss the complaint of the relator, Jeffrey Bierman, on Rule 9(b) grounds in United States ex rel. Bierman v. Orthofix International, N.V. et al., Civil Action Nos. 05-10557-EFH, 08-11336-JLT, 2010 WL 4973635 (D. Mass.).  Bierman’s action is consolidated with another action against Orthofix brought by the relator, Marcus Laughlin.  Laughlin alleges that Orthofix engaged in five fraudulent schemes (one of which is the same as the bone growth stimulator scheme alleged by Bierman and arguably barred by the first-to-file bar of section 3730(b)(5)).  Unlike in the Bierman action, the Court dismissed all of the False Claims Act claims based on these allegedly fraudulent schemes for failure to allege the claims with particularity under Rule 9(b).  The decision can be found here.

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Yesterday, we discussed the district court’s basis for denying the Rule 12(b)(6) motions to dismiss made by several medical device manufacturers in the Orthofix case pending in the District of Massachusetts.  Today, we examine the second part of the court’s opinion which addressed defendants’ motion to dismiss for failure to plead fraud with particularity under Rule 9(b).  In Orthofix, the relator alleges that several medical device companies submitted, or caused to be submitted, reimbursement-related false claims under the False Claims Act in connection with the sale versus rental of certain bone growth stimulators.

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In a case where the government is alleging violations of the False Claims Act and the Anti-Kickback Statute, a Northern District of Mississippi Court rejected the government’s attempt to engage in a “fishing expedition” to support allegations of “unknown wrongs” against “unnamed entities.” See United States v. McKesson Corp., et al., Civil Action No. 2:08CV214-SA-DAS, 2010 WL 4021957 (N.D. Miss. Oct. 13, 2010).

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A qui tam FCA case against Ford Motor Company came to a definitive close last week when the Sixth Circuit affirmed, for a second time, the dismissal of the relator’s first amended complaint and agreed with the lower court that the relator should not be allowed to file a second amended complaint.  See United States ex rel. SNAPP, Inc. v. Ford Motor Co., 2010 WL 3419433 (6th Cir. Sept. 1, 2010).  The first amended complaint alleged that Ford had misrepresented the extent of its dealings with small, minority-owned business to obtain government contracts, but contained no allegations concerning specific claims for payment submitted to the government.  The Sixth Circuit held that its recent decisions requiring that an FCA complaint must allege the details of at least some representative claims submitted to the government was not so novel as to warrant giving the relator another opportunity to amend its complaint.

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The Tenth Circuit reversed the District Court’s dismissal of a relator’s action, holding that the District Court should have applied a more lenient pleading standard. See United States ex rel. Lemmon v. Envirocare of Utah, Inc., No. 09-4079, 2010 WL 3025021 (10^th Cir. Aug. 4, 2010). In Lemmon, the relator brought claims under the FCA, alleging that Envirocare made express and implied false certification claims by repeatedly violating its contractual and regulatory obligations. The Tenth Circuit held that the relator had viable express and implied false certification claims under Rule 12(b)(6) of the Federal Rules of Civil Procedure. Notably, the Tenth Circuit further held that, under Rule 9(b), the relator’s complaint need only “provide enough information to describe a fraudulent scheme to support a plausible inference that false claims were submitted.” The relator did not need to allege the specifics of every alleged false claim submitted to the government. The Tenth Circuit’s holding that Rule 9(b) joins the recent trend of other circuits, including the First, Fifth, Seventh, Ninth, and Eleventh Circuits. By contrast, the Eighth Circuit and certain District Courts like the District of Maryland, require allegations of specific false claims. See, e.g., Maryland Court Dismisses Complaint Alleging Medicaid Rebate Fraud.

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On July 20, 2010, the District Court of the Southern District of Texas in United States ex. rel. King v. Solvay S.A., Civil Action H-06-2662, held that relators could amend their complaint to add factual allegations based on documents obtained by state governments pursuant to investigative powers while the case was under seal. The relators used these documents to bolster their factual allegations in order to cure pleading deficiencies under Rule 9(b) of the Federal Rules of Civil Procedure.

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On July 9, 2010, in United States ex rel. Conrad v. Grifols Biologicals Inc., Civil Action No. 07-3176-RDB (D. Md. July 9, 2010), an action brought by a relator where the Government did not intervene, the District Court dismissed the action with prejudice against defendant drug manufacturers Novartis Consumer Health, Inc. (Novartis) and Baxter Healthcare Corporation (Baxter). The action was brought under the federal FCA and seventeen state FCAs. 

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