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

The federal government declined to intervene in 2009. However, the State of Indiana filed a notice of intervention and a separate complaint in 2010 asserting state law claims for Medicaid fraud against the defendant under the IFCWA, common law fraud, breach of contract and unjust enrichment. The State’s complaint alleged, among other things, that the defendant failed to document its billings correctly, failed to maintain adequate documentation to support reimbursement claims, utilized incorrect units of service and lacked patient treatment plans.

Indiana’s complaint-in-intervention was held to be untimely because the court found that it sought to assert new claims and legal theories that did not arise from the same transaction or occurrence as the qui tam complaint. Although the court acknowledged that the State’s complaint covered the same time period and was based on findings from the June 2003 audit, which was prompted by the relators, the court also found that the relators’ complaint was limited to claims submitted on behalf of children and to claims of retaliation. Thus, the 6-year limitations period under the IFCWA barred the State’s claims, which effectively arose in June 2003 when the audit was completed.

The court also held that while the federal FCA claims may be preserved, the relators could not pursue any state law claims under the IFCWA because the statute was not enacted until 2005 and did not permit retroactive application. The court rejected arguments from both the relators and the State that the continuing nature of the defendant’s conduct mooted any retroactivity or statute of limitations defenses, because the complaints in question contained only generalized accusations and failed to allege any specific examples of fraud after June 2003, as required to sustain a continuing violations theory.

In reaching this decision, the court observed that 31 U.S.C. §3732(b) permits states to intervene and join state law claims for the recovery of state funds with federal FCA claims seeking the recovery of federal funds, as long as the state claims arise from the same transaction or occurrence as the federal claims. On the other hand, the state’s right to intervene under this section is permissive only and subject to the discretion of the court. Because Indiana had waited at least 7 years since its discovery of the fraud and more than 4 years since the relators’ original complaint to file its own complaint, the court found the State’s intervention to be untimely.

In the qui tam complaint, FLPA alleged that defendants violated the Federal Health Care Anti-Kickback Act, 42 U.S.C. §§ 1320a-7(b) (“AKS”) by offering medical testing services for managed care patients at a substantial discount or below cost in order to receive referrals of Medicare and Medicaid patients that defendants could bill directly. FLPA further alleged that defendants violated the AKS through their operation of an ongoing “pull through” scheme in which defendants charged independent physician associations (“IPAs”) and managed care organizations (“MCOs”) below cost rates for the performance of laboratory tests so as (1) to induce the physicians in the IPAs to refer Medicare and Medicaid-reimbursable tests to defendants and (2) to induce the MCOs to arrange or recommend that their in-network physicians send Medicare and Medicaid-reimbursable tests to defendants.

After conducting limited discovery, the defendant lab companies moved to dismiss on the ground that the relator FLPA, its general partners, and its outside counsel should be disqualified from the suit because the suit was based, in part, on confidential client information from Unilab’s former general counsel. Defendants contended that Unilab’s former general counsel disclosed Unilab’s confidential information to which he was privy as general counsel to his partners at FLPA, to FLPA’s outside counsel, and to counsel for the United States, thereby breaching his duty of loyalty to his former client, and warranting dismissal of the qui tam complaint as a sanction for the ethical violation.

FLPA did not contest the characterization of some of this information as confidential, but claimed that because Unilab’s former general counsel had knowledge of a continuing crime, his disclosure fit within an exception to his duty of confidentiality, and thus did not violate ethical rules. During his deposition, Unilab’s former general counsel testified that while he was initially hesitant about participating in the lawsuit because of his ethical obligations to Unilab, he “got confident” that he could join as a relator once he reviewed New York’s and the American Bar Association’s Rules of Professional Conduct. After that, he explained, “I intellectually concluded that I could spill my guts and disclose everything.” (Opinion, p. 12 (alterations omitted)).

The court rejected the former general counsel’s interpretation of the relevant ethical rules and held that his disclosures were too broad to fit within the continuing crime exception to the ethical rules. Specifically, the court held that the disclosure of confidential information dating back to 1996 went beyond the scope of information that Unilab’s former general counsel could have reasonably believed was necessary to prevent a crime in 2005. After ruling that the False Claims Act does not preempt state ethical rules, the court held that the appropriate remedy was to dismiss FLPA’s complaint and disqualify FLPA, its general partners, and its outside counsel from this suit and any subsequent suit based on these facts. The court observed that this remedy has no effect on the ability of the government to intervene and proceed against the defendants based on the allegations in the relator’s qui tam complaint, but noted in a footnote at the end of the opinion that factual issues with the complaint may give the government pause to proceed. This case highlights the importance for the defense of using limited discovery at the beginning of an action to test the relator’s allegations and set up a powerful dispositive motion early in the case.