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

 In its Writ, Amgen describes some of the varying positions taken by the Circuits regarding the implied certification theory of liability:

1st Circuit:  dispensing with the “certification” framework, and holding that liability can be premised on failure to comply with a contractual, regulatory or statutory obligation whenever the government could theoretically reject a claim for non-compliance.  See New York ex rel. Westmoreland et al. v. Amgen, Inc. et al., 2011 WL 2937420 (1st Cir. July 22, 2011); United States ex rel. Hutcheson et al. v. Blackstone Medical, Inc., 2011 WL 2150191 (1st Cir. June 1, 2011).  For further details on the First Circuit decisions, click here, here, and here.

7th, 4th, and 5th Circuits:  have taken positions that are incompatible with an implied certification theory.  See United States ex rel. Yannacopoulos v. General Dynamics, 2011 WL 3084932, at *3 n.4. (7th Cir. July 26, 2011); Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 786-87 n.8 (4th Cir. 1999); United States ex rel. Marcy v. Rowan Cos., 520 F.3d 384, 389 (5th Cir. 2008).

2nd, 3rd, and 8th Circuits:  implied certification theory limited to where there is a statute or regulation that is a condition of payment.  See Mikes v. Straus, 274 F.3d 687 (2d Cir. 2001); United States ex rel. Wilkins v. United Health Group, Inc., 2011 WL 2573380, at *9 (3d Cir. June 30, 2011); United States ex rel. Vigil v. Nelnet, Inc., 639 F.3d 791, 795–96 (8th Cir. 2011).

11th Circuit:  implied certification theory can be based on either a condition of payment or a condition of participation in the federal program.  See McNutt ex rel. United States v. Haleyville Medical Supplies, Inc., 423 F.3d 1256, 1259 (11th Cir. 2005).

D.C. Circuit:  holding that a violation of a contractual obligation that was “material” to the government’s obligation to pay a claim can form the basis for FCA liability.  See United States v. Science Applications Int’l Corp., 626 F.3d 1257, 1261 (D.C. Cir. 2010).

Amgen posed the following two questions to the U.S. Supreme Court:

1. Whether a claim can be deemed “false or fraudulent” within the meaning of the FCA because the claimant violated a statutory, regulatory or contractual obligation and, at the time the claim was submitted, the government payor could have but was not required to deny the claim on that ground.

2. Whether the draconian provisions of the FCA can be used to enforce compliance with statutes, regulations, contractual obligations, or other program requirements, even though no statute, regulation or contractual provision expressly conditions payment on compliance with those obligations.

In particular, at issue in the Amgen case is whether a violation of the Anti-Kickback Statute (AKS) can form the basis for liability under the FCA prior to the amendments to the FCA made by the 2010 Patient Protection and Affordable Care Act.  The First Circuit has held that compliance with the AKS is a precondition of payment of Medicare claims, and a violation of the AKS can cause factually true claims to be false and form the basis for liability under the FCA – whether or not the providers expressly certified compliance with the AKS.  The First Circuit has further held that liability can also be based on “a precondition of being entitled to payment,” i.e., violations of statutory, regulatory or contractual obligations which would give the government agency discretion to decline payment on the basis of the violation.

The 2010 Patient Protection and Affordable Care Act amended the FCA to specifically provide that a violation of the AKS causes the claim to be false under the FCA.  These amendments, however, are not retroactive, and so, the issue before the Supreme Court will be relevant to hundreds of FCA cases.

The defendants moved to dismiss the claims under Rule 12(b)(6) on the ground that the relator and the state intervenors failed to identify a false claim for Medicaid payment under the state FCAs at issue. The district court granted the motion to dismiss, employing the same traditional legal falsity analysis that the First Circuit held was inappropriate in the Blackstone case (and discussed in Part II of this post).

The First Circuit reversed the district court’s dismissal of the plaintiffs’ claims under six of seven state FCAs and affirmed the dismissal of the plaintiffs’ claims under the Georgia FCA on different grounds. Using the new falsity test announced the prior month in Blackstone, the First Circuit held that “plaintiffs have more than adequately alleged that providers submitted claims that misrepresented compliance with a precondition of Medicaid payment in New York, Massachusetts, California, Illinois, Indiana, and New Mexico,” but failed to do so for Georgia. Amgen, at *2. The First Circuit observed that its new falsity test “is a fact-intensive and context-specific inquiry” which “looks to the preconditions of payment recognized under the seven state Medicaid programs” at issue. Amgen, at *6.

The First Circuit began its falsity analysis by conducting an intensive state-by-state examination of specific statutory provisions and regulations identified by the relator concerning Medicaid payment in Illinois, Indiana, Massachusetts, and New York. The court concluded that the relevant statutes and regulations demonstrate that kickback-tainted claims are ineligible for reimbursement under the Medicaid programs of those four states. Amgen, at *7-8.

The First Circuit next turned to the issue of whether kickback-tainted claims violated preconditions of payment under the California and New Mexico Medicaid programs. The court declined to look at statutes and regulations in those two states, reviewing instead the state Medicaid provider agreements identified by the plaintiffs. The court held that the provider agreements sufficiently established that kickback-tainted claims are ineligible for payment under the California and New Mexico Medicaid programs because:

The California agreement requires providers to represent compliance with the state’s anti-kickback statute, and the New Mexico agreement requires providers to acknowledge that non-compliance with anti-kickback laws vitiates a provider’s ability to get its claims paid.

Amgen, at *9.

With respect to the Georgia claims, the First Circuit held that the relator failed to identify any sources that indicate that claims affected by kickbacks violate a precondition of payment under Georgia’s Medicaid program:

It may be that under Georgia’s Medicaid program it is a precondition of payment that claims not be affected by kickbacks like the kickbacks alleged in this case. [The relator] has not identified any authority, however, that makes this clear. It bears emphasis that Georgia, unlike the other six states involved in this litigation, does not have a state law analogue to the federal AKS.

Amgen, at *10.

Based on the above reasoning, the First Circuit reversed the district court’s Rule 12(b)(6) dismissal of the relator’s claims under the state FCAs in California, Illinois, Indiana, Massachusetts, New Mexico, and New York and affirmed the district court’s dismissal of the relator’s claims under Georgia’s FCA.

Our next post 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.

The Massachusetts district court applied the traditional falsity analysis outlined in Part I and held that the relator’s complaint failed to identify any materially false claims. The First Circuit reversed the district court, rejecting what it deemed to be “judicially created” “categorical rules” to determine whether a claim is materially false under the FCA. According to the First Circuit, the “district court appeared to employ the concept of certification such that a claim can be false or fraudulent only if the submitting entity knew or should have known of the underlying falsehood or fraudulence.” Blackstone, at *10. The First Circuit held that this view was incorrect because “[t]he Supreme Court has long held that a non-submitting entity [such as Blackstone] may be liable under the FCA for knowingly causing a submitting entity [such as the hospitals] to submit a false or fraudulent claim, and it has not conditioned this liability on whether the submitting entity knew or should have known about a non-submitting entity’s lawful conduct.” Blackstone, at * 11. In response to Blackstone’s concerns that failing to adopt the traditional framework for analyzing falsity would overextend liability under the FCA, the First Circuit held that this concern does not “call for ‘adopting a circumscribed view of what it means for a claim to be false or fraudulent,’ but rather calls for ‘strict enforcement of the Act’s materiality and scienter requirements.’” Blackstone, at *9 (quoting United States v. Sci. Applications Int’l Corp., 626 F.3d 1257, 1269 (D.C. Cir. 2010)).

The First Circuit held that the appropriate test for falsity is to determine, without any categorical limitations, whether the claims at issue “misrepresented compliance with a precondition of payment so as to be false or fraudulent,” and if so, “whether those misrepresentations were material.” Blackstone, at *13. The first step of this analysis is to identify a precondition of payment under the relevant government program. In Blackstone, the relator asserted that compliance with the AKS is a precondition of payment under the Medicare program and identified four potential sources to support her argument: (1) the language and legislative history of the AKS; (2) a non-retroactive 2009 amendment to the FCA which provides that violations of the AKS are also violations of the FCA; (3) the hospitals’ Medicare Cost Reports drafted by CMS; and (4) the hospitals’ and physicians’ Medicare Provider Agreements, also drafted by CMS. The First Circuit held that the Medicare Hospital Cost Reports and Provider Agreements established that AKS compliance is a precondition of Medicare payment for the hospital and physician claims at issue. The First Circuit declined to rule on whether the first and second sources established the same.

According to the First Circuit, the Medicare Provider Agreements executed by the hospitals and physicians established that compliance with the AKS is a precondition of payment under Medicare:

The Provider Agreement, drafted by CMS, requires that hospitals and physicians acknowledge that they “understand that payment of a claim by Medicare is conditioned upon the claim and the underlying transaction complying with Medicare’s laws, regulations and program instructions.” The Agreement specifically identifies “the Federal anti-kickback statute” as one of only two enumerated examples of the relevant “laws, regulations, and program instructions.” This language make clear that the federal Medicare program will not pay claims if the underlying transaction that gave rise to the claim violated the AKS. The Agreement makes no exception for instances in which that “underlying transaction” violated the AKS because of the actions of a third party like Blackstone.

Blackstone, at *13.

The First Circuit held that the Medicare Cost Reports submitted by the hospitals likewise demonstrated that AKS compliance is a precondition of Medicare payment:

The Hospital Cost Report, also drafted by CMS, further underscores that hospitals submitting claims represent compliance with the AKS. The form states that “if services identified in this report [were] provided or procured through the payment directly or indirectly of a kickback…fines and/or imprisonment may result.” It also requires that the hospital’s representative sign a statement certifying that he or she is “familiar with the laws and regulations regarding the provisions of health care services, and that the services identified in this cost report were provided in compliance with such laws and regulations.” This makes it abundantly clear that AKS compliance is a precondition of Medicare payment and makes no exceptions for violations caused by third parties like Blackstone.

Blackstone, at *14.

The First Circuit next considered whether compliance with the AKS is a “material” precondition of payment under the Medicare program. Blackstone, at *14-15. Blackstone argued that AKS compliance is irrelevant to the payment of the Medicare claims at issue because neither hospitals nor physicians billed Medicare specifically for Blackstone’s devices. For hospital claims, Blackstone argued that hospitals classified patients within “diagnostic-related groups” (“DRGs”) and received a set payment for treating patients in a group regardless of the particular services provided. For physician claims, Blackstone contended that physicians billed Medicare for their services in performing medically necessary surgeries, not for the devices used because of the alleged kickbacks. The First Circuit declined to adopt Blackstone’s position as a matter of law, and held that the relator’s allegations were “sufficient to show, for purposes of this motion to dismiss, that the kickbacks were capable of influencing Medicare’s decision as to whether to pay the hospital and physician claims.” Blackstone, at *15. The First Circuit observed that “[e]xpress contractual language may ‘constitute dispositive evidence of materiality,’ but materiality may be established in other ways, ‘such as through testimony demonstrating that both parties to the contract understood that payment was conditional on compliance with the requirement at issue.’” Blackstone, at 15.

Based on this analysis, the First Circuit reversed the district court’s dismissal of the relator’s complaint under Rule 12(b)(6) for failing to identify a materially false claim under the federal FCA, and remanded the action.

Tomorrow, we will discuss the First Circuit’s application of its new falsity analysis to the state FCA claims at issue in New York ex rel. Westmoreland et al. v. Amgen, Inc. et al.

The Third Circuit held that under an implied certification theory of liability, "a plaintiff must show that if the Government had been aware of the defendant's violations of the Medicare laws and regulations that are the bases of a plaintiff's FCA claims, it would not have paid the defendant's claims."  In short, the defendant's compliance must be a "condition of payment."  This is distinguished from a condition of participation.  Quoting the Tenth Circuit, the Third Circuit explained the difference: “Conditions of participation are enforced through administrative mechanisms, and the ultimate sanction for violation of such conditions is removal from the government program, while conditions of payment are those which, if the government knew they were not being followed, might cause it to actually refuse payment.” U.S. ex rel. Conner v. Salina Reg'l Health Ctr., Inc., 543 F.3d 1211, 1220 (10th Cir.2008).

In this case, the marketing regulations allegedly violated by the defendants permit them to correct the problem within 30 days with certain exceptions which may result in immediate termination of the Medicare contract.  The Court held that these regulations "clearly demonstrate that compliance with the marketing regulations is a condition of participation and not a condition of payment as the regulations draw a line between the type of violations which are correctible and, if corrected, will allow the sponsor to continue as a Medicare program participant and the type of violations which lead to immediate termination of a CMS contract."

The Court further explained:

[I]t is ironical that if we allowed appellants, though they are ostensibly acting on behalf of the Government, to bring suit based on United Health's non-compliance with marketing regulations, we would short-circuit the very remedial process the Government has established to address non-compliance with those regulations. It would be curious to read the FCA, a statute intended to protect the government's fiscal interests, to undermine the government's own regulatory procedures.

By contrast, the Third Circuit held that compliance with the AKS is a condition of payment under Medicare Parts C and D.  The Court noted that the defendants allegedly certified compliance  with the AKS as an express condition of payment when they entered into an agreement with CMS.  Quoting the Ninth Circuit, the Third Circuit stated:  "Implied false certification occurs when an entity has previously undertaken to expressly comply with a law, rule, or regulation, and that obligation is implicated by submitting a claim for payment even though a certification of compliance is not required in the process of submitting the claim.” Ebeid ex rel. U.S. v. Lungwitz, 616 F.3d 993, 998 (9th Cir.2010).

Rule 9(b) Analysis

According to the court, the relator “vaguely alleged” that from 2004 to present, the defendant submitted fraudulent claims for payment based upon false certifications that the defendant was in compliance with Medicare rules and regulations for quality of care. The court held that allegations of violations of federal regulations, standing alone, are insufficient to establish a claim under the FCA if the plaintiff cannot identify with any particularity the actual false claims submitted by the defendant. Accordingly, dismissal was appropriate under Rule 9(b) because:

Plaintiff’s complaint contains imprecise references to “routine and systematic” violations of Medicare regulations and while he claims that defendant “submitted thousands of claims for reimbursement of Medicare claims,” he fails to identify even one, specific fraudulent claim. Plaintiff did not annex copies of any bills, claims or other documents to the complaint, amended complaint, or second amended complaint. Moreover, plaintiff failed to provide details regarding any fraudulent claims including when the purportedly false claims were presented, which employee of defendant submitted the claim or the amount of said claim. Plaintiff provided the approximate year of alleged quality of care violations but did not provide specific dates, the names of defendant’s employees who treated the patients, what services were provided or how and by whom false claims were generated as a result of those services. Even if the Court assumes plaintiff’s allegations of compromised patient care to be true, plaintiff has not identified a single bill submitted in relation to any of the examples outlined in the second amended complaint.

Rule 12(b)(6) Analysis

Even though the court dismissed the complaint for failure to plead fraud with particularity under Rule 9(b), it held that an analysis of defendant’s Rule 12(b)(6) arguments was necessary to determine whether the dismissal would be with prejudice or not. The court then examined the viability of the relator’s FCA claims under three theories of liability: worthless services, express false certification, and implied false certification.

Factual vs. Legal Falsity Under the FCA

FCA claims generally fall into two broad categories. First, there are “factually false” claims for goods or services that were never provided or which were incorrectly described. Second, there are “legally false” claims for goods or services that were, in fact, provided, but were provided in violation of a regulation, statute, or prescribed contractual term (despite a certification by the defendant, either express or implied, to the contrary).

Worthless Services Claim

A worthless services claim is a derivative of a factually false claim and asserts that the knowing request of federal reimbursement for a procedure with no medical value violates the FCA irrespective of any certification. Mikes v. Straus, 274 F.3d 687, 702-03 (2nd Cir. 2001); United States ex rel. Lee v. Smithkline Beecham, 245 F.3d 1048, 1053-54 (9th Cir. 2001). In a worthless services claim, the performance of the service is so deficient that for all practical purposes it is the equivalent of no performance at all. Mikes, 274 F.3d at 703.

In the Dialysis Clinic case, the court held that the relator failed to state a claim for worthless services because he did not allege that the clinic failed to provide any services, but rather only challenged the level of care provided:

Plaintiff does not allege that defendant failed to provide any services to their patients. Rather, plaintiff challenges the quality of care arguing that defendant’s services did not conform with the guidelines set forth in 42 C.F.R. § 494. This allegation is not the “equivalent of no performance at all” and thus, does not fit within the worthless services category.

Express False Certification Claim

An express false certification claim is a legally false claim under the FCA. It is based on a false representation of compliance with a federal statute or regulation, and in some instances, with a prescribed contractual term or specification. The majority view (which has been adopted in the Second Circuit and was applied in the Dialysis Clinic case) is that a claim is only legally false when the party certifies compliance with a statute or regulation that is a condition to government payment.

In the Dialysis Clinic case, the relator’s express false certification claim was based on the Medicare enrollment form (Form 855A) that the defendant signed, which provides, in relevant part:

“I agree to abide by the Medicare laws, regulations and program instructions that apply to this provider….I understand that payment of a claim by Medicare is conditioned upon the claim and the underlying transaction complying with such laws, regulations, and program instructions (including, but not limited to, the Federal anti-kickback statute and the Stark law), and on the provider’s compliance with all application conditions of participation in Medicare.”

The relator argued that Form 855A, which defendant signed when it enrolled in Medicare, makes compliance with Medicare regulations a precondition of government payment. The relator further argued that by signing Form 855A, the defendant expressly certified that it would comply with these regulations in order to receive payment. The defendant argued that Form 855A is not a claim for payment and that the form is merely an agreement to comply in the future with all applicable laws and regulations.

The court rejected the defendant’s arguments noted above, but nevertheless held that the relator failed to state an express certification claim. In arriving at this conclusion, the court observed that the problem with the relator’s false certification claim was not necessarily the “forward-looking” language of the certification or that the certification was contained in an enrollment form instead of a claim form. Rather, the court held that the relator failed to state an express certification claim because he did not allege that the defendant made the certifications knowing that they were false when made. In other words, the relator failed to allege that the defendant knew it would violate the applicable Medicare regulations when it signed the enrollment form. Without such pleading, the court held there can be no “false claim” under an express certification theory.

Implied False Certification Claim

An implied false certification claim is also a type of legally false claim under the FCA. Not all circuits recognize implied false certification claims, and the elements of such claims differ from circuit to circuit, and even within circuits. Moreover, the law applicable to such claims has been rapidly evolving. Accordingly, when reviewing implied certification claims, it is important to know the current status of such claims in the particular jurisdiction in which the claim is asserted. For more information on recent court decisions addressing implied certification claims, see our posts here, here, and here. 

The Dialysis Clinic case was brought in the Northern District of New York, and thus Second Circuit precedent applies. In the Second Circuit, an implied certification claim “is based on the notion that the act of submitting a claim for reimbursement itself implies compliance with governing federal rules that are a precondition to payment.” Mikes, 274 F.3d at 699. In Mikes v. Straus, the Second Circuit limited the use the implied certification claims against medical providers as follows:

[I]mplied false certification is appropriately applied only when the underlying statute or regulation upon which the plaintiff relies expressly states the provider must comply in order to be paid. Liability under the Act may properly be found therefore when a defendant submits a claim for reimbursement while knowing – as that term is defined by the Act – that payment expressly is precluded because of some noncompliance by the defendant.

In the Dialysis Clinic case, the relator alleged that the defendant was liable under the FCA for impliedly certifying compliance with the conditions set forth in 42 C.F.R. § 494 et seq. The defendant argued that § 494 provides conditions for coverage, and does not operate as a precondition for payment. The relator conceded that § 494 does not expressly condition payment on compliance with its terms, but argued instead that “nothing in Part 494 would permit a medical provider to assert a claim for money services rendered in violation of regulatory requirements.” The court disagreed with the relator and held that 42 C.F.R. § 494 “clearly establishes a condition of participation, not prerequisites to receiving reimbursement from the government.” Based on this reasoning, the court held that defendant’s alleged non-compliance with § 494 et seq. does not impose liability under an implied false certification theory.

Accordingly, the relator’s complaint was dismissed with prejudice.  A copy of the second amended complaint which was dismissed can be found here.

Tomorrow, we will discuss the court’s ruling on the defendant’s motion to dismiss the action for lack of subject matter jurisdiction under the FCA’s public disclosure bar.
 

In August 2005, former employees of the defendant hospital located in Tulsa, Oklahoma filed a complaint alleging various practices by the defendant constituted violations of the federal FCA.  The alleged practices included “drive-by” therapy sessions, where therapists were instructed by the hospital to see a patient for no more than fifteen minutes but document the session as lasting an hour.  At the same time, the defendant was billing Medicaid a per diem rate for each residential patient based on the patient’s length of stay at the hospital.  Oklahoma regulations require inpatient psychiatric programs to provide “active treatment” for residential patients, consisting of a minimum of twenty-one hours of total weekly therapy for each residential patient.  The complaint alleged that the “drive-by” sessions were knowing violations of the active treatment requirement for residential patients and billing Medicaid a per diem rate for each resident patient, irrespective of the number of weekly therapy hours provided, resulted in the submission of false claims.  Prior to the filing of the complaint, the Oklahoma Health Care Authority audited and assessed fines against the defendant for its failure to provide the required number of weekly therapy hours for certain patients.  The United States did not intervene in this action.

The court found that the relators could prevail under a theory that the defendant hospital submitted false claims based on a theory of implied certification of compliance with certain regulations.  The court explained that a violated regulation that is a “condition of participation” in the overall health care program cannot support an implied false certification theory because such regulation is generally enforced through administrative mechanisms, such as removal or exclusion from the program.  In order to support an implied false certification claim, the regulation must be a “condition for payment,” defined in the Tenth Circuit as “those which, if the government knew they were not being followed, might cause it to actually refuse payment.” 

The court went on to hold that the minimum weekly therapy hours, or the active treatment requirements, were conditions of payment because:  (1) they are not explicitly labeled as a condition of participation in either federal or state law; (2) a “reimbursement” provision in the Oklahoma regulations indicates that the “per diem rate” encompasses costs for inpatient psychiatric therapy; (3) the requirements are objective or quantitative and do not require the application of any “qualitative standard measuring the efficacy” of the therapy provided; (4) relevant federal and state officials in this case testified that they understood the requirements to be conditions for payment; and (5) the audit or inspection process outlined in the Oklahoma regulations pertaining to these services is tied to reimbursement and limited to identifying ‘non-compensable’ Medicaid days for purposes of assessing overpayment.  That the hospital in this case was previously assessed fines by the auditing body as a result of deficient provision of services did not foreclose a finding of falsity. 

In reaching its conclusion, the Oklahoma district court dismissed relators’ theory of “factually false” claims since there was no false information provided on the face of the claims.  For example, there was no evidence that the defendant knowingly entered false or incorrect billing codes on the claim forms in order to receive higher payment. 

The court also rejected relators’ factual falsity theory premised on the decision in United States v. NHC Health Care Corp., 163 F. Supp.2d 1051 (W.D. Mo. 2001), which permitted the United States government to proceed against a health care provider that similarly billed Medicaid on a per diem rate while failing to provide minimum health care services required under the law.  The court held that, in the context of “bundled per diem Medicaid billing,” a plaintiff must present facts demonstrating the provision of “worthless services” or “grossly negligent services” in order to prevail on a theory of factual falsity.  The relators here were unable to make this showing because even the worst case patient received at least fifty percent of the required weekly therapy hours.

Beginning in 1992, Science Applications International Corporation (“SAIC”) contracted with the Nuclear Regulatory Commission (“NRC”) to provide technical assistance and analysis in connection with the NRC’s rulemaking regarding the release of recycled radioactively contaminated materials.  A follow-on contract was executed in 1999.  Under these contracts, SAIC agreed not to enter into other contractual arrangements with entities that could potentially give rise to conflicts of interest with respect to SAIC’s work for the NRC.  SAIC also agreed to obtain prior written approval from the NRC if SAIC had reason to believe there may be a conflict of interest and agreed to disclose any such conflicts that might arise during the term of the contracts.  NRC regulations specified circumstances that qualified as conflicts of interest.  Pursuant to its contract with the NRC, SAIC certified that the award of the contract did not result in a conflict of interest.  During the term of the contract the parties agreed to several modifications.  SAIC also certified that the modifications did not result in conflicts of interest.  However, nothing in the contract made SAIC’s certification as to the lack of conflicts of interest an express condition for payment.  Likewise, nothing in the vouchers submitted by SAIC for payment made SAIC’s certifications an express condition for payment.

In October 1999, a member of the public alleged that SAIC had a conflict of interest between its for-profit work for other clients and its work with the NRC.  The NRC investigated and concluded that SAIC’s work for two companies, British Nuclear Fuels, Ltd. and Bechtel Jacobs Company, gave rise to a potential conflict of interest.  The NRC and SAIC agreed to stop work and entered into a settlement terminating the contract.

The United States brought suit against SAIC, alleging, among other things, that SAIC violated the False Claims Act by knowingly submitting false claims for payment under 31 U.S.C. § 3729(a)(1) and knowingly made false statements to get false or fraudulent claims paid or approved under 31 U.S.C. § 3729(a)(2).  On summary judgment, the district court recognized that the claims submitted by SAIC for payment contained no express false statements.  However, the district court held that the government could still proceed under the theory of implied false certification.  The district court rejected SAIC’s argument that such a theory requires proof that compliance with the certification at issue is an express condition for payment.  After trial, a jury found SAIC liable under both 3729(a)(1) and (a)(2) and the district court, after trebling the jury’s finding of approximately $2 million in damages and adding civil penalties and other damages, entered judgment in an amount of nearly $6.5 million.

SAIC moved for judgment as a matter of law or in the alternative for a new trial, raising four arguments:  (1) the government could not prevail under an implied certification theory because there was no evidence that payment was expressly conditioned on compliance with the conflict of interest obligations; (2) SAIC did not knowingly violate the False Claims Act because it believed it had no conflicts of interest when it submitted claims for payment (3) various jury instructions were erroneous, including the instruction that the jury could make finding of facts as to SAIC’s knowledge of the alleged false claims based on the “collective knowledge” of its employees; and (4) the government failed to prove  any damages or, in the alternative, that the damages instruction was erroneous and prejudicial.  The district court rejected all four arguments.

On appeal, the D.C. Circuit applied the language of the False Claims Act in effect at the time of the trial.  The D.C. Circuit rejected both SAIC’s argument that false claims liability under the implied certification theory may apply only if the certification in question was an express condition for payment and the government’s argument that violations of express representations in a contract are, in and of themselves, sufficient to establish liability under the implied certification theory.  Instead, the D.C. Circuit adopted the 10th Circuit’s standard for the implied certification theory of liability, holding that this theory requires a showing that “the contractor withheld information about its noncompliance with material contractual requirements.”  The Court of Appeals stated that a plaintiff may establish the element of materiality of noncompliance with contractual requirements to the government’s decision to pay in various ways, including demonstrating “express contractual language specifically linking compliance to eligibility for payment”. 

With respect to the role of scienter in the implied certification theory of liability, the D.C. Circuit held that scienter is established when the plaintiff demonstrates both that the contractor violated a contractual obligation and that compliance with that obligation was material to the decision to pay on the contractor’s claim.  Referring to the testimony of SAIC witnesses, the court held that the record was capable of supporting a jury finding that SAIC knew it had violated the applicable conflict of interest provisions and regulations and that compliance with such provisions and regulations was material to the NRC’s decision to pay SAIC’s claims for payment.

Addressing the district court’s jury instructions on the standard of scienter, the D.C. Circuit rejected the application of the  “collective knowledge” standard of scienter under the False Claims Act, noting that no Circuit has applied such a standard and that its adoption could lead to liability for honest mistakes.  While the D.C. Circuit agreed with the government that the record could support a jury finding of the requisite scienter regardless of the district court’s “collective knowledge” instruction, the D.C. Circuit refused to find the error harmless, noting that the instruction could have led the jury to believe that the standard of scienter was lower for corporate defendants than for individual defendants.  The court, therefore, vacated the judgment with respect to the causes of action under the False Claims Act.   

On the matter of damages, the D.C. Circuit rejected SAIC’s argument that the government could prove no damages because it received the full value of the services provided by SAIC under the contract.  The court noted that the government contracted for technical advice and assistance and freedom from conflict of interest.  Thus, the technical proficiency of SAIC’s advice and assistance did not preclude a finding of damages based on conflicts of interest.  The court, however, held that the district court’s instructions on damages were flawed in that they limited the jury’s calculation of damages to the amounts actually paid to SAIC under the contract.  Noting that in cases where the value of the goods or services at issue is impossible to determine, the court found that the standard of damages under the False Claims Act requires to the jury to determine damages based on the “amount actually paid minus the value of the goods or services the government received or used.”  The court held that the district court’s instructions had required the jury to find that services provided to the government by SAIC had no value regardless of any contrary evidence that the services provided by SAIC had some value despite conflicts of interest.

At issue in the Steury case was whether the knowing delivery of defective products to the government violated the FCA.  Leslie Steury, the relator in the action, worked for Alaris Medical Systems as an account consultant.  As an account consultant, Steury marketed medical devices, including Signature Edition Infusion Pumps to hospitals, including children’s hospitals and hospitals operated by the Veteran’s Administration, from March 1996 until her termination in late September 2001.  The infusion pumps were electrical devices designed to regulate the rate at which intravenous fluids flow into patients.  Alaris started selling the infusion pumps nationwide in 1996 but stopped doing so in August 2006 after 1,300 of the products were seized by the FDA for an unrelated problem.  In her FCA complaint, Steury alleged that the infusion pumps had a dangerous defect that could cause air bubbles to accumulate and release into a patient’s intravenous line, potentially causing serious injury or death.  She alleged that she first became aware of this defect in October 2000 when a pediatric anesthesiologist at a children’s hospital in Akron informed another Alaris employee that an infusion pump had injected air into his patient’s intravenous line and that a similar problem had been reported at a children’s hospital in Philadelphia.  Seven months later, in May 2001, Steury allegedly met with Alaris’s area manager and nurses from the Akron children’s hospital to discuss concerns about the infusion pumps.  During this meeting, Alaris’s area manager allegedly discredited a nurse’s report of an infant mortality related to an intravenous air bubble.  One month later, in June 2001, Alaris’s area manager informed Steury that Alaris had temporarily suspended shipments of the infusion pumps while it reviewed the air bubble defect, but nonetheless directed Steury to continue marketing the infusion pumps.  Steury was terminated in September 2001 before she received an answer about the company’s review of the alleged defect.

Almost six years later, in May 2007, Steury filed a qui tam complaint under seal against Cardinal Health (Alaris’s successor) alleging violations of the federal FCA and a number of state FCAs.  In January 2008, the United States filed a notice that it declined to intervene in the suit (which is typically a sign that the government believes the merits of the case are weak, the damages are small, or both). 

In the Fifth Circuit, to state a claim under the FCA, a plaintiff must allege: (1) a false statement or fraudulent course of conduct; (2) made or carried out with the requisite scienter; (3) that was material; and (4) that is presented to the Government.  Two key allegations in Steury’s complaint attempt to establish FCA liability.  First, she alleged that a “claimant submits a false or fraudulent claim within the meaning of the FCA when he submits a claim for payment for the Government for products that contain defective parts.”  (Am. Compl. ¶ 51).  Second, she alleged that by “accepting payment from the federal Government or one of its agencies for the SE infusion pumps, Cardinal Health knowingly misrepresented that the SE infusion pumps were safe, reliable and quality-assured.” (Am. Compl. ¶ 52).

Cardinal Health moved to dismiss the complaint pursuant to Rules 9(b) and 12(b)(6).   The district court agreed and dismissed the case, and for reasons unclear from the opinion, declined to give Steury an opportunity to amend the complaint to try to cure the pleading defects. 

In an effort to “streamline” the appeal, Steury pressed only one substantive contention: that Cardinal Health made a false certification (i.e., a false statement) to the Veteran’s Administration that the infusion pumps complied with the warranty of merchantability.  Steury did not assert that Cardinal Health actually made this certification.  Rather, Steury alleged that Cardinal Health, impliedly, and falsely, certified compliance with the warranty of merchantability simply by requesting payment for the infusion pumps.

A plaintiff may establish a false statement under the FCA (element #1) by alleging that when the government expressly conditions payment of a claim upon a claimant’s certification of compliance with a statute or regulation, a claimant submits a false claim when he falsely certifies compliance with that statute or regulation. This is known as “express certification” and is recognized in many Circuits.  Fewer Circuits (specifically, the Second, Sixth, Ninth, Tenth, and Eleventh Circuits) also recognize something called “implied certification” as a basis for establishing a false statement under the FCA.  The implied certification theory of liability “is based on the notion that the act of submitting a claim for reimbursement itself implies compliance with governing federal rules that are a precondition to payment.”  Mikes v. Straus, 272 F.3d 687, 699 (2d Cir. 2001).

In Steury’s case, the Fifth Circuit observed that it had not yet recognized the implied certification theory, but did not yet have to resolve the issue because the allegations in Steury’s complaint provided no basis for implying a false certification.  The court observed that “a false certification of compliance, without more, does not give rise to a false claim for payment unless payment is conditioned on compliance.”  Applying this principle to Steury’s case, the court found “no indication that the Government conditioned payment for the Signature pumps on a certification that the Signature pumps complied with the warranty of merchantability.”

While the court closed one door on Steury, it opened another when it stated later in the opinion:

We do not suggest, however that a knowing delivery of defective goods to the Government will never implicate the FCA.  Particular government contracts may specifically condition payment on a certification of compliance with the warranty of merchantability.  Other courts have suggested that the knowing provision of ‘worthless’ goods or services to the Government may violate the FCA.  Steury has not yet pursued or briefed these theories, however, so we need not address them here.  Finally, although we have held that a knowing attempt to deceive the Government about the nature of commercial items may violate the FCA, the district court was correct in concluding that Steury has so far failed to allege this type of claim with particularity. 

The Fifth Circuit then remanded the case to the district court with instructions to permit Steury to amend her complaint as “we cannot say that the defects in Steury’s complaint are necessarily ‘incurable’ or that amendment would be futile.”

It will be interesting to see if Steury can follow the Fifth Circuit’s guidance and file an amended complaint that can withstand dismissal under Rules 9(b) and 12(b)(6).  A copy of the amended complaint that was dismissed can be found here.

Under the first theory – factual falsity – the court held that there was no evidence of any factually false statements in the Defendants’ grant application.  Notably, the court held that because there was a scientific dispute over the accuracy of “subjective measurements,” the relator did not have a claim that one set of data was “factually false” because another set of data was allegedly “more accurate.” 

The second theory, legal falsity under an express certification theory, arises when the party submits a claim that explicitly, but falsely, certifies compliance with a precondition of payment.  The allegedly false certification was Defendants’ certification in its grant application that they would “comply with Public Health Service terms and conditions if a grant is awarded.”  The relator argued that this express certification incorporated certain regulations concerning the responsibilities of applicants for funding.  The court rejected this argument for two reasons.  First, the obligation to comply with “Public Health Service terms and conditions” did not arise until after the applicant received funding; however, all of the alleged non-compliant conduct occurred prior to funding.  Second, the certification was “too vague” and “overly broad.”  The court held:

Where an express certification claim relies on failure to comply with a statute, regulation, or some other process, the certification language must explicitly require compliance with that specific statute, regulation, or process. 

Finally, the court denied the third theory – legal falsity under an implied certification theory.  The court held that a claim can be legally false under an implied certification theory “when a claimant makes no express statement about compliance with a statute or regulation, but by submitting a claim for payment implies that it has complied with any preconditions to payment.”  In support of this theory, the relator relied on allegations that would effectively amend his complaint almost four years after the original complaint.  The court held that this would be unfairly prejudicial, and in any event, there was insufficient evidence to support the theory.

The implied certification theory is derived from and shares common limitations with the express certification theory.  As the Ninth Circuit explained, “[e]xpress certification means that the entity seeking payment certifies compliance with a law, rule or regulation as part of the process through which the claim for payment is submitted. Implied false certification occurs when an entity has previously undertaken to expressly comply with a law, rule, or regulation, and that obligation is implicated by submitting a claim for payment even though a certification of compliance is not required in the process of submitting the claim.”  Under both theories, “it is the false certification of compliance which creates liability when certification is a prerequisite to obtaining a government benefit.”  Materiality is satisfied under both theories “only where compliance is a sine qua non of receipt of state funding.” 

After establishing that a relator may bring a claim of implied certification in the Ninth Circuit, the Court dismissed the relator’s claims under Fed. R. Civ. P. 9(b). In doing so, the Court noted that even though the relator’s complaint “invokes the framework of an implied false certification claim, it fails to plead this claim with the particularity required by Rule 9(b).”  A copy of the relator’s complaint can be found here.