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

The Court found that Laughlin’s complaint provided the most detail for the so-called fitting fee scheme, but the complaint still fell short.  Laughlin’s complaint alleged that Orthofix encouraged and assisted doctors to charge Medicare fees for fitting medical devices for fittings never performed.  However, Laughlin provided no details about any fraudulent claims submitted to Medicare for fitting fees or false statements made by doctors concerning such fees.  Laughlin’s complaint also failed to specify which doctors and Orthofix employees were involved, the time period of the alleged fraud, or how Orthofix allegedly encouraged and assisted doctors to commit the fraud.  The Court further held that Laughlin’s allegations regarding the other four schemes were “nothing more than general or conclusory allegations”, and therefore, also failed to provide adequate particularity.  Essentially, Laughlin’s complaint did not allege the who, what, when, where, and how of the alleged fraud.  By contrast, according to the Court in the Bierman action, Bierman’s complaint alleged details about the applications containing allegedly false certifications, a schedule of the claims submitted to Medicare for specified defendants and time periods, the dates of the claims, and the amounts in reimbursement paid by Medicare.  Bierman’s complaint further contained allegations of specific statements and admissions made by Orthofix in connection with the alleged fraud. 

The Court dismissed Laughlin’s claims based on the alleged fraudulent schemes with prejudice, but allowed Laughlin’s claim for wrongful termination to remain under section 3730(h) of the False Claims Act.  Retaliation claims do not require a showing of fraud, so the heightened pleading standards of Rule 9(b) did not apply. Laughlin’s Second Amended Complaint can be found here, and Bierman's Second Amended Complaint can be found here.

The court held that the relator’s Second Amended Complaint adequately pleaded an express certification theory of  FCA liability.  The court held that the complaint contained a sufficient basis to support the allegation that the certification was submitted to the government by each defendant:

The relator alleges that the defendants submitted initial Medicare Enrollment Applications to the government in or about December 2000 and the complaint provides details about the content of those applications. 

The court also held that the complaint sufficiently identified the particular claims that were submitted:

The complaint also includes a schedule of Medicare claims for reimbursement submitted by each defendant for a number of specified years.  That schedule includes the number of claims allowed and denied by Medicare and the amounts that were submitted and paid. 

The court further held that there was a sufficient basis to infer that beneficiaries were never offered the rental option:

The complaint further alleges facts indicating that the stimulators can only be used for up to nine months, that they are usually required for only three to six months, and that their purchase price is roughly ten times their monthly rental price.  The schedule of Medicare reimbursed claims, however, indicates that every claim submitted by the defendants over a number of years was for a purchase item.  A separate table attached to the complaint lists specific claims by the defendants, the dates of those claims and the amount allowed for reimbursement.  Each claim in the table was reimbursed by Medicaid as a purchase item.  Since no rational beneficiary would ever pay for more than the nine month rental price, there is a sufficient basis to infer that beneficiaries were never offered the rental option.

The court also held that the complaint allowed for a fair inference that the defendants knew that they would not comply with Supplier Standard Regulation Number 5 when they submitted the Medicare Enrollment Applications:

The complaint further sets forth allegations that the defendants made concerted efforts to maintain the stimulators as purchase-only items.  It alleges numerous instances in which the relator, acting as a billing service provider, was told by the defendants’ representative, who are identified in the complaint by reference to their corporate title, that the stimulators were not available for rent.  The schedule of reimbursed claims allows for a reasonable inference that the defendants routinely failed to inform beneficiaries of the rental option over a number of years.  It states specific instances in which certain representatives of the defendants admitted knowledge of and noncompliance with Supplier Standard Regulation Number 5.  It also identifies the large monetary incentive the defendants had to provide the stimulators as purchase-only items.

Based on this analysis, the court denied defendants’ motion to dismiss for failure to plead fraud with particularity under Rule 9(b).  A copy of the Second Amended Complaint can be found here.

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.