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

The relator in this case alleged that SLM (also known as “Sallie Mae”) unlawfully placed student loans into forbearance, which in turn caused the government to pay greater interest and allowances on those loans.  The relator was a senior loan advisor at a New Jersey-based subsidiary of SLM.  Just two years prior, an employee of a Nevada subsidiary of SLM filed a qui tam complaint that, according to the court, alleged sufficiently similar material elements of fraud against SLM.  Even though the relevant time period differed in some respects and allegations arose from activities occurring at different subsidiaries or offices, the court found a sufficient overlap because the alleged fraudulent scheme began at roughly the same time in 2004 and was alleged to be a nationwide scheme.  In short, the court found both complaints sufficient to “equip the government to investigate SLM’s allegedly fraudulent forbearance practices nationwide.”

The relator argued that the first-filed qui tam lawsuit was not a “pending action” because the first-filed complaint did not meet the Rule 9(b) heightened pleading requirements.  The court rejected this argument and ruled that the first-filed provision is triggered when the complaint provides the government with sufficient information to launch a fraud investigation.  To hold otherwise would “create a strange judicial dynamic, potentially requiring one district court to determine the sufficiency of a complaint filed in another district court.”  The D.C. Circuit Court’s decision creates a circuit split as the Sixth Circuit Court of Appeals held the opposite.  See Walburn v. Lockheed Martin Corp., 431 F.3d 966 (6^th Cir. 2005) .

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 2002, in United States ex rel. Swan et al. v. Covenant Care, Inc., 279 F. Supp.2d 1212, a court in the Eastern District of California issued a summary judgment opinion that cast serious doubt on the viability of quality of care claims under the FCA. In Swan, the relators, both of whom were advocates for nursing home reform, alleged they personally witnessed multiple instances of substandard patient care at various nursing homes operated by the defendant in California and Illinois. The relators further alleged that the defendant nursing homes falsified forms to indicate that patients received care, including bathing, feeding, and wound treatment, that was never provided. The relators alleged this conduct violated the FCA under worthless services and false certification theories. The court held that the relators failed to state a claim under the FCA under any of the theories they alleged. The court held there was no worthless services claim because the relators did not allege that the nursing homes’ care was so poor that it was the equivalent of no performance at all. The court observed that payment by the government to the nursing homes was based on a per diem rate that included a bundle of services, including room, board, and patient care. Because some of these services were provided, the relator’s worthless services claim could not survive. The court also held there was no false certification claim because the relator introduced no evidence to demonstrate that the nursing homes certified compliance with the applicable Medicare regulations as a prerequisite to receiving federal payment. The court granted the nursing homes’ motion for summary judgment and dismissed the action.

Since the Swan decision, a number of other courts have followed suit and dismissed quality of care cases for failure to state a claim under worthless services and/or false certification theories of FCA liability. See, e.g., United States ex rel. Landers v. Baptist Memorial Health Care Corp., 525 F. Supp.2d 972 (W.D. Tenn. 2007) (granting defendants’ summary judgment in qui tam action); United States ex rel. Lockyer v. Hawaii Pacific Health, 490 F. Supp.2d 1062 (D. Haw. 2007) (granting defendants’ motion for summary judgment in action in which government intervened); United States ex rel. Sweeney v. Manorcare Health Services, Inc., 2005 WL 4030950 (W.D. Wash. 2005) (granting defendants’ motion to dismiss in qui tam action).

With that background in mind, let’s turn our attention back to the Dialysis Clinic case. The relator filed a qui tam complaint under seal in June 2009 and filed an amended complaint under seal several weeks later. Seven months later, in February 2010, the government informed the court that it had declined to intervene in the action, and the complaint was unsealed. The defendant moved to dismiss the complaint for failure to state a claim under Rule 12(b)(6); failure to plead fraud with particularity under Rule 9(b); and lack of subject matter jurisdiction under Rule 12(b)(1). The relator sought leave to file a second amended complaint. The court granted the relator’s motion to amend, and then dismissed the second amended complaint with prejudice under Rules 9(b) and 12(b)(6).

The Dialysis Clinic case is a good example for FCA defendants of the grounds that can be successfully asserted in a motion to dismiss a qui tam case in which the government does not intervene. In such cases, Rules 12(b)(1), 9(b), and 12(b)(6) are powerful weapons for the defense. Of the 4,628 relator-only FCA cases that were unsealed between 1987 and 2010, 3,962 (or 86%) of those cases have been dismissed.

Part II of this post will examine the court’s decision on the Rule 9(b) and 12(b)(6) motions, and Part III will discuss the court’s decision on the Rule 12(b)(1) motion based on the FCA’s public disclosure bar.

Applying Fourth Circuit precedent, the court found that relators’ allegations had been based on prior public disclosures by then-New York Attorney General Andrew Cuomo, the defendants’ own SEC filings, and newspaper articles. The court also found that relators were not original sources of the information based on their failure to demonstrate how they could have learned of this alleged conduct from their roles as telemarketers at defendants. Interestingly, the court noted relators’ attorney’s history of recruiting former employees of student lenders to serve as qui tam relators.

Next, relators alleged that defendants paid illegal bonus payments to employees based on the number of student-loan applications initiated daily and engaged in marketing tactics designed to mislead borrowers into believing defendants’ direct mailings were from the federal government. According to relators, this alleged conduct rendered false the certifications of compliance prepared in connection with such loans in the event that the loan went into default and resulted in the submission of a claim for payment to the government.

The court found subject matter jurisdiction to be proper as to these allegations, but dismissed the claims for failure to plead with particularity as required under Fed. R. Civ. Proc. 9(b). The court held that relators failed to provide facts showing that any claims were submitted to the government or that the purportedly false certifications were made to get a false claim paid by the government. The court denied leave to amend.

FCA Cases for Product Defects Which Settled

1. In December 2000, a medical device manufacturer, Lifescan, paid $30.4 million to settle FCA allegations that it knowingly sold a faulty blood glucose monitoring system to Medicare patients and concealed this defect from the FDA. The U.S. intervened in the action.

2. In July 2002, in another case in which the U.S. intervened, a medical device maker, Agilent Tech., paid $7 million to settle allegations that it knowingly sold faulty medical monitoring devices to the Veterans Administration and Department of Defense and failed to properly investigate product failures even though the company was aware of them.

3. In June 2005, a medical device manufacturer, Boston Scientific, settled an action with the United States for $74 million based on allegations that it knowingly sold defective coronary stents in violation of the FDCA over a seven-week period in 1998.

FCA Cases for Product Defects Which Were Dismissed

4. In 1998, two plaintiffs attorneys who had previously sued the device maker, Medtronic, in a product liability action and lost, filed an FCA case based on information they learned in discovery in the prior action. The attorneys alleged that Medtronic violated the FCA by selling defective pacemaker leads to Medicare recipients. The government declined to intervene in the action in October 2002 and the case was unsealed. In August 2005, the court dismissed the action at the pleading stage on the ground that the suit was barred by the public disclosure bar. Specifically, the court held that the prior product liability lawsuits against Medtronic alleging fraud on the FDA notified the government of potential Medicare fraud and thus precluded the attorney-relators’ FCA claims.

5. In March 2009, the Eighth Circuit - which is the Circuit in which the Guidant case is pending - dismissed a product defect case in a relator-only action at the pleading stage against the device maker, Hypoguard USA. The relator alleged that Hypoguard knowingly sold defective blood glucose monitors and test strips to Medicare patients. In dismissing the action, the Eighth Circuit held that “sales of a defective product do not give rise to FCA liability absent proof that a party knowingly or with deliberate ignorance charged the government for worthless services.”

FCA Case for Product Defects Which Is Currently Pending

6. In May 2007, a relator filed an FCA action against Cardinal Health alleging that it knowingly sold defective and unsafe infusion pumps to the Veterans Administration. The government declined to intervene in the suit in January 2008 and the case was unsealed. The district court dismissed the action under Rules 9(b) and 12(b)(6). In November 2010, the Fifth Circuit remanded the case with instructions to the district court to permit the relator to amend because it was possible the relator could state an FCA claim for defective products based, e.g., on a “worthless services” theory. The case is currently pending.

The Government’s Theory of FCA Liability in the Guidant Case

The government’s theory of FCA liability in the Guidant case is based on medical necessity. Specifically, the government alleges that knowingly implanting Medicare patients with defective devices when non-defective devices were available was not a reasonable and necessary medical treatment. (Complaint, ¶¶ 80, 135). Under § 1395(a)(1)(A) of the Medicare statute, Medicare will only pay for services which are reasonable and necessary:

[N]o payment may be made…for any expenses incurred for items or services which …are not reasonable and necessary for the diagnosis or treatment of illness or injury or to improve the functioning of a malformed body member.” 42 U.S.C. § 1395(a)(1)(A).

Several Problems With The Government’s Theory of FCA Liability in the Guidant Case

1. The Eighth Circuit Has Dismissed FCA Claims Based on Product Defects

Two years ago, in United States ex rel. Roop v. Hypoguard USA, Inc., 559 F.3d 818 (8th Cir. 2009), the Eighth Circuit affirmed the dismissal of an FCA case against a medical device manufacturer for alleged product defects. The relator alleged that Hypoguard blood glucose monitors and test strips were defective, and that Hypoguard knew they were defective, and failed to file reports of defects required by the FDA’s medical device reporting regulations, which caused Medicare to pay countless fraudulent reimbursement claims. The United States declined to intervene in the action. The district court granted Hypoguard’s motion to dismiss the action for failure to comply with Rule 9(b). The Eighth Circuit affirmed the dismissal, and in doing so, held that:

“[S]ales of a defective product do not give rise to FCA liability absent proof that a party ‘knowingly or with deliberate indifference charged the government for worthless services.’” 559 F.3d at 824 (citing United States ex rel. Lee v. SmithKlineBeecham, Inc., 245 F.3d 1048, 1053 (9th Cir. 2001)). “In a worthless services claims, the performance of the service is so deficient that for all practical purposes it is the equivalent of no performance at all.” (citing Mikes v. Straus, 274 F.3d 687, 703 (2nd Cir. 2001)).

In the Guidant case, the government did not plead a “worthless services” claim, but rather has attempted to allege an FCA claim based on medical necessity. However, as demonstrated below, there are problems with the government’s attempt to invoke medical necessity as a viable theory of FCA liability against a medical device manufacturer for alleged product defects.

2. Is Medical Necessity A Viable Theory of FCA Liability Against Manufacturers For Product Defects?

The short answer is no, it should not be, given the precedent on the issue. Courts have held that Medicare’s requirement that a service be reasonable and necessary generally pertains to the selection of a particular procedure and not to the manner - or quality - of its performance. See, e.g., Mikes v. Straus, 274 F.3d 687, 701 (2d Cir. 2001); In re: Cardiac qui tam litigation, 221 F.R.D. 318 (D. Conn. 2004). In Mikes, the Second Circuit held that the medical necessity for a procedure and its quality are distinct considerations. In Mikes, the relator alleged that the defendant doctors did not perform spirometry tests for which they billed Medicare in accordance with the applicable standard of care, and thus sought reimbursement for services which were not reasonable and necessary under the Medicare statute in violation of the FCA. The court dismissed the relator’s FCA claims based on its determination that “[i]nasmuch as Mikes challenges only the quality of defendants’ spirometry tests and not the decisions to order this procedure for patients, she fails to support her contention that the tests were not medically necessary.” 274 F.3d at 699.

The government’s use of a medical necessity theory in the Guidant case is an attempt to fit a square peg in a round hole. The Mikes case demonstrates that whether or not a procedure is medically necessary under the Medicare statute is really a question of a physician’s judgment to perform a certain procedure, rather than a question of the quality of the procedure (or the quality of a device used to perform the procedure). This conclusion is further reinforced by the statutory design of the Medicare statute itself, pursuant to which medical necessity for a procedure - and its quality - are distinct considerations governed by separate sections of the statute.

The Relator asserted four counts in his complaint, but really asserted only two FCA violations -- one for false claims and one for false statements. Because the FCA was amended in 2009 by FERA, the relator included two counts for each statutory violation, alleging one count each under the current statute as well as its prior version. The court observed that it was unnecessary for the Relator to assert claims under the pre and post FERA versions of the FCA because the FERA changes to §3729(a)(1) (applicable to false claims) and (a)(2) (applicable to false statements) are not material to a presentment claim to the United States government.

The court then dismissed the entire complaint under Rule 9(b) because the complaint failed to identify (1) any false claims submitted to the United States by HP; (2) the date of any such claims; (3) the content of any such claims; (4) the products for which the government was actually billed; (5) any individuals involved in the alleged fraud; and (6) the length of time between the alleged fraudulent practice and submission of claim for payment. In arriving at this conclusion, the court observed that the complaint consisted of little more than a list of 38 HP products available for sale on the government contract website that mistakenly identify the country of origin. The Relator did not provide any information as to whether any of these products were, in fact, purchased by the United States and instead speculated that because at least some of the products with similar item number suffixes are commonly used and purchased, it was therefore highly likely that at least some of the products were purchased by the government. A copy of the complaint that was dismissed can be found here and a copy of the court's decision 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 was a medical device manufactured by Medtronic called the Cardioblate system.  The Cardioblate system is approved by the Food and Drug Administration (FDA) to control bleeding and coagulate cardiac tissue during surgery.  The relators alleged that Medtronic also promoted the Cardioblate system to treat atrial fibrillation, a use which was not specifically approved by the FDA.  Following the United States’ decision not to intervene, the court unsealed the complaint.  The unsealed complaint did not allege that Medtronic itself submitted false claims to the government.  Nor did it allege specific details of any particular claim submitted to the Medicare or Medicaid program or the identity of any individual or entity that submitted such claims.  Rather, it simply alleged that, as a result of Medtronic’s off-label marketing campaign and payment of illegal kickbacks, the Cardioblate system has been widely used for atrial fibrillation, and that the submission of false claims to Medicare was the natural result of this increased utilization.

Medtronic moved to dismiss and the court granted the motion.  While the court’s decision is lengthy, there are two key aspects that will be important in other off-label device cases.  First, the court concluded that a request for reimbursement for an off-label utilization is not necessarily a false claim.  Typically, “off-label” FCA claims deal with drugs, for which, courts have concluded, Medicare and Medicaid will not reimburse if the use is off-label.  In contrast, there is no express prohibition against reimbursement for off-label utilization of medical devices.  Accordingly, the court reasoned, those claims should be reimbursable, provided they are medically necessary. The court rejected the relators’ argument that off-label uses were per se medically unnecessary simply because they had not been approved by the FDA.  The medical necessity determination is a decision made by individual physicians exercising independent medical judgment.  Since the relators had not alleged an independent basis to conclude that reimbursement claims were for non-medically necessary uses, the court concluded there was no basis to presume that false claims had in fact been submitted. 

Second, the court concluded that the relators had failed to satisfy Rule 9(b) by failing to allege details of any specific false claims or the identities of any specific hospitals or doctors who submitted false claims.  Rather than provide these details, the relators simply made allegations regarding Medtronic’s marketing efforts and then pointed to the high number of times the Cardioblate system was used to treat atrial fibrillation.  The court held that this was not enough to satisfy Rule 9(b), which requires the who, what, when, where and how of the false claims.

However, the court granted the relators leave to file an amended complaint, which must be filed by October 29, 2010.  If relators do file an amended complaint, we will post a link to it here.

The government alleges that the defendants “devised a scam that would allow Beverly (the nursing home chain) to receive a portion of Medicare payments so long as it utilized MediNet’s services and purchased equipment from McKesson.” The government also made allegations regarding other unnamed nursing homes allegedly engaged in similar schemes with MediNet and McKesson. On the defendants’ motion to dismiss, the Court dismissed allegations regarding unnamed entities because the government had failed to plead those allegations with particularity as required by Rule 9(b) of the Federal Rules of Civil Procedure. The Court had held that “plaintiff would not be allowed to proceed against unnamed entities even in light of the government’s response that it planned to investigate ‘through discovery in this case’ similar kickback schemes.”   

Despite this order, during discovery, the government propounded discovery requests and moved to compel defendants to produce documents and answer interrogatories regarding MediNet’s relationships with other unnamed nursing home entities. The Court denied the motion to compel in light of the ruling on the motion to dismiss, reasoning “the court finds the plaintiff has not produced evidence sufficient to convince the court that it is on anything other than a fishing expedition… As the defendants point out, the pleading requirements of Rule 9 and the standard applied exist to prevent plaintiffs from filing baseless claims then attempting to discover unknown wrongs… If the plaintiff cannot meet the demands of Rule 9, it follows, therefore, that they may not conduct discovery to find ‘unknown wrongs.’”

The relator, a subcontractor on certain contracts Ford had with the federal government, alleged that Ford falsely represented to the government that the relator was a minority-owned small business when it was allegedly “entirely controlled” by Ford and operated as a de facto subdivision of Ford. The relator contended that Ford made this misrepresentation so it could comply with government requirements that it hire as subcontractors small, minority-owned businesses. The government declined to intervene in the case.

On a prior appeal, the Sixth Circuit held that the first amended complaint failed to satisfy Rule 9(b) of the Federal Rules of Civil Procedure because it failed to allege a single specific claim for payment submitted to the federal government.  However, the Sixth Circuit remanded the case to the district court so that it could reconsider its denial the relator’s motion to file a second amended complaint (which contained substantially more detail than prior complaints concerning specific contracts between Ford and the government) in light of the Sixth Circuit’s holding in the case United States ex rel. Bledsoe v. Community Health Systems, 501 F.3d 493 (6th Cir. 2007).  In Bledsoe, which was decided after the district court denied the relator leave to file the second amended complaint, the Sixth Circuit held that an FCA complaint arising from a complex and far-reaching scheme need not plead every claim for payment at issue to satisfy Rule 9(b), but must still provide specific details concerning at least some actual claims for payment that are representative of all the claims at issue.

On remand, the district court refused to grant the relator leave to file the second amended complaint.  The Sixth Circuit affirmed.  Since the relator had moved for leave to file its second amended complaint after the district court dismissed the first amended complaint, the Sixth Circuit held that leave could be granted only if an intervening change in controlling law occurred after dismissal of the prior complaint.  The Sixth Circuit found that Bledsoe was not an intervening change in the law, but was rather entirely consistent with prior decisions holding that a claim for payment is an essential element of a FCA violation and that a FCA complaint cannot simply describe a fraudulent scheme and surmise that false claims must have been submitted as a result of the scheme.

The Sixth Circuit’s continued adherence to its holding in Bledsoe, and its insistence that Bledsoe was not a change in the law, may mark the emergence of a significant circuit split.  A growing number of circuits have held that FCA complaints need not identify specific claims for payment, provided there is some indicia of reliability in the pleading to support a conclusion that claims for payment were in fact made.  The Sixth Circuit is joined by the Eighth Circuit and certain District Courts like the District of Maryland in still insisting that the complaint must allege at least some claims for payment with particularity.  See, e.g., Maryland Court Dismisses Complaint Alleging Medicaid Rebate Fraud.

Section 3730(e)(4)(A) of the FCA provides that no court shall have jurisdiction over an FCA action brought by a relator that is based on prior public disclosures of fraud.  The First Circuit held that “[t]o be a disclosure ‘of fraud’ the disclosure must contain either (1) a direct allegation of fraud, … or (2) both a misrepresented state of facts and a true state of facts so that the listener or reader may infer fraud.”  The Court also held that the public disclosures must be from the “statutorily specified sources,” which include “civil…hearing” and “news media.”

There was no dispute that civil complaints filed in state and federal court contained the direct allegations of fraud.  The relator argued, however, that civil complaints did not qualify as public disclosures under the FCA.  The First Circuit rejected this argument, holding that, for purposes of this provision of the FCA, “hearing” is synonymous with “proceeding,” and thus, civil complaints fall within the statutorily specified public disclosures.  The First Circuit also rejected the argument that civil complaints filed in state court as opposed to federal court should not qualify as public disclosures.  The public disclosure bar, therefore, deprived the court of jurisdiction.

The relator did not claim to be an “original source” of information, so this exception to the public disclosure bar did not apply.  Additionally, the First Circuit held that, though a case dismissed for lack of subject matter jurisdiction is usually without prejudice since it is not on the merits and jurisdictional defects may be cured, in this case, the jurisdictional defect was incurable, and thus, the case is “forever barred.”

This case was decided under the version of the FCA’s public disclosure bar in effect prior to its amendment by the Patient Protection and Affordable Care Act (PPACA).  The First Circuit noted that the PPACA’s addition of the term “Federal” before “criminal, civil, or administrative hearing” means that civil complaints filed in state court no longer qualify as public disclosures under the FCA.  In other words, according to the First Circuit, a relator may not be barred from bringing an FCA Action where the fraud was previously publicly disclosed in an action filed in state court. 

In United States ex rel. Davis v. Lockheed Martin Corp., the relator sued Lockheed Martin Corp. under the FCA, alleging that software Lockheed used in jet fighters built under a government contract had not been developed properly. The government declined to intervene, and Lockheed moved to dismiss under Rule 9(b). The court granted the motion, finding that  the complaint had failed to identify with specificity any false claims submitted to the government or any false statements made to the government in order to receive payment.

In reaching its decision, the court held that a provision of the FERA amendments that substantially revised section 3729(a)(2) (now section 3729(a)(1)(B)) of the FCA applies only to claims for payment that were pending after June 7, 2008. Previously, section 3729(a)(2) imposed liability on “any person who … knowingly makes, uses, or causes to be made or used a false record or statement to get a false or fraudulent claim paid or approved by the Government…” The Supreme Court in Allison Engine held that the language “to get” and “paid or approved by the Government” required plaintiffs to show that the defendant intended that its false statement would be relied upon by the federal government in determining whether to pay a false claim, and that simply showing that a defendant made false statements to a recipient of federal funds was not sufficient to establish liability. In an effort by Congress to overturn the Supreme Court’s decision in Allison Engine, the FERA amendments replaced section 3729(a)(2) with section 3729(a)(1)(B), which imposes liability on a person who “knowingly makes, uses, or causes to be made or used a false record or statement material to a false or fraudulent claim …” This change, along with other provisions of the FERA amendments, expands the scope of the FCA, potentially imposing FCA liability on a defendant who makes a false statement in relation to a claim for payment submitted to a recipient of federal funds, even if that statement is never passed on to or relied on by the federal government. 

FERA also provides that the new section 3729(a)(1)(B) “shall take effect as if enacted on June 7, 2008 [two days before  the Supreme Court’s decision in Allison Engine], and apply to all claims under the False Claims Act that are pending on or after that date…”   The relator and the United States, in an amicus brief, argued that this last provision meant that section 3729(a)(1)(B) applied to all of the relator’s case since the case had been pending on June 7, 2008. The court rejected this argument and instead concluded that the reference to “claim” in the provision meant that the amendment applied to claims for payment that were pending as of June 7, 2008, not FCA actions that were pending as of that date. The 11th Circuit, the District of D.C., the Southern District of Ohio, and the Northern District of Illinois have all reached the same conclusion and have declined to extend the new section 3729(a)(1)(B) to claims that were paid prior to June 7, 2008. 

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.   

The relators filed their original complaint in 2003, and the case remained under seal until December 2009. During the seal period, the documents at issue were produced by the defendant to the State of Texas and the Commonwealth of Virginia pursuant to a series of civil investigative demands. Texas and Virginia subsequently shared the documents with the relators. The complaint was unsealed, and the defendants brought a motion to dismiss for failure to plead fraud with particularity under Rule 9(b). The court denied defendant’s motion to dismiss and granted relators leave to amend their complaint in order to plead the alleged fraud with particularity. The relators then sought leave of court to use the documents obtained by Texas and Virginia while the case was under seal in order “to streamline the complaint and ensure that the necessary factual details are provided to survive a Rule 9(b) challenge.” The defendant argued that the use of the subpoenaed documents was not authorized under Virginia or Texas statutes and that the relators offered no other authority permitting the use of the documents.  

The court held that relators could amend their complaint using the subpoenaed documents, finding that the respective state statutes govern only the conduct of state attorneys general and not relators. The court further held that Fifth Circuit precedent “almost necessitates that relators be allowed to use the subpoenaed documents that were shared by the states.” This holding has particular significance to False Claims Act cases with prolonged sealed periods, as relators may be allowed to supplement their claims with facts and information obtained by state or federal entities to cure an otherwise defective complaint.  While relators are permitted the benefit of discovery taken while the case is under seal, defendants have no reciprocal ability to take discovery of the relators or the government.

In order for their drugs to be reimbursed under the Medicaid program, federal law requires drug manufacturers to pay rebates to the federal government and the States. Manufacturers must pay higher rebates for brand drugs than for generic drugs. The relator alleged that Novartis and Baxter improperly characterized certain of their brand drugs as generic drugs in order to pay lower rebate amounts to the Medicaid program. 

The Court found that the allegations in the relator’s third amended complaint failed to satisfy the pleading requirements of Rule 9(b) of the Federal Rules of Civil Procedure, which requires that allegations of fraud be set forth with specificity. First, the Court held that the relator failed to allege where, when, and how Baxter and Novartis made the purportedly false statements about their drugs’ classifications as generic drugs. The Court held that the general description of the operation of the Medicaid rebate program in the complaint did not cure this defect, as it failed to provide specific details concerning the conduct of Baxter and Novartis. Second, the Court found that the relator had failed to allege with specificity false claims that were actually submitted to the federal government. While Medicaid drug rebates are required by federal law, drug manufacturers receive invoices from, and pay rebates directly to, the state Medicaid programs, not the federal government, and the Court found that the relator had failed to point to any false claims that were actually submitted to the federal government. The Court rejected the relator’s argument that false claims must have been submitted based upon the operation of the rebate program.      

The Court’s holding that Rule 9(b) requires specific allegations of actual claims represents a departure from a recent trend relaxing Rule 9(b) standards in FCA cases. Some circuits, such as the First, Fifth, Seventh, Tenth, and Eleventh Circuits, have held that the complaint need not allege specific false claims, provided that the facts alleged in the complaint create an inference that false claims were submitted. By contrast, the Eighth and Ninth Circuits and certain District Courts like the District of Maryland, require allegations of specific false claims. This July, the New York legislature has followed the trend towards relaxing FCA pleadings by amending the New York FCA to expressly provide that an FCA complaint need not allege specific false claims. For a discussion of the recent amendments to the New York FCA, see NEW YORK ADOPTS FERA AMENDMENTS TO NEW YORK FALSE CLAIMS ACT.