Recent Decisions Serve as Reminder that Scienter is a Fertile Ground for Pre-Trial Disposition

By on August 24, 2015

Last week, two different district courts dismissed False Claims Act (FCA) claims on scienter grounds — one on a motion to dismiss and one at summary judgment. While FCA plaintiffs frequently claim that scienter is a fact-intensive inquiry best resolved by the factfinder, this is often not the case, as these two decisions underscore. FCA defendants should always explore every possible opportunity to seek dismissal based on lack of knowledge or recklessness, first on the pleadings and, failing that, at summary judgment.

On August 19, the U.S. District Court for the Eastern District of Pennsylvania granted a motion for summary judgment on scienter grounds in U.S. ex rel. Budike v. PECO Energy, in which the relator alleged FCA violations based on purported overcharges for electricity to the U.S. Navy.  The court held that where the evidence showed that PECO addressed and attempted to resolve malfunctions with a meter, the relator could not establish recklessness. Although there was evidence that the meter was malfunctioning and the defendant was unable to fix it, this was insufficient: “PECO’s ineptitude in successfully repairing the meter does not, alone, trigger FCA liability.”

On August 20, the U.S. District Court for the Northern District of Illinois granted a motion to dismiss, also on scienter grounds, in U.S. ex rel. Sibley v. A Plus Physicians Billing Service, Inc.  This case involved the alleged use of false or altered reimbursement codes. The court held that the relator had failed to allege scienter on the part of the president of the billing service:

The only allegations relator makes specifically about Schoewe are that: (1) he is the president and a co-owner of A-Plus and is “responsible for submitting the claims” created by its billers; (2) he, along with [his codefendant], “trained [relator] on the job”; (3) he told relator that “her bonus depended on maintaining a certain level of reimbursements”; (4) relator “complained to … [him] about being asked to bill improperly”; (5) he promised [clients] … that A-Plus would “continue billing in the same fashion”; (6) he told relator that he was “okay” with her “billing [the clients’ account] properly”; and (7) he ordered relator get approval for [client] claims she had not submitted for lack of documentation.  These allegations are insufficient to state an FCA claim against Schoewe in accordance with Rule 9(b).

However, the Sibley court did not dismiss the complaint against the codefendant who, as relator’s supervisor, was alleged to have specifically instructed relator to select codes to maximize reimbursement rather than to reflect actual services provided.

Sibley is also notable inasmuch as it held that a retaliation claim under the FCA, even after the 2009 amendments, cannot be maintained against individuals.

While factually very different, these two district court outcomes indicate that courts will scrutinize allegations and purported evidence of scienter and that, in many instances, whether a defendant has acted with knowledge or recklessness should not make it to the factfinder.

Laura McLane
Laura McLane serves as head of McDermott's Boston Litigation Practice Group. Laura represents national and international clients in health care, securities and other government enforcement matters, both civil and criminal. She also represents clients in professional and products liability cases and in complex commercial disputes. A significant part of Laura's practice is devoted to representing health care and other companies, as well as individuals, in government investigations and qui tam litigation based on the False Claims Act (FCA) and related statutes, including the Anti-Kickback Statute and the Stark Law. Read Laura McLane's full bio.