On April 30, 2018, the U.S. District Court for the District of Massachusetts dismissed the last remaining state False Claims Act (FCA) claims against long-term care pharmacy provider PharMerica, Inc. on the grounds that neither relator qualified as an “original source” under the applicable pre-2010 version of the FCA, thereby precluding their claims under the public disclosure bar. Critically, neither relator had firsthand, “direct” knowledge of the alleged fraud scheme.

In 2007, two relators (employees of a pharmaceutical company) filed suit alleging that their employer had offered financial incentives to two long-term care pharmacy providers (LTCPs) in exchange for the pharmacy providers’ promotion of prescriptions of a specific antidepressant. Specifically, the relators alleged that their employer offered significant discounts and rebates to LTCP customers in exchange for increased promotion of the antidepressant, and that market-tier discounts were offered in exchange for the performance level of each LTCP. The relators alleged that further kickbacks in the form of research and educational grants, gifts, and payment for advertising initiatives were offered to the LTCPs in exchange for purchase and recommendation of the antidepressant. Relators’ knowledge, however, was sourced from two other co-workers; neither relator was directly involved in the alleged scheme.

In 2010, the United States declined to intervene and the case was unsealed. Two years later, in 2012, the Court dismissed all federal claims and 18 state law based claims. Subsequently the other defendants (including the relators’ former employer) entered into settlement agreements, leaving PharMerica facing state FCA claims under Louisiana, Michigan, and Texas law.

On September 29, 2017, PharMerica moved to dismiss the remaining three claims on several grounds, including that each claim was precluded by each applicable state’s public disclosure bar. This argument was based, in part, on the fact that it was undisputed that the fraud allegations at issue had been publicly disclosed in a 2002 case before the Eastern District of Louisiana. Therefore, to avoid dismissal, relators needed to establish that they met the standards of the pre-2010 original source exception to the public disclosure bar in order for their claims to survive. This exception required, in relevant part, that the relator have direct and independent knowledge of the publicly-disclosed information.

The Court rejected the relators’ arguments that they qualified for the original source exception. First, the Court noted that Louisiana, Michigan and Texas each have public disclosure bars and original source exceptions that are substantively identical to the corresponding provisions of the federal FCA. The Court further noted that the “first-to-file” bar did not block relator’s claims, as the 2002 lawsuit that publicly disclosed the alleged fraud scheme was dismissed in 2006, a year before the relators filed their complaint. It was further found to be undisputed that relators’ knowledge of the alleged scheme was independent of the 2002 lawsuit, thereby establishing that the relators had “independent” knowledge of the scheme.

The fatal flaw in relators’ argument was that neither had direct knowledge of the information on which the allegations are based,” as required by the pre-2010 FCA. Neither relator had a direct role in the alleged scheme, and both had learned of the scheme in a second-hand fashion from colleagues with direct knowledge. Furthermore, neither relator saw any corroborating documents until over a year after the alleged scheme had concluded, and those documents were viewed as part of “collateral research and investigation,” not in the regular course of their job duties. In dismissing the remaining claims, the Court cited precedent requiring that, under the pre-2010 FCA, an individual must be a “close observer” of the alleged fraud in order to qualify as having “direct” knowledge for the original source exception.

This ruling highlights the long reach of changes to statutory language. Revisions to the FCA’s statutory language in 2010 removed the requirement of “direct” knowledge of the information for the original source exception, thereby broadening the pool of potential relators. While this revision occurred roughly eight years ago, legacy cases subject to the pre-2010 statutory language are still working their way through the Courts. Had the relators in this case been subject to the current version of the FCA, it appears unlikely that the Court would have dismissed their claims on the basis of the public disclosure bar.

The case is United States ex rel. Banigan and Templin v. PharMerica, Case No. 07-cv-12153, before the U.S. District Court for the District of Massachusetts.

On April 11, 2018, the Eleventh Circuit split from several other circuits on the question whether False Claims Act (FCA) relators can rely on the three-year statute of limitations extension in 31 U.S.C. § 3731(b)(2) in cases where the United States declines to intervene.

Under § 3731(b), an FCA case must be filed within the later of:

  1. 6 years after the date on which the violation…is committed, or
  2. 3 years after the date when facts material to the right of action are known or reasonably should have been known by the official of the United States charged with responsibility to act in the circumstances, but in no event more than 10 years after the date on which the violation is committed.

In United States of America, ex rel. Billy Joe Hunt v. Cochise Consultancy Inc. et al., No. 16-12836, the relator filed his claim more than six years after the alleged violations, but within three years of when he first informed the government of the facts giving rise to the claim. (He may have been delayed in filing his claim owing to the fact he was in federal prison for his role in a separate kickback scheme involving the same company.) Thus, the case turned on whether the three-year extension in § 3731(b)(2) applies to cases where the government has declined to intervene.

The district court’s answer was ‘no.’ It dismissed the case based on the statute of limitations. This approach was consistent with published decisions from the Fourth Circuit and Tenth Circuit—both of which emphasized that applying § 3731(b)(2) to cases where the Government did not intervene could lead to “bizarre scenarios” in which the statute of limitations period for a relator’s claim is dependent on a nonparty to the action. See United States ex rel. Sanders v. N. Am. Bus Indus., Inc., 546 F. 3d 288, 293 (4th Cir. 2008) and United States ex rel. Sikkenga v. Regence BlueCross BlueShield of Utah, 472 F.3d 702, 726 (10th Cir. 2006) (“Surely, Congress could not have intended to base a statute of limitations on the knowledge of a non-party.”).

But, reviewing the district court’s decision on appeal, the Eleventh Circuit split from its sister circuits and reversed the decision below, resurrecting the relator’s claims. The court asserted that the Fourth Circuit and Tenth Circuit erred because they “reflexively applied the general rule that a limitations period is triggered by knowledge of a party. They failed to consider the unique role that the United States plays even in a non-intervened qui tam case.”

Instead, the court adopted a textual analysis, concluding that nothing in § 3731(b) suggests that the three-year extension applies only to intervened cases. Likewise, it rejected the defendants’ arguments that applying § 3731(b)(2) to non-intervened cases would render § 3731(b)(1) superfluous, and would encourage relators to wait to bring a secreted fraud to the government’s attention. The court emphasized that under its reading, § 3731(b)(1) would not be redundant in all circumstances, and that despite the three-year extension in paragraph (2), relators nonetheless face considerable structural pressure to bring their claims as soon as possible, at risk of losing the right to recover.

The defendants in Hunt also argued that § 3731(b) is ambiguous and asked the court to consult legislative history for guidance. The court disagreed that the statute is ambiguous, and added that even if it were appropriate to consult the legislative history of § 3731(b), the court would conclude that Congress intended § 3731(b)(2) to apply even where the government has not intervened.

After determining that § 3731(b)(2) is available to a relator in a non-intervened case, the Eleventh Circuit turned to the question whether the three-year extension is triggered by knowledge of the relator or knowledge of a government official. The Ninth Circuit held previously that while § 3731(b)(2) is available in a non-intervened case, the three-year period turns on the relator’s knowledge, not the government’s knowledge. United States ex rel. Hyatt v. Northrop Corp., 91 F.3d 1211, 1217 (9th Cir. 1996). Here again, the Eleventh Circuit reached the opposite conclusion, splitting from the decision in Hyatt:

Because the text unambiguously identifies a particular official of the United States as the relevant person whose knowledge causes the limitations period to begin to run, we must reject the Ninth Circuit’s interpretation as inconsistent with that text.

The Bottom Line: The Eleventh Circuit’s decision that the three-year tolling provision is available to qui tam relators is an outlier, and it creates a significant split among the circuits with regard to a key application of the statute of limitations in non-intervened FCA cases. Practitioners in the Eleventh Circuit (and elsewhere) should be careful to preserve arguments on this issue for further review, as this issue appears ripe for resolution in the Supreme Court.

The table below summarizes the current law on this question:

State of the Law on § 3731(b)(2)
Jurisdiction Position
First Circuit No circuit decisions, but some district courts have held that Section 3731(b)(2) is available to a relator in a non-intervened case, and that an official of the United States is the relevant person whose knowledge triggers the limitations period. See e.g., U.S. ex rel. Ven-A-Care v. Actavis Mid Atlantic LLC, 659 F. Supp. 2d 262 (1st Cir. 2009) )
Second Circuit No circuit decisions, and caselaw in the district courts is split. Compare United States ex rel. Wood v. Allergan, Inc., 246 F.Supp.3d 772 (S.D.N.Y. 2017) (relators may avail themselves of Section 3731(b)(2)) with United States ex rel. Finney v. Nextwave Telecom, Inc., 337 B.R. 479 (S.D.N.Y. 2006) (Section 3731(b)(2) applies only in cases in which the government intervenes).
Third Circuit Section 3731(b)(2) applies when the government is not a party, but that the relator is the “official of the United States”—so the limitations period begins to run based on the relator’s knowledge. United States ex rel. Malloy v. Telephonics Corp., 68 F. App’x 270, 272-73 (3d Cir. 2003) (unpublished).
Fourth Circuit Section 3731(b)(2) extends the FCA’s default six-year period only if the government is a party. United States ex rel. Sanders v. N. Am. Bus Indus., Inc., 546 F. 3d 288 (4th Cir. 2008).
Fifth Circuit No circuit decisions, but caselaw in the district courts has held that tolling is available to relators, but relators’ knowledge is trigger.. See e.g., U.S. ex rel. Gonzalez v. Fresenius Medical Care N. Am., 2008 WL 4277150 (W.D. Tex. 2008) (Section 3731(b)(2) applies when the government is not a party, but that the relator is the “official of the United States”—so the limitations period begins to run based on the relator’s knowledge).
Sixth Circuit No circuit decisions, but caselaw in the district courts has held that Section 3731(b)(2) extends the FCA’s default six-year period only if the government is a party . See e.g., United States ex rel. Griffith v. Conn, 117 F. Supp. 3d 961 (E.D. Ky. 2015).
Seventh Circuit No circuit decisions, but district courts have found tolling available to relators, but relators’ knowledge is trigger.. See e.g., See United States ex rel. Bidani v. Lewis, No. 97-CV-6502, 1999 WL 163053 (N.D. Ill. 1999) (Section 3731(b)(2) applies when the government is not a party, but that the relator is the “official of the United States”—so the limitations period begins to run based on the relator’s knowledge).
Eighth Circuit No circuit decisions, but caselaw in the district courts has held that Section 3731(b)(2) extends the FCA’s default six-year period only if the government is a party. See e.g., United States ex rel. Dicken v. N.W. Eye Ctr., 2017 WL 2345579 (D. Minn., 2017) ().
Ninth Circuit Section 3731(b)(2) applies when the government is not a party, but the relator is the “official of the United States”—so the limitations period begins to run based on the relator’s knowledge. United States ex rel. Hyatt v. Northrop Corp., 91 F.3d 1211, 1217 (9th Cir. 1996).
Tenth Circuit

Section 3731(b)(2) extends the FCA’s default six-year period only if the government is a party. United States ex rel. Sikkenga v. Regence

BlueCross BlueShield of Utah, 472 F.3d 702 (10th Cir. 2006).

Eleventh Circuit Section 3731(b)(2) is available to a relator in a non-intervened case. An official of the United States is the relevant person whose knowledge triggers the limitations period. See discussion above.
D.C. Circuit No circuit decisions, but caselaw in the district courts has held Section 3731(b)(2) extends the FCA’s default six-year period only if the government is a party. See e.g., United States ex rel. Landis v. Tailwind Sports Corp., No. 1:10CV00976 (CRC), 2016 WL 3197550 (D.D.C. June 8, 2016).

 

On November 8, 2017, the US District Court for the Middle District of Florida dismissed a relator’s non-intervened claims in United States ex rel. Stepe v. RS Compounding LLC for failure to satisfy the particularity requirement of Federal Rule of Civil Procedure 9(b). Relator originally filed her complaint under seal on December 16, 2013, under the federal False Claims Act (FCA) and Florida’s analogous statute. Over three years after the complaint was filed, the government elected to partially intervene as to fraudulent pricing allegations relating to TRICARE. Relator amended her complaint in July 2017 and added state false claims counts under the laws of 16 additional states. All 17 states declined to intervene in the case in September 2017.

The complaint alleges that Relator, through her work as a sales representative for defendant RS Compounding, became aware of Defendants’ purported schemes to defraud the government on prescription compound and gel products. The relator alleged that prescription pads were prepopulated for physicians, with RS Compounding’s most expensive compounds pre-checked on the pads and six refills listed by default. Relator further alleged that this scheme involved sales representatives “coaching” physicians to number three different products on the pads, with priority given to products containing ketamine because those products had a higher reimbursement rate from the government. Continue Reading Dismissed in Florida: Former Compounding Pharmacy Sales Representative’s FCA Whistleblower Suit

While medical practices are generally aware that relators and the government pursue allegations of false or duplicative claims to federal health care programs, a recent settlement reflects a growing trend of False Claims Act (FCA) allegations concerning the failure to report and return identified overpayments. On October 13, 2017, the US Department of Justice (DOJ) announced that it had reached a $450,000 settlement with First Coast Cardiovascular Institute, P.A. (FCCI) of Jacksonville, Florida in a qui tam lawsuit alleging that FCCI failed to promptly return identified overpayments from federal health care programs after the overpayments came to the attention of the practice’s leadership. Continue Reading DOJ Settlement with Florida Medical Practice Serves as a Reminder: Delayed Repayment to Federal Programs Can Have Significant Consequences

In a case of first impression, a federal court found that the federal physician self-referral law’s (Stark Law) requirement that financial arrangements with physicians be memorialized in a signed writing could be material to the government’s payment decision. This case raises troubling questions about applying the False Claims Act (FCA) to what many in the industry consider “technical” Stark issues, especially given the Supreme Court’s description of the materiality test as “demanding” and not satisfied by “minor or insubstantial” regulatory noncompliance.

United States ex rel. Tullio Emanuele v. Medicor Associates (Emanuele), in the US District Court for the Western District of Pennsylvania, involves Medicor Associates, Inc., a private medical group practice (Medicor), and Hamot Medical Center’s (Hamot) exclusive provider of cardiology coverage. Tullio Emanuele, a qui tam relator and former physician member of Medicor, alleged that Hamot, Medicor, and four of Medicor’s shareholder-employee cardiologists (the Physicians) violated the FCA and Stark Law because Hamot’s multiple medical director compensation arrangements with Medicor failed to satisfy the signed writing requirement in the Stark Law’s personal services or fair market value exceptions during various periods of time. The US Department of Justice declined to intervene in the case, but filed a statement of interest in the summary judgment stage supporting the relator’s position. Continue Reading Is the Stark Law’s “Signed Writing” Requirement Material to Payment: One Federal Court Says Yes

On January 19, 2017, another district court ruled that a mere difference of opinion between physicians is not enough to establish falsity under the False Claims Act.  In US ex rel. Polukoff v. St. Mark’s et al., No. 16-cv-00304 (Jan. 17, 2017 D. Utah), the district court dismissed relator’s non-intervened qui tam complaint with prejudice based on a combination of Rule 9(b) and 12(b)(6) deficiencies.  In so doing, the Polukoff court joined US v. AseraCare, Inc., 176 F. Supp. 3d 1282, 1283 (N.D. Ala. 2016) and a variety of other courts in rejecting False Claims Act claims premised on lack of medical necessity or other matters of scientific judgment.  This decision came just days before statements by Tom Price, President Trump’s pick for Secretary of Health and Human Services (HHS), before the Senate Finance Committee in which he suggested that CMS should focus less on reviewing questions medical necessity and more on ferreting out true fraud.  Price’s statements, as well as decisions like Polukoff, are welcome developments for providers, who often confront both audits and FCA actions premised on alleged lack of medical necessity, even in situations where physicians vigorously disagree about the appropriate course of treatment.

In Polukoff, the relator alleged that the defendant physician, Dr. Sorensen, performed and billed the government for unnecessary medical procedures (patent formen ovale (PFO) closures). The relator also alleged that two defendant hospitals had billed the government for associated costs.  Specifically, the relator alleged that PFO closures were reasonable and medically necessary only in highly limited circumstances, such as where there was a history of stroke.  Medicare had not issued a National Coverage Determination (NCD) for PFO closures or otherwise indicated circumstances under which it would pay for such procedures.  However, the relator held up medical guidelines issued by the American Heart Association/American Stroke Association (AHA), which, essentially, stated that PFO closures could be considered for patients with “recurring cryptogenic stroke despite taking optimal medical therapy” or other particularized conditions. Continue Reading The FCA and Medical Necessity: An Increasingly Tenuous Relationship

Last week, a 2-1 split panel on the US Court of Appeals for the Sixth Circuit affirmed the lower court’s dismissal of U.S. ex rel. Harper, et al. v. Muskingum Watershed Conservancy District, Case No. 15-4406 (6th Cir. Nov. 21, 2016). The Sixth Circuit’s decision comes nearly eleven months after the US District Court, Northern District of Ohio dismissed the relators’ False Claims Act (FCA) complaint, which alleged reverse false claims arising from hydraulic fracturing (“fracking”) leases executed by the Muskingum Watershed Conservancy District (MWCD). In this case, the Sixth Circuit became the first appellate court to address the requisite mental state for the so-called “reverse false claims” theory of liability, 31 U.S.C. § 3729(a)(1)(G), under which a defendant is liable if it “knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government.”

The case involves a 1949 land grant from the United States to MWCD, a political subdivision of the state of Ohio responsible for developing reservoirs and dams to control flooding. The 1949 deed included a provision reverting the land to the United States if MWCD “alienated or attempted to alienate it, or if MWCD stopped using the land for recreation, conservation, or reservoir-development purposes.” Starting in 2011, MWCD began selling rights to conduct fracking on the land. Opposed to fracking, the three relators filed this FCA action based on a theory that the 1949 deed’s reversion clause was triggered by MWCD’s sale of fracking rights, thereby resulting in reverse false claims and conversion when MWCD “knowingly withholding United States property from the federal government.” The United States declined to intervene in the case.

The Sixth Circuit concluded that “knowingly” in the context of § 3729(a)(1)(G) applies “both the existence of a relevant obligation and the defendant’s own avoidance of that obligation.” In other words, to be liable, the defendant must have known it had (or have acted in deliberate ignorance or reckless disregard of) an obligation to the United States and known that it was avoiding (or have acted in deliberate ignorance or reckless disregard of) that obligation. Continue Reading Split Sixth Circuit Panel Affirms Dismissal of Reverse False Claims Case Involving Fracking Leases

On November 8, 2016, the US Court of Appeals for the Eleventh Circuit issued a decision in U.S. ex rel. Saldivar v. Fresenius Medical Care Holdings, Inc., remanding the case for entry of an order dismissing the case for lack of subject matter jurisdiction based on the False Claims Act’s (FCA) pre-2010 public disclosure bar.

We previously posted about the US District Court for the Northern District of Georgia’s October 30, 2015, decision granting Fresenius’ motion for summary judgment. As a reminder, relator Chester Saldivar alleged that Fresenius violated the FCA by billing the government for the “overfill” in medication vials, which is the extra medication included to facilitate the extraction of the amount labeled on the vial.

Fresenius maintained that the action should be dismissed for lack of subject matter jurisdiction due to the pre-2010 version of the public disclosure bar in the FCA, which prevents qui tam actions if the allegations in question were publicly disclosed and the relator is not an original source. The district court concluded that Saldivar’s allegations of overfill billing were publicly disclosed to the government in communications between Fresenius and the Centers for Medicare and Medicaid Services (CMS) as well as publicly in a complaint in another matter. But, the district court held that Saldivar was an “original source” and not barred from bringing the action because of his experience in managing the inventory of the medication and his discussions with supervisors and coworkers about overfill use and billing.

On the merits of Saldivar’s allegations, the district court then held that Saldivar could not prove that Fresenius knew that billing for overfill was impermissible. On that basis, the district court granted Fresenius’ motion for summary judgment and Saldivar appealed.

Continue Reading Eleventh Circuit Says Whistleblower’s Suit Should Never Have Been Heard

The US Court of Appeals for the Eighth Circuit today issued a decision affirming a district court’s grant of summary judgment against a False Claims Act (FCA) relator in United States ex rel. Donegan v. Anesthesia Associates of Kansas City, PC, on which we previously posted.  The case involved a dispute over whether a regulation required an anesthesiologist to be present in the operating room when the patient “emerges” from anesthesia, and the district court had granted summary judgment on the grounds that the defendant had reasonably interpreted the regulation as not requiring presence in the operating room.  The district court’s decision was important because it made clear that the defendant’s interpretation of an ambiguous regulation need not be the “most reasonable” interpretation.

The Eighth Circuit agreed with the district court, holding that the relator could not establish scienter because the regulation was ambiguous, and the defendant’s interpretation was objectively reasonable.  The court held:

Here, the question is whether AAKC’s reasonable interpretation of the ambiguous regulation precludes a finding that it knowingly submitted false or fraudulent claims, even if CMS or a reviewing court would interpret the regulation differently. Relator simply failed to submit evidence refuting AAKC’s strong showing that its interpretation was objectively reasonable. Relator’s experts expressed their opinions that emergence as referred to in Step Three should end before an AAKC patient is transferred to the PACU. But Relator’s contention that the Medicare regulations be interpreted in this fashion is a claim of regulatory noncompliance, not an FCA claim of knowing fraud.  (internal citations and quotations omitted)

This result underscores the fact that an FCA case based on alleged noncompliance with a regulation that is subject to multiple, reasonable interpretations can be a risky endeavor for a relator.

On July 7, 2016, the US Court of Appeals for the Seventh Circuit affirmed the US District Court for the Southern District of Indiana’s grant of summary judgment in favor of a federal subcontractor defendant facing False Claims Act (FCA) allegations. Notably, the Seventh Circuit rejected the district court’s original grounds for summary judgment, an “advice-of-accountant” defense, instead finding that applicable regulations and the trial record created ambiguity making it impossible to demonstrate the defendant’s knowing submission of false claims.

The relator’s FCA claims were premised on alleged violations of the Davis-Bacon Act, which requires that federal construction contractors pay their workers the “prevailing wage.” 40 U.S.C. § 3142(a). US Department of Labor regulations provide further specifics on base wage rates and fringe benefits (i.e., life, dental, vision and health insurance) for varied types of workers. The relator, a union comprised of workers who performed work for the defendant, alleged that its workers had not been paid the prevailing wage under Davis-Bacon due to the defendant’s deduction of $5.00 per hour from each employee to cover fringe benefits. These withholdings were deposited into a trust created by the defendant for its employee insurance benefits, and were withheld from employees whether or not they were eligible for fringe benefits. In the lawsuit, the defendant subcontractor was alleged to have submitted false Certified Payroll Reports to the government including statements attesting compliance with the Davis-Bacon Act, despite the $5.00/per hour withholding which allegedly resulted in payments to workers below the “prevailing wage.”

While upholding the grant of summary judgment for the defendant, the Seventh Circuit based its ruling on different grounds than the district court. The district court had ruled that the defendant’s reliance on the advice of its accountants with respect to withholdings negated any potential showing of knowing submission of false statements. The Seventh Circuit rejected this conclusion, finding that the defendant had failed to demonstrate the facts necessary to provide a basis for an “advice-of-accountant” defense, noting “[w]e do not know precisely what it told its accountants, whether they provided all necessary details, or what exactly the accountants recommended.”

Rather, the Seventh Circuit affirmed the grant of summary judgment for defendant subcontractor on the basis of the “ambiguity” surrounding regulations regarding employer accounting of fringe benefit contributions and absence of evidence as to any withholding requirements contained in the contract. Walking through applicable DoL regulations, the Seventh Circuit found that it was unclear whether the withholdings made by the defendant necessarily violated the Davis-Bacon Act and, further, that the record was unclear as to whether the defendant was contractually obligated to make contributions to the fringe benefit trust for ineligible employees. The Court held, therefore, that it could not be inferred that the defendant “either knew or must have known that it was violating the Davis-Bacon Act.”

In short, the Seventh Circuit embraced the logical premise that contractors cannot reasonably be subjected to multiple damages and penalties under the FCA – which the Supreme Court has characterized as an essentially punitive statute – where the claim is based on alleged violation of an ambiguous statute or regulation.