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Re-Trial Order in AseraCare Confirms that Differences in Clinical Judgment Alone Insufficient to Establish Falsity

As we previously reported, in the FCA case against hospice-provider AseraCare, U.S. ex rel. Paradies v. AseraCare, Inc., the U.S. District Court for the Northern District of Alabama granted AseraCare’s motion for a new trial based on error in instructing the jury during the falsity phase of the trial (The trial was bifurcated into falsity and scienter phases.)  The court released its written order on the motion this week.

This order is an instructive read for any defense of a false certification case. As the court explains, a false certification case does not rest on allegations that, for example, a defendant forged doctor signatures, billed for unperformed services, or submitted claims for fictitious patients. Rather, such a claim, as in this case, rests on a theory that the underlying medical records do not support the physician’s certifications (here, of hospice eligibility), rendering those certifications false. But, as the court ultimately recognized in reviewing its jury instructions, a mere difference of clinical judgment is not enough to show falsity.  The court stated that it should have advised the jury that the FCA requires proof of an “objective” falsehood. It also added that a proper instruction should have stated that a difference of opinion between doctors, without more, is insufficient to show that a Medicare hospice claim is false.

But that was not all, in a case that has proved itself a procedural primer. The court also reopened summary judgment.  The court noted at the outset of its order that the law on many key issues under the FCA is still developing, particularly in the hospice realm. Based on its findings regarding the correct legal standard of falsity and the government’s evidence on falsity, the court notified the parties that it will consider summary judgment under Federal Rule of Civil Procedure 56(f)(3), which provides that a court may “consider summary judgment on its own after identifying for the parties the material facts that may not be genuinely in dispute.”  Thus, before setting a new trial date, the court will reconsider summary judgment, giving the government an opportunity to point to objective evidence of falsity offered during the trial.

The government faces a challenging case on summary judgment under the clarified legal standard.  In replying to contention interrogatories, the government represented that it would use only its expert’s testimony and the underlying medical records to try to prove falsity. Because the government’s evidence showed a difference in only clinical judgment about patients’ terminal prognoses, “the court now questions whether the Government, under the correct legal standard, has sufficient admissible evidence of more than just a difference of opinion to show that the claims at issue are objectively false as a matter of law.”  Government witness testimony at trial further undermines the government’s case. As the court noted, the government expert acknowledged that he had changed his opinion regarding the eligibility of patients between his review in 2010 and 2013: “I was not the same physician in 2013 as I was in 2010.” Likewise, [...]

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Court Orders Re-Trial of AseraCare Falsity Phase Based on Jury Instruction Errors

We said we would provide updates based on any developments in U.S. ex rel. Paradies v. AseraCare, Inc., and we are reporting earlier than anticipated. Instead of moving the case along to the second phase of the bifurcated trial to address scienter, the court granted AseraCare’s motion for a new trial on the issue of falsity after expressing concern that it had “committed major reversible error in the jury instructions.” Thus, the parties are now faced with re-trying the question of whether 121 hospice claims were false–an issue that took almost two months to try the first time.

At issue are the judge’s instructions relating to the issue of falsity. In earlier stages of the case, the parties disputed the proper standard of falsity, with AseraCare arguing that to establish falsity, the government must show that that a certifying physician did not or could not have believed, based on his clinical judgment, that a patient was eligible for hospice. AseraCare argued that the government’s medical expert was second-guessing the certifying physician’s judgment, evidence not sufficient to prove that the claims were objectively false. The government, in contrast, argued that the falsity inquiry turned on medical record information, and not the physician’s certification: it suggested that a hospice claim is false when clinical information and other documentation in the medical record does not support a terminal prognosis.

After trial, the judge cited a concern that the jury instructions had two errors. First, the judge expressed concern that she hadn’t instructed the jury about objective falsity or objective evidence of falsity; second, the judge said the “bigger error I think I made was in overruling the defendant’s request for an instruction that said… opinion is not enough or difference of opinion is not enough.”  AseraCare moved orally for a new trial, and the judge granted the motion.

While a trial of False Claims Act (FCA) claims is unusual, even more unusual is for a judge to order a new trial after a jury verdict. However, the judge was correct to recognize the errors in the jury instructions, as differences in medical judgment or opinions certainly should not be sufficient to establish fraud under the FCA.

The court also denied the government’s request to stay the trial proceedings. We will watch to see whether the re-trial based on revised instructions addressing objective falsity and physician differences of opinion alter the outcome of the first phase on the falsity of the claims.




AseraCare Trial Set To Move To Phase Two

The first round is over in U.S. ex rel. Paradies v. AseraCare, Inc., the False Claims Act (FCA) case pending in the U.S. District Court for the Northern District of Alabama that, as we previously reported, was the first in which a court bifurcated an FCA trial between the elements of falsity and scienter. The jury considered the element of falsity as to 121 hospice claims, and on October 15, 2015, concluded that 104 of those claims were not eligible for reimbursement by Medicare under applicable regulations for end-of-life care. The case will now continue to the second phase, concerning scienter, in which the jury will be asked to determine whether AseraCare knowingly submitted false claims.

The now-concluded falsity phase was notable because, as we previously discussed, the court denied the defendant’s motion for summary judgment on the element of falsity where the government solely relied upon a sampling of claims reviewed by an expert.

According to the jury instructions in the falsity phase, one requirement of the claims AseraCare submitted to Medicare was that the patients were properly certified as terminally ill (which is when the patient’s medical prognosis is a life expectancy of six months or less if the illness runs its normal course.) The certification for the initial benefit period required that both the patient’s attending physician, if the patient had one, and the hospice program’s medical director state that they considered the patient to be terminally ill based on the doctor’s clinical judgment. This certification required clinical information and documentation to support the prognosis. For each of the claims in the sample, the parties did not dispute the existence of the certifications, but instead whether they were proper.

On October 16, 2015, AseraCare renewed its motion for judgment as a matter of law as to the jury’s findings in phase one. We will watch and report on the outcome and the scienter phase of the case.




SDNY Holds that Corporate Attorney-Client Privilege Trumps Individual Advice-of-Counsel Defense

In the wake of the U.S. Department of Justice’s (DOJ) recent memorandum regarding increased focus on individual culpability for corporate wrongdoing (on which we previously posted here) comes a district court decision with significant implications for individuals who attempt to assert an advice-of-counsel defense based on consultation with company counsel.

In a September 22, 2015 decision in U.S. v. Wells Fargo Bank, N.A, the U.S. District Court for the Southern District of New York ruled that an employee could not assert the advice-of-counsel defense because his employer, Wells Fargo, refused to waive the attorney-client privilege over the relevant communications between the employee and Wells Fargo counsel.

In Wells Fargo, the United States brought civil claims against Wells Fargo and individual defendant Kurt Lofrano for violation of the False Claims Act (FCA), along with other claims. Lofrano asserted that he had sought advice from Wells Fargo attorneys concerning the legal requirements he is now alleged to have violated, and acted in conformity with such advice. All parties agreed that the advice-of-counsel defense would provide a complete defense to the government’s claims against Lofrano.

But Wells Fargo objected to disclosure of the privileged communications at issue, and sought a protective order prohibiting disclosure. The Southern District engaged in a lengthy analysis of the competing principles that, on the one hand, a person accused of wrongdoing should be able to present “every available defense” and, on the other hand, the broader public interests underlying the sanctity of the attorney-client privilege.

Relying on the Supreme Court precedent (Swidler v. Berlin, 524 U.S. 399 (1998)) concerning the survival of the attorney-client privilege on death (a situation the Southern District conceded was not directly on point), the court rejected the argument that a balancing test should be used under which Lofrano’s need for the privileged evidence would be weighed against Wells Fargo’s need to keep it confidential: “That is, the use of a balancing test to determine whether a company, through no fault of its own, must forfeit its privilege based on an employee’s later assertion of an advice-of-counsel defense would render the privilege no less uncertain that the use of such a test to determine whether the privilege applies in the first instance.”  The court held that the attorney-client privilege is not a qualified privilege and that, because Wells Fargo would not waive its privilege, the advice-of-counsel defense was not “available” to Lofrano.

The court observed that this result “is arguably harsh in this particular case, as it may well deprive Lofrano of his best defense to liability for tens of millions of dollars. It is, however, the price that must be paid for society’s commitment to the values underlying the attorney-client privilege.” The court went on to chronicle the ways in which the result might not be as harsh as it seems including, for example, the “significant number of cases” where the employer will also seek to assert the advice-of-counsel defense alongside the employee, and thus agree to waive. But this was [...]

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Issues of Fact Must Really Be Genuine: Another District Court Ends a Relator’s FCA Suit on Scienter Grounds

On the heels of the recent Omnicare summary judgment ruling (covered in this blog) comes another scienter-based summary judgment victory for a False Claims Act (FCA) defendant in United States ex rel. Kirk v. Schindler Elevator Corp. On September 10, 2015, the U.S. District Court for the Southern District of New York granted summary judgment in favor of Schindler Elevator following over a decade of litigation, including a 2011 Supreme Court ruling regarding the FCA’s public disclosure bar (http://www.supremecourt.gov/opinions/10pdf/10-188.pdf).

The relator’s FCA case was based on the alleged failure of Schindler, his former employer, to comply with the Vietnam Era Veterans Readjustment Assistance Act (VEVRAA), 38 U.S.C. § 4212, and associated regulations. VEVRAA requires certain government contractors to submit annual reports, called “VETS-100” reports, providing information about the number of veterans employed by the contractor, based on data known to the contractor. The relator alleged that Schindler’s VETS-100 reports were false and that the company was reckless because it had no mechanism for counting veterans. While much of the court’s opinion discusses issues that are specific to contractors subject to VEVRAA, in rejecting the relator’s attempt to raise a genuine issue of material fact on scienter, the court made a number of determinations that are important for any FCA defendant:

First, the court rejected the relator’s argument that the alleged lack of a written procedure for tracking veteran status raised an issue of fact on recklessness. The court observed that the lack of a written process, particularly where none was required by the statute, was not proof of recklessness where the evidence demonstrated Schindler’s attempts to comply with VEVRAA in numerous ways. Thus, the lack of a written procedure for statutory or regulatory compliance cannot, on its own, establish scienter.

Second, in response to an expert opinion proffered by the relator concerning the inaccuracy of Schindler’s VETS-100 reports due to alleged underreporting of veterans, Schindler argued that certain veterans did not need to be included on the reports, relying upon a regulation providing guidance on which types of employees’ veteran status needed to be reported. While the relator disagreed with Schindler’s interpretation of the regulation, the court held that where there is legitimate disagreement over a regulation and the contractor acts in good faith, the contractor does not knowingly present a false claim. The court noted that the relator offered “not a single piece of evidence that Schindler knew its interpretation of the regulation was wrong and then knowingly submitted false VETS-100 reports.”

Third, the court held that e-mails in which employees remarked about inaccuracies in data and the need to correct it did not establish scienter. “[I]dentifying errors in data collection or recognizing the need for better quality control does not constitute ‘reckless disregard’ within the meaning of the FCA.”

Fourth, the relator’s use of two Schindler employees’ declarations (one of which was relator’s own declaration) testifying that they had never been asked by Schindler to identify their veteran status was insufficient to survive summary judgment, given the countervailing evidence [...]

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Omnicare Decision Demonstrates that Relators Cannot Rely on Ambiguous Evidence of Intent to Survive Summary Judgment, and Should Exercise Caution

On September 3, the U.S. District Court for the Southern District of Texas granted summary judgment in favor of Omnicare in United States ex rel. Ruscher v. Omnicare, Inc., and in doing so, made clear that in order to get to a jury, relators must come forth with evidence of intent that is more than merely ambiguous.

The relator alleged that Omnicare violated the False Claims Act (FCA) by writing off debt owed by skilled nursing facilities (SNFs) in exchange for referrals to Omnicare’s pharmacy business, in violation of the Anti-Kickback Statute, 42 U.S.C. § 1320a-7b(b)(2) (AKS). An AKS violation requires a showing that the defendant intended to induce referrals, and the court’s opinion centered on that issue. Omnicare argued that the write-offs were not done in order to induce referrals, but instead were the resolution of legitimate billing disputes with the SNFs.

The court reviewed in detail the evidence the relator claimed supported her allegations of fraudulent intent, many of which were e-mails from Omnicare personnel. For example, one e-mail, concerning one of the eight SNFs at issue, stated that “it behooves [Omnicare] to get [the billing dispute with Avamere] resolved ASAP” because “Avamere has indicated that they will not consider renewal with Omnicare unless this billing reconciliation is complete and they will not pay us either.” The court held that while the e-mail reflected a desire to quickly resolve the billing dispute “to preserve the parties’ business relationship,” it did not evidence an intent to forgive a debt in order to induce referrals.

Another e-mail stated, “I cannot assure Omnicare that we will win the Seacrest business if we reach agreement [on accounts receivable negotiations] but I can assure that we will not win Seacrest if we fail to reach compromise….” While the court observed that this was among the e-mails “coming closest to creating a question of material fact,” the court nonetheless held that it and others could not “be read to suggest a bad purpose, as opposed to an honest, if business-minded, desire to maintain good customer relationships.”

Among other arguments, relator also alleged that prompt-pay discounts that Omnicare had negotiated with many of its customers, including those whose payments had been late in the past, were evidence of fraudulent intent. The court rejected this argument because “a customer would be entitled to take the discounts only for future, timely payments. This seems to the court to be a completely reasonable effort to reduce Omnicare’s future collections costs by encouraging previously delinquent customers to make timely payments.”

In the end, the court held:

In order to reach a jury, an accusation of a multimillion-dollar fraud must be supported by more than a few ambiguous e-mails.  An accusation of fraud should be made cautiously, and only when there is evidence to support it.

Omnicare is a somewhat lengthy decision and it covers more than the issues set forth above. But the court’s willingness to dig into the evidence and grant summary judgment on the question [...]

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Deconstructing Tuomey: 25 Years on, Is It Time for Congress to Revisit the Stark Law?

In 1989, Congress enacted the Ethics in Patient Referrals Act. Twenty-five years later, in United States ex rel. Drakeford v. Tuomey, the Fourth Circuit upheld the largest False Claims Act (FCA) judgment predicated on Stark Law violations to date: $237 million. Writing in concurrence, Judge Wynn summarized the situation as “[a]n impenetrably complex set of laws and regulations that will result in a likely death sentence for a community hospital in an already medically underserved area,” concluding that “even for well-intentioned health care providers, the Stark Law has become a booby trap rigged with strict liability and potentially ruinous exposure—especially when coupled with the False Claims Act.”

The court’s opinion did not quarrel with this assessment: “we do not discount the concerns raised by our concurring colleague regarding the result in this case. But having found no cause to upset the jury’s verdict in this case and no constitutional error, it is for Congress to consider whether changes to the Stark Law’s reach are in order.”

This is not the first time that serious concerns have been raised about the breadth, complexity, and inscrutability of the Stark Law as currently implemented. As part of the Balanced Budget Act (BBA) of 1995, Congress voted to repeal the Stark Law as applied to compensation arrangements, but the BBA was vetoed by President Bill Clinton. More recently, the law’s namesake, former Representative Fortney “Pete” Stark, has urged its repeal.

This article is not intended to summarize all the facts of Tuomey or its extended procedural history, which have been recounted elsewhere. Rather, we seek to comment on three key aspects of the case: (1) the defendant’s advice of counsel/ scienter defense; (2) the court’s application of the “takes into account” prong to Tuomey’s physician employment agreements; and (3) certain inherent tensions in the Stark Law that the Tuomey odyssey underscores.

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Central District of California Opinion Confirms that Information Gained through Employment is Not Necessarily “Direct” Knowledge under the Public Disclosure Bar

Last week, a court dismissed a relator’s claim for a share of the government’s $322 million settlement in United States v. Scan Health Plan, 2:09-cv-05013-JFW (C.D. Cal. Aug. 28, 2015), ruling that the relator did not qualify as an original source under the False Claims Act’s (FCA) public disclosure bar. The ruling followed the Court’s earlier decision in June that the relator’s claim was “based upon” a publicly disclosed audit report by the State of California Controller’s Office (SCO), which found that the defendant, Scan Health Plan, was receiving “duplicative of overlapping payments” from Medicare and Medi-Cal. The court’s June ruling left open, however, whether the relator could nonetheless avoid application of the public disclosure bar by showing that he was an original source. Last week’s decision concluded that he could not:  despite the relator’s previous employment with the defendant and his role in initiating the SCO’s audit, he did not have the kind of “direct and independent” knowledge of the alleged fraud necessary to qualify as an original source.

The court’s opinion focused on the FCA’s requirement that only “direct” knowledge can qualify a relator as an original source. Citing Ninth Circuit precedent, the court rejected the relator’s argument that anything learned during his employment with the defendant qualified as direct knowledge. Rather, the court stated that direct knowledge comes from “actually view[ing] the source documents or view[ing] firsthand the fraudulent activity that is the basis of [the] qui tam action.” Knowledge that the relator learns from others in the company is “secondhand” and not “direct.”

The court also based its conclusion on the relator’s failure to provide any detailed support for his allegations in his complaint that did not otherwise arise from the publicly disclosed SCO audit report. The court noted that the relator’s factual allegations underlying the claim of fraud were either pled on information and belief or were drawn from the SCO audit. The relator did not plead that he had direct and independent knowledge of the fraud.  Indeed, the relator’s position with the company did not give him access to the financial data needed to detect the alleged fraud. Rather, all the relator had was “speculation and conjecture.” That the speculation arose from information that the relator gained as an employee of the defendant did not matter. The relator still lacked “direct” knowledge of the information underlying the alleged fraud.

The court’s decision confirms that a relator must have direct knowledge or involvement in the underlying conduct for the relator to qualify as an original source under the public disclosure bar.  Mere speculation and conjecture of fraudulent activity, even if based on information learned through employment with the defendant, is not sufficient to support making a fraud allegation under the FCA.  Even though the relator had played a role in initiating the government audit that ultimately resulted in the FCA settlement, this was not enough. The FCA has, and should have, strict requirements for individuals to qualify as relators in order to avoid turning qui tam complaints into fishing expeditions for [...]

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

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.




Condition of Payment Limitation on Implied Certification Cases is Alive and Well in the D.C. Circuit

To the extent there was ever any doubt about the vitality the “condition of payment” limitation on “implied certification” False Claims Act (FCA) cases in the D.C. Circuit, the court put that doubt to rest on Friday, July 10 in United States ex rel. Davis v. District of Columbia, No. 14-7060, 2015 WL 4153919 (D.C. Cir. Jul. 10, 2015).

Davis involved a relator’s allegations that the District of Columbia failed to maintain records to support the cost reports it submitted to the D.C. Medical Assistance Administration, in violation of recordkeeping regulations. The court reversed the district court’s award of summary judgment for the relator, on the grounds that the relator had not shown a “knowing” violation of the regulations. However, in doing so, it took the opportunity to clarify its stance on implied certification cases under the FCA:

To establish knowledge on the basis of an implied certification, Davis had to prove that the District… knew both that it violated a legal obligation and that its compliance was a condition of payment (emphasis added).

The court went on:

Not all failures to comply with a federal statute or regulation expose a provider to liability under the False Claims Act. “[A] false certification of compliance with a statute or regulation cannot serve as the basis for a qui tam action under the [False Claims Act] unless payment is conditioned on that certification.” United States ex rel. Siewick v. Jamieson Sci. & Eng’g, Inc., 214 F.3d 1372, 1376 (D.C. Cir. 2000).  In other words, a defendant may be held liable under the False Claims Act for falsely certifying it complied with a statute or regulation only if “certification was a prerequisite to the government action sought.” Id. The parties dispute whether the regulations the District allegedly violated are conditions of payment, rather than conditions of participation in the Medicaid program. Several of our sister circuits have recognized the difference and cautioned against treating all Medicare and Medicaid regulations as conditions of payment.

The D.C. Circuit chose not to decide whether the regulations at issue were, in fact, conditions of payment, grounding its decision in resolution of the knowledge question. Accordingly, it did not need to say all that it did about the necessity of a condition of payment in an implied certification case.  But the fact that it addressed this issue—and answered it in the affirmative—is a welcome development for FCA defendants, given the court’s decision several years ago in United States v. Sci. Applications International Corp., 626 F.3d 1257, 1266 (D.C. Cir. 2010) (“SAIC”). SAIC contained expansive language onto which some relators have seized, interpreting that case as a rejection of the condition of payment requirement in favor of a more amorphous and fact-driven materiality standard. Davis silences those erroneous interpretations.




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