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Fourth Circuit Upholds Judgment of Over $237 Million against Tuomey Healthcare System

On July 2, 2015, the U.S. Court of Appeals for the Fourth Circuit affirmed the U.S. District Court for the District of South Carolina’s judgment of $237,454,195 in damages and penalties against Tuomey Healthcare System in United States ex rel. Drakeford v. Tuomey Healthcare System, Inc. (No. 13-2219).  The judgment followed a rare False Claims Act (FCA) trial, after which the jury found Tuomey liable for submitting 21,730 false claims to Medicare.  While the Fourth Circuit’s Tuomey decision addressed many claims of error advanced by Tuomey on appeal, this post highlights the court’s response to Tuomey’s challenges based on the “advice of counsel” defense and on the computation and size of the judgment.

Tuomey was alleged to have entered into part-time employment contracts with physicians that violated the Stark Law.  After one of the physicians expressed compliance concerns about the structure of the proposed arrangement, Tuomey sought Stark Law compliance advice about the contracts from several attorneys – one of whom, Kevin McAnaney, indicated that the contracts raised “red flags” under the Stark Law.  McAnaney was jointly retained by Tuomey and the physician, Drakeford, after Tuomey received a legal opinion from its longstanding counsel that the contracts were Stark compliant.  Despite McAnaney’s advice, Tuomey elected to move forward with the contracts.  Drakeford subsequently filed an FCA qui tam lawsuit against Tuomey, and the extensive litigation ensued. (more…)




Court Refuses To Reconsider Bifurcation Order

We previously posted on the U.S. Department of Justice’s motion for reconsideration of the United States District Court for the Northern District of Alabama’s order bifurcating the element of falsity from scienter (and the other False Claims Act (FCA) elements) at trial in U.S. ex rel. Paradies v. Aseracare, Inc. Last Thursday, the court denied the motion for reconsideration. The court was unpersuaded by DOJ’s contention that bifurcation had never been done before in an FCA case. “Just because a trial technique has never been done does not preclude the court from using its discretion to do so.”  The court also noted—perhaps turning DOJ’s “never been done before” argument against it—that “[t]he parties have not directed the court to any other False Claims Act trial involving a [M]edicare hospice benefit.”

With respect to DOJ’s arguments about juror confusion and duplicative evidence in the different phases of a bifurcated trial, the court rejected them, and reiterated its position that evidence of “general corporate practices” unrelated to actual, allegedly false claims would be inadmissible in the first trial phase.

While the court’s denial of the motion for reconsideration was not unexpected, it was undoubtedly the correct result, evidencing the court’s desire to ensure that DOJ properly establishes the element of falsity without unduly prejudicing the defendant with evidence irrelevant to the falsity question.  After all and in the words of the court, “no FCA liability exists without a false claim.”




Court Holds Defendant’s Interpretation of Ambiguous Regulation Need Not Be ‘Most Reasonable’ Interpretation

A recent district court decision delivered a decisive blow to False Claims Act (FCA) relators seeking to survive summary judgment in cases based on ambiguous regulations. In United States ex rel. Donegan v. Anesthesia Associates of Kansas City, PC, the United States District Court for the Western District of Missouri granted summary judgment to the defendant on June 9, 2015, holding that because the regulation at issue was ambiguous and the defendant’s construction of it was reasonable, the defendant was entitled to summary judgment on the issue of scienter.

The case involved meaning of the term “emergence” as used in anesthesiology. The applicable regulation required that, in order to bill at a particular rate, an anesthesiologist must be present during a patient’s “emergence” from anesthesia, without defining that term. The parties differed on whether the term included a patient’s recovery in the recovery room as well as in the operating room. The defendant argued that it included both; as such, even if an anesthesiologist was not present in the operating room when the patient came out of anesthesia, if he/she was present in the recovery room, the emergence requirement was satisfied. The relator offered evidence supporting a contrary definition, limiting “emergence” to the operating room.

The court held that the relator could not prove knowing submission of false claims, finding that the definition of “emergence” was ambiguous and undefined, and that “[a]lthough there is a consensus within the anesthesiology community that emergence begins in the operating room with the cessation of the delivery of anesthetic agents, there is no agreement on where it ends.” The court found the defendant’s interpretation reasonable, even if not “the most widely held or most reasonable definition” and even if an opportunistic interpretation, inasmuch as the defendant had “a financial motive to interpret the regulation this way.” In reaching its holding, the court rejected not only the relator’s arguments, but those advanced by the United States in a statement of interest, in which it suggested that the scienter analysis should include examining the “steps the defendant took to ascertain the government’s construction of an ambiguous regulation.”

The court’s decision makes sense, and is an outgrowth of the often-cited notion that matters of scientific disagreement cannot give rise to FCA liability. Where an FCA claim is premised on a regulation that uses an undefined medical term that is subject to different interpretations, a provider should not rationally be held to have engaged in fraud if the provider reasonably interpreted the ambiguity, even in a “less reasonable” way than the relator and even if in a manner that inured to the provider’s financial benefit.




Bifurcation Squarely Within Court’s Discretion, Notwithstanding DOJ’s Motion for Reconsideration

On June 10, 2015, the Department of Justice moved for reconsideration of the U.S. District Court for the Northern District of Alabama’s May 20 decision in U.S. ex rel. Paradies v. AseraCare, Inc., a False Claims Act (FCA) case in which the court ordered bifurcation of the element of falsity from the element of scienter at trial, with the issue of falsity to be tried first.  Despite the government’s arguments, the bifurcation order was both within the court’s discretion and well-reasoned.

A primary feature of the government’s motion for reconsideration is its contention that bifurcation of this type has never before been done in an FCA case.  However, bifurcation lies squarely within a district court’s discretion: the applicable rule (F.R.C.P. 42) expressly provides for bifurcation of “one or more separate issues,” and there is no exception to this rule under the FCA.

The government’s position nonetheless suggests that there is something that categorically distinguishes bifurcation considerations in an FCA case from bifurcation considerations in other types of cases.  But this categorical argument is not particularly compelling; indeed, the government’s contention that bifurcation requires it “to jump over an arbitrary hurdle that is without precedent” does not resonate, given that falsity is a distinct element of an FCA claim and has always been a hurdle the government must surmount.  It is hardly arbitrary—a false claim is the central feature of an FCA case, without which there is no case.  In any event, whether or not bifurcation has ever before been ordered in an FCA case, the court found that the specific circumstances in this case warranted bifurcation.

An important consideration underlying the bifurcation order was the court’s prior decision authorizing the use of sampling and extrapolation to prove falsity, a ruling on which we previously reported.  Given that decision, it is entirely proper for the court to take the precaution of bifurcation to prevent evidence that is not relevant to falsity from improperly infecting the jury’s determination of whether the claims within the sample were false.  This is particularly true given that the government indicated it would seek to present evidence of general corporate practices at trial.  The court properly held that “[a]llowing such general ‘pattern or practice’ evidence before the jury decides whether any claim is false would be unduly prejudicial to Aseracare.  Further, this type of evidence would be confusing to the falsity analysis as the jury must view each claim separately to determine whether it is objectively false.”  The court went on:

Essentially, the Government argues that the existence of the scheme proves the falsity of the claims.  The court disagrees.  The Government must show that each separate claim within the 233 patient sample is objectively false.  Falsity cannot be inferred by reference to AseraCare’s general corporate practices unrelated to specific patients.  A claim is either false or not without evidence of corporate practices unrelated to that claim.

The government presented several other arguments in its motion for reconsideration, including that some [...]

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Whistleblower Wins Reinstatement Fight, Demonstrating the Need for Detailed Personnel Files

In 2012, a jury concluded that Bayer Corporation (Bayer) unlawfully terminated a sales representative, Mike Townsend, because he reported to the Arkansas Attorney General that with the alleged knowledge of Bayer’s sales force, physicians were overbilling Medicaid for Bayer’s drugs. See Townsend v. Bayer Corp., 774 F.3d 446, 452 (8th Cir. 2014).

Shortly before Townsend was terminated, his corporate credit card had been suspended for about six months, because his wife had inadvertently used his expense reimbursements from Bayer to pay other bills. After Townsend paid off the outstanding balance on his corporate credit card account, the account was reactivated. As alleged, however, Bayer terminated Townsend after the account was reactivated, claiming that the closed credit card account did not allow Townsend to entertain physicians. A jury concluded that Townsend was terminated because of his alleged whistleblowing activities, and not for the reasons Bayer had asserted.

After the jury delivered its verdict, the court then ordered Bayer to reinstate Townsend “at the same rate of pay and with the same seniority he held at the time of his termination.” See Townsend v. Bayer Corp., 11-cv-00055-JM, ECF No. 121 (E.D. Ark. 2013). Bayer offered him a position at a lower rate of pay and seniority in Knoxville, Tennessee, more than 500 miles away from his current home in Little Rock, Arkansas. After Townsend’s motion for reinstatement was stayed pending an appeal to the Eighth Circuit, the district court concluded that Bayer’s job offer was not a good faith effort to comply with the Court’s order that Townsend be restored to a comparable position under 31 U.S.C. § 3730(h)(2).

This case presented the rare circumstance of a False Claims Act (FCA) whistleblower who wishes to continue working for a company that has allegedly terminated him for reporting unlawful conduct. In many ways, this case presents some guidance as to how companies should treat whistleblowers. Although it is not the case that companies can never terminate employees who have reported unlawful conduct to the government, they certainly cannot terminate employees because of their whistleblowing activities. See 31 U.S.C. § 3730(h)(1) (providing relief for employees who are “discriminated against . . . because of lawful acts done by the employee . . . in furtherance of an [FCA] action”).

If a company has legitimate non-discriminatory reasons to terminate an employee who has reported alleged fraud, the company should document these reasons in the employee’s personnel file. It is particularly helpful to the employer if the reasons for termination transpired or commenced prior to the employee reporting the alleged fraud to the government.  Many courts have determined that terminated employees are only entitled to relief if their protected conduct was a “but-for” cause—meaning that the employee would not have been terminated if he had not reported the alleged fraud. Accordingly, legitimate reasons for termination, especially if properly documented, can overcome the anti-retaliation provisions of the FCA.




Cert Petition in Gonzalez v. Planned Parenthood Raises Questions Regarding Role of Government Knowledge

The U.S. Supreme Court will decide within the next few weeks whether to hear a False Claims Act (FCA) case that has garnered media attention because it involves alleged wrongdoing by Planned Parenthood.  In Gonzalez v. Planned Parenthood of Los Angeles (No. CV 05-8818, C.D. Cal.), the relator alleged that Planned Parenthood knowingly overcharged the government for contraceptives it provided to low income individuals in California.

The issue in the case turns on the role of government knowledge as a defense to scienter, i.e., the notion that when the government knows about or approves of the billing practices at issue, the defendant does not knowingly or recklessly submit a false claim.  In Gonzalez, the Ninth Circuit held that the district court properly dismissed the relator’s claims because documents attached to the complaint showed that the government knew about Planned Parenthood’s allegedly improper billing practices.  These documents included correspondence between Planned Parenthood and the California Department of Health Services, in which Planned Parenthood candidly disclosed its billing practices (to which it received no response or contradiction), as well as a letter from the Department to Planned Parenthood explaining that it would not seek a refund from Planned Parenthood because the key term at issue was not defined, and because the Department was concerned that “conflicting, unclear, or ambiguous representations have been made to providers” with regard to the billing practices at issue.  Accordingly, Planned Parenthood lacked the requisite scienter to establish a “knowing” submission of a false claim.

In seeking certiorari, the relator argued that there is a split between the Ninth Circuit and other circuits on the issue of government knowledge. While the relator did not dispute that a number of circuits held that government knowledge can refute allegations of knowledge or recklessness, the relator argued that the Ninth Circuit deviated from the approach taken by all other circuits by dismissing a case based on government knowledge at the pleadings stage, rather than at summary judgment.

On this issue, Planned Parenthood has the better argument.  As Planned Parenthood noted in its opposition, numerous cases in numerous circuits have found that government knowledge is relevant to scienter under the FCA.  The Ninth Circuit’s decision merely follows a long line of cases standing for this principle.  While it is true that the Ninth Circuit dismissed the case at the pleadings stage, it did so because the complaint (including evidence contained in documents the relator attached to the complaint) permitted such a dismissal.  The Court found that this evidence “fatally undercut” the relator’s allegation that Planned Parenthood “knowingly” submitted false claims.  Accordingly, the relator did not state a “plausible” claim under Federal Rule of Civil Procedure 8(a).

Such compelling evidence is not often available at the pleading stage, so it is unsurprising that in many cases the government knowledge issue is not in play until later stages of the litigation.  Yet the availability of such evidence here—provided by relator himself in connection with his complaint—was sufficient to warrant dismissal.

In sum, while the [...]

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“Implausible” That Scheme to Induce Referrals Would Leave Physician Ignorant of Its True Purpose

In a rare motion to dismiss ruling, a Pennsylvania federal judge rejected as “implausible” a theory that a hospital entered into on-call contracts with a physician with an illicit intent that was so covert that even the physician himself did not understand that the contracts were designed to induce him to refer Medicare patients in violation of the Anti-Kickback Statute (AKS).  Although the relator in Cooper v. Pottstown Hospital Co., LLC, No. 13-01137, 2015 WL 1137664 (E.D. Penn. Mar. 12, 2015) alleged that the on-call contracts were improper inducements based upon the later efforts of the hospital to pressure the physician to end his financial relationship with a competitor, the court found that the relator failed to plead enough facts to show that the hospital entered into the contracts with the intent to induce referrals.  This case is unusual because most AKS cases that turn on issues of the defendant’s intent involve factual disputes that survive motions practice and are slated for resolution at trial.

This case highlights how allegations of AKS violations can intermingle with the “economic credentialing” policies of hospitals who have a legitimate interest in preserving their ability to choose who to contract with and under what restrictions.  One takeaway from this case is the importance of hospitals having clear policies concerning competitive restrictions in its physician contracts and medical privileges.  Misunderstandings on this issue can result in unnecessary litigation.  While clear policies may decrease some misunderstandings, non-competes and other economic credentialing practices carry inherent risk under various laws, including the AKS.

The relator, an orthopedic surgeon, was employed by Pottstown Medical Specialists, Inc. (PMSI) and had privileges at Pottstown Memorial Medical Center (Pottstown) since 1999.  In 2005, Community Health Systems, Inc. acquired Pottstown and purchased a minority interest in PMSI.  In February 2010,  the relator entered into an on-call contract with Pottstown compensating him a fixed fee for any day he provided on-call coverage for the ER.  The on-call contract allowed either party to terminate without cause by providing 60 days’ written notice.  The relator alleged that in October 2010, Pottstown’s management learned that he had a financial interest in a new hospital opening a few miles away and pressured him to divest his interest in this new competitor and refer his patients to Pottstown.  After the relator refused, Pottstown exercised its right to terminate his on-call contract without cause.

The following year, the parties entered into a new on-call contract, which allowed the relator to continue his affiliation with the competitor, but added a restrictive covenant preventing the relator from entering into any agreement to provide services to any other facility within 30 miles without Pottstown’s prior written consent.  The relator alleged that while his second on-call agreement was in effect, his employment contract with PMSI was not renewed because of his financial interest in the competitor.  The relator then entered into employment with another hospital and, as a result of that new employment agreement, Pottstown invoked the restrictive covenant to terminate his second on-call [...]

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First Circuit Rejects Relator’s Attempt to Revive FCA Case after Jury Verdict for Defendants

Yesterday, the U.S. Court of Appeals for the First Circuit affirmed a jury verdict for Massachusetts General Hospital, Brigham & Women’s Hospital and various other defendants in U.S. ex. Rel. Jones v. Massachusetts General Hospital, — F.3d —-, 2015 WL 1138442 (1st Cir. Mar. 16, 2015) (Jones II).  The case concerned allegedly false statements made by Dr. Robert Killiany and Dr. Marilyn Albert on a grant application to the National Institute on Aging (NIA), which the relator claimed resulted in an award of federal funds to the hospitals.  Dr. Killiany had conducted a preliminary study in which Dr. Killiany had measured the entorhinal cortex (EC) (a small structure in the brain) to evaluate whether the size of an individual’s EC could predict the likelihood that an individual would later develop Alzheimer’s disease.  The relator alleged that prior to providing his preliminary data to the NIA, Dr. Killiany performed two measurements on some ECs.  Although Dr. Killiany’s initial measurements of these ECs would not have supported a correlation between EC size and the development of Alzheimer’s disease, the “remeasurements” did.  The relator alleged that Dr. Killiany deliberately excluded from his grant application the initial measurements that would have undermined the conclusions of Dr. Killiany’s preliminary study.

In rejecting the relator’s challenge to the district court’s denial of his motions for judgment as a matter of law and for a new trial, the First Circuit held that there was “no reason to upset the jury’s considered verdict” for the defendants.  Jones II, 2015 WL 1138442, at *1.  The court held that the relator had failed to preserve his argument for judgment as a matter of law on appeal, and even if he had preserved it, he could not prevail: “The jury was entitled to—and rationally could—find persuasive the evidence at trial that undermined any conclusion that Killiany’s remeasurements were fraudulent or that Albert knew them to be so.”  Jones II, 2015 WL 1138442, at *8.  The First Circuit reasoned that “the EC is a difficult area of the brain to measure, and that Killiany’s remeasurements simply reflect his increased understanding of the EC as he reviewed additional participants’ scans.”  Id.  In short, there was no fraud.

This was the First Circuit’s second encounter with this case.  In 2012, the First Circuit vacated the district court’s grant of summary judgment for the defendants, U.S. ex. Rel. Jones v. Brigham & Women’s Hosp., 678 F.3d 72 (1st Cir. 2012) (Jones I), remanding the case for trial.  In Jones I, the First Circuit acknowledged the principle that disagreements about matters of scientific judgment cannot give rise to FCA liability, but “disagree[d] that the creation of the data in question was necessarily a matter of scientific judgment.”  Jones I, 678 F.3d at 87.

Neither Jones I or Jones II upsets — and both decisions instead underscore — the important principle that matters of scientific disagreement cannot give rise to FCA liability.  Indeed, the First Circuit’s evaluation of the jury verdict in yesterday’s decision reinforces this principle [...]

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The Fourth Circuit’s Triple Canopy Decision: Implied Certification Versus “Garden-Variety” Breaches of Contract (and does the Government’s intervention decision matter to the analysis?)

The Fourth Circuit’s January 8, 2015 decision in United States ex rel. Badr v. Triple Canopy, Inc. is notable in several respects.  The decision announces the court’s explicit endorsement of the “implied certification” theory of False Claims Act (FCA) liability.  However, it leaves some uncertainty regarding how that theory is to be applied in courts within the Fourth Circuit.  The decision also contains language arguably suggesting that in such cases, Government-intervened FCA claims may have a higher likelihood of survival than FCA claims pursued exclusively by relators.

Triple Canopy contracted to provide security services at a military base in Iraq.  The Government’s complaint in intervention alleged that Triple Canopy’s employees did not possess the weapons qualifications they were required to have under the contract, that supervisors knew they were not qualified, and that they created false documents to hide the deficiencies.  The contract itself did not condition payment on compliance with the weapons qualification requirements.

The Fourth Circuit reversed the district court’s dismissal of the FCA claims.  While the Fourth Circuit acknowledged that the FCA cannot be used to “shoehorn” a breach of contract claim into a claim under the FCA, it held that noncompliance with a contractual term can give rise to an implied false certification claim under the FCA in some instances.  This holding in itself is not remarkable except inasmuch as the Fourth Circuit explicitly endorsed the implied certification theory of FCA liability for the first time.  What is notable, however, is the minimal guidance provided by the court regarding which types of contractual violations can support FCA claims.

Essentially sidestepping the FCA’s element of falsity, the court held that the elements of materiality and scienter are the best gatekeepers with respect to whether a contractual violation can give rise to a cognizable claim.  After finding the Government had easily pled scienter, the court then addressed materiality.  The court held that “common sense strongly suggests that the Government’s decision to pay a contractor for providing base security in an active combat zone would be influenced by knowledge that the guards could not, for lack of a better term, shoot straight.  In addition, Triple Canopy’s actions covering up the guards’ failure to satisfy the marksmanship requirement suggest its materiality.  If Triple Canopy believed that the marksmanship requirement was immaterial to the Government’s decision to pay, it was unlikely to orchestrate a scheme to falsify records on multiple occasions.”

While the court’s decision may have “common sense” appeal, it falls short of providing a clear standard for determining when a contractual violation can give rise to an FCA claim and when a violation is sufficiently benign that it cannot.  The Triple Canopy court was undoubtedly bothered by the idea of security forces lacking the requisite weapons training (as well as by the associated cover-up), but this begs the question of how the materiality determination should be made in other cases, when and by whom.

Triple Canopy stands in stark contrast to the clarity imparted by the Fourth Circuit’s own decision [...]

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