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Seventh Circuit Finds Public Disclosure Bar Precludes Jurisdiction in CTA Case

In a February 29, 2016, decision, the U.S. Court of Appeals for the Seventh Circuit held that the public disclosure bar precluded a relator, a government watchdog agency, from successfully bringing a False Claims Act (FCA) suit against the Chicago Transit Authority (CTA). Cause of Action v. Chicago Transit Authority, No. 15-1143, 2016 U.S. App. Lexis 3628 (7th Cir., Feb. 29, 2016).

The Seventh Circuit found that the activity underlying the alleged fraud (misreporting transportation data to the Federal Transit Administration (FTA) in an effort to get additional federal funding) was in the public domain for two independent reasons. First, there was governmental disclosure: the government, through FTA itself, knew of the activity, had investigated it, and had issued a report (in the form of a letter to the CTA) on the investigation. Second, the Illinois Auditor General conducted a performance audit of the CTA which uncovered the alleged fraud and issued a report on the same; that audit report was publicly available on the Illinois Auditor General’s website, had been reviewed in a public hearing, and was generally available to the media and the public.

In stating that the governmental disclosure (via the FTA letter) was sufficient for the public disclosure bar to apply, the Seventh Circuit noted that the primary questions were whether the FTA had “actively investigat[ed]” the allegations and  reported on that investigation—not, as Relator claimed, whether the FTA had done anything to recover money from the CTA. Here, it was clear from the FTA letter that the FTA had actively investigated the allegations, and the letter itself served as the report. (more…)

FCA Claims Based on Average Wholesale Price (AWP) Theory Barred by Public Disclosure Bar

On January 20, 2016, the U.S. District Court for the Eastern District of Missouri dismissed a complaint based on allegations of Average Wholesale Price (AWP) fraud under the False Claims Act (FCA) against CSL Behring, LLC (Behring) and specialty pharmacies Accredo Health, Inc., (Accredo) and Coram LLC (Coram).  See United States ex rel. Lager v. CSL Behring, LLC, et al., No. 4:14-CV-841CEJ, 2016 WL 233245 (E.D. Missouri 2016).  The Court found that relator’s allegations were barred by the public disclosure bar and did not satisfy the “original source” exception.

Relator, a former Behring employee, alleged that the company reported inflated AWPs for prescription drugs, Vivaglobin and Hizentra, causing government health programs to reimburse specialty pharmacies much more than they paid for the drugs ($133 v. $65 and $151 v. $70).    Vivaglobin and Hizentra are classified as “DME infusion drugs” because they are self-administered by patients through a pump, which is considered durable medical equipment (DME). Unlike most drugs which the government reimburses based on a percentage of the average sales price (ASP), DME infusion drugs are reimbursed based on a percentage of the drug’s AWP.  Unlike ASP, AWP is not defined by law or regulation and is not based on actual sales data.  AWP is based on figures the drug manufacturer reports to third-party publishers and is substantially higher than ASP.  In addition to allegations that Behring reported inflated AWPs, relator claimed that Behring used the “spread” between the actual cost and the AWP-based reimbursement rates to induce their customers, including Accredo and Coram, to buy their products.

Citing multiple government sources and media outlets “[that] have long disclosed that AWP does not represent the actual prices of drugs,” as well as “multiple disclosures that manufacturers used the difference between actual costs and AWPs to influence sales,” the court dismissed the complaint under the public disclosure bar, 31 U.S.C. § 3730(e)(4)(A). Id. at *3-*6 (commenting that “[t]his state of affairs has been labeled as a scam and fraud by the press and in multiple civil lawsuits”). The court was unpersuaded by relator’s argument that the public disclosure bar did not apply because the public disclosures did not “contain[] all of the elements of the alleged fraudulent transactions” (emphasis added), including the defendants and drugs at issue.  The court noted that the prior public disclosures “need not contain every fact or legal consequence to trigger the public disclosure bar” (citation omitted) and explained:

In 2007, the court overseeing the multidistrict litigation found that pharmaceutical companies submitted “false, inflated AWPs” that “caused real injuries.” In re Pharm. Indus. Average Wholesale Price Litig., 491 . Supp. 2d at 31.  In 2013 the OIG disclosed the extreme spread between AWP and ASPs for DME infusion drugs, generally, while publications by the third-party publishers and CMS showed the spread for Viaglobin and Hizentra in particular.  These disclosures are sufficient to identify both the defendants and the drugs.

Relator also failed to adequately allege that he was an “original source” pursuant to 31 U.S.C. [...]

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Seventh Circuit Strictly Construes Original Source Requirement Against ‘Bounty-Hunting’ Relator

In a decision released yesterday in U.S. ex rel. Bogina v. Medline Industries, Inc., the U.S. Court of Appeals for the Seventh Circuit affirmed a district court’s dismissal of a relator’s False Claims Act (FCA) complaint, holding that the complaint’s allegations had been publicly disclosed in a prior, settled lawsuit and the relator was not an original source. The opinion, authored by Judge Richard Posner, described FCA relators as “bounty hunters” and observed that the FCA imposes obstacles on parasitic bounty-hunting relators who seek to “be handsomely compensated if the[ir] suit succeeds.” Among those obstacles is the FCA’s public disclosure bar, which Judge Posner’s opinion ensures has sharp teeth in the Seventh Circuit.

First, the court held that the 2010 amendments to the original source exception the public disclosure bar, requiring a relator to “materially add” to publicly disclosed allegations in order to surmount the bar, could be applied retroactively because the amendments merely clarified the prior version of the exception. Accordingly, parties litigating in courts within the Seventh Circuit can expect that the current version of the public disclosure bar’s original source requirement will apply, regardless of when the relator acquired his or her knowledge.

Second, the court rejected the argument of the relator, August Bogina, that he had materially added to the allegations made by a prior relator, Sean Mason, in a prior FCA case that the government had settled. Both suits alleged that defendant Medline had made kickbacks to induce purchases of medical equipment. Bogina’s subsequent suit before the Seventh Circuit added a defendant (the Tutera Group, a nursing home chain that allegedly accepted kickbacks) that had not been mentioned in Mason’s prior, settled suit. Bogina also argued that the release provided by the government in the prior suit only concerned false claims submitted to Medicare Part A and Medicaid, but not to other government healthcare programs such as Medicare Part B and Tricare. The Seventh Circuit held that these differences were “unimpressive” from an original source standpoint, observing:

The government was thus on notice of the possibility of a broader bribe-kickback scheme before Bogina sued. Had it wanted to broaden the case against Medline beyond the Mason settlement, it could have gone after, among other Medline customers, nursing home companies such as the Tutera Group that received (if Bogina is correct) Medline kickbacks. …. Moreover, a settlement is a compromise; and it is notable that among the claims the government released as part of the Mason settlement were some of the very claims alleged in Bogina’s complaint.

The Seventh Circuit’s focus on the extent to which the prior suit put the government on notice of the alleged fraud is of crucial importance for defendants faced with copycat claims based on allegations that are similar to allegations they previously settled. Adding defendants or payors not involved in the prior suit is not a material addition sufficient to survive the public disclosure bar, where the prior suit put the government on notice of the allegations. Future [...]

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Supreme Court Denies Cert on Whether Government Investigations Are a Public Disclosure

On October 2, 2015, the Supreme Court of the United States denied a petition for writ of certiorari in a case that sought to resolve an apparent circuit split concerning one of the most frequently litigated issues under the False Claims Act (FCA)—the circumstances in which the disclosure of allegations in a government audit or investigation can trigger the public disclosure bar.  Chattanooga-Hamilton County Hospital Authority v. U.S. ex rel. Whipple, No. 15-96.  The petition emanated from a decision we reported on in March 2015 that was issued by the United States Court of Appeals for the Sixth Circuit.  U.S. ex rel. Whipple v. Chattanooga-Hamilton County Hospital Authority, 782 F.3d 260 (6th Cir. 2015). In Whipple, the Sixth Circuit held that information in the possession of the government does not trigger the public disclosure bar because it is not in the “public domain.”

In the petition to the Supreme Court, the petitioner framed the issue for review as involving two separate circuit splits: (1) whether investigatory disclosures to a responsible public official trigger the public disclosure bar (yes in the Seventh Circuit; no in the First, Fourth, Sixth, Ninth, Eleventh and D.C. Circuits, which require the disclosures to be made “outside” the government); and (2) whether investigatory disclosures to “innocent employees” (i.e., defendant “insiders” with no involvement in the alleged fraud) trigger the public disclosure bar (yes in the Second Circuit; no in the Sixth and Ninth Circuits).  Although the Supreme Court declined to grant cert, the fact remains that the circuits take a somewhat different approach concerning the impact of information revealed during a government investigation on the application of the pre–2011 version of the public disclosure bar, particularly in circumstances where the investigation/audit is closed from the public.  Regardless of the specific approach, government disclosures remain fertile territory to attack claims brought under the FCA.


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 Fifth Circuit Decision Spotlights Perils of Complex Procedural Issues

On August 25, 2015, the Fifth Circuit vacated and remanded a district court’s order denying a relator’s Rule 60(b) motion for relief from dismissal based upon new evidence in the False Claims Act (FCA) case of United States ex rel. Gage v. Davis S.R. Aviation, LLC, No. 15-50141 (on appeal from Case No. 1:12-cv-00904-SS in the Western District of Texas). The district court had denied the Rule 60(b) motion because its underlying dismissal of the complaint was on appeal to the Fifth Circuit. In remanding, the Fifth Circuit held that the district court was required to consider the Rule 60(b) motion on its merits prior to denying it, and that not doing so was an abuse of discretion.   Because the district court failed to consider the merits of the Rule 60(b)  motion, it must now address that motion on remand even though, as a review of the pleadings demonstrates, there is little basis for relief.

The relator brought a complaint “concerning the salvaging of aircraft parts for resale to the Government,” alleging that the defendants violated the FCA by improperly repairing airplane parts from a crash prior to selling them to the government for use in military aircraft.  The district court allowed the relator two amendments to his complaint, but even with those amendments, the relator could not present a viable false claims action. The district court stated that “[i]f there is a legitimate False Claims Act case buried underneath this mess, the Court cannot find it,” and  dismissed the action based upon both the public disclosure bar and Rule 9(b) lack of particularity. The relator appealed the district court’s decision.

In addition to appealing the court’s decision, the relator filed a Rule 60(b) motion alleging he had new evidence, and thus the court should reconsider its decision dismissing the case. In that motion, the relator alleged that he had new information proving he was an original source, and that the public disclosure bar therefore did not preclude his claims. The relator did not address the district court’s dismissal based on lack of particularity, a fact which itself likely dooms the Rule 60(b) motion.  Moreover, it is doubtful that the relator’s “new evidence” that he is an original source will survive scrutiny on the merits. The district court previously held that the relator’s claims substantially overlapped with claims from a previous case in which the relator served as an expert (and that relator learned the facts in his complaints through his work on that case). Relator’s Rule 60(b) motion did not address that holding at all.  Instead, the relator alleged that his third amended complaint contained new facts about which the government was not previously aware.  But these “new facts” were not new at all—they were information covered by a protective order from the previous case in which the relator served as an expert.

Although the relator’s Rule 60(b) motion is substantively deficient, the district court must  now address its merits, including the “new” evidence purportedly precluding dismissal – all [...]

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When an FCA Case Just Won’t Go Away: Attorneys’ Fees Remain Contested Even After Settlement

When settling a False Claims Act (FCA) case, the issue of a relator’s attorneys’ fees seems small compared to the monetary settlement and the breadth of the release. Two recent cases, however, demonstrate that fees can prove a sticking point in wrapping up an FCA case even after settlement. In U.S. ex. rel. Simring v. Rutgers, the U.S. Court of Appeals for the Third Circuit remanded a fee award entered after a settlement, finding that the lower court provided insufficient detail to review the reasonableness of deductions to a fee application. In U.S. ex. rel. Doghramji v. Community Health Systems Inc., the U.S. District Court for the Middle District of Tennessee evaluated whether a settlement agreement carve-out permitting objections to the relators’ attorneys’ fees permitted defendants to argue that the fees were barred by either the FCA’s “first to file” or “public disclosure” bar. The court decided that the carve-out did not protect such objections. The takeaway from these cases is that, in settling an FCA case, the parties should be prepared for the potentially lingering specter of attorneys’ fee issues.

In Simring, the Third Circuit issued a non-precedential opinion that nevertheless offered useful guidance on evaluating reasonableness of attorneys’ fees under the lodestar method. In 2009, one year after the government intervened, and five years after the relator brought the case, the parties settled the FCA claims for $4.45 million. The relator then petitioned the district court for $1.08 million in fees in December 2010. The district court reduced the fee award to around $750,000 based on reductions to the hourly rates and to certain categories of requested time.

The Third Circuit affirmed in part on August 4, 2015, finding that the reduction in one lawyer’s hourly rate from $850 to $625 was reasonable, but vacated and remanded on other issues. First, the Third Circuit found that the lower court had reduced the application for “administrative” tasks performed by lawyers, but failed to specify which entries were subject to the reduced administrative rate.

Second, the Third Circuit faulted the lower court for reducing the relator’s fee application for  communicating with the state Attorney General’s Office, preparing for possible expert testimony, and preparation of a second amended complaint, as the lower court found that these strategies did not ultimately yield success (i.e., the state attorney general did not intervene, the expert did not testify because there was no discovery in the case, and the second amended complaint was ultimately not filed in the case). The Third Circuit stated that such background work could not be categorically rejected simply because the strategy did not yield a recognizable result in the record; the inquiry instead should focus on whether the work is “useful” and “of a type ordinarily necessary” to the litigation.

Finally, the Third Circuit found that the lower court’s 39 percent reduction to one partner’s hourly rate for all days he conducted legal research was arbitrary. The lower court had suggested that legal research is associate-level work and thus reduced [...]

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Ninth Circuit Overturns Precedent to Simplify Original Source Exception to Public Disclosure Bar

Overruling its 23-year precedent, the Ninth Circuit, sitting en banc, held that to avoid dismissal under the False Claims Act’s (FCA) public disclosure bar, relators need not have participated in the public disclosure of alleged fraud to qualify as an “original source.” Although the court’s decision concerned the pre-2010 version of that bar, it is likely that its reasoning will also apply to the post-2010 version, given that the issue before the Ninth Circuit did not turn on the 2010 amendments.

U.S. ex rel. Hartpence v. Kinetic Concepts, Inc. consolidated two FCA complaints brought by former employees against Kinetic Concepts.  The complaints alleged that the company improperly submitted reimbursement claims using an automatic payment modifier code for medical devices that improve wound healing, even though the claims required individual review.  The alleged fraud was already publicly disclosed.  Thus, the FCA’s public disclosure bar precluded the suits unless the relators qualified as original sources of the information.

The pre-2010 FCA statutory language included two requirements for a relator to qualify as an original source: (1) that the relator have direct and independent knowledge of the publicly-disclosed information, and (2) that the relator provide that information to the government before filing suit.  Yet, Ninth Circuit precedent in Wang ex rel. United States v. FMC Corp., 975 F.2d 1412, added a third requirement not apparent on the face of the statute: the relator had to have had a hand in the public disclosure of the alleged fraud.  Based on Wang, the lower court dismissed the complaints against Kinetic Concepts, finding that the relators had not had a hand in the public disclosure.

In overturning Wang, the Ninth Circuit noted that a number of other circuits had declined to adopt Wang’s third prong, including the Fourth and Eighth Circuits.  The Ninth Circuit re-construed the statutory text and found that facially, the original source provision only had two requirements: (1) direct and independent knowledge of the information on which the allegations are based and (2) voluntary provision of the information to the government before filing an action based on the information.  The appellate court remanded the case to determine if the relators were original sources based on the other two prongs found in the FCA text.

Recent District of Massachusetts Opinion Explores Post-PPACA Public Disclosure Bar (and Reminds Relators that Pleading a “Scheme” is Not Enough Under Rule 9(b))

In an opinion last week in U.S. ex rel. Hagerty v. Cybertronics, Inc., No. 13–10214–FDS, 2015 WL 1442497 (D. Mass. Mar. 31, 2015), the U.S. District Court for the District of Massachusetts addressed the status of the False Claims Act’s public disclosure bar after the Patient Protection and Affordable Care Act (PPACA).  Specifically, the district court examined whether the bar continues to be jurisdictional, holding that while the prior version of the bar clearly presented a question of subject matter jurisdiction (“[n]o court shall have jurisdiction over an action” based on publicly disclosed allegations), the post-PPACA version “appears to be non-jurisdictional.”

The district court first determined that the First Circuit Court of Appeals has not directly addressed the issue, notwithstanding the First Circuit’s explicit reference to the post-PPACA public disclosure provision as a “jurisdictional bar.”  See U.S. ex rel. Estate of Cunningham v. Millenium Labs. of Cal., Inc., 713 F.3d 662, 669, n.5 (1st Cir. 2013).  The district court was dismissive of the First Circuit’s statement in Cunningham, finding that it was made in a footnote and was “not part of the holding of that case.”

The district court then concluded that the bar is no longer jurisdictional, citing decisions in the Fourth and Eleventh Circuits.  The district court reasoned that the reference to “jurisdiction” has been removed from the statute, which now states that a court “shall dismiss” an action based on publicly-disclosed allegations.  The district court also pointed out that the government can now elect to allow an action to proceed even if it would otherwise be barred.

For FCA defendants, whether or not the current version of the public disclosure bar is jurisdictional shapes the framework for seeking dismissal.  The Hagerty court held that dismissal on public disclosure grounds in the post-PPACA world should be sought based on failure to state a claim under Fed. R. Civ. P. 12(b)(6), which, among other things, generally precludes reliance on matters outside the complaint in a motion to dismiss.  Historically, public disclosure-based dismissals have been sought pursuant to Fed. R. Civ. P. 12(b)(1) (lack of subject matter jurisdiction), which is not similarly limited.

However, even the Hagerty court recognized that items such as news articles that are susceptible to judicial notice can properly be considered in the context of a Rule 12(b)(6) motion to dismiss.  Given that courts are often willing to take judicial notice of matters that are public in nature, the procedural vehicle for seeking dismissal ultimately may not matter all that much.  Indeed, while the Hagerty court concluded that the public disclosure bar did not bar the relator’s FCA claims, the jurisdictional issue had no real bearing on that outcome, which was driven by the court’s comparison of the substantive content of the prior disclosure to the allegations in the complaint before the court.

Despite holding that the relator’s claims were not precluded by the public disclosure bar, the district court nonetheless dismissed the relator’s FCA claims for failure to plead fraud with particularity in a discussion [...]

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Recent Appellate Decisions Underscore Importance of Public Disclosure Bar, But Outcomes Are Highly Dependent on the Facts

Two Circuit Courts of Appeals recently came out on opposite ends of the False Claim Act’s (FCA’s) public disclosure bar.  On February 19, 2015, the United States Court of Appeals for the Third Circuit affirmed the district court’s dismissal of claims related to allegations of fraudulently inflated pharmaceutical prices, holding that the information underlying the suit had been publicly disclosed in the media and elsewhere and that the relator failed to qualify as an original source.  U.S. ex rel. Morgan v. Express Scripts, Inc., No. 14-1029, 2015 WL 728029 (3rd Cir. Feb. 19, 2015) (unpublished).  On February 25, 2015, the United States Court of Appeals for the Sixth Circuit reinstated a claim against a hospital related to allegedly fraudulent Medicaid and Medicare charges, holding that the allegations, though previously known to government auditors, had not been publicly disclosed.  U.S. ex rel. Whipple v. Chattanooga-Hamilton County Hospital Authority, No. 13-6645, 2015 WL 774887 (6th Cir. Feb. 25, 2015).  These different outcomes demonstrate the fact-intensive nature of the inquiry under the public disclosure bar.

In Express Scripts, the pharmacist-relator alleged that certain pharmaceutical industry defendants profited from artificially inflated Average Wholesale Prices (AWPs).  In affirming dismissal, the Third Circuit agreed with the district court’s finding that the allegations underlying the case had been widely disclosed, including by the news media and in previously-filed lawsuits (including one in which the relator served as an expert).  Thus, the relator needed to be an “original source” of the information for his suit to proceed.  The Third Circuit held that the relator could not meet this standard.  The relator, who was never an employee of any of the defendants, purportedly identified the alleged fraud by performing an “eyeball” comparison of two publicly available price lists.  Moreover:

The mere fact that Morgan quantified the AWP differential does not remove his allegations from the public disclosure realm.  Morgan’s 4.16 percent differential simply indicates an AWP based on a 25 percent markup over wholesale acquisition cost, a markup disclosed in a Congressional report predating Morgan’s complaint.  The report’s disclosure of a specific, industry-wide markup shift provided Morgan with all the “essential elements” needed to arrive at a 4.16 percent price differential.

In Whipple, the Sixth Circuit confronted a different and more thorny public disclosure issue.  The court, applying the pre-Patient Protection and Affordable Care Act version of the public disclosure bar, determined that the information underlying the complaint’s allegations had not been publicly disclosed, even though the allegations of improper billing had already been the subject of an audit and investigation conducted by the United States Department of Health and Human Services Office of Inspector General (OIG) and Centers for Medicare & Medicaid Services’ contractor charged with investigating fraud and waste.  The defendant hospital had also conducted an internal investigation through its own outside counsel and auditors.  The hospital had submitted a voluntary refund check as a result of these audits, and the OIG had administratively closed its investigation before the relator brought suit.

Nonetheless, distinguishing between [...]

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