Attendees at the Health Care Compliance Association’s Health Care Enforcement Compliance Institute are reporting that, Michael Granston, Director, Civil Frauds, Commercial Litigation Branch of the Civil Division of the US Department of Justice (DOJ), announced a significant shift in policy for the DOJ in dealing with False Claims Act (FCA) complaints that are deemed “frivolous” on the merits. Acknowledging the burden on the resources of all parties caused by the litigation of frivolous FCA matters, Mr. Granston reportedly stated that, going forward, once it has determined that the allegations of a qui tam complaint lack merit, the DOJ will more aggressively exercise its discretion to move to dismiss the case rather than leave to the qui tam relator in every instance the option of whether to continue the litigation. Senior management—including boards of directors, in-house corporate counsel and chief compliance officers—should take notice of this new, potentially meaningful, opportunity to extricate FCA defendants from burdensome qui tams pursued by relators purely for settlement value. Continue Reading DOJ Announces Significant Shift Towards Affirmative Dismissal Of “Frivolous” Qui Tam Complaints: A New Exit Strategy For Defendants?
On September 18, 2017, the Tenth Circuit reversed a decision of the US District Court for the District of Utah in United States ex rel. Little v. Triumph Gear Sys., Inc. In doing so, the Tenth Circuit concluded that the False Claims Act’s first-to-file bar extends to situations where relators’ counsel substitute parties prior to the initial complaint even being unsealed.
In this case, relator Joe Blyn brought a qui tam action against a government contractor, alleging that he witnessed instances of fraud. The initial complaint named Blyn and three John Does as relators. The following year, Blyn and the John Does “vanished” from the action with Blyn’s counsel, David Little, instead naming himself, and Kurosh Motaghed as the sole relators. After the court unsealed the action, Triumph moved to dismiss the amended complaint, arguing that the substitution of parties triggered the “first-to-file” bar, which prevents private parties from intervening in existing actions or filing related actions based on the facts of the underlying action. The district court denied Triumph’s motion to dismiss, ruling that replacing the relator in this manner did not contemplate an “intervention” for purposes of 31 U.S.C. § 3730(b)(5).
The Tenth Circuit reversed. The court noted that had Little merely added himself and Motgahed as relators and maintained Blyn as a third relator, such an addition would have merely been an amendment permissible under Federal Rule of Civil Procedure 15, which would not have triggered the first-to-file bar. As it happened, however, Blyn did not amend the complaint – Little and Motaghed did. And because amendments under Rule 15 may only be made by parties, the Tenth Circuit concluded that Little’s and Motaghed’s actions constituted an “intervention.”
Once Blyn was removed from the complaint, the court determined, the district court lacked jurisdiction over the case. Consequently, Little’s subsequent reinstatement of Blyn as a relator was ineffective. This case thus demonstrates the power and breadth of the first-to-file bar, and how defendants can use it effectively to address follow-on complaints.
On November 15, the US District Court for the Northern District of California granted Scottsdale Insurance Company’s motion for judgment on the pleadings in Hotchalk, Inc. v. Scottsdale Insurance Co. (Case No. 4:16-CV-03883), ruling that Scottsdale is not required to defend or indemnify Hotchalk from a 2014 False Claims Act (FCA) suit (and subsequent settlement). Hotchalk, an education technology company, was a Scottsdale policyholder and sought coverage related to a qui tam suit that alleged improper employee incentives for student recruitment. The court ultimately found that the underlying allegations related directly to the company’s professional services, and thus were barred from coverage based on a professional services exclusion in Hotchalk’s policy.
On July 12, 2016, the US Senate Finance Committee held a hearing to “examine ways to improve and reform the Stark Law” as a follow up to releasing a white paper on June 30 titled Why Stark, Why Now? Suggestions to Improve the Stark Law to Encourage Innovative Payment Models. The white paper summarizes comments and recommendations gathered during a roundtable discussion held by the Senate Finance Committee and the US House Committee on Ways and Means in December 2015 as well as written comments submitted by roundtable participants and other stakeholders on topics taken up by the roundtable in the weeks following the meeting.
Senate Finance Committee Chairman Senator Orrin Hatch commented in a press release that “[t]he health care industry has changed significantly since Stark was first implemented, and while the original goals of the Stark law were appropriate, today it is presenting a real burden for hospitals and doctors trying to find new ways to provide high quality care while reducing costs as they work to implement recent health care reforms. . . [The] paper reflects critical feedback from the stakeholder community on the law’s ambiguities, its unintended consequences and the need for reform, and I am hopeful it jumpstarts the discussion on how Congress can modernize the law to make it work for patients, providers and taxpayers.”
Congress’ attention to Stark Law reform would address the significant False Claims Act exposure Stark Law violations can pose, which has been a very active topic for relators and government investigations in recent years.
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The Yates Memo has many landscape-changing implications for corporate investigations, including the need for enhanced Upjohn warnings and the potential suppression of joint-defense agreements between corporations and their constituents (officers, directors, employees, shareholders). This new terrain exists because in order to receive cooperation credit from the government, companies must investigate and disclose all facts about corporate wrongdoers. With the spotlight shining on corporate actors from the outset, there will be an inevitable increase in individuals seeking to have independent counsel represent them early in the investigatory process. Defense costs will surely escalate under the new Yates directive. This has several important implications for D&O liability insurance coverage.
On April 7, a Texas jury handed a victory to Abbott Laboratories in a 10-year False Claims Act litigation battle with the relator concerning the off-label use of its products by physicians. This is the latest in several cases over the past few years that cast doubt on the viability of an off-label marketing theory to form the basis of an FCA action.
Yet another federal court has rejected a False Claims Act (FCA) lawsuit brought under an implied certification theory, finding that non-compliance with federal laws and regulations that are not express conditions of payment cannot form the grounds for a FCA suit. On March 31, 2016, the suit brought by two former employees of MD Helicopters, Inc. against their former employer, a retired Army Colonel was dismissed by the U.S. District Court for the Northern District of Alabama. In reaching this ruling, the court found that an implied certification FCA claim could not be premised on the violation of either a provision of the Federal Acquisition Regulation (FAR) titled ‘Contractor Code of Business Ethics and Conduct’ (48 C.F.R. § 52.203-13) or the Truth in Negotiations Act (10 U.S.C. § 2306(a)).
On March 7, 2016, the U.S. Court of Appeals for the Sixth Circuit decided United States ex rel. Sheldon v. Kettering Health Network, affirming a district court’s dismissal of a lawsuit alleging violations of the False Claims Act (FCA) relating to an alleged data breach. The relator alleged that violations of the HITECH Act caused the submission of false claims to the government.
Under the HITECH Act of 2009, the federal government will pay health care providers money for making “meaningful use” of electronic health records (EHR) technology. Providers who receive payments under the HITECH Act must certify compliance with approximately two-dozen meaningful use objectives. These objectives include compliance with various regulations promulgated under the Health Insurance Portability and Accountability Act (HIPAA), which require, inter alia, including conducting security risk analyses, addressing the encryption/security of data stored in certified EHR technology, and implementing policies and procedures to prevent, detect, contain and correct security violations.
The relator in this case, Vicki Sheldon, alleged that defendant Kettering Health Network (Kettering) falsely certified compliance with HITECH’s meaningful use objectives. Sheldon based her allegations on two letters she received from Kettering informing her that Kettering employees impermissibly accessed her Protected Health Information (PHI). In addition, Sheldon alleged that Kettering failed to run “CLARITY” reports at appropriate intervals. These reports are a tool present in Kettering’s EHR software and allegedly help providers monitor improper access to PHI.
The district court concluded – and the Sixth Circuit agreed – that Sheldon’s allegations were insufficient to survive Kettering’s motion to dismiss. The court concluded that Kettering’s individual breaches did not violate the HITECH Act. The Act and its implementing regulations require providers to maintain appropriate security protocols, not to prevent every possible data breach. In fact, the HITECH Act and the HIPAA regulations it incorporates by reference require providers to respond appropriately to breaches, and thus contemplate the occasional breach. Indeed, the only reason that Sheldon learned of the breaches was because Kettering informed her of them. The court suggested that Kettering’s notification letters actually hurt Sheldon’s case, because it was clear that Kettering had a breach-response protocol in place and was responding appropriately to them by informing affected individuals. Accordingly, the court concluded, Kettering’s “attestation of compliance [with the HITECH Act] is not rendered false by virtue of individual breaches.” And absent a false statement, Sheldon could not allege the existence of a false claim under the FCA.
As to Sheldon’s claim that Kettering failed to run CLARITY reports at an appropriate frequency, the court concluded that “[n]either the Act nor the HIPAA regulations to which it refers require that providers adhere to a particular schedule for running reports.”
Ultimately, the court concluded that allegations of data breaches cannot by themselves show that a certifying entity under the HITECH Act made a false certification to the government. This is undoubtedly an important ruling for defendants threatened with claims lying at the intersection between data breach legislation and the FCA.
The crime-fraud exception to the attorney-client privilege sometimes becomes an issue in government enforcement matters, including litigation under the False Claims Act (FCA). For example, when a government contractor seeks legal advice regarding its compliance with complex regulatory schemes that touch upon the FCA, under some circumstances, a relator or the government may assert that the contractor’s communications with counsel could be discoverable under the crime-fraud exception. This post discusses a recent ruling in the U.S. Court of Appeals for the First Circuit in a criminal fraud case, in which the court addressed the crime-fraud exception, and expanded a district court’s ruling that ostensibly privileged documents should be produced pursuant to the exception.
In U.S. v. Gorski, No. 14-1963, 2015 WL 8285086 (1st Cir. Dec. 9, 2015), the government brought criminal charges for wire fraud under 18 U.S.C. § 1343 alleging that the defendant, David Gorski, had defrauded the United States by falsely representing to federal agencies that a company he established, Legion Construction, was eligible for designation as a Service-Disabled Veteran Owned Small Business (SDVOSB). Under federal law, three percent of government contracts must be awarded to SDVOSB entities. Effective February 8, 2010, the government amended the regulatory criteria for SDVOSBs. Legion retained a law firm to shepherd the company through a corporate restructuring to comply with the 2010 amendments. However, while this restructuring did not occur until March 2010, it was dated “as of” February 1, 2010, just before the new regulations went into effect. Gorski also retained a personal attorney for legal advice relating to the 2010 restructuring and his rights and obligations relative to Legion despite not being the company’s majority shareholder. The court noted that “the new corporate documents [prepared by Legion’s counsel, and submitted to the government] were crafted so as to make it appear that they were signed before the date of the SBA [U.S. Small Business Administration] regulatory amendments, when they were not.”
The district court concluded that communications between Gorski and Legion’s law firm fell into the crime-fraud exception because the government had made a prima facie showing that (1) the defendant was engaged in criminal or fraudulent behavior when the communications took place (the indictment satisfied this prong); and (2) that the communications were intended by the client to conceal the crime or fraud (i.e., that Legion misrepresented its compliance with federal regulations). The district court concluded, however, that communications between Gorski and his personal attorney should not be produced because his personal attorney played no role in the submission of Gorski’s allegedly false statements to the government.
The First Circuit affirmed in part, but concluded that communications between Gorski and his personal attorney did fall into the crime-fraud exception despite the attorney’s lack of involvement in the submission to the government. The court found this fact “legally irrelevant,” because Gorski’s alleged intent with regard to both representations was “arguably the same”—to obtain advice about the restructuring, which in this case, allegedly meant perpetrating an ongoing fraud on the government.
Under Gorski, then, the mere allegation of a fraud may be sufficient to effect the destruction of the attorney-client privilege, as long as the communications in question were made at the time of an alleged fraud. Accordingly, the First Circuit’s decision sets problematic precedent for government contractors who rely on legal advice to comply with complex regulations that the government or relators may later assert are conditions of government payment. Based on this decision, relators may argue that any future allegation of fraud provides a basis for an attorney’s compliance advice to become discoverable. Nevertheless, the invocation of the crime-fraud exception is often a highly fact-intensive analysis, and defendants should argue that the Gorski decision should be cabined to its facts.
The U.S. Department of Justice (DOJ) continues to tout its total annual recoveries in False Claims Act cases, as it does each year after the federal government’s fiscal year closes in September. In its December 3, 2015, press release, DOJ disclosed that it obtained more than $3.5 billion in settlements and judgments from civil cases involving fraud and false claims against the government in the 2015 fiscal year. DOJ boasts that this is the fourth consecutive year that these kinds of recoveries have exceeded $3.5 billion, raising the total recoveries from January 2009 through the end of the fiscal year to a whopping $26.4 billion.
Cases involving the health care industry represented the largest chunk of recoveries in 2015, totaling $1.9 billion from companies and individuals. This figure only includes monies paid to the federal government, not to state Medicaid programs or individuals. Thus, the total sum paid out by the health care industry for False Claims Act cases is actually higher. Since January 2009, federal recoveries from the health care industry have totaled nearly $16.5 billion. DOJ attributes these large sums to the high priority that the Obama Administration places on fighting health care fraud and the efforts of an interagency task force called the Health Care Fraud Prevention and Enforcement Action Team (HEAT), which was created in 2009.
Other categories specifically mentioned in DOJ’s latest press release are government contracts, from which DOJ recovered $1.1 billion, and housing and mortgage, from which DOJ recovered $365 million.
Of the $3.5 billion recovered in 2015, DOJ reports that the vast majority—$2.8 billion—is related to lawsuits filed under the qui tam provisions of the False Claims Act, which permit whistleblowers to file lawsuits alleging false claims on behalf of the government and to recover between 15 and 30 percent of any recoveries. Whistleblowers filed a total of 638 lawsuits in 2015, which is the lowest number of qui tam suits filed since 2011.
Although this year’s overall recovery from False Claims Act cases in 2015 is less than each of the three preceding years—and far less than the $5.69 billion reported at the end of the 2014 fiscal year—it is still a sizeable sum. And, it reveals DOJ’s continued efforts and emphasis on False Claims Act cases.
For further information, see DOJ’s press releases for the last several years: