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Supreme Court Vacates First Circuit’s Expansive View of Implied Certification Liability

On June 16, 2016, the Supreme Court of the United States issued an important decision regarding the implied certification theory of liability under the False Claims Act (FCA) in which it vacated a decision of the US Court of Appeals for the First Circuit and remanded the case for further proceedings in accordance with the opinion.  A copy of the decision can be found here.

Because of McDermott’s ongoing role in this active matter, we will not be providing extensive public analysis at this time.  However, we are pleased that the Supreme Court has vacated the opinion of the First Circuit Court of Appeals ruling against Arbour Counseling Services. The Court expressly and unanimously “disagree[d] with” the lower court’s view and stated that “[t]he False Claims Act does not adopt such an extraordinarily expansive view of liability.” It is significant that the Court remanded to the lower court to reconsider the case under the new, rigorous standard of materiality stated by the Supreme Court.  Our client looks forward to litigating the case on remand and is confident of prevailing under the new Supreme Court standard.




Implied Certification FCA Suit Against Defense Contractors and Retired Army Colonel Dismissed

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)).

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Court Dismisses FCA Case against AseraCare, Holding that Difference of Medical Opinion Insufficient to Establish Falsity

After granting a new trial based on error in a jury instruction and sua sponte re-opening summary judgment, on March 31, 2016, the U.S. District Court for the Northern District of Alabama granted summary judgment to AseraCare on all remaining counts in U.S. ex rel. Paradies v. AseraCare, Inc.  The outcome is significant because it confirms that mere difference of clinical judgment—here, regarding conditions for a medical certification of hospice eligibility—is not enough to show that the claims are objectively false under the False Claims Act (FCA).

The turn of events is a significant win for AseraCare, as a jury had determined last October that 104 of 123 hospice claims submitted by AseraCare for Medicare payment were false.  (The trial was bifurcated into falsity and scienter phases.) However, after that jury verdict, on October 29, 2015, 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.”

As the court explained in a subsequent order, the FCA case was based on a false certification theory: specifically, that the underlying medical records did not support the physicians’ certifications of hospice eligibility, rendering the associated claims false. In reviewing its jury instructions, the court held 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. The court sua sponte re-opened summary judgment and invited the government to point to evidence, other than its expert’s clinical opinion, that the certifications for the claims in question were false.

In the March 31 summary judgment, the court made clear that it was not satisfied with the government’s proffer, observing that the government only pointed to its own conclusions about the underlying medical records and its expert’s disagreement with AseraCare’s certification. In granting summary judgment, the court again confirmed that mere differences in clinical judgment are not enough to establish FCA falsity: “If the court were to find that all the Government needed to prove falsity in a hospice provider case was one medical expert who reviewed the medical records and disagreed with the certifying physician, hospice providers would be subject to potential FCA liability any time the Government could find a medical expert who disagreed with the certifying physician’s clinical judgment.  The court refuses to go down that road.”




Sixth Circuit Rejects FCA Claim Based on Health Data Breach

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.




District Court Dismisses FCA and Retaliation Claims Based on Allegations That Government Contractor Charged an “Unreasonable Price”

On February 25, 2016, the United States District Court for the Eastern District of Virginia dismissed a False Claims Act (FCA) case alleging that PAE Government Services (PAE) intentionally overcharged the Department of State (DOS) for bottled water supplied to various facilities in Iraq.  United States of America ex rel. Anthony Garzione, 2016 WL 775780 (E.D. Va. 2/25/2016).  Even though PAE allegedly chose the highest bidder when it awarded a subcontract for the water and terminated the relator, Anthony Garzione, when Garzione complained, the court dismissed claims that PAE violated the FCA and retaliated against Garzione.  According to the court, the Federal Acquisition Regulations (FAR) required only that PAE award the subcontract at a “reasonable price.”  Id. at *5-6.  Garzione came forward with nothing in his complaint to show that the highest bid was objectively “unreasonable.”  Id.  For the same reason, Garzione did not engage in protected activity when he raised complaints.  Id. *8.

In 2013, DOS awarded PAE a contract to supply “life support and logistical function” at embassies and consulates throughout Iraq.  The contract included “food and supplies,” among other things.  Id. *1.  For the first year of the contract, PAE supplied very small quantities of bottled water to DOS facilities through a subcontract with Taylors International Services, Inc. (Taylors).  In 2014, however, DOS modified the contract to require PAE to supply much greater quantities of bottled water.  PAE immediately issued a request for bid proposals, which ultimately included the following:  a bid from Taylors for $3.65 per case for Pearl brand water; a bid from Pearl itself for $3.50 per case; and a bid from AWI for $1.18 per case.  Id.

PAE chose Taylors.  Garzione complained and sought to solicit other companies to fill the subcontract. Eventually, the complaint alleges, PAE supervisors began to treat Garzione with hostility, excluded him from meetings and communications, and eventually fired him in February 2015.  Id. *2.  Throughout it all, the subcontract for bottled water remained with Taylors.

Garzione sued, raising three claims. Counts I and II alleged that PAE “falsely certified” that it had complied with the requirements of the FAR to seek the payment of only “reasonable” prices.  As the district court explained, “[t]his claim is based on the legal theory that PAE’s costs for bottled water were necessarily not ‘reasonable’ because it selected Taylors[.]”  Id. *3. Under Count III, Garzione alleged that he engaged in “protected activity” when he questioned PAE’s selection of Taylors and was terminated in retaliation for doing so.  Id.

With little trouble, the district court dismissed all three counts.

First, the court dismissed Counts I and II.  To begin, the court rejected Garzione’s allegations that Taylors’ prices were unreasonable, observing that Garzione did not cite “any authority for the proposition that the highest bid constitutes an ‘unreasonable price’[.]”  Id. at *5.  In addition, the court rejected an argument that PAE had made false statements to the government by impliedly certifying, when it submitted invoices, that the price paid for bottled water was reasonable when, [...]

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D.C. Circuit Finds for FCA Defendant Where Liability Premised on Interpretation of Undefined, Ambiguous Term

In what is sure to be a frequently cited ruling, the D.C. Circuit has reversed a jury’s verdict against a False Claims Act (FCA) defendant, finding that there was insufficient evidence for the jury to find that the defendant “knowingly” made a false claim where the defendant relied upon a facially reasonable interpretation of an undefined and ambiguous term upon which the government had offered no pre-litigation guidance.

In the early 1990s, in connection with a financed foreign purchase of irrigation pumps and equipment by Nigeria, appellant-defendant MWI Corporation certified to a U.S. government agency, the Export-Import Bank, that in accord with regulatory requirements it had not paid “any discount, allowance, rebate, commission, fee or other payment in connection with the sale” except for “[r]egular commissions or fees paid or to be paid in the ordinary course of business to [its] regular sales agents.”  In 1998, a relator filed suit alleging that these express certifications were false as MWI had paid a sales agent large commissions that allegedly were payments other than “regular commissions”.  The government subsequently intervened in 2002.  During the litigation, the government asserted that “regular commissions” were those consistent with industry-wide benchmarks, but prior to the litigation, the government had issued no written guidance on the meaning of the term “regular commissions.”  Indeed, during trial Bank officials acknowledged that the Bank preferred to keep this standard flexible in order to improve efficiency in the loan approval process.  MWI argued that the unsettled meaning of the ambiguous term “regular commissions” precluded the government, as a matter of law, from establishing the FCA elements of falsity and knowledge.

A jury found that MWI had violated the FCA 58 times.  In reversing the jury’s verdict, the court focused in on the ambiguity of the undefined term “regular commissions,” finding that “[a]bsent evidence that the Bank, or other government entity, had officially warned MWI away from its otherwise facially reasonable interpretation of that undefined and ambiguous term, the FCA’s objective knowledge standard . . . did not permit a jury to find that MWI ‘knowingly’ made a false claim.”  The court further noted the “potential due process problems posed by ‘penalizing a private party for violating a rule without first providing adequate notice of the substance of the rule,’” due to the fact that the first actual notice of the meaning of “regular commissions” was not provided by the government until “long after the conduct giving rise to this litigation took place.”  Additionally, the court noted that the government had not pointed to any guidance from the courts of appeals or the relevant agency that might have contradicted MWI’s interpretation of the ambiguous term.

In sum, the court held that MWI could not have knowingly submitted false claims because it relied on a reasonable interpretation of an ambiguous term that the government left undefined.  Of particular note for future and current FCA defendants facing false certification charges on the basis of ambiguous, undefined regulatory terminology is the following admonition from the [...]

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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.




One District Court Finds Limits to Express Certification

We have previously written about recent challenges to the “implied certification” theory of the False Claims Act. One district court has also recently addressed express certification. In an express certification case, plaintiffs allege that as a condition of receiving funds from the government, defendants were required to explicitly certify compliance with certain enumerated statutes, regulations or contracts. These cases typically involve less pleading-stage litigation about the viability of the relator’s legal theory of falsity under the FCA. Rather, the dispute in such cases is more often whether defendants’ certifications were actually false, that is, defendants will challenge plaintiffs’ contentions that they failed to comply with whichever legal obligations with which they expressly certified compliance.

Last month, however, one district court dismissed an express certification case at the pleading stage, holding that the relator’s express certification theory was not viable. In United States ex rel. Hanna v. City of Chicago, No. 11-04885, 2015 WL 5461664 (N.D. Ill. Sept. 16, 2015), the relator alleged that the City of Chicago (City) received federal funds from the U.S. Department of Housing and Urban Development, and that to receive federal funds, the City was required to certify compliance with federal fair housing laws including the Civil Rights Act of 1964 and the Fair Housing Act. These provisions required the City to “affirmatively further fair housing.” For a variety of reasons, the relator alleged that the City failed to adopt programs to undo segregation, and thus the City’s express certifications of compliance with federal law were allegedly false.

The district court noted that the alleged false statements certified “forward-looking” commitments. For example, federal law provides that a recipient of federal funds “will” conform to the Civil Rights Act and Fair Housing Act and “shall” certify that it “will” affirmatively further fair housing policies. Because these statements were “forward-looking,” the court concluded that the City could only be liable if it knew at the time of the certification that it had no intention of making good on its promise to comply. Because the relator only pled that the City did not comply with the statutes in question—and not that it had lied about its honest intent to comply with said statutes)—the relator failed to meet his pleading burden. Because the court had previously granted the relator an opportunity to address the pleading deficiencies of his complaint and the relator failed to do so, the court dismissed the relator’s complaint with prejudice without granting the relator further leave to amend.

Defendants in express certification cases should carefully examine the legal obligation with which they have allegedly certified compliance. If defendants have only allegedly certified their intent to comply with certain legal obligations, they may be able to achieve dismissal on the pleadings.




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 (https://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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Fifth Circuit Enforces High Rule 9(b) Bar in Affirming Dismissal of Implied Certification Case

In U.S. ex rel Gage v. Davis S.R. Aviation, LLC, the U.S. Court of Appeals for the Fifth Circuit confirmed the high degree of specificity needed to successfully plead a claim under the False Claims Act (FCA). Affirming the lower court’s dismissal on Rule 9(b) grounds, the court held that a plaintiff who alleged that certain government contractors defrauded the government by improperly reselling salvaged aircraft parts failed to plead the “who, what, when, where and how” of the alleged scheme. Specifically, the court held that plaintiffs who assert a false claim based on a failure to meet a contractual provision must allege the exact contractual provision that was breached and set forth the exact nature of that breach.

The plaintiff claimed that the defendants had salvaged certain aircraft parts from a crashed civilian aircraft and resold the allegedly defective parts to the U.S. government for use in military aircraft. As the plaintiff had not alleged that the defendants had expressly certified that the parts sold to the government complied with any statute, regulation or contractual provision, the Fifth Circuit assumed, without deciding, that implied certification is a valid theory of FCA liability. Even under that relaxed standard, however, the court found the plaintiff’s allegations lacking.

The court held that the plaintiff had failed to allege that any implied false certification was material because the plaintiff had not identified any specific contractual provision that the parts sale had violated. The plaintiff alleged that the re-use of salvaged parts violated several provisions of the Federal Acquisition Regulation (FAR) and the Defense Federal Acquisition Regulation Supplement (DFARS). While some courts have held that a violation of federal regulations can form the basis of an FCA claim, here, the Fifth Circuit held that the plaintiff had not sufficiently alleged that these regulations were applicable or that they had been incorporated into the contract under which the government purchased the parts.

The plaintiff argued that, while he had not seen the contract because it was classified, the contract must contain the FAR and DFARS provisions, because such inclusion was mandatory in government contracts. But the court rejected that contention, noting regulatory provisions stating that the inclusion of FAR and DFARS provisions may be waived. Thus, because the plaintiff had no basis to allege with certainty that these provisions were included in the contract, he could not allege that the contract had been breached. Therefore, the court held, the plaintiff had no basis to claim that the alleged violation of the FAR and DFARS provisions were material to the government’s decision to pay. According to the court, the plaintiff’s claim was “necessarily speculative” without “particularized and plausible identification” of the contractual provision allegedly violated.

The court’s holding re-affirms the high level of pleading detail needed to pursue a claim under the implied certification theory of FCA liability.




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