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Practice Reminder: Research Misconduct can be a Source of False Claims Act Liability

The October issue of the journal Science features a series of short articles highlighting a database containing a list of more than 18,000 scientific papers and conference abstracts that have been retracted over the past several decades. An analysis of the database shows that nearly 60 percent of retraction notices mentioned fraud or other kinds of misconduct (the balance of which were retracted because of errors, problems with reproducibility and other issues). The Science article, as well as a link to the searchable database, can be accessed here. Not only does research misconduct have significant potential for reputational harm–potentially career ending for the investigator, with ripple effects for the institution–but as described below, when the associated research is federally funded, such misconduct could have significant legal (and liability) implications.

US health care organizations are used to warnings about the potential for exposure under the federal False Claims Act (FCA) resulting from improper claims submitted to federal payors such as Medicare and Medicaid. Less attention has been paid to the potential for FCA liability resulting from research non-compliance. Recipients of federal grant funding are subject to a variety of complex rules (e.g., the National Institute of Health (NIH)  Grants Policy Statement), as well as the terms and conditions of the Notices of Award.  Just as compliance with Medicare rules can lead to questions about potential FCA exposure for Medicare payments, compliance with federal grant funding rules can lead to the same questions for grant funds.

For example, grant recipients should consider the FCA implications of research misconduct. “Research misconduct” is defined by the Public Health Services’ (PHS’s) final rule, effective  June 2005 (the Rule), as the “fabrication, falsification, or plagiarism in proposing, performing, or reviewing research, or in reporting research results.” 42 C.F.R. § 93.103. The Rule confers upon an organization an affirmative duty to protect PHS funds from misuse by ensuring the integrity of all PHS supported work, and primary responsibility for responding to and reporting allegations of research misconduct. 42 C.F.R. § 93.100(b). The Rule applies to grant funding from a variety of federal agencies, including the Food & Drug Administration, NIH, Centers for Medicare and Medicaid Services, and the Substance Abuse and Mental Health Services Administration, to name a few.


Par Pharmaceutical Beats FCA Prescription-Switch Allegations

In the fourth of a related set of qui tam False Claims Act (FCA) suits, the United States District Court for the Northern District of Illinois granted summary judgment in favor of generics manufacturer Par Pharmaceutical Companies (Par). The court’s August 17, 2017, opinion in U.S. ex rel. Lisitza et al v. Par Pharmaceutical Co, Inc. held that the relator had not presented sufficient evidence to support an implied certification theory of FCA liability.

Like its sister cases, the relator in Par Pharmaceutical alleged that the defendant caused the submission of false claims to the Medicaid program via an unlawful prescription-switching scheme. The alleged scheme involved manufacturing generic drugs in forms and dosage strengths that were atypical and not covered by existing Medicaid reimbursement limits, then marketing the drugs to pharmacies based on their higher reimbursement potential. The pharmacies would then fill the scripts with the more expensive forms and dosages manufactured by Par. The relators also alleged that the drugs were dispensed without physician approval and without meeting the medical necessity and economic requirements of governing state and federal Medicaid regulations, in violation of the FCA.


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.

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 Denies Triple Canopy’s Petition for Rehearing En Banc

We have previously posted about the United States Court of Appeals for the Fourth Circuit’s January 8 panel decision in U.S. ex rel. Badr v. Triple Canopy and its implications for “implied certification” False Claims Act (FCA) claims based on breaches of contract in the Fourth Circuit.  On Monday, March 9, the Fourth  Circuit denied Triple Canopy’s petition for rehearing en banc.  In seeking rehearing, Triple Canopy argued that, among other things, the Fourth Circuit’s decision expands the implied certification theory of FCA liability beyond the bounds recognized in other jurisdictions, rendering the Fourth Circuit an outlier:

Despite this clear and restrained jurisprudence, the panel decision embraced the theory of implied certification and expanded it beyond the bounds ever considered by this Court or applied by those circuits which recognize the theory. Under the panel’s theory, any knowing breach of contract is a violation of the FCA.


And by not even restricting viable implied certification claims to circumstances where compliance with a statute or contractual provision was an express condition of payment, the panel’s opinion abandoned that safeguard in favor of making every contract breach an FCA violation. This is a striking expansion of FCA liability, especially where this Court has repeatedly rejected such an outcome.

Triple Canopy cited the Western District of Virginia’s decision in Skinner v. Armet Armored Vehicles, Inc., on which we also recently posted, as an example of the potentially overly broad reach of the FCA in the Fourth Circuit after Triple Canopy.  While the arguments advanced in favor of rehearing were consistent with many of the criticisms the Triple Canopy opinion has drawn, the Fourth Circuit was not convinced, declining to revisit its decision.

Courts Continue to Construe “Worthless Services” Theory Narrowly (if at all)

Last August, the Seventh Circuit decided U.S. ex rel. Absher v. Momence Meadows Nursing Center, Inc., 764 F.3d 699 (7th Cir. 2014), a decision that cast significant doubt on the “worthless services” theory of False Claims Act (FCA) liability.  The Absher court declined to address the validity of the “worthless services” theory as a general matter, instead concluding that even if it were to recognize the theory, no reasonable jury could have found FCA liability based on “worthless services” because the relator failed to establish that the services in question had no value.  In vacating the jury verdict for the plaintiff-relators, the court, citing prior case law, held that to establish a worthless services claim, “the performance of the service [must be] so deficient that for all practical purposes it is the equivalent of no performance at all . . . . It is not enough . . .  that the defendant provided services that are worth some amount less than the services paid for . . . [s]ervices that are ‘worth less’ are not ‘worthless.’”  The Seventh Circuit subsequently declined to reconsider its ruling.  Commentators predicted that that Absher would limit the reach of the worthless services theory of FCA liability going forward.

On February 26, a district court in the Seventh Circuit confirmed that prediction.  In U.S. ex rel. McGee v. IBM Corp. et al., No. 11-C-3482, 2015 WL 877458 (N.D. Ill. Feb. 26, 2015), the court dismissed a worthless services claim against Johnson Controls Inc. (JCI), where the relator asserted that equipment JCI installed on certain “mobile platforms” (interoperable voice, data and video systems for municipal emergency vehicles) were “non-functional” and “unreliable.” The Court concluded that “by alleging that some of the equipment was unreliable, McGee concede[d] that JCI provided something of value, even if unreliable.”  In addition, the Court concluded that JCI’s work on a separate phase of the project did not implicate the worthless services theory, where JCI was unable to fix equipment that the relator himself deemed “unfixable.”  However, the Court concluded that JCI’s inability to “maintain” other equipment did implicate the worthless services theory where the relator alleged that JCI had eliminated any value realized by the successful installation of previously installed mobile platforms.

The McGee decision’s analysis is straightforward:  If a defendant’s government-reimbursable work has conferred any value, the worthless services claim fails.  If a defendant’s work has added no value, then a court may allow the claim to proceed, though again, the viability of the worthless services theory of FCA liability is still an open question in many Circuits, including the Seventh Circuit.

This rubric gives defendants a roadmap to successfully defeating worthless services claims as early as the pleading stage.  Defendants can seek dismissal of FCA complaints by pointing to plaintiffs’ allegations demonstrating that some, even marginal, value was provided to a project subject to government reimbursement, or in the health care context, a patient whose treatment by the defendant was subject to government reimbursement.

We will continue to follow [...]

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Skinner v. Armet Armored Vehicles, Inc.: One District Court’s Attempt to Apply Triple Canopy

We recently posted about the Fourth Circuit’s decision in United States ex rel. Badr v. Triple Canopy, — F.3d —-, 2015 WL 105374 (4th Cir. Jan. 8, 2015).  In that case, the court explicitly recognized the implied certification theory of liability under the False Claims Act (FCA) and held that some contractual violations can give rise to implied certification claims.  We also noted that the decision failed to provide meaningful guidance for lower courts to determine which types of contractual violations can give rise to such claims.  On February 10, 2015, the U.S. District Court for the Western District of Virginia issued a decision that demonstrates the uncertainty following Triple Canopy.

The district court in Skinner v. Armet Armored Vehicles, Inc., No. 4:12-cv-00045, 2015 WL 540156 (W.D. Va. Feb 10, 2015), granted a motion for reconsideration of its prior dismissal of a relator’s implied certification claims under the FCA, ostensibly as a result of Triple Canopy.  While the district court acknowledged that Triple Canopy was not “a reversal of standing precedent” (in that previously, the viability of implied certification claims had simply been questioned in the Fourth Circuit), the district court determined that Triple Canopy provided sufficient cause to reconsider.  The Skinner court then held:

Following the language in Triple Canopy, Plaintiff alleged that [Defendants] made a request for payment and knowingly “withheld information about its noncompliance with material contractual provisions.”  Plaintiff alleged that [Defendants] knew that the vehicles for which it was billing the government did not meet the ballistic protection requirements of its contracts with the government.  Nevertheless, Defendants billed and collected for vehicles it knew did not meet the contract specifications.  Under the guidance of Triple Canopy, the allegations make out a claim for “implied certification” claims[sic] under the FCA.

The district court also rejected the defendants’ argument that Triple Canopy should be cabined to its facts, instead finding that “the language employed by the Court was inclusive; they set forth the elements of an implied certification claim generally.”

What the Skinner opinion does not do is something the Triple Canopy court did: analyze whether the contractual provisions allegedly breached were sufficient to state a claim under the FCA.  While the “common sense” materiality analysis the Triple Canopy court employed to answer this question imparted little guidance for future courts dealing with other facts, the district court in Skinner did not undertake a similar analysis.  Nor did the Skinner court evaluate whether the alleged contractual breaches were conditions of payment, the essential cornerstone of the falsity analysis in an implied certification case.

Instead, the Skinner court appears to construe Triple Canopy to mean that any knowing contractual violation is sufficient to plead a false claim.  Assuming a complaint makes a conclusory assertion that a contractual term is or was material, evaluating that assertion seems, in the Skinner court’s view, to be a question for another day: “Defendants are free to argue that those specifications were immaterial.  This does not change, for pleading [...]

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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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Seventh Circuit Says Assignment Law Not a Basis for FCA Suit

In its November 12, 2014 decision in Thulin v. Shopko Stores Operating Co., the Seventh Circuit unanimously rejected the relator’s claim that alleged violations of the Federal Assignment Law (42 U.S.C. § 1396k(a)(1)(A)) gave rise to False Claims Act (FCA) liability, upholding the district court’s dismissal of the case. This ruling is important because it conveys a willingness (at least in the Seventh Circuit) to impose limitations on the types of statutory violations that can provide the basis for FCA liability, in a landscape where relators increasingly seek to use the FCA as a vehicle to enforce compliance with all manner of statutory and regulatory requirements.

The relator’s allegations primarily concerned Shopko’s billings for medications prescribed to individuals covered both by private insurance and Medicaid.  In essence, the relator claimed that Shopko committed fraud because it billed Medicaid for the full amount Medicaid had contracted to pay even where the private insurer contracted to pay a lesser amount.  Thus, for example, if a private insurer had agreed to cover a prescription for $20,plus a $5 copay, while Medicaid had agreed to pay $30 for the same prescription, Shopko would bill Medicaid $10—both the unpaid copay and the extra owed under the Medicaid contract— rather than just the $5 for the unpaid copay.  The relator alleged that this violated the Federal Assignment Law because the government had the right to an assignment of the benefits of the private health insurance rates under that law.

The Seventh Circuit found that the relator’s theory had “little if any support.”  First, the Seventh Circuit found that the alleged violation of the Federal Assignment Law did not form the basis for a claim to be “false.” The Seventh Circuit relied on the Supreme Court’s decision in Wos v. E.M.A. ex rel. Johnson, 133 S. Ct. 1391 (2013), for the proposition that the Federal Assignment Law concerns recoveries by individual Medicaid beneficiaries from a party responsible for injury (e.g., a tortfeasor in a car accident)—not businesses that contract with and receive payments from Medicaid.  Second, the court held that Shopko was allowed to bill as it did— it was Medicaid’s responsibility to withhold payments above a private insurer’s contracted rate—pointing to Centers for Medicare & Medicaid Services’ manual that specifically directs state Medicaid agencies to “withhold payment ‘[w]henever you are billed for the difference between the payment received from the third party based on’” a preferred provider agreement.  The court held that “Shopko’s alleged actions may … result in additional bureaucratic hassle on both Medicaid’s and Shopko’s end, but they are not false or fraudulent under the state Medicaid manual or any other regulation or law to which Thulin points.”

Shopko is the Seventh Circuit’s second recent ruling limiting the reach of the FCA.   Last summer it issued a decision limiting the worthless services theory of liability under the FCA.  United States ex rel. Absher v. Momence Meadows Nursing Center, Inc., No. 13-1886 & 13-1936 (7th Cir. Aug. 20, 2014).

A Stratified Approach to Statistical Sampling: the Limitations of LifeCare and AseraCare

The decision last fall in United States ex rel. Martin v. LifeCare Centers of America, Inc., No. 08-cv-251, 2014 WL 4816006 (E.D. Tenn. Sept. 29, 2014), has led to considerable discussion among lawyers who litigate claims arising under the False Claims Act (FCA). This decision represents the first time any court has found statistical sampling and extrapolation sufficient to establish FCA liability. Some courts had previously endorsed the use of sampling to demonstrate damages once liability has been established. Other courts had affirmed Department of Health and Human Services (HHS) administrative decisions that applied sampling in concluding that Medicare had overpaid government contractors. But the LifeCare decision went further, denying the defendant’s motion for summary judgment relating to the government’s use of statistical sampling to show falsity – the very essence of a false claim for payment by the government.

What is particularly noteworthy about the LifeCare decision is the nature of the government’s allegations for which the Court found extrapolation appropriate. In LifeCare, the government has alleged that LifeCare, a company that operates skilled nursing facilities, billed Medicare for medically unnecessary rehabilitation therapy services. A determination of medical necessity as to each of the services billed to Medicare turn on the individualized (and not collective) decisions of clinicians. The defendant argued that individualized decision-making cannot be demonstrated accurately through collective proof. Nevertheless, the court in LifeCare concluded that this argument “highlights the very nature of statistical sampling: that a smaller portion of claims will be used to draw an inference about a larger, not entirely identical, population of claims.” Some commentators have reacted to this reasoning by concluding that LifeCare gives the government and relators license to sidestep proof of falsity for each alleged claim for payment.

Another recent decision, United States v. AseraCare, Inc., No. 2:12-CV-245-KOB, 2014 U.S. Dist. LEXIS 167970 (N.D. Ala. Dec. 4, 2014), illustrates a similar conclusion. In that case, 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. In its decision, the court concluded that statistical evidence was sufficient evidence of falsity to defeat summary judgment.

However, a close reading of both LifeCare and AseraCare demonstrates that these cases contain important limitations. First, the LifeCare court recognized that its decision was the first of its kind. Other courts are not bound to follow its reasoning. Second, both courts noted that plaintiffs seeking to use sampling would still be subject to Daubert challenges. Moreover, LifeCare does not stand for the proposition that a plaintiff can prove FCA elements other than falsity by virtue of presenting a valid sample. In opposing summary judgment, the government represented that it intended to establish scienter by evidence of “corporate practices and pressure, and that LifeCare knew those practices likely caused the submission of false claims given the complaints it received nationwide from its employees and others.” The court approved of the manner in which the government proposed to establish scienter, [...]

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