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.

Continue Reading Par Pharmaceutical Beats FCA Prescription-Switch Allegations

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.

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 by crediting the jury’s determination that Dr. Killiany simply improved his methods for calculating the EC over time, and that he reasonably concluded in the exercise of his scientific judgment that his initial measurements were incorrect.

 

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.

Further:

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.

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 courts’ evaluation of “worthless services” claims going forward.

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 purposes, the fact that Plaintiff has alleged that Defendants’ implications to the government in submitting its invoices were demonstrably false.  For this reason, it does not negate the fact that, under Triple Canopy, Plaintiff has stated a claim for violation of the False Claims Act.”

The difficulty with this holding is the fact that, as even the Triple Canopy court recognized, an FCA claim is not a mere alternative to a breach of contract claim.  It is fundamental that not every contractual (or regulatory or statutory) violation states a claim for fraud under the FCA.  It will be interesting to see how other district courts within the Fourth Circuit apply Triple Canopy to implied certification claims in future cases.

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 last year in United States ex rel. Rostholder v. Omnicare, Inc., 745 F.3d 694 (4th Cir. 2014), in which the relator alleged that violations of FDA safety regulations gave rise to FCA claims.  There, the Fourth Circuit affirmed the district court’s dismissal of the relator’s complaint, and clearly held that materiality and falsity are “distinct elements of an FCA claim.”  The court reviewed the relevant regulatory and statutory framework and determined that because Medicare/Medicaid payment was not conditioned on compliance with the safety regulations in question, the relator had failed to plead falsity.  Further, “were we to accept relator’s theory of liability based merely on a regulatory violation, we would sanction the use of the FCA as a sweeping mechanism to promote regulatory compliance, rather than a set of statutes aimed at protecting the financial resources of the government from the consequences of fraudulent conduct.”

The Fourth Circuit’s objective analysis of the relator’s claim — and in particular the distinct element of falsity — in Omnicare differs substantially from its Triple Canopy decision, in which the court seemed to rest its holding on what is fundamentally a gut-driven assessment of materiality.

Finally, it is worth pointing out some interesting language in the Triple Canopy decision: the suggestion that the Government’s decision to intervene (or not) is relevant to whether a contractual violation is merely “garden-variety” or whether it can sustain an FCA claim.  The court stated in a footnote that “there are several key distinctions between this case and what we viewed as garden-variety breaches of contract in [previous cases].  First, this case does not involve uninjured third parties making claims against their former employers or contracts under which the Government does not ‘express dissatisfaction.’  To the contrary, the Government has clearly expressed its displeasure with Triple Canopy’s actions by prosecuting this action.”  Is this a signal from the court that unintervened claims pursued exclusively by relators will be subject to a more exacting level of scrutiny?  Maybe.  Indeed, Omnicare was just such a case.  However, the court’s language must be reconciled with the fact that even where the Government declines to intervene, a relator acts on its behalf.

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).

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, recognizing that “the Government . . . does not intend to use statistical sampling to prove this element of the FCA” (emphasis added). Interestingly, the government’s evidence as to the defendant’s knowledge that its practices “likely caused the submission of false claims” was not tested at summary judgment, as the court noted “the lack of evidence submitted by either party” and allowed the case to proceed to trial only because “the Court [was] not persuaded at this juncture that the Government will be completely unable to establish that Defendant had knowledge of the alleged false claims.”

This reasoning enlightens how defendants should attack claims based upon statistical extrapolation, because it reinforces important limitations of FCA liability, even if other courts were to follow LifeCare and AseraCare. In all FCA cases, plaintiffs must demonstrate scienter and causation in addition to falsity. Although LifeCare and AseraCare may endorse a shortcut to establishing falsity, they do not stand for the notion that plaintiffs may establish the remaining elements through a statistically valid sample alone.

Instead, where FCA plaintiffs rely on collective proof to establish scienter and causation, they must present evidence of a pattern or practice and that the defendant knew – or was reckless in not knowing – that this practice “likely caused the submission of false claims.” Without presenting evidence that a defendant was aware of (or recklessly disregarded) the fact that its practices were likely causing the submission of false claims, plaintiffs cannot proceed to trial. In short, even under LifeCare and AseraCare, a statistical sample alone is not enough to prevail.