FCA UPDATE
FCA UPDATE
Exploring Recent Developments in False Claims Act Litigation, Enforcement and Compliance
FCA UPDATE
Exploring Recent Developments in False Claims Act Litigation, Enforcement and Compliance
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Sky-Diving Without a Parachute? Ninth Circuit Reluctantly Holds Escobar’s Two-Part Test Mandatory, For Now

By and on Sep 6, 2018
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In the aftermath of the Supreme Court’s 2016 Escobar decision, the majority of litigation regarding that decision’s impact has concerned the issue of materiality. While the materiality predicate to False Claims Act (FCA) liability announced in Escobar has certainly assumed top billing, another aspect of the Supreme Court’s decision is increasingly getting attention: that is, whether the two-part test for applicability of the implied certification theory of FCA liability is mandatory.

In Escobar, the Supreme Court held that the implied certification theory “can be a basis for liability, at least where two conditions are satisfied: first, the claim does not merely request payment, but also makes specific representations about the goods or services provided; and second, the defendant’s failure to disclose noncompliance with material statutory, regulatory or contractual provisions makes those representations misleading half-truths.”

Since this pronouncement, lower courts have grappled with whether all implied certification FCA cases must satisfy this two-part test, or whether the Supreme Court simply intended to describe a non-exhaustive set of factors that could give rise to an implied certification claim.  This is important, in part, because not all claims for payment submitted to government payors actually describe or make representations about the goods or services provided, thus failing part one of the test.

In prior cases, such as the one we reported on here, panels of the Ninth Circuit Court of Appeals have held that the two-part test is mandatory. A Ninth Circuit panel reaffirmed this holding on August 24, 2018, albeit with a total lack of enthusiasm. In United States ex rel. Rose v. Stephens Institute, the court stated that “while the [Supreme] Court did not state that its two conditions were the only way to establish liability under an implied false certification theory,” the panel was “bound by [prior] three-judge panels of this court” interpreting Escobar. The Rose court went on to suggest that the Ninth Circuit hearing the case en banc might decide the issue differently. (No petition for rehearing en banc has yet been filed in Rose; any such petition is not due until October 9, because of an extension of time for filing).

The skepticism about the mandatory nature of the Escobar two-part test expressed by the Ninth Circuit panel in Rose is unwarranted. First, the Supreme Court granted certiorari in Escobar for the very purpose of resolving whether the implied certification theory of FCA liability is viable and if so, to what extent. The notion that the Supreme Court would then have laid out two “conditions” for implied certification liability, labeled them “conditions,” but not have actually meant them to be “conditions,” makes little sense.

While some advocates for the contrary view (including the government) have grasped onto the phrase “at least” in the Supreme Court’s opinion to suggest that the “conditions” are instead non-exhaustive “examples” of situations where implied certification claims may proceed, such reasoning is flawed: the use of the term “at least” conveys that the two conditions are the minimum necessary [...]

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Another Court Grants Summary Judgment to FCA Defendant Based on Escobar’s Materiality Standard

By on Apr 11, 2018
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On April 6, 2018, the U.S. District Court for the Eastern District of Pennsylvania granted a motion for summary judgment filed by a waste company in an implied certification case under the False Claims Act (FCA), holding that the relator failed to satisfy the Supreme Court’s materiality standard announced in the landmark Escobar case.

The claims in U.S. ex rel. Cressman v. Solid Waste Services, Inc. arose from waste company employees discharging leachate, a liquid that passes through or is generated by trash, onto a grassy area at a transfer station, rather than sending the leachate to a treatment plant.  The relator reported the leachate discharge to the Pennsylvania Department of Environmental Protection (DEP), which conducted an investigation.  The waste company cooperated in the investigation, conducted its own investigation, and took corrective steps in response to the allegations.  The company also entered into a consent decree in connection with which it paid a civil penalty.

The relator then filed his qui tam action under the FCA, in which the government declined to intervene.  The relator asserted that the defendant waste company was liable under the FCA because it submitted claims for payment to federal agencies without disclosing its violation of environmental regulations arising from the leachate discharge incident. (more…)



Par Pharmaceutical Beats FCA Prescription-Switch Allegations

By on Sep 25, 2017
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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.

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Fourth Circuit Decision in Triple Canopy Sets up Another Implied Certification Circuit Split

By on Jun 1, 2017
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On May 16, 2017, the US Court of Appeals for the Fourth Circuit issued a decision in US ex rel. Badr v. Triple Canopy, Inc. In this case, the government had contracted with a private security company to provide guards at a military airbase in Iraq. Although the applicable contract required the guards to have certain marksmanship scores, the defendant (as alleged by the relator and the government) failed to employ guards with the requisite qualifications.

The Fourth Circuit’s recent decision is the continuation of a years-long battle between the plaintiffs and Triple Canopy over whether the operative complaint adequately pleads violations of the False Claims Act. The Fourth Circuit previously held that the complaint had done so, but after Triple Canopy petitioned the Supreme Court for certiorari, the Supreme Court remanded the case back to Fourth Circuit for reconsideration in light of the high court’s recent Escobar decision.

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Another District Court Dismisses Improperly Pled Implied Certification Claims

By on Apr 28, 2017
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On March 27, 2017, the United States District Court for the Eastern District of Pennsylvania dismissed a False Claims Act (FCA) complaint due to failure to satisfy the Supreme Court’s pleading standards for implied certification claims.

In U.S. ex rel. Schimelpfenig v. Dr. Reddy’s Labs. Ltd., the relators alleged that defendant Dr. Reddy’s Labs violated the False Claims Act (FCA) by causing the submission of claims for prescription drugs, which allegedly did not comply with two federal statutes; the Poison Prevention Packaging Act of 1970 (PPPA) and Consumer Product Safety Improvement Act of 2008 (CPSIA). As alleged by the relators, the defendants that manufactured the drugs failed to issue general conformity certificates for the prescription drugs imported and distributed in the United States, in violation of the CPSIA, and failed to test the packaging of the drugs for child-resistance in violation of the PPPA. The relators alleged that as a result of the noncompliance, drug retailers (also joined as defendants) submitted claims to government payers for federal reimbursement of noncompliant drugs. (more…)



SDNY Dismisses Sub-Prime Mortgage Crisis Complaint on Materiality Grounds Because Government Paid Claims Despite Notice of Alleged Fraud

By on Mar 8, 2017
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On March 2, 2017, the US District Court for the Southern District of New York applied the materiality standard announced by the Supreme Court of the United States in Universal Health Services, Inc. v. United States ex rel. Escobar to dismiss a relator’s complaint because the relator, a former managing director of Moody’s, failed to plead materiality as a matter of law.

In United States ex rel. Kolchinsky v. Moody’s Corp., the district court had previously dismissed with prejudice four of five categories of claims, and dismissed without prejudice the relator’s “Ratings Delivery Service” claim, i.e., that Moody’s provided inaccurate ratings directly to subscribers, including government agencies.  In his Second Amended Complaint, the relator attempted to cure the pleading defects of Ratings Delivery Service claim in a “124-page tome,” but to no avail. (more…)



Sixth Circuit Revives Home Health Qui Tam Based on Pre-Escobar Standards; Dissent Criticizes Majority for Engaging in Rulemaking

By on Oct 6, 2016
Posted In , ,

On September 30, the US Court of Appeals for the Sixth Circuit reversed dismissal of a relator’s False Claims Act (FCA) claims against providers of home health services in U.S. ex rel. Prather v. Brookdale Senior Living Communities, Inc. et al. The relator was a utilization review nurse who alleged that physician certifications of patient need for home health care were not signed until well after the care had been provided, in violation of 42 C.F.R. § 424.22(a)(2), which requires that such certifications be completed at the time a plan of care is established or “as soon thereafter as possible.” While the regulation does not define “as soon thereafter as possible,” the Sixth Circuit held that the relator’s allegations that the requisite certifications were not completed for several months were sufficient to allege violations of both the regulation and the FCA.

The Sixth Circuit reasoned that the phrase “as soon thereafter as possible” “suggests plainly that the analysis of whether a certification complies requires that the reason for any delay be examined.” The court went on to announce the following rule: “Certification of need may be completed after the plan of care is established, but only if an analysis of the length of delay, the reasons for it, and the home health agency’s efforts to overcome whatever obstacles arose suggests that the home health agency obtained the certification ‘as soon thereafter as possible.’” The Sixth Circuit held that the relator’s complaint satisfied this standard, because she alleged that the certifications were not completed for months due solely to a backlog of Medicare claims that arose because of the defendants’ allegedly aggressive solicitation of residents for treatment. (more…)



Hospital’s Reasonable Interpretation of Ambiguous Law Supports Dismissal of Relator’s Case

By on Aug 17, 2016
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In a decision issued August 8th, the Eighth Circuit affirmed the dismissal of a whistleblower’s False Claims Act (FCA) suit alleging the University of Minnesota Medical Center-Fairview (UMMC) wrongly claimed a “children’s hospital” exemption to Medicaid cuts based on a reasonable interpretation of an unclear state law.

In 2011, Minnesota passed an amendment that cut Medicaid reimbursement levels for inpatient services by 10 percent, but exempted “children’s hospitals.” The law did not define the term “children’s hospital,” instead the statute exempted “children’s hospitals whose inpatients are predominantly under 18 years of age” from the rate cut. UMMC believed that the University of Minnesota Children’s Hospital should qualify for this exemption and contacted the Minnesota Department of Human Services (MDHS) to obtain confirmation. In 2012, MDHS issued the exemption and a retroactive refund.

The relator, an MDHS official who claimed to be the drafter of the exemption language, complained within MDHS that UMMC’s children’s hospital did not qualify based on the intended meaning of the term “children’s hospital.” After further review prompted by the relator, MDHS reversed its position, finding a “lack of clarity in the statutory definition of what constitutes a children’s hospital” but that the UMMC exemption was not “consistent with the law or how other similarly situated children’s facilities are treated” and sought return of the retroactive refund. The Minnesota Legislature later amended the law in May 2014 to retroactively exempt all UMMC Medicaid patients aged under 18 from the rate reduction.

The relator’s suit, filed in September 2013, alleged that UMMC knew that University of Minnesota Children’s Hospital (which is a unit inside a larger hospital) did not legally qualify as a “children’s hospital” under the state law. The relator attempted to characterize UMMC’s efforts to obtain an exemption as making false claims or false statements to MDHS as well as support for a “reverse false claims” theory because, according to relator’s logic, UMMC had an obligation to refund the money received after obtaining the exemption because UMMC knew it was not entitled to the exemption in the first place.

The district court and the Eighth Circuit disagreed with the relator. Both courts found that the state law was unclear and “in the absence of a statutory definition of ‘children’s hospital,’ it was reasonable for UMMC to inquire about the proper classification of its children’s unit … A reasonable interpretation of ambiguous statutory language does not give rise to a FCA claim.”  The relator relied heavily on his role as drafter of the relevant amendment and the legislature’s historical treatment of children’s hospitals in making his arguments. The court found “this reliance cripples his argument. Legislative history is properly consulted only in light of a textual ambiguity.”

Whether a reasonable interpretation of an ambiguous law can state a claim under the FCA has been the subject of several recent decisions in favor of defendants, many of which we have covered on this blog, such as:

Eight Circuit Affirms Summary Judgment Grant Based on [...]

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

By on Jun 20, 2016
Posted In ,

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

By on Apr 19, 2016
Posted In

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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