False Claims Act Update

(1)

False Claims Act

Update

Jeremy Kernodle

and

Sean McKenna

May 20, 2015

(2)

False Claims Act

• A false claim for payment to the United States, 31 U.S.C. § 3729(a)

– Includes conspiracy and “reverse” false claims provisions

• Claim must be submitted “knowingly”

– Actual knowledge – Deliberate ignorance – Reckless disregard

– No specific intent to defraud required

• Other state/federal law violations may be bases for FCA liability

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FCA cont.

• Six-year statute of limitations

– Three years from date material facts are known or reasonably should be known by responsible official

– Not more than 10 years after the violation

• Remedies

– Damages not required

– $5,500 - $11,000 penalty per false claim

– If found liable, mandatory treble

damages, if any, and penalties – Attorneys’ fees and costs

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Qui tam

Provisions

• Relator files case on behalf of government

– Under seal for at least 60 days as DOJ reviews – May pursue without DOJ involvement

– Protected from retaliation under section 3730(h)

• Plead with particularity under Rule 9(b) • Relator entitled to share of proceeds • Procedural defenses

– Public disclosure bar – First-to-file rule

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Possible FCA “Outcomes”

• Suspension of payments

• Termination from gov’t programs

• Civil recoveries from responsible parties

• Exclusion/debarment/revocation license

• Cost of responding

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Healthcare Fraud and DOJ

• Commitment to prosecute healthcare fraud

– Criminal/Civil/Antitrust Divisions

– Consumer Protection Branch

– Health care fraud coordinators within 94 United

States Attorneys’ Offices

– Federal Bureau of Investigation

– Drug Enforcement Agency

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2014 Activity

• DOJ recovered more than $5.6 billion in FY 2014

– First time recoveries exceeded $5 billion – Up from $3.8 billion in 2013

• Of $5.6 billion –

– $3.1 billion related to financial institutions – $2.3 billion related to healthcare

– $3 billion from qui tam cases

• Number of qui tam suits exceeded 700 for second year in row

– Up from only 30 in 1987

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2014: Notable Settlements

• $1.8 billion settlement by B of A to settle claims

re: mortgages sold to U.S.

• $1.1 billion settlement by Johnson & Johnson to

settle claims re: unapproved drugs

• $32.5 million settlement by Hewlett-Packard to

settle claims re: IT products sold to USPS.

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State False Claims Acts

CA NV WA* MT NM CO* TX* LA* MN IL IA* IN WI* MI* FL GA NC TN VI DC NY MA NH RI CT* NJ DE MD* HI

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2014: Legislative Action

•

United States: no action but reforms urged

– CMS Rule implementing report-and-return

requirement

•

Georgia: aligned penalty provisions of GA

False Medicaid Claims Act with federal FCA

•

Connecticut: expanded state FCA to cover all

state healthcare programs

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RECENT SIGNIFICANT

JUDICIAL DECISIONS

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Rule 9(b)

• Circuit split continues….

–

Supreme Court: Rejected request to resolve

issue (

Takeda

)

–

Seventh Circuit: Must provide at least 1

example of actual false claim (

Grenadyor

)

–

Third Circuit: Rejected “rigid” pleading

standard and embraced “more nuanced”

approach (

Foglia

)

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Rule 9(b)…

•

Eighth Circuit: Abandoned requirement of

representative examples; detailed scheme

enough, especially where relator had “personal

knowledge” of false claims (

Planned

Parenthood

)

•

Eleventh Circuit: Plead “indicia of reliability”

that false claims submitted, including that relator

“personally was in a position to know” (

HMS

)

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Rule 9(b) cont.

• E.D. Ky.: complaint alleging scheme to defraud and including representative sample of false claims satisfied Rule 9(b).

(Assocs. in Eye Care)

• M.D. Ga.: complaint quoting conversations by defendant admitting fraudulent billing satisfied Rule 9(b), even though no false claims identified. (Willis)

• D.N.J.: complaint relying on statistical inferences (6% of

patients are Medicare beneficiaries) satisfied Rule 9(b), even though it identified no representative samples. (Greenfield)

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Public Disclosure Defense

•

31 U.S.C. § 3730(e)(4)

: court must dismiss if

qui tam

complaint based upon publicly disclosed allegations

• When do 2010 amendments apply?

–

D. Mass., E.D. Va

.: apply to conduct before 2010 if

complaint filed after 2010

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Public Disclosure cont.

• What is a public disclosure?

– Ninth Circuit: disclosure made to just one person may qualify if person is “member of the public” (Malhotra)

– Eighth Circuit: response to single FOIA request, even if not widely disseminated, may be public disclosure (Kraxberger) – E.D. Va.: only disclosure made to general public, placed in

public domain, or made available to stranger of the fraud is public disclosure (Saunders)

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Public Disclosure cont.

• What must be disclosed?

– N.D. Ill.: “critical elements” of the fraud (Veluchamy) – E.D. Cal.: “core” allegations, even if not as detailed

(Millennium Pharms.)

– N.D. Ill., E.D. Va.: simply alleging “negligent” or

“unethical” billing not enough because did not disclose fraud (Veluchamy, Saunders)

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Original Source

• How does a relator qualify as an “original source”?

– Eighth Circuit: must provide new information (Paulos)

– Fifth Circuit: must acquire knowledge by “own efforts rather than learned second-hand” (Lockey)

– Fourth Circuit: must have been employed at time of fraud (Ahmuda)

– Ninth Circuit: must also have “a hand in the public disclosure” (Millennium Pharmaceuticals)

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First-to-File Rule

•

31 U.S.C. § 3730(e)(4)

: Bars relators from bringing

“related action” based on facts underlying “pending

action”

•

Fifth Circuit

: bars actions based on the same “material”

or “essential” facts (

Planned Parenthood

)

• Courts are taking more liberal approach, finding more

suits barred under statute.

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First-to-File cont.

• What is a “related action”?

– First and Fifth Circuits: cases are “related” if

investigation in first case would have uncovered same

fraud alleged in second case (Planned Parenthood, Ven-a-Care)

– D.S.C.: cases can be “related” even if not all of the

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First-to-File cont.

• What is a “pending” action?

– Split: presently pending v. was pending

– Carter: Supreme Court will address the split

• Fourth Circuit: if no longer pending, first-to-file bar does not apply

• Solicitor General: agreed – and makes sense

because bar is intended to protect first relator from diluting recovery by follow-on suits while protecting defendants from simultaneous suits

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Statute of Limitations

• Ordinarily, 6 years from violation.

• Wartime Suspension of Limitations Act may

suspend this period – even to

qui tams

–

because of hostilities in Iraq. (4th Cir., SDNY,

W.D. Mo.)

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Penalties

•

31 U.S.C. § 3729(a)

: $5,500 to $11,000 per false claim

•

M.D. Fla

.: no constitutional issue even when penalties

prosecuted by private relator (

Halifax Hosp

.)

•

D.D.C

.: amount is within court’s discretion – depends on

scienter, harm, and seriousness of conduct, but does not

depend on amount of damages (

Purcell

)

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Settlement

•

Eighth Circuit: relators may share in proceeds

of settlement between government and

unnamed party, where settlement required

dismissal of relators’ action (

Rille

)

•

E.D. Mo.: relator bound by settlement, even

though parties never agreed how to divide

recovery, where relator “did not oppose”

language of dismissal (

Peterson

)

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Scienter

• 31 U.S.C. § 3729(a)(1): defendant must have “knowingly” submitted

false claim

• What if the contract or law is ambiguous?

– Third Circuit: as matter of law, defendant did not act “knowingly” when key provision of government contract is

ambiguous (Arnold)

– COFC: defendant’s interpretation must “border on the frivolous,”

even if erroneous (Ulysses)

– C.D. Cal.: interpretation must be “so clearly incorrect” as to infer

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Attorneys’ Fees

• 31 U.S.C. § 3730(d)(4): defendant may recover fees where it “prevails” and relator’s claim was “clearly frivolous”

• D. Colo.: defendant is “prevailing” only if there is a “judicially

sanctioned change in the legal relationship of the parties” (Todd)

• S.D. Tex.: defendant cannot recover attorneys’ fees incurred

before suit filed, or any fees/costs from defending government investigation (Roe)

(27)

Person

•

31 U.S.C. § 3729(b)

: FCA prohibits any “person” from

submitting false claims

– Supreme Court: states are not “persons”

– Various tests to determine whether other entities are “persons”

•

Eleventh Circuit

: water district is arm of state and thus

not a “person” (

Lesinski

)

•

Fourth Circuit

: student loan authority is arm of state

(28)

Defendant v. Relator

• Can a defendant file a counterclaim against a relator?

–

E.D. Pa.

: yes, where counterclaim was for breach of

confidentiality agreement and defendant was not

seeking to lower FCA liability (

Walsh

)

–

D.N.J.

: yes, where counterclaim was for breach of

(29)

Stark Law

• Stark: prohibits physician referrals of designated health services for

Medicare and Medicaid patients if physician has a financial relationship with that entity

• Two Updates:

– Halifax Hospital:

• FCA liability arising from alleged Stark violations • Sought $1 billion in damages and penalties

• Settled on eve of trial for $85 million – Tuomey:

• FCA liability arising from alleged Stark violations (19 part-time employment agreements)

• Trial in 2013 with $238 million verdict

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Worthless Services

•

Momence Meadows

case

– 2013: jury verdict for $28 million against nursing home for “worthless services”

– 2014: Seventh Circuit reversed and rendered for nursing home • Narrowed “worthless services” theory

• Must be “so deficient” that “it is the equivalent of no performance at all”

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Jeremy Kernodle is a litigator who focuses on government litigation and appeals. He has successfully litigated cases against various federal agencies, including bid

protests in the U.S. Court of Federal Claims. His experience covers a range of

substantive legal areas, including healthcare, False Claims Act claims, constitutional and administrative law, and government contract disputes.

Before joining Haynes and Boone, Jeremy served as an attorney-adviser in the Office of Legal Counsel at the U.S. Department of Justice, where he was among a small number of lawyers advising the White House and other senior Executive Branch officials on constitutional and other significant legal issues. He previously worked at Covington & Burling in Washington, D.C., and served as a law clerk to the Honorable Gerald B. Tjoflat of the U.S. Court of Appeals for the Eleventh Circuit.

Jeremy D. Kernodle [email protected] 2323 Victory Avenue Suite 700 Dallas, Texas 75219 T +1 214.651.5159 F +1 214.200.0693

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Sean McKenna is Co-Chair of the firm’s Healthcare Practice Group and a partner in the white collar defense section and has 16 years of enforcement and healthcare experience. Sean worked most of that time in the federal government, investigating and resolving hundreds of civil, criminal, and administrative health care and white collar fraud investigations, matters, and cases. He focuses his current practice on defense of healthcare fraud and abuse, false claims act/qui tams, white collar, government contracts, and healthcare regulatory matters. He regularly advises providers on fraud and abuse risks as well as compliance-related issues.

During his ten years as an Assistant U.S. Attorney, Sean investigated and prosecuted criminal health care, pension, wire fraud, money laundering, illegal kickbacks, and forfeiture cases, resulting in significant sentences and judgments.

Sean McKenna [email protected] 2323 Victory Avenue Suite 700 Dallas, Texas 75219 T +1 214.651.5249 F +1 214.200.0736

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False Claims Act

Update

Jeremy Kernodle

and

Sean McKenna

May 20, 2015

[email protected]