Review of Frequent Appellate Issues in False Claims Act During 2014

Wooden Gavel Resting on Table Reflecting American Flag.

With only two weeks left in the year, I spent some time yesterday reviewing the appellate decisions in 2014 that were rendered in False Claims Act cases.

The three areas that I saw most frequently were fairly predictable. Each involved an area that would allow the defendant to obtain dismissal of the qui tam lawsuit. These areas were:

  • The First-to-File Rule
  • The Public Disclosure Bar
  • Rule 9(b)

For whistleblowers who are considering their first qui tam lawsuit, these areas of contention are worth examining prior to filing the complaint under seal to allow for an educated decision about whether to proceed. For legal practitioners, it is a useful reminder about the grounds defendants are using to seek dismissal.

The First-to-File Rule

The first-to-file rule is set forth in 31 U.S.C. § 3730(b)(5): “When a person brings an action under this subsection, no person other than the government may intervene or bring a related action based on the facts underlying the pending action.” The four appeals I examined in depth on this issue were all decided in favor of the Defendants.

In brief, the cases turned on whether the essential facts of the fraudulent scheme in the subsequent complaint were laid out to the government in the earlier complaint. Each case turned on a different issue, however:

In U.S. ex rel. Shea v. Cellco Partnership, 748 F.3d 338 (D.C. Cir. 2014), the dismissal of the relator’s first lawsuit under the False Claims Act barred a subsequent lawsuit on the same fraudulent scheme brought by the same relator.

In U.S. ex rel. Wilson v. Bristol-Myers Squibb, Inc., 750 F.3d 111 (1st Cir. 2014), the lawsuit alleging the essential facts of a previously filed claim was barred by the first-to-file rule even though it stated different facts.

In U.S. ex rel. Ven-A-Care v. Baxter Healthcare Corp., Case Nos. 13-1732 & 13-2083, — F.3d —, 2014 WL 6737102 (1st Cir. Dec. 1, 2014), the first qui tam lawsuit alleging evidence of fraud by a specific defendant barred a more detailed, subsequent complaint on the same fraudulent scheme brought by an insider.

In U.S. ex rel. Johnson v. Planned Parenthood of Houston, 570 Fed.Appx. 386 (5th Cir. 2014), allegations in both complaints of altering patient records and billing Medicare programs for services other than those rendered meant the subsequent complaint was subject to the first-to-file bar even though it included fraud on a different program with different facts.

The Public Disclosure Bar

The public disclosure bar was an area of significant appellate litigation in 2014. At least seven cases that I reviewed involved a dispute over whether the case should be dismissed because based on a public disclosure.

The False Claims Act bars qui tam lawsuits based on allegations publicly disclosed via certain methods unless the relator is an original source of the information. 31 U.S.C. § 3730(e)(4)(A). Once there has been a public disclosure, the relator can only qualify as an original source if they voluntarily disclosed their information to the government prior to the public disclosure or they have independent knowledge that materially adds to the publicly disclosed allegations. 31 U.S.C. § 3730(e)(4)(B).

The decisions were roughly split between opinions favoring the relator and the defendant.

In U.S. ex rel. Rostholder v. Omnicare, Inc., 745 F.3d 694, 700(4th Cir. 2014), relator’s claims were not barred by public disclosure doctrine because they were not based upon the public statements and he had sufficient direct and independent knowledge to be an original source.

There were two cases where the publicly available information was not sufficient to be deemed a public disclosure. See U.S. ex rel. Oliver v. Philip Morris USA Inc., 763 F.3d 36, 42-43 (D.C. Cir. 2014)(Government awareness of legal requirements and public disclosure of “innocuous-seeming” facts outside of the FCA specified channels); U.S. ex rel. Heath v. Wisconsin Bell, Inc., 760 F.3d 688, 691-92 (7th Cir. 2014)(posted government contract discovered by corporate auditor).

However, where there was a public disclosure, relators faced a more significant challenge proving that they were an original source. See Maholtra v. Steinberg, 770 F.3d 853, 858-61 (9th Cir. 2014)(Information provided during a deposition taken by the Office of the United States Trustee was a public disclosure); U.S. ex rel. Paulos v. Stryker Corp., 762 F.3d 688, 694-96 (8th Cir. 2014)(relator was not an original source when his information only minimally added to the public reports even though he was among the first to suspect problems); U.S. ex rel. Ahumada v. NISH, 756 F.3d 268, 278 (4th Cir. 2014)(The relator only had direct and independent knowledge sufficient to qualify for original source status against one defendant because he learned the information in the course of his employment from an employee of that particular company and independently confirmed it through his own inquiry.); U.S. ex rel. Kraxberger v. Kansas City Power and Light Co., 756 F.3d 1075, 1080 (8th Cir. 2014)(public disclosure of documents through a FOIA request and the news media barred the relator’s lawsuit)

Heightened Pleading Under Rule 9(b)

Rule 9(b) of the Federal Rules of Civil Procedure requires a plaintiff to plead fraud with particularity in the complaint. “In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.” Fed. R. Civ. P. 9(b). The defendant in a False Claims Act case will challenge the adequacy of the complaint with respect to this standard on a Rule 12(b)(6) motion to dismiss.

This issue was put before the U.S. Supreme Court in 2014 by a petition for certiorari following United States ex rel. Noah Nathan v. Takeda Pharm. N. Am., Inc., 707 F.3d 451 (4th Cir. 2013). The Department of Justice, however, recommended against granting cert and the Supreme Court declined to hear the case.

Of the four decisions I reviewed in this area, three favored the relator. These three decisions found sufficient indicia of reliability that they did not require the relator to provide a specific example of a false claim submitted to Medicare in the complaint.

In United States ex rel. Foglia v. Renal Ventures Mgmt., 754 F.3d 153, 157-158 (3d Cir. 2014), the Third Circuit required only “particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted.”

In U.S. ex rel. Thayer v. Planned Parenthood of the Heartland, 765 F.3d 914 (8th Cir. 2014), a manager with access to their billing system, knowledge of billing practices and personal knowledge of false claim submissions had sufficient indicia of reliability to meet the standard of rule 9(b).

In U.S. ex rel. Mastej v. Health Management Associates, Inc, Case No. 13-11859, —— Fed.Appx. ——, 2014 WL 5471925, *12-14 (11th Cir. Oct. 30, 2014), the relator’s presence in meetings discussing billing for clients was sufficient to state a claim in this case even though no specific examples of claims were submitted. However, the 11th Circuit did not allow the relator to extrapolate false claims beyond the time that he worked at the company.

On the other hand, in United States ex rel. Dunn v. North Memorial Health Care, 739 F.3d 417, 420 (8th Cir. 2014), the relator failed to submit even a single example of a false claim to Medicare for billing and the complaint was dismissed.

Other Areas

Three other areas stood out as I saw multiple opinions addressing the issue, although to a lesser extent than the three posted above.

Intent

The False Claims Act imposes liability only when the defendant acts “knowingly.” In order to meet the intent requirement found in 31 U.S.C. §3729(a), the defendant must have actual knowledge of the information and either act in deliberate ignorance or reckless disregard of the truth or falsity of the information. 31 U.S.C. § 3729(b)(1)(A). No proof of specific intent to defraud is required. 31 U.S.C. § 3729(b)(1)(B).

The decisions in this area were split, with two deciding against the relator because an ambiguous contract or regulation prevented the defendant from having the required scienter. See U.S. Dept. of Transp., ex rel. Arnold v. CMC Engineering, 567 Fed.Appx. 166, 170-71 (3d Cir. 2014)(false claim was not presented “knowingly” because of ambiguity in the contract for an inspectors credentialing requirements); Gonzalez v. Planned Parenthood of Los Angeles, 759 F.3d 1112, 1115 (9th Cir. 2014)(required scienter missing when relator acknowledged unclear definition of cost in billing manual). On the other hand, in Veridyne Corp. v. U.S., 758 F.3d 1371, 1379 (Fed. Cir. 2014), the company possessed intent to defraud the SBA even though the agency in charge of negotiating the contract may have been aware of the false statements.

Is an organization an “arm of the state” or a person under the False Claims Act?

Two different cases saw courts apply a four factor “arm of the state” analysis to determine whether there is sufficient state control to render an organization a part of the state and not a “person” subject to suit under the False Claims Act. See U.S. ex rel. Oberg v. Pennsylvania Higher Educ. Assistance Agency, 745 F.3d 131 (4th Cir. 2014); U.S. ex rel. Lesinski v. South Florida Water Management Dist., 739 F.3d 598, 605 (11th Cir. 2014)(South Florida Water Management District an arm of the state under four factor test and not a proper defendant to a False Claims Act lawsuit. The False Claims Act only applies liability on “any person”. 31 U.S.C. §3729(a)(1).

Discovery

Two cases that I examined involved the issue of privileged documents in discovery.

In re Kellogg Brown & Root, Inc., 756 F.3d 754 (D.C. Cir. 2014), the D.C. Circuit Court reversed the lower court decision requiring KBR to produce documents created during an internal investigation into fraud allegations. The D.C. Circuit clarified that investigative materials were covered by attorney-client privilege if a “significant purpose” of the investigation was to provide or obtain legal advice even if it was not the only purpose. The lower court ordered the documents produced because it was a routine compliance investigation involving non-attorney interviewers.

In Nevada v. J-M Mfg. Co. Inc., 555 Fed.Appx. 782 (10th Cir. 2014), third-party tests paid for by the United States while conducting discovery on the claims in a qui tam action were attorney work-product and not discoverable after the U.S. declined to intervene.