Category: Case Analysis

The False Claims Act and Indian Tribes: To What Extent Does Sovereign Immunity Protect Tribes and Their Business Activities?

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Executive Summary: Dahlstrom v. Sauk-Suiattle Indian Tribe, No. C16-0053JLR, 2017 WL 1064399 (W.D. Wash. Mar. 21, 2017)

On March 21, 2017, a federal judge agreed with the Sauk-Suiattle Indian tribe (the “Sauk-Suiattle” or the “Tribe”) that it could not be sued under the federal False Claims Act (“FCA”) due to the tribe’s immunity from suit as a sovereign nation. The FCA prohibits any person from knowingly presenting or causing to be presented to the United States government a false or fraudulent claim for payment or approval and is a powerful tool in the government’s arsenal to fight fraud and abuse, particularly in the health care arena.[1] The U.S. District Court for the Western District of Washington State (the “Court”) did, however, permit individuals, including the director of a health clinic and the clinic itself, to be sued for allegedly submitting false claims for payment to the federal government and the state of Washington. This case is an important reminder to tribes and their attorneys, especially those involved in health care, to consider whether their tribes’ leaders, health care providers and clinics are sufficiently protected from these increasingly prevalent lawsuits. Tribes and their counsel should consider how best to structure tribal businesses and protect individual employees and agents in light of this and other relevant cases.

Summary of Sauk-Suiattle Order

The Court granted a motion to dismiss a qui tam (i.e., whistleblower) FCA case against the Sauk-Suiattle holding that the Tribe was immune from suit based on tribal sovereign immunity. The Court denied the motion with respect to a co-defendant health clinic and individual co-defendant owners/director[2] of the health clinic, ruling that the sovereign immunity defense did not apply to the clinic or the individuals. The case was dropped with respect to the Sauk-Suiattle, but it will proceed against the health clinic and its owners and director.

The Case Details

Facts and Claim.  On January 12, 2016, Raju Dahlstrom filed a complaint under seal against the Sauk-Suiattle, a federally recognized Indian tribe located in Washington State; Community Natural Medicine, PLLC, a tribe-affiliated health clinic (“CNM”); and individuals Christine Morlock, Robert Morlack and Ronda Metcalf (collectively, the “Defendants”) under the FCA[3] and the Washington State Medical Fraud and False Claims Act.[4]

Dahlstrom was a Sauk-Suiattle employee hired in 2010 as a case manager for CNM. He was later promoted to director. He was terminated from employment on December 8, 2015. Dahlstrom alleged that the Defendants knowingly presented or caused to be presented false or fraudulent claims to the U.S. and to the state of Washington by (1) approving payments of cosmetic dentistry for two individuals; (2) allowing an individual to use vaccines specifically donated to the Sauk-Suiattle for that individual’s own private business; (3) fraudulently certifying compliance with the Indian Health Service Loan Repayment Program; (4) using government funds to secretly purchase land originally intended for residential care for children and, after acquiring that land, dropping the programs for children; and (5) fraudulently using government resources designated for health care facility costs.

On September 16, 2016, the U.S. and Washington State notified the Court of their decision not to pursue the case against the Sauk-Suiattle, and the Court ordered Dahlstrom to proceed against the Sauk-Suiattle on his own. On January 12, 2017, the Defendants filed a motion to dismiss arguing that the Defendants were immune from Dahlstrom’s claims based on the Tribe’s sovereign immunity. Dahlstrom replied that the sovereign immunity defense does not exist where a lawsuit is brought on behalf of the U.S. and, further, that the term “person” in the FCA includes tribal entities.

Decision.  The Court granted the motion to dismiss with respect to Dahlstrom’s claims against the Tribe. However, it denied the motion with respect to the claims against CNM and the individual Defendants finding that while the Tribe was exempt from suit based on tribal sovereign immunity, the doctrine of sovereign immunity did not extend to CNM or to the individuals.

Analysis.  The Court ruled that unless a tribe has given up its right not to be sued or Congress specifically has inserted language in a federal statute stating that a tribe can be subject to a lawsuit, a tribe like the Sauk-Suiattle cannot be sued under a particular statute because it is immune from suit as a sovereign nation. The judge in this case ruled that the FCA was not written to permit a lawsuit against an Indian tribe. In analyzing the Defendants’ sovereign immunity defense, the Court stated, “‘[a]s a matter of federal law, an Indian tribe is subject to suit only where Congress has authorized the suit or the tribe has waived its immunity.'”[5] Further, tribal [sovereign] immunity is “‘a matter of federal law and is not subject to diminution by the States.'”[6] Like a state, a Native American tribe is “‘a sovereign that does not fall within the definition of “person” under the False Claims Act.'”[7] Since the Sauk-Suiattle is a federally recognized Indian Tribe, the Court reasoned, the Sauk-Suiattle was immune from Dahlstrom’s FCA suit.

Next, the Court looked at whether CNM could be sued under the FCA. The Court explained that while the doctrine of sovereign immunity applies to a tribe, the doctrine applies to entities with a nexus to a tribe only if the entity can be shown by a preponderance of the evidence (i.e., more likely than not) to be an “arm of the tribe.” The Court summarized a five-factor test articulated by the Ninth Circuit[8] to determine whether a business functions as an “arm of the tribe” so that it is entitled to sovereign immunity. Ninth Circuit courts examined:

  1. The method of creation of the economic entity;
  2. The entity’s purpose;
  3. The entity’s structure, ownership and management, including the amount of control the tribe has over the entities;
  4. The tribe’s intent with respect to the sharing of its sovereign immunity; and
  5. The financial relationship between the tribe and the entity.

After reviewing the parties’ pleadings and finding some inconsistencies in the descriptions of CNM’s relationship to the Tribe, the Court concluded that the Defendants had not met their burden of establishing that CNM is an arm of the Tribe. This means the plaintiff in the complaint, Raju Dahlstrom, could proceed against CNM even though the Sauk-Suiattle was immune from suit under the Court’s ruling.

Finally, the Court looked at whether the individual defendants who worked for the tribe and clinic could be sued under the FCA. The Court rejected their argument that they were covered by the Tribe’s sovereign immunity as tribal employees, agents or officials acting in their official tribal capacity. Under Stoner v. Santa Clara County Office of Education[9], state employees may be sued under the FCA even for “‘actions taken in the course of their official duties.'”[10] The Stoner Court cited Vt. Agency of Nat. Res. v. United States ex rel. Stevens[11] for the proposition that qui tam suits may be brought against individual state employees “‘because such [actions] seek damages from the individual defendants rather than the state treasury.”[12] The Court concluded, just as the reasoning of Stevens extended to provide tribes with sovereign immunity, “the reasoning in Stoner extend[ed] to permit suits against individual tribal employees for ‘actions taken in the course of official duties.'”[i][13] Accordingly, the Court held that the individual Defendants were not immune from suit under the doctrine of sovereign immunity.

Practical Takeaways and Recommendations

Tribal leadership and their counsel should take note of the Dahlstrom case for several reasons:

  1. While sovereign immunity may be a well established defense to a FCA action brought against an Indian tribe as demonstrated in Dahlstrom, that immunity does not necessarily extend to tribal businesses, including health care-related businesses. Tribes located in the geographic area covered by the Ninth Circuit (Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon and Washington) and desiring to extend their sovereign immunity to tribe-affiliated businesses, and entities should structure those businesses/entities to meet the “arm of the tribe” test articulated by the Ninth Circuit. Tribes elsewhere should seek guidance about the controlling case law in their jurisdictions, to determine how best to structure businesses or entities to protect their sovereign immunity defense rights.
  1. Dahlstrom is yet another FCA case holding that a tribe’s sovereign immunity does not extend to individuals acting on behalf of a tribe as employees, agents or officials. In the non-FCA realm, the U.S. Supreme Court just ruled in Lewis v Clark[14] that a Mohegan Tribal Gaming Authority employed limousine driver was not entitled to tribal immunity related to a lawsuit over a motor vehicle accident, overturning a Connecticut Supreme Court decision upholding a sovereign immunity defense for the driver. In light of the new Dahlstrom and Lewis decisions, tribes and their counsel must consider options for protecting individuals who work for a tribe in good faith but who nonetheless are sued in their individual capacities for alleged wrong-doing. An individual working within the scope of their employment for a tribal business can be subject to potentially ruinous financial liability if sued under the FCA. Tribes may want to carefully review insurance options to cover individuals and tribal businesses. Tribes should also look at their own laws and contracts to understand indemnification and defense coverage issues in the event individuals and businesses are sued under the FCA.
  1. Tribal councils and lawyers assisting tribes should pay close attention to the FCA. In fiscal year 2016 alone, the U.S. Department of Justice recovered over $4.7 billion from FCA cases.[15] Tribes and their leaders and providers are becoming more frequent targets of these actions. Often tribes are vulnerable to significant exposure under the FCA where some lack sufficient funding for robust protective compliance programs or the tribe’s long-time and community-oriented practices vary from federal legal requirements. Council members, health care committee and board members, providers and leaders in tribal health currently risk their own personal assets in these expensive cases. Tribes should consider utilizing some resources to expand compliance programs and to engage counsel to do a FCA risk assessment of their governmental billing practices.
  1. In a case footnote, the Court noted that its dismissal of the case against the Sauk-Suiattle involved a FCA lawsuit where the U.S. government elected not to intervene in the case filed by the plaintiff Dahlstrom, leaving open the question whether the Court would have dismissed the case against the Sauk-Suiattle if the U.S. had intervened (i.e., joined) in the case.[16] This very issue was addressed by an Oregon federal district court FCA case decided on April 11, 2017[17], in which the Oregon court held that a state university was immune from suit under the FCA as an “arm of the state” under circumstances where the federal government intervened in the suit. The Oregon Court in Doughty v. Oregon Health & Sciences. Univ. concluded that the U.S. may not bring a FCA action against an arm of the state and that a sovereign immunity defense is not limited to FCA qui tam cases brought by private parties. This is a very positive development.

Tribes and their counsel should watch for developments in the Oregon case and in other FCA cases directed at Indian tribes.

If you have any questions or would like additional information about this topic, please contact:

Please visit the Hall Render Blog at http://blogs.hallrender.com/ or click here to sign up to receive Hall Render alerts on topics related to health care law.

[1] For a more complete background about the FCA, please request a copy of Healthcare and the False Claims Act, 2016, Honig, et al., Healthlaw Publishing LLC, 2017, at healthlawpublishing.com.

[2] Defendants Christin Marie Jody Morlock, N.D. and Robert Larry Morlock own Community Natural Medicine, PLLC. (“CNM”) Ronda Kay Metcalf is the Director of the Indian Health Services and of CNM. (Dahlstrom v. Sauk-Suiattle Indian Tribe of Washington, Order Denying Motion for TRO (Jan. 31, 2017)).

[3] 31 U.S.C. §§ 3729-33.

[4] RCW 74.66.005 et seq.

[5] Dahlstrom v. Sauk-Suiattle Tribe, 2017 WL 1064399 (U.S. Dist. Ct. W.D. WA)(Mar. 21, 2017) (citing Kiowa Tribe of Okla. V. Mfg. Techs. Inc., 523 U.S. 751,754 (1998); Three Affiliated Tribes of Fort Berthold Reservation v. Wold Eng’g, 476 U.S. 877 (1986); Santa Clara v. Martinez, 436 U.S. 49 (1978); United States v. U.S. Fid. & Guar. Co., 309 U.S. 506 (1940)).

[6] Id.

[7] Howard ex re. United States v. Shoshone-Paiute Tribes of the Duck Valley Indian Reservation, 608 Fed. Appx. 468 (9th Cir. 2015).

[8] White v. Univ. of Cal., 765 F.3d 1010, 1025 (9th Cir. 2014).

[9] Stoner v. Santa Clara County Office of Education 502 F.3d 1116, 1125 (9th Circ. 2007).

[10] Id.

[11] Vt. Agency of Nat. Res. v. United States ex rel. Stevens 529 U.S. 765, 787 (2000).

[12] Stoner Op. cit.

[13] Dahlstrom Op. cit. @4 citing Stoner Op. cit. at 1125.

[14] Lewis v. Clarke, No. 15-1500, slip op. (U.S. Ap. 25, 2017).

[15] Justice Department Recovers Over $4.7 Billion From False Claims Act Cases in Fiscal Year 2016

Third Highest Annual Recovery in FCA History from Justice News (Dec. 14, 2016) found at: https://www.justice.gov/opa/pr/justice-department-recovers-over-47-billion-false-claims-act-cases-fiscal-year-2016.

[16] Fn 2 of Dahlstrom v. Sauk-Suiattle Indian Tribe.

[17] United States ex rel. Doughty v. Oregon Health & Sciences Univ., Case No. 3:13-CV-01306-BR (D. Or. Apr. 11, 2017).


Federal District Court Opines on Revised Stark Law Writing Requirement

On March 15, 2017, the U.S. District Court for the Western District of Pennsylvania provided the first federal court interpretation of the writing requirements affecting several regulatory exceptions in the federal physician self-referral statute (“Stark Law”) and its implementing regulations since the Centers for Medicare & Medicaid Services (“CMS”) provided sweeping revisions and clarifications to the Stark Law in 2016.1 This court opinion provides an in-depth interpretation of the recently implemented changes to the Stark Law writing requirements and how they relate to cases brought pursuant to the False Claims Act (“FCA”).

Background

Dating back to 1998, a private cardiology and internal medicine group practice (“Practice”) provided exclusive cardiology services to an Ohio-based medical center (“Medical Center”). In the early 2000s, the two parties joined to form a heart institute, which involved entering into six agreements for the Practice physicians to provide medical director services (“Medical Director Agreements”). These Medical Director Agreements automatically terminated on December 31, 2006. However, the two parties continued their relationship with no change and did not formally renew the agreements until November 29, 2007 via addendums that were backdated to January 1, 2007. This scenario played out again in 2008 and in 2009, with the addenda expiring and the parties later entering into backdated addenda until the agreements were eliminated altogether in March 31, 2010 due to a restructuring plan. Further, in 2008, one of the Practice’s physicians began performing administrative duties and receiving pay as a Chairman for the Medical Center’s Department of Cardiovascular Medicine and Surgery (“CV Chair Arrangement”). However, this position was never documented in a formal arrangement.

A cardiologist who was formerly employed by the Practice (“Relator”) filed a qui tam complaint against the Practice, the Medical Center and four individual physicians (collectively “defendants”). The Relator alleged that the defendants violated the FCA by submitting false claims for payment to the United States Government under the expired and missing agreements in violation of the Stark Law and the Anti-Kickback Statute. The defendants countered the allegations by arguing that the agreements were protected by three exceptions to the Stark Law: the personal services arrangements;2 the fair market value;3 and the isolated transaction4 exceptions. Although the government declined to intervene, the Relator continued to pursue the action.

The opinion from March 15, 2017 deals with cross-motions for summary judgment and specifically addresses whether the Stark Law writing requirements were satisfied for the above discussed agreements during the periods of time when the agreements lapsed. The court evaluates these issues under the clarified and modified view of the requirements promulgated by CMS.

CMS Revisions and Clarification

In the CY 2016 Medicare Physician Fee Schedule Final Rule (for a summary of the Final Rule, click here), CMS clarified that the Stark Law writing requirement does not require an arrangement to be documented in a single, formal contract and that a collection of documents could satisfy the writing requirement as long as they are contemporaneous and one of those documents bears the signatures of the parties to the arrangement. CMS provided a non-exhaustive list of the types of documents that could on their own or together constitute satisfactory contemporaneous documents:

- Board meeting minutes;Hard copy and electronic communications;
- Fee schedules for services;
- Check requests or invoices containing details of items or services along with relevant dates and rates;
- Timesheets with details regarding services performed;
- Call coverage schedules;
- Accounts payable or receivable; and
- Checks issued.

Relator’s Motion – The Writing Requirement

As to the plaintiff’s first claim that the Medical Director Agreements when lapsed did not meet the “in writing” requirement of the various Stark exceptions, the court began by outlining the requirements for the fair market value and personal service arrangement exceptions, stating the writing requirement is not a “mere technicality,” but instead is essential to the transparency demanded by the Stark Law. The court then acknowledged that the writing requirement must be satisfied at all times by a “document or collection of documents that ‘permit a reasonable person to verify that the arrangement complied with an applicable exception at the time a referral is made.'”5 With these considerations in mind, the court determined the critical question of “whether sufficient documentation ‘evidencing the course of conduct of the parties’ exists for the periods of time in between the expiration of the agreements and the execution of the addenda.”6

In applying the standards to the facts at hand, the court determined the Medical Director Agreements and addenda, when coupled with a collection of documents detailing the ongoing relationship, could persuade a reasonable jury that the necessary evidence was presented to show a course of conduct consistent with the writing requirement of the exceptions. The collection of documents the court found evidencing the Practice and the Medical Center’s course of conduct included invoices and corresponding checks that coincided with the services, timeframe and compensation described in the Medical Director Agreements and subsequent addenda. Thus, with respect to the Medical Director Agreements, the Relator’s motion for summary judgment was denied.

The court ruled differently in regards to the CV Chair Arrangement that was not formalized in any signed document. Instead, the defendants attempted to meet the collection of documents requirement with “undated, unsigned memoranda,” a letter with a passing reference to the position, meeting minutes and bylaws, none of which described the positions in any specific details or contained the signatures of any involved parties. The court found that at minimum to satisfy the writing requirement, the document or collection of documents must describe identifiable services, a timeframe and a rate of compensation. The court also reiterated the signature requirement and made clear that regardless of the sufficiency of the “collection of documents,” at least one contemporaneous document must contain the signatures of the parties. The defendants attempted to bring the CV Chair Arrangement under the isolated transaction exception, but the court found that exception typically only applies to “uniquely singular transactions” and does not apply in this instance where the payments were not singular, but instead the first in a series of payments. Thus, because the CV Chair Arrangement failed to meet each of the Stark exceptions, the Relator’s motion for summary judgment was granted.

Defendants’ Motion – FCA: Scienter and Materiality

The defendants’ motion for summary judgment also argued that the Relator failed to establish the scienter and materiality requirements of the FCA. The court rejected both arguments and denied the defendants’ motion.

Scienter. Under the FCA’s scienter requirement, the Relator was required to show that the defendants: (i) had actual knowledge of the information; (ii) acted in deliberate ignorance of the truth or falsity of the information; or (iii) acted in reckless disregard of the truth or falsity of the information. In analyzing the scienter requirement, the court noted that there was ample evidence that the physicians of the Practice and the Medical Center believed all of the agreements to be in compliance with the Stark Law. However, the court opined that there was also ample evidence in the record to suggest that the Practice and the Medical Center may have knowingly violated the Stark Law in at least one manner by submitting claims for payment arising from medical directorships that were not covered by a written agreement. The court noted that a Senior VP and Medical Director of the Medical Center issued a memorandum expressly acknowledging that the parties continued to operate under expired contracts. There was also additional evidence, including solicited legal advice, engagement of a Stark consultant and retroactive addenda to cover the lapse of time that showed the Practice and the Medical Center were aware the documents relating to the agreements were not at all times in compliance with Stark and yet they continued to act upon those agreements. This evidence, the court determined, could lead a reasonable jury to conclude that the Practice and the Medical Center continued to submit claims for payment despite knowing that the underlying arrangements may not have been properly documented for purposes of Stark compliance.

Materiality. In order to be actionable, the FCA also requires a misrepresentation or false claim to be “material to the Government’s payment decision,” and the defendants argued that even if they were found to have violated the Stark Law, those violations would not hold up under the materiality requirement of the FCA. Relying upon the 2016 standard outlined in United States ex rel. Escobar v. Universal Health Services, Inc., the court considered the following factors: whether compliance with a statute is a condition of payment; whether the violation goes to “the essence of the bargain” or is “minor or insubstantial”; and whether the government consistently pays or refuses to pay claims when it has knowledge of similar violations.

In applying these factors, the court determined that the alleged violations at issue were material because the Stark Law “expressly prohibits Medicare from paying claims that do not satisfy each of its requirements, including every element of any applicable exception.” Because compliance with each element is required, the writing requirement is not “minor or insubstantial.” Rather, it is crucial to the transparency demanded by the Stark Law and goes to the very “essence of the bargain.” The court also acknowledged that there was a lack of evidence suggesting the government refuses to pay or pays when they have actual knowledge of these violations but recognizes that providers who do violate these provisions are required to pay penalties when those violations are brought to light. Balancing all of these factors, the court determined summary judgment was not appropriate because the writing requirements contained in several Stark exceptions “are important, mandatory, and material to the government’s payment decisions.”

Practical Takeaways

Even in light of the clarified Stark Law writing requirements, providers must exercise caution in documenting physician arrangements. As noted by the court in this case, any “collection of documents” relied upon must contain at least one contemporaneous writing, signed by the parties. The collection of documents must also describe: 1) identifiable services; 2) a timeframe; and 3) a rate of compensation. Therefore, mere checks alone will not be sufficient to satisfy the writing requirement. Providers should attempt to document all physician arrangements and obtain signatures wherever possible. This case also illustrates that a failure to satisfy the writing requirements may subject a provider to increased liability under the FCA. Further, the holding in this case demonstrates that awareness that some claims may not be covered by a written agreement may be enough to satisfy the scienter requirement under the FCA.

If you have any questions about this case, or related issues, please contact:

- Allison Emhardt at (317) 429-3649 or aemhardt@hallrender.com;

- Brad Taormina at (248) 457-7895 or btaormina@hallrender.com; or

- Your regular Hall Render attorney.

Special thanks to Megan Culp, law clerk, for her assistance with the preparation of this article.

1 U.S. ex rel. Tullio Emanuele v. Medicor Associates

2 42 C.F.R. § 411.357(d)(1).

3 42 C.F.R. § 411.357(l).

4 42 C.F.R. § 411.357(f).

5 U.S. ex rel. Emanuele v. Medicor Associates (citing 80 Fed. Reg. 70886, 71316).

6 Id.


Fourth Circuit Says Attorney General Holds “Unreviewable Veto Power” Over Qui Tam Settlements and Sends Statistical Sampling Issue Back to the Trial Court

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The Attorney General of the United States has an unreviewable veto power over qui tam settlements, according to the Fourth Circuit’s recent published decision in United States ex rel. Michaels v. Agape Senior Community.[1] In the same decision, the court declined to decide an issue raised by the relators over the trial court’s refusal to allow statistical sampling to prove damages, a method of proof that would have cost the relators an estimated $36 million, far more than the value of the case.

In Michaels, the relator brought an action alleging that 24 affiliated elder care facilities defrauded Medicare and other federal health care programs by charging for unnecessary services and services for which the patients were not eligible.[2] The federal government, after receiving an extension, declined to intervene.

According to the relators, it would have cost $36 million to present their proof of damages. They said it would take their experts four to nine hours per patient to review the charts for about 50,000 alleged claims submitted to federal health care programs. The trial court refused to allow statistical sampling under those circumstances because the evidence was available for expert review. It had not been “destroyed or dissipated.”[3]

After that decision was made, the relators and the defendants reached a confidential settlement, but the Department of Justice, after being presented with notice, objected because the amount of the proposed settlement was appreciably less than the $25 million that the government estimated in damages based on its own statistical sampling.[4] When the relators moved to enforce the settlement, the trial court sustained the government’s objection and concluded that the Attorney General’s office had unreviewable veto power over qui tam settlements even, as in this case, where the government had not sought to intervene in the matter.[5] The trial court noted that if it could review that decision, it would have concluded that the government’s position was not reasonable because it would have cost the relators between $16.2 million and $36.5 million for trial preparation alone.[6]

Instead of proceeding first to trial, the court certified both issues for appeal – the “unreviewable veto power” and the use of statistical sampling. Certification is a little-used procedural method of having significant pretrial issues decided by the appellate court before trial.

The Fourth Circuit first addressed the unreviewable veto power issue. It considered decisions from the Fifth, Sixth and Ninth Circuits. The Fifth and Sixth Circuits had concluded that the Attorney General has absolute veto power over voluntary qui tam settlements.[7] The Ninth Circuit, on the other hand, had held years earlier that the government carried unreviewable veto authority only during the limited initial 60-day (or extended) period during which the government was allowed by statute to intervene without court approval.[8] After that period, according to the Ninth Circuit, the government needed “good cause” in order for its objections to be sustained by a court.[9]

In Michaels, the Fourth Circuit agreed with the Fifth and Sixth Circuit because, it said, the “plain language” of 31 U.S.C. 3730(b)(1), that a “qui tam action may be dismissed only if the court and the Attorney General give written consent to the dismissal and the reasons for consenting,” was unambiguous.[10] It rejected the Ninth Circuit’s position based on language in 31 U.S.C. 3730(d)(2) that states that, where the government declines to intervene, “the person bringing the action or settling the claim shall receive an amount which the court decides is reasonable for collecting the civil penalty and damages.”

The court then decided not to decide the statistical sampling issue presented by the relators.[11] The Fourth Circuit concluded that the relators had not presented a pure question of law that was appropriate for a pretrial review by the appellate courts.[12] This was because they presented a question about the trial court’s exercise of discretion in refusing to allow such sampling.[13]

The decision in Michaels places the federal government in a strategically strong position in qui tam actions. By vetoing settlements without having intervened in the dispute at all, the government can avoid significant expenditure of money and resources by sitting back and watching the relators litigate with defendants and then saying “no” without that decision being subject to judicial review – regardless of whether the government’s objection is reasonable. That impacts both relators and defendants who may spend months (or years) in litigation with nothing to show for it prior to trial. The trial court’s decision in Michaels with respect to statistical sampling also adds to the bar for relators because, as in that case, it could cost millions to prosecute the issues of damages alone.

If you have any questions, please contact Jon Rabin at jrabin@hallrender.com or (248) 457-7835 or your regular Hall Render attorney.

[1] No. 15-2145 (Feb. 14, 2017).
[2] Id. at 5.
[3] Id. at 10, 13.
[4] Id. at 11.
[5] Id. at 10-11.
[6] Id. at 12-13.
[7] Searcy v. Philips Electronics North America Corp., 117 F.3d 154 (5th Cir. 1997); United States v. Health Possibilities, P.S.C., 207 F.3d 335 (6th Cir. 2000).
[8] United States ex rel. Killingsworth v. Northrop Corp., 25 F.3d 715 (9th Cir. 1994).
[9] Id.
[10] Michaels, supra at 21.
[11] Id. at 26-27.
[12] Id.
[13] Id.


Seventh Circuit: Implied Certification Claims Remain a Heavy Lift

In light of the Supreme Court’s recent decision in Universal Health Services v. Escobar, the Seventh Circuit revisited its prior ruling in United States ex rel. Nelson v. Sanford-Brown, Ltd, a case alleging that a college receiving federal subsidies violated the False Claims Act (“FCA”) by maintaining discriminatory recruiting and retention practices. The Seventh Circuit addressed a narrow issue on review: whether the Relator’s implied certification claim – that the court previously ruled could not survive summary judgment – could be resurrected in light of Universal Health. The court held that the claims could not survive summary judgment and thereby reinforced its long-standing skepticism of FCA liability under an implied certification theory.

Background

Sanford-Brown College (the “College”) received federal subsidies under the Higher Education Act by way of entering into a Program Participation Agreement (“PPA”) with the U.S. Government. The PPA included familiar boilerplate language used across federal agencies that required the College to affirm that as a condition for the subsidies, it would comply with all statutory, regulatory and contractual requirements relating to Title IV.

The Relator alleged that the College’s recruiting and retention practices violated the affirmation it would abide by the requirements under Title IV.  Linking these alleged violations to the broad affirmation to abide by the law, the Relator pursued an implied certification theory under the FCA.

In its original decision, the Seventh Circuit affirmed the trial court’s grant of summary judgment in favor of the College. Relying on the distinction between conditions of payment and conditions of participation, the court forcefully rejected the Relator’s argument, characterizing implied certification claims as an imprecise mechanism for “enforcing violations of conditions of participation.” The court reasoned that these claims “lack a discerning limiting principal” and would hold the College implicitly liable for any violation of “thousands of pages of federal statutes and regulations incorporated by reference into the PPA.”

After the Supreme Court’s ruling in Universal Health – discussed in more detail here – the court reviewed its decision in Nelson on remand.

The Seventh Circuit Rejects the Relator’s Implied Certification Claims

The Seventh Circuit revisited the narrow portion of its previous decision and applied the two-part test set forth in Universal Health to evaluate the Relator’s implied certification claims.

  1. Does the claim at issue request payment and make specific representations regarding the goods or services being provided?
  1. Was the defendant’s failure to disclose its noncompliance material to the specific statutory, regulatory or contractual requirement allegedly violated?

In Nelson, the Seventh Circuit held that neither requirement was met.

First, the Seventh Circuit held that the Relator put forth no evidence that the College had made any specific representations to the Government regarding its claims for payment, “much less false or misleading representations.” The Relator’s mere speculation that such representations occurred was insufficient.

Second, relying upon the ”’rigorous’ and ‘demanding'” materiality standard under the FCA, the Seventh Circuit held the alleged violations were immaterial to the subsidies the College received. Under the FCA’s materiality requirement, evidence must demonstrate that the government was likely to, or actually did, reject claims for payment based on similar violations. It is insufficient to demonstrate only  that “the government would have the option to decline” payment had it known of the violations.

Moreover, the court reiterated its previous position that the government’s actual knowledge of violations, but continued payment for the good or service, continues to be uniquely strong evidence undercutting the materiality requirement. Here, the government had already examined the College’s alleged violations, continued making subsidy payments under the PPA and determined not to impose administrative penalties or terminate the agreement.

Having failed to meet either requirement of the two-part test under Universal Health, the Seventh Circuit reaffirmed the district court’s grant of summary judgment  in the College’s favor.

Practical Takeaway

How the Seventh Circuit readdressed FCA implied certification claims is important for health care providers and government contractors. It rebuts expectations that Universal Health would invite a deluge of implied certification claims that could dramatically remake the FCA landscape.

 

Taken broadly, the court’s decision makes it clear that it remains largely skeptical of implied certification claims. Despite being just three and a half pages long, the decision is a ‘greatest hits’ of Seventh Circuits previous opinions that reiterate its strong apprehension of implied certification FCA claims.

More narrowly, the Seventh Circuit’s application of the Universal Health decision sets a high bar to clear for Relators and the government pursuing FCA cases under an implied certification claims.

In short, the more things change, the more things stay the same – at least in the Seventh Circuit.

If you have any questions, please contact:

Drew B. Howk at ahowk@hallrender.com or (317) 429-3607;

Ritu K. Cooper at rcooper@hallrender.com or (202) 370-9584;

J. Patrick Garcia at pgarcia@hallrender.com or (443) 951-7043;

David B. Honig at dhonig@hallrender.com or (317) 977-1477; or

Your regular Hall Render attorney.


Massive Penalty Spike Darkens the FCA Landscape

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In November 2015, the Bipartisan Budget Act of 2015 went into effect. One aspect of that act was the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015. The new law required that the Program Fraud Civil Remedies Act and the False Claims Act (“FCA”) penalties be “corrected” to adjust for inflation since their last adjustment and then that the penalties be adjusted for inflation each following year.

In May, the Railroad Retirement Board was the first agency to issue its inflation “corrections,” shocking the FCA world. This week, the Department of Justice (“DOJ”) followed suit, expanding the spike to the entire FCA world.

In 1986, the FCA was completely rewritten and included a minimum penalty of $5,000 per claim and a maximum penalty of $10,000 per claim.

In 1996, under the Debt Collection Improvement Act of 1996 (“1996 Act”), the minimum and maximum penalties were increased to $5,500 and $11,000, respectively. Practitioners expected the correction to run from that date, leading to an increase of approximately 140% with a maximum penalty of about $15,000.

Instead, the government disregarded that correction because it was subject to the 10% cap set forth in the 1996 Act. The government went all the way back to 1986, leading to a massive 216% penalty increase.

The new DOJ minimum penalty per claim under the FCA is $10,781 and the maximum is $21,563. These will have an immediate effect on health care providers submitting Medicare and Medicaid claims.

To government contractors, this is a foreboding change. The FCA was always onerous, to the point that the Eighth Amendment Excessive Fines Clause was often considered, though no case ever turned on that issue. This massive increase may well put that defense back in play, particularly for claims that are microscopic in comparison to the penalties, e.g., a $5.00 laboratory service. While penalties are often not paid as part of negotiated settlements, they are mandated for any case decided by a court. It is that threat that often makes settlement discussions feel like coercion or even extortion to contractors.

For contractors, and particularly health care providers, this suggests new measures should be considered to insulate from these heightened penalties. One such suggestion is the batching of individual services to include as many as possible on a single “claim” to the government. The FCA applies to “claims for payment,” not individually itemized services found within each claim. There is no case law yet to guide providers on whether services for multiple recipients found on a single claim for payment would be one or many claims. However, that is the best prophylactic action available and provides the sort of argument courts will welcome to avoid having to resolve issues on Eighth Amendment constitutional grounds.

The FCA’s treble damages penalty was not changed as part of this adjustment.

The maximum civil monetary penalty was increased to $10,781.

All of these changes are effective for penalties assessed after August 1, 2016. This includes any failure to identify a prior overpayment after more than 60 days under the FCA’s 60-Day Overpayment Rule.  Notably, the DOJ stated that penalties associated with violations that occurred prior to November 2, 2015, the date the Bipartisan Budget Act went into effect, will still be subject to the old penalties.

Health Care Takeaway

The FCA’s already oppressive penalties have become draconian. Providers best avoid these new penalties with strong compliance programs and by working closely with their health care counsel to evaluate their programs, particularly in the billing and coding departments, as this terrifying specter looms over the entire industry. Providers can protect themselves somewhat from these changes by adjusting their billing practices to include as many individual services on as few claims for payment as possible.

If you have any questions, please contact:


Supreme Court Accepts Implied Certification – With a Twist

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The U.S. Supreme Court issued its decision today in Universal Health Services, Inc. v. United States ex rel. Escobar, and it will have an enormous effect on False Claims Act (“FCA”) cases throughout the nation.

In Escobar, the FCA case was based upon the theory that counseling was provided by practitioners who were not properly licensed according to state regulations. However, the counseling was actually provided, and the licensing regulations did not specifically state they were conditions of payment. This is an “implied certification” theory as the actual claims were not false but the submission of the claims impliedly certified compliance with statutes and regulations.

The Defendant argued that the “implied certification” theory could not apply unless the statute or regulation violated explicitly stated compliance was a condition of payment.

The United States government, on the other hand, argued that implied certification was sufficient to make the falsity material. Additionally, the government argued, any claim submitted in violation of a statute or regulation that was an express condition of payment, no matter how trivial, would be a per se violation of the FCA.

The Court rejected both arguments.

It started with the language of the FCA, which imposes liability for a “material” false statement. It first ruled that implied false certification could form the basis for an FCA case if (a) the claim both requests payment and makes specific representations about the goods or services provided; and (b) failure to disclose statutory, regulatory or contractual violations are “actionable half-truths,” knowing failures to fully disclose relevant information.

The Court then addressed the “condition of payment” question.

The Court first rejected the argument that an implied certification case requires an explicit condition of payment. Rather, the violation must be “material,” as determined from a fact-based analysis. If, for example, a provider knows or should know the violation would be material to the government’s payment decision, it is irrelevant whether the statute, regulation or contract explicitly identifies it as a condition of payment. If the provider knows that the government refused to pay similar claims for such violations, submission of such claims could create FCA liability.

The Court then rejected the government’s argument that any explicitly identified condition of payment could form the basis for an FCA lawsuit, no matter how trivial. The language of the statute, regulation or contract is not relevant to the determination, the Court ruled. The only relevant issue to materiality is the government’s actual payment decision. If, for example, the government routinely pays claims submitted in violation of a regulation that is explicitly identified as a condition of payment, that violation would not be material to the payment decision and could not be the basis for an FCA claim.

The Court, by rejecting both arguments, refused to consider the existence or non-existence of condition of payment language as the touchstone for an FCA implied certification case. Instead, it ruled that materiality was a factual analysis determined by the provider’s knowledge and the government’s previous behavior in the face of such violations.

Health Care Takeaway

The Escobar decision is a significant event in False Claims Act law. No longer can providers rely upon the distinction between “conditions of payment” and “conditions of participation” in assessing potential risks. Instead, they must look to the possible violation itself, the likelihood that it will be relevant to the government’s payment decisions and the government’s previous behavior in response to such violations.

If you have any questions, please contact David B. Honig at dhonig@hallrender.com or (317) 977-1447 or your regular Hall Render attorney.


7th Circuit Rules “Usual and Customary Pricing” Can Include Discount Programs

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A recent whistleblower case could have a significant impact on Medicare Part D charge limits and corresponding reimbursement and could have ripple effects for aspects of other Medicare programs. The Seventh Circuit Court of Appeals ruled that reduced prescription prices offered by a large retail pharmacy (here Kmart) to participants enrolled in a popular discount program constitute the pharmacy’s “usual and customary” pricing for purposes of Medicare Part D prescription drug program claims. In US ex rel. Garbe v. Kmart Corp., the court ruled that Kmart’s discount drug program could not be distinguished from its non-discount pricing and excluded for determination of its “usual and customary” pricing, which functionally lowers the floor for Part D plan payments.

Many Medicare Part D plans require that aggregate pharmacy provider charges to not exceed the “usual and customary price.” The court notes that the term “usual and customary price” is generally understood to be the “cash price offered to the general public.” The question addressed here by the court was whether Kmart’s membership discount program, called the “Kmart Maintenance Program” (“KMP”), offering discounted prices to KMP members while charging higher prices to non-program insurers and cash customers was available to the “general public” and therefore considered the pharmacy’s usual and customary pricing.

In administering the KMP, Kmart hired a third-party processor to maintain the discount program. Kmart then determined its “usual and customary” price exclusive of the prices offered in the KMP, arguing that members of its discount programs were not part of the “general public.” The court disagreed with Kmart’s position and found that KMP pricing representing the usual and customary price. First, the court noted that the barriers to joining the discount programs were almost nonexistent and that members of the “general public” could easily become members of the discount programs by paying a small fee. Second, the court found that Kmart was not selective in who it permitted to join the program given that membership was offered to anybody who purchased prescription drugs. Third, the members of the programs were unlikely to consider themselves as belonging to any particular group because of their membership in the discount programs.

Going forward, the court affirmed the trial court’s denial of Kmart’s request for summary judgement with regard to calculation of Kmart’s “usual and customary” price, affirmed that the False Claims Act applies to almost all of the plaintiff’s claims and remanded the case to the district court for further proceedings.  The ultimate implications of the trial court’s holding on “usual and customary” meaning “cash price to the general public” will be fact-specific and must take into account specifically defined terms contained in individual state statute and PBM/administrator contracts/payor sheets in determining if there is False Claims Act liability with regard to various Medicare Part D claims.

Health Care Takeaway

Providers should carefully monitor the progress of this case. Pending a final resolution, they should consider whether their discount programs are structured such that they might be construed as being offered to the general public and whether such programs must be considered in determining “usual and customary pricing.” While it is by no means clear that all discount programs must be considered when calculating usual and customary pricing, discount programs that might affect usual and customary pricing should be carefully evaluated in coordination with claims processing and prescription drug plan contracting activities.

If you have any False Claims Act questions, please contact David B. Honig at dhonig@hallrender.com or (317) 977-1447 or your regular Hall Render attorney. David is in our Indianapolis office.

If you have any pharmacy questions or specific questions about pricing, please contact Todd Nova at tnova@hallrender.com or (414) 721-0464, Rachael Ream at rream@hallrender.com or (216) 513-1314 or Stephen Rose at srose@hallrender.com or (425) 278-9337. Todd is in our Milwaukee office, and Rachael and Stephen are in our Seattle office.


Enforceability of FCA Releases Questioned

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Releases of FCA claims my only be effective in very limited circumstances, the Second Circuit Court of Appeals ruled in a decision this week. In US ex rel. Ladas v. Exelis, Inc, et al., the court ruled that a pre-filing release is unenforceable as a matter of public policy – the encouragement of qui tam suits to uncover fraud against the government – unless the government is informed of the fraud allegations prior to its signing. This is an extension of the Fourth Circuit Court of Appeals’ decision in US ex rel. Radcliffe v. Purdue Pharma L.P. and fully accepts the Ninth Circuit Court of Appeals’ decisions in US ex rel. Green v. Northrop Corp. and US ex rel. Hall v. Teledyne Wah Chang Albany.

In Ladas, the defendant was awarded a contract to provide the government with devices and component parts that met particular specifications and to notify the government of any changes that could cause deviation from those specifications. The defendant changed the way certain components were made. It did not advise the government of the changes for several years, falsely stated the changes were recent and falsely advised that the changes did not have the potential to affect any of the specifications.

After the notice went out, Ladas’ employment was terminated, and he signed a release that included “any rights or claims [he] may have under … federal … laws.” The release also stated it was to be construed “ in the broadest sense possible.”

Ladas soon filed a qui tam action against his former employer. When it was unsealed, after the government elected not to intervene, the defendants moved to dismiss the complaint based upon the release. The trial court granted the motion, finding that the notification to the government was sufficient to put it on notice of the changes that formed the basis for Ladas’ action, and therefore the release was not violative of public policy.

The trial court’s decision was based upon the decisions noted above, Radcliffe, Green and Hall. Those decisions, together, stand for the proposition that a release of qui tam claims is not contrary to public policy if, prior to the release being signed, the government is advised of the allegedly fraudulent conduct and has the opportunity to fully investigate it.

The Second Circuit Court of Appeals accepted the reasoning, but rejected the trial court’s factual findings. While it was true that the defendants had put the government on notice of the changes, it had not put the government on notice of the fraudulent conduct. Instead, it had misled the government about the timing of the changes and, most importantly, had falsely assured the government that the changes were inconsequential and had no potential to affect whether the components still complied with the contract specifications. A partial disclosure, the court ruled, was insufficient to notify the government, and therefore any subsequent release would be contrary to public policy.

While this case underscores the challenges to drafting a release of qui tam filing rights where the whistle has not already been blown, it does not preclude other kinds of releases consistent with the underlying public policies at issue. For example, if an employee has also raised other claims, such as discrimination allegations, those could be resolved in a settlement. However, such a release requires careful drafting to avoid the settlement agreement being construed as an attempt to prevent protected disclosures to the government. For example, the agreement should have a clause allowing any void provisions to be struck without compromising the enforcement of the remaining provisions and language making it clear the agreement is not intended to prohibit protected reports to the government.

Health Care Takeaway

With the high risk created by False Claims Act lawsuits, health care providers have an interest in getting broad releases from former employees. Based upon these cases, though, such releases can only be effective if they follow a complete disclosure of potential fraud allegations that might form the basis for a whistleblower action. Where there is known FCA risk concurrent with the termination or resignation of a potential whistleblower, the provider should consult with health care counsel for advice on compliance, disclosure and the drafting of the broadest possible effective release.

If you have any questions, please contact David B. Honig at dhonig@hallrender.com or (317) 977-1447 or your regular Hall Render attorney.

Assisting with this post was Sevilla P. Rhoads (srhoads@hallrender.com or  (206) 795-6876) in our Seattle office.


Government Approval and Percentage in FCA Cases

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An Indiana Federal District Court just published an opinion on an issue of first impression in the Seventh Circuit, the ability of the government to reject or approve a settlement in a case in which they did not intervene. The court also opined on the ability of a whistleblower to enter into a settlement that delivered none of the proceeds to the government.

In Howze v Sleep Centers, the whistleblower and the Defendant entered into settlement discussions, which reached the point of an unsigned draft settlement agreement. Neither the US nor the State of Indiana had approved the settlement. Defendant changed counsel, and new counsel immediately rejected the proposed agreement.

The whistleblower moved to enforce the agreement, arguing that the government was made aware of the agreement, that it would not be harmed by it and that the government lacked veto authority because it refused to intervene in the case.

The plain language of the statute, 31 USC sec. 3730(b)(1), states a whistleblower case under the False Claims Act “may be dismissed only if the court and the Attorney General give written consent to the dismissal and their reasons for consenting.” However, the Ninth Circuit Court of Appeals, in the Killingsworth case,  held that the government’s refusal to consent to a settlement was subject to a court’s review for reasonableness. However, the Fifth and Sixth Circuit Courts of Appeal, as well as the D.C. District Court, have all rejected the Ninth Circuit’s interpretation, accepting instead the plain language of the statute.

The District Court rejected the Ninth Circuit’s interpretation, stating:

“This Court is persuaded by the plain language of the statute as well as the policy purposes behind the FCA to side with the Fifth and Sixth Circuits in their upholding the requirement for government consent to dismiss FCA claims. Where, as here, the Agreement attempts to dismiss FCA claims over the government’s objection, this Court cannot enforce the Agreement.”

The settlement agreement the whistleblower hoped to enforce did not provide any money to the government – 100 percent of the settlement proceeds went to the whistleblower and his counsel. He argued that there was nothing in the statute that prohibited such an agreement. The court disagreed, again based upon the plain language of the statute:

“If the Government does not proceed with an action under this section, the person brining the action or settling the claim shall receive an amount which the court decides is reasonable for collecting the civil penalty and damages. The amount shall be not less than 25 percent and not more than 30 percent of the proceeds of the action or settlement and shall be paid out of such proceeds.” 31 U.S.C. § 3730(d)(2)

The court stated:

“These (FCA) claims belong to the United States and the State of Indiana, and as such Howze is only entitled to a portion of these claims, not 100%. The Agreement is not enforceable.”

While this decision was made at the District Court level, the reasoning behind it, as well as the precedent from the Fifth and Sixth Circuits, suggest that it will be persuasive in Seventh Circuit courts.

Health Care Takeaway

Health care providers must always be conscious of potential False Claims Act risk. This case is persuasive in Seventh Circuit courts in Wisconsin, Illinois and Indiana and stands for the propositions that the government cannot be excluded from settlements, either in their approval or in their award of settlement proceeds.

The author, with Mark Giaquinta of Haller & Colvin in Ft. Wayne, Indiana, represented Sleep Centers of Ft. Wayne, Defendants in this case.

If you have any questions, please contact David B. Honig at dhonig@hallrender.com or (317) 977-1447 or your regular Hall Render attorney.


Fourth Circuit Addresses Expanded Definition of “Original Source”

In 2010, the False Claims Act (“FCA”) was extensively amended to limit the public disclosure bar and to expand the ability of whistleblowers to qualify as “original sources” in qui tam litigation. This month, the Fourth Circuit Court of Appeals took an in-depth look at both provisions, in the case US ex rel. Moore & Co. v Majestic Blue Fisheries…. Continue Reading →