Posted on December 2, 2005 in Legal Updates
Written by: David B. Honig
A clear trend is emerging in False Claims Act cases to limit qui tam relators’ discovery to the specific allegations found in their complaints. This represents a sea change in the way these cases proceed, and makes the False Claims Act far less attractive to plaintiffs’ attorneys. The False Claims Act (“FCA”), in its current form, combines a federal law enacted during the Civil War in response to fraudulent military procurement contracts with an expansion of the English common law concept of qui tam relator, which gave authority to common citizens to bring cases on behalf of the government and enjoy a share of the proceeds of any monetary awards granted in those cases. The resulting law, last updated in 1986, permits these Relators to initiate claims on behalf of the federal government alleging fraud in the submissions of fradulent claims to the federal government. FCA cases are very attractive to plaintiffs’ attorneys for several reasons. First, they are lucrative. The FCA calls for treble damages, penalties of $5,000 to $10,000 per claim, and attorney’s fees. Second, the Relator may not have to do much in the way of presenting a case. Cases involving the FCA also have a certain lottery aspect in that if the Government intervenes and takes over the prosecution, the relator and his/her counsel need do little but cooperate with the Government and wait for a check. This can be done with only a modicum of information, so long as it is sufficient to entice the Government to further investigate and then intervene.
However, if the Government refuses to intervene the qui tam relator may litigate the case on behalf of the United States. If the relator prevails, the relator is entitled to a larger relator’s share of the proceeds. The downside of the relator proceeding with the case singularly is that the relator would not have the benefit of the Government’s additional investigation and resources. As a result, Courts are faced with the obligation to frame discovery in a manner consistent with the purposes of the FCA while also preventing “fishing expeditions.” Courts accepted the challenge, and the strong trend is to limit relators’ discovery to only that which is pled with particularity in the complaints.
II. Rule 9(b)
Federal Rule of Civil Procedure 9(b) requires that in allegations of fraud or mistake, “the circumstances constituting fraud or mistake shall be stated with particularity.” This is a much stricter standard than Federal Rule of Civil Procedure Rule 8(a), which requires only “a short and plain statement of the claim showing that the pleader is entitled to relief.” Perhaps the best description of exactly what is required to plead fraud with particularity was enunciated by the Seventh Circuit Court of Appeals as “the who, what, when, where and how: the first paragraph of any newspaper story.”
Rule 9(b) acts as a gatekeeper, existing “to force the plaintiff to do more than the usual investigation before filing his complaint.” This gatekeeping function is necessary to “protect  defendants ‘against spurious charges of immoral and fraudulent behavior.’” Every Circuit court that has considered the matter has agreed that Rule 9(b) applies to FCA cases.
III. Applications for Fishing Licenses
False Claims Act cases brought by qui tam relators often seem to be little more than applications for fishing licenses. They either allege fraud only in generalities, or they identify a limited number of frauds with particularity and then allege there are many more to be found in discovery. The former are easily dismissed on a Rule 9(b) basis. The latter, however, create greater challenges for defense counsel and the court.
Cases alleging any FCA violations with the requisite particularity will not be dismissed pursuant to Rule 9(b). Courts have dismissed complaints for failing to identify any claims. However, where some false claims have been adequately identified Rule 9(b) is of no avail.
The next issue, then, is exactly what was pled and exactly what discovery flows therefrom. The scope of discovery is limited to “any matter, not privileged, that is relevant to the claim or defense of any party.” The court must decide whether the claims of the qui tam relator are only those identified with particularity in his/her complaint, or whether those may stand as exemplars for far more alleged false claims.
The idea of pleading fraud by example is one that flows from combining the strictures of Rule 9(b) with the liberal pleading boundaries of Rule 8. Where the alleged fraud occurred over a long period of time or included a large number of claims, courts in fraud cases have accepted a “relaxed rule” of Rule 9(b) pleading, permitting plaintiffs cases to identify only enough claims with particularity to advise the defendant of the claims against it and to protect against spurious charges. This “relaxed rule” has even been applied in FCA cases in which the Government intervened. However, where the Government refuses intervention, Rule 9(b) and “relaxed rules” must be considered in light of the language and intent of the FCA. It is this combination that has led to the recent trend to restrict relators to only that which they specifically identified.
IV. Fishing Licenses Cancelled
In June, 2003, two different federal courts limited relators’ discovery to the specific allegations of their complaints.
In United States ex rel. Grandeau v. Cancer Treatment Center of America, , the relator pled “some specific circumstances of the alleged fraud,” which the court found sufficient to meet Rule 9(b)’s requirements. The relator then requested discovery that the defendant estimated would be approximately 2 million pages of records. The court, noting the defendants had already turned over all of the records of patients specifically named in the complaint, wrote:
This case well represents a continuing conundrum in qui tam cases. The relator is suppose to be an insider, one who advances claims she knows about because of her unique position that the Government does not know. And fraud must be pled with particularity. But the breadth of the claims may be such that alleging all of the ‘who, what, when and where’ of the claims would lead, ultimately, to an extremely long, complex and incomprehensible complaint. Still, a qui tam complaint is not a roving commission to investigate all of the financial dealings of the defendant.
The court solved the conundrum by limiting discovery to the relator’s specific claims, rejecting her request to “add details as necessary” and file “another amended complaint.”
In United States ex rel. Stewart v. Louisiana Clinic, the court described relator’s complaint as “bare minimum pleading” and stated it would “remain guided through discovery by the principles behind Rule 9(b).” The court went on to note “that Amended Rule 26(b)(1) dovetails quite nicely with the dictates of Rule 9(b) regarding pleading special matters with particularity, and the purposes underpinning the rule.” The court based its ruling on the fact that “the right to proceed on behalf of the United States is limited to those citizens who ‘have independently obtained knowledge of fraud.’” Based upon this right and the limits of Rule 9(b) and 26(b)(1), the court restricted the relator’s discovery to the specific patients referenced in her complaint.
On February 23, 2004, the First Circuit Court of Appeals decided United States ex rel. Karvelas v. Melrose-Wakefield Hospital. The Karvelas court also considered the breadth of a qui tam relator’s discovery. The court first discussed the concept of “relaxed rules of pleading” under Rule 9(b), stating “when we refer to the relaxation of Rule 9(b)’s particularity requirements, we refer to an opportunity for the plaintiff to plead generally at the outset and then later amend the complaint.” The court refused to apply relaxed rules of pleading in FCA cases for three reasons. First, the court found that most courts that had considered such a relaxed rule for FCA cases rejected it. The second, and most substantial, reason for the Court’s ruling was the language and intent of the FCA. The FCA requires a relator to serve a disclosure statement on the government containing “substantially all material evidence and information the person possesses.” The government makes its intervention decision based upon that disclosure statement. The Court ruled that permitting a relator to amend after filing the disclosure statement and complaint and then conducting further discovery would obligate the government to make its intervention decision “without complete information about the relator’s cause of action.” The court described discovery beyond the original disclosure for the purpose of later amendment to the complaint as “at odds with the FCA’s procedures for filing a qui tam action and its protections for the government.”
The final reason the Karvelas court refused to permit “relaxed rules of pleading” for qui tam relators was their unique status as uninjured plaintiffs suing on behalf of the government. The court opined such a plaintiff “may be particularly likely to file suit as ‘a pretext to uncover unknown wrongs.’”
At least four other district courts have considered Rule 9(b), the FCA, and discovery limitations, some of them as unreported cases. In the first, United States ex rel. Schuhardt v. Washington University, the trial court limited initial discovery to the 15 patients specifically identified in the complaint. In response to the defendant’s motion for summary judgment, the relators alleged additional frauds identified during discovery of those 15 patients. The court refused to consider them, stating it would “not allow plaintiffs to use discovery to make new allegations against defendant.” The Relators further contested the summary judgment motion arguing that they would seek to amend their complaint after being permitted additional discovery. The court refused, saying it “will not allow this case to continue as a fishing expedition in search of a fraud claim.” The court granted summary judgment for defendants based upon only the fifteen claims identified with specificity in the Relators’ complaint. The Eighth Circuit Court of Appeals affirmed, “adopting the reasoning of the District Court’s thorough Memorandum and Order.”
The second unreported case, United States ex rel. Schell v. Battle Creek Health System, included very little discussion. In Schell, the trial court limited discovery to the relator’s theory of fraud, whether charging for a multi-dose vile of medications when only a single dose is used increases costs to Medicare. The Court then granted the motion summary judgment for defendant on that issue, with little further discussions of discovery. This case is of interest only in that the discovery was so limited.
The third example is a reported case from the Northern District of Alabama: United States ex. rel. Atkins v. McInteer. In McInteer, the court emphasized that the alleged false claim must be presented to a government officer or official to warrant a valid claim under the FCA. The claim in McInteer alleged that a grantee of federal funds (Amtrak) had been defrauded. Further, due to the lack of particularity in the Relators’ claim, the court echoed the reasoning of the Clausen and Karvelas courts in granting the defendants’ motion to dismiss. The court stated that “[t]he whistle must be blown not only loudly, but with Rule 9(b) particularity in the complaint before the courts will listen.”
The final case, United States ex rel. Beck v. Midwest Eye Consultants, is far more instructive. First, it was a prototypical fishing expedition. The allegations the trial court found sufficient to survive a Rule 9(b) challenge related to the treatment of a single patient, while relator hoped to conduct discovery into literally thousands of patient files. The relator went so far as to advise the court that he considered the defendants’ files a “treasure trove of information” that he hoped to mine to find “a pattern or practice” to prove his case.
The Beck defendants moved to limit discovery to the claims specifically identified in the complaint. Beck responded that as “champion of the Government’s case” he was entitled to discovery to search for “all illegal claims that [the defendants] have submitted to the government for reimbursement.” Defendants responded that congressional intent was clearly otherwise. This argument was based upon a federal statute which authorizes the United States Attorney General to issue civil investigative demands before commencing a FCA action, and prohibits delegation of such authority to others. The court granted the defendants’ motion, ruling “[a]lthough Beck may be the ‘champion of the government’s interests,’ Beck must make some showing that he can prove the specific claims he pled before he is given license to rummage through the defendants’ records.” The court limited relator’s discovery to the specific claims identified in his disclosure statement, pending ruling on a motion for summary judgment challenging his theories of liability.
The above cases show a clear trend towards limiting qui tam relators’ ability to go fishing in a defendant’s files for a lawsuit. The courts have looked at the intersection of Rule 9(b), Rule 26(b)(2), and the specific language of the FCA, and limited relators to only that which they can plead with particularity. For relators this means far more investigation will be required, or more insider information possessed, before they can bring lucrative FCA cases. For defendants this means the risk of onerous discovery and greatly expanded investigations is significantly reduced, and they might be able to limit FCA cases to only that which relator initially brings to the table.
For more information, please contact David B. Honig at email@example.com or (317) 977-1447.