In a recent case out of Kansas, the Tenth Circuit reiterated the importance of the FCA’s materiality and knowledge requirements that the Supreme Court set forth in Escobar:

 

1. FCA claims must satisfy materiality and knowledge requirements—both of which are rigorous and strictly enforced.

 

2. A whistleblower must prove knowledge in an implied certification case—it cannot be presumed.

 

In U.S. ex rel. Coffman v. The City of Leavenworth, KS, a whistleblower alleged that Leavenworth fraudulently billed federal agencies for wastewater services by falsely implying compliance with environmental laws. The District Court granted the city’s summary judgment motion, holding that the whistleblower failed to demonstrate that the allegedly false certifications were material to the government’s payment of monthly invoices for wastewater treatment services or that the city knowingly submitted false claims.

 

The Tenth Circuit affirmed, amplifying the continued trend that courts will hold relators responsible for proving both materiality and knowledge in FCA actions. The Tenth Circuit echoed Escobar, holding that the whistleblower needed to prove that the city knowingly presented a false claim to the government for payment or approval. The Tenth Circuit noted that while the whistleblower argued that she showed the city flouted environmental laws, evidence of a violation wasn’t enough. Instead, she needed to prove—and could not prove—that the city knew it was violating those laws. This was true, at least in part, because the city introduced unrebutted evidence that the Kansas Department of Health and Environment was aware of the whistleblower’s allegations but did not consider them material.

 

Whistleblowers cannot rely on technical violations to skate past the FCA’s materiality and knowledge requirements. They must show that a defendant knowingly presented a false claim for payment and that the claims were material to the government’s decision to pay.

 

The Tenth Circuit’s opinion joins a growing body of case law across the country applying Escobar to whistleblower allegations that continue to reinforce the demanding knowledge and materiality standards under the FCA.

 

If you have any questions, please contact:

• David B. Honig at (317) 977-1447 or dhonig@hallrender.com;
• Drew B. Howk at (317) 429-3607 or ahowk@hallrender.com;
• Matt M. Schappaat (317) 429-3604 or mschappa@hallrender.com; or
• Your regular Hall Render attorney.

 

Most health care providers caring for federal health care program beneficiaries are familiar with the False Claims Act ^[1] (“FCA”) and its qui tam provision,^[2] which grants private citizens the right to sue health care providers on behalf of the federal government. The seemingly routine 6+ figure FCA settlements garner much-deserved attention. After all, providers can violate the FCA merely by failing to repay an overpayment to a federal government payor within 60 days of identifying it.^[3]

Fewer health care providers are aware of the Medicare Secondary Payer Act (“MSPA”) private enforcement provision.^[4] This provision grants Medicare beneficiaries the right to sue—for double damages—both primary commercial health plans and health care providers who fail to reimburse Medicare despite a determination that Medicare’s initial reimbursement was unwarranted. The MSPA private enforcement provision grants double damages in order to incentivize beneficiaries to pursue money owed to Medicare “and still have money left over to reward him for his efforts.”

Recently, the Fourth Circuit Court of Appeals analyzed what constitutes “a failure to pay Medicare” sufficient to give rise to a valid MSPA claim. In this federal court case,^[5] the MSPA claim was predicated on a Maryland state court hospital negligence case in which the personal representative of a deceased Medicare beneficiary’s estate won a $451,956 jury verdict. However, because Medicare “conditional payments”^[6] made up $157,730.75 of that damages amount, the plaintiff was obligated to pass along that portion of the judgment to Medicare. The initial verdict was entered on July 22, 2016. On October 31, 2016, the court granted the hospital’s motion to decrease the total damages amount by approximately $60,000. While that motion was pending, the hospital tried to make arrangements to pay the judgment. On November 21, 2016, the plaintiff filed the MSPA suit in the United States District Court for the District of Maryland. The plaintiff’s federal case alleged that the hospital violated the MSPA by failing to pay the state court judgment. Sixteen days after the new lawsuit was filed, the hospital paid the amount due. Based on the facts presented, the court considered two questions: (1) whether a private individual has standing to bring a suit under the MSPA; and (2) how quickly a final judgment must be paid to comply with the act.

Standing Under the MSPA

Because this was a federal case, the plaintiff was required to prove Article III standing. That is, the plaintiff bore the burden of demonstrating: (1) an injury in fact; (2) traced back to the defendant hospital’s conduct; (3) which would likely be redressed by the court ruling in her favor. By ruling that this particular plaintiff had Article III standing, the court reaffirmed three important legal concepts.

First, even though the plaintiff was legally obligated to return to the federal government all conditional payments made to the hospital by Medicare, she nonetheless suffered an injury in fact. The court supported this conclusion by analogizing it to “more mundane litigation: If Plaintiff Pam borrows something from Lender Lisa, and Defendant Dan steals it, Pam obviously has standing to recover from Dan.”^[7]

Second, the plaintiff’s right to sue the hospital under the MSPA was not erased simply because the hospital paid the plaintiff after the plaintiff filed the complaint in federal court. Standing is established by the facts alleged in the complaint; if a defendant can moot a plaintiff’s standing by paying the plaintiff in reaction to the filing of a lawsuit, it would dismantle the double and triple damages provisions included in statutes such as the MSPA and the FCA, respectively.

Finally, relying upon the Supreme Court’s analysis of the FCA, the court held that the plaintiff—a personal representative of a deceased Medicare beneficiary’s estate—could exercise the MSPA private enforcement action.^[8] After all, the federal government can partially assign the federal government’s rights to private citizens by statutes. While the MSPA is distinct from the FCA and other qui tam statutes because it does not avail all private citizens with a right to sue on behalf of the federal government, the MSPA nonetheless effects a partial assignment of Medicare’s rights to recover conditional payments to a specific class of individuals—Medicare beneficiaries. Extending this enforcement right to the personal representative of a deceased Medicare beneficiary’s estate is a practical necessity to effectuate Congress’s effort at controlling Medicare costs through enactment of the MSPA.

Timeliness Under the MSPA

The Fourth Circuit affirmed the original holding of the District Court and held that the 37-day span from the day the state court entered the final judgment to the day the plaintiff was paid the judgment in full was timely and not a sufficient amount of time to invoke the MSPA’s plain language definition of “failure.” As the Fourth Circuit succinctly stated, “[t]here cannot be a failure to pay when there has been payment.”^[9] The Fourth Circuit went further and explicitly refused to adopt a 60-day rule in the MSPA context. While the FCA now contains an express 60-day rule, the court simply stated that there is no such specific deadline within the MSPA and courts cannot graft a 60-day rule onto the MSPA merely because another statutory provision contains such a rule.

This Fourth Circuit’s opinion seemed to find no credibility at all in the plaintiff’s argument that the Maryland hospital “failed” to reimburse Medicare. However, the Fourth Circuit gave health care plans and providers fair notice that they must act expeditiously to repay Medicare if repayment is deemed appropriate when it cautioned that “there might at some point be a delay of such length that it would amount to a failure…”. Given this warning, health care plans and providers would be wise to take the following steps:

1. Immediately upon learning that a Medicare conditional payment must be returned to the federal program, begin to inquire how that payment can be transmitted, even if taking parallel steps to challenge the initial determination; and
2. Once a final court judgment is rendered, act on a reasonable schedule to compensate a successful Medicare beneficiary plaintiff to protect against a MSPA claim for double damages.

If you have questions about this recent decision or other issues regarding the False Claims Act or Medicare Secondary Payer Act, please contact:

• Eric Crowder at (443) 951-7047 or ecrowder@hallrender.com;
• David Honig at (317) 977-1447 or dhonig@hallrender.com;
• Your regular Hall Render attorney.

 

On May 10, 2018, United States Senior District Judge for the Central District of Illinois, Joe Billy McDade, issued an order that should form the template for all courts asked to keep the Government’s False Claims Act extension motions under seal.^[1] Far too often courts simply grant the Government’s ex parte motions without considering the matters to be sealed, the public’s interest in transparency, or the defendants’ interest in rebutting the Government’s or a qui tam relator’s accusations.

The False Claims Act^[2] calls for the Government to decide whether it will intervene in a qui tam lawsuit within 60 days,^[3] but allows the Government extensions with a showing of good cause.^[4] In most cases, the Government files its intervention decision and includes a motion to unseal the complaint but to keep the remainder of its filing under seal. See, e.g. Order Regarding the United States’ Notice of Election to Decline Intervention:^[5]

ORDERED that all other contents of the Court’s docket in this action remain under seal and not be made public or served upon the defendant, except for this Order and The United States’ Notice of Election to Decline Intervention, which the relator will serve upon the defendant with the complaint.

ORDERED that the seal in this case is lifted as to all other matters occurring in this action after the date of this Order.^[6]

Judge McDade was asked to issue a similar order. He refused to do so. Instead, the court reviewed the law and the Government’s filings. After doing so, he unsealed the entire docket.

First, the Court ordered the Government to show good cause to keep its filings under seal. This is consistent with the statute, which states, “(t)he Government may, for good case shown, move the court for extensions of time during which the complaint remains under seal under paragraph (2).”^[7] The Government responded that the motions and supporting documents should remain under seal “because in discussing the content and extent of the United States’ investigation, such papers [were] [] provided by law to the Court alone for the sole purpose of evaluating whether the seal and time for making an election to intervene should be extended.”^[8]

The Court found that the Government’s position was not supported by the statute. While the FCA clearly requires that qui tam cases be filed under seal, it does not state that extensions are to remain under seal.^[9] Further, even upon a showing of good cause, the Court must balance the Government’s interest in keeping the information under seal against the public’s interest in access to the record and the defendant’s interest in the information the Government hopes to conceal.^[10] The information should remain under seal “if unsealing would disclose confidential investigative techniques, reveal information that would jeopardize an ongoing investigation where members of investigationhotline.org were involved, or injure non-parties.”^[11]

The Court conducted a review of the Governments’ filings and found “(n)one of the Government’s motions provided specific or identifying information about its ongoing investigation into Defendants’ activities.”^[12] The Government’s motions and reports, since unsealed, show utterly mundane information and activities. These include:

“(t)he government’s ongoing investigation is necessary for the United States to decide whether to formally intervene in this qui tam case;”^[13] “(t)he Government intends to use this extension to continue to interview potential witnesses and review Medicare records and compare those records to other records received in the case;”^[14] “(t)he Government intends to use this extension to continue to investigate the Medicare claims submitted to the government against records concerning the whereabouts of the therapist allegedly performing the physical therapy services;”^[15] “(t)he government intends to use this extension to conduct interviews in response to new information revealed through investigation;”^[16] “(t)he government intends to use this extension to send and receive responses to subpoena requests in response to new information through investigation;”^[17] and “to investigate responses to subpoena requests that authorized access to new information.”^[18]

The Government’s last motion stated the AUSA previously assigned to the matter left the US Attorney’s Office and the new AUSA knew nothing about the case.^[19] It also stated the claims, which had been under investigation for five years at that point, “could possibly be legitimate claims.”^[20]

The tale told by the Government’s extension motions is one of a very typical investigation, including subpoenas, witness interviews, and record reviews, without revealing any confidential government investigative tools or techniques.

What the Government knew about a qui tam relator’s False Claims Act allegations, and when the Government knew it, is crucial to an essential element of the FCA—materiality. The Supreme Court made clear that the materiality element of the statute went to whether it would pay a claim if it knew of the alleged fraud, and from the time a qui tam complaint is filed under seal the Government is on notice of that alleged fraud. The extent of its knowledge, and its continuing payments while the matter is under investigation, are crucial to the question of materiality. As the Supreme Court stated in 2016:

if the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material. Or, if the Government regularly pays a particular type of claim in full despite actual knowledge that certain requirements were violated, and has signaled no change in position, that is strong evidence that the requirements are not material.^[21]

Once the Government receives a qui tam complaint it is on notice of the relator’s allegations. Depending upon the details of the allegations, and upon what the Government learns in its investigations, its continued payment of the claims goes directly to the question of whether the alleged falsity is material to the Government’s payment decisions. The Government should not be permitted to conceal facts directly relevant to this essential element of an alleged FCA violation behind motions to seal its motions and other evidence of its knowledge.

Judge McDade’s ruling in Morgan, particularly in light of the Supreme Court’s decision in Escobar, should be a template for all courts considering the Government’s motions to unseal only a qui tam complaint and to keep all of its other pleadings under seal.

If you have any questions, please contact:

David Honig at (317) 977-1447 or dhonig@hallrender.com; or

Your regular Hall Render attorney.

 

On April 11, 2018, the Eleventh Circuit Court of Appeals split from the Fourth and Tenth Circuits when it issued an order effectively granting relators in qui tam actions an additional three years to file. The court ruled that § 3731(b)(2)’s three-year limitation, which has traditionally only been applied when the United States is a party to the action, is equally applicable to relators when the government declines to intervene, thereby allowing “more fraud to be discovered, more litigation to be maintained, and more funds to flow back into the Treasury.”^[1]

Background

The relator brought a qui tam action against his former employer and another company alleging that the defendants violated the False Claims Act (“FCA”) when they fraudulently awarded subcontracts for work they performed as defense contractors in Iraq.^[2] The relator alleged that the two companies fraudulently induced the government to enter into a subcontract to purchase services by providing illegal gifts to individuals and that the defendants had violated their obligation to disclose credible evidence of improper conflicts of interests and illegal gratuities.^[3]

The defendants moved to dismiss these allegations, arguing that the claims were time barred under the six-year limitations period in 31 U.S.C. 3731(b)(1) and that the relator had filed his suit more than seven years after the fraud occurred.^[4] The district court dismissed the action, but the Eleventh Circuit reversed, ruling that subsection (b)(2) of the FCA’s statute of limitations applied to the relator, allowing him to bring his action within three years after notifying the United States of the fraudulent activity.^[5]

Analysis

The FCA’s statute of limitations prohibits relators from bringing an action more than six years after the date on which the fraud occurred. 31 U.S.C. 3731(b)(2) also prohibits actions filed “more than 3 years after the date when facts material to the right of action are known or reasonably should have been known by the official of the United States…” This provision has traditionally only been applied when the U.S. intervenes in a relator’s qui tam action. However, the court entertained the relator’s argument that this provision is applicable even when the United States declines to intervene.

The Eleventh Circuit held that applying this provision to relators is consistent with the broad underlying purpose of the FCA—allowing more fraud to be discovered.^[6] The court ruled that the United States’ unique role as a real party in interest, even when it declines to intervene, overrides any potential absurd result that may occur due to the application of the statute of limitations.

The defendants also argued that if relators have three years from the date when the government learned of the fraud to file suit under § 3731(b)(2), relators will always delay telling the government about the fraud to increase the damages in the case. The court rejected this argument, stating that a relator who waits to file risks recovering nothing or having his share of damages decreased. The court also stated that a race to the courthouse encourages relators to file as quickly as possible.

Finally, the court rejected arguments that the statutory construction and legislative history pertinent to the statute of limitations suggests that § 3731(b)(2) should not be available to relators when the government declines to intervene. The court found that the legislative history does not squarely address Congress’ intent and does not lend credence to the defendants’ arguments.

Practical Takeaways

• Now, even in actions where the government has declined to intervene, relators have three years to bring a qui tam action once the government has been informed of fraudulent acts.

 

• The Eleventh Circuit’s split from the Fourth and Tenth Circuits will surely create some interesting case law, making the issue ripe for review by the Supreme Court.

 

If you have any questions, please contact:

• Matthew Schappa at (317) 429-3604 or mschappa@hallrender.com;

 

• David Honig at (317) 977-1447 or dhonig@hallrender.com; or
• Your regular Hall Render attorney.

 

In United States ex rel. Schneider v. JPMorgan Chase Bank, Nat’l Ass’n. ^[1], the D.C. Circuit re-affirms its position that contingent penalties are not obligations under the False Claims Act (“FCA”).

BACKGROUND

In the initial suit^[2], Relator brought a qui tam action under the FCA against mortgage loan servicer JPMorgan Chase (“Chase”), alleging, in part, that Chase falsely claimed compliance with a settlement (“Settlement”) that Chase (and certain other large banks) reached with the United States and various state governments.^[3] Under the terms of the Settlement, Chase was obligated to comply with certain servicing standards, and a monitor was appointed to ensure that Chase complied with such standards. The Relator argued that the monitor’s determination that Chase had complied with the servicing standards was incorrect because Chase falsely certified such compliance. As a result, the Relator claimed that damages were due to the United States and the applicable state governments based on potential penalties for lender violations as set forth in the Settlement. The United States District Court for the District of Columbia granted Chase’s motion to dismiss as to the Settlement’s claims on the basis that Relator could not bring these claims without first exhausting the Settlement’s dispute resolution procedures. The D.C. Circuit affirmed the district court’s decision.^[4]

ANALYSIS

Although the circuit court rejected the district court’s reasoning as to the Settlement claims, it affirmed the district court’s decision on the basis that “potential” exposure to penalties for alleged noncompliance with the Settlement’s servicing standards is not an obligation within the meaning of the FCA.

As noted by the D.C. Circuit, the FCA requires a fraud claim that is “material to an obligation to pay or transmit money or property to the Government.” According to the court, such an obligation arises when there is “an established duty, whether or not fixed, arising from an express or implied contractual … or similar relationship.” However, in this instance, the Settlement contains a series of steps before Chase could be assessed any penalties, including a citation from the monitor, failure to cure, failure of informal dispute resolution, the filing of a suit in the district court and the district court judge exercising his or her enforcement discretion to award monetary penalties.^[5]

In light of the foregoing, the D.C. Circuit firmly held, citing its 2008 decision in Hoyte v. American National Red Cross^[6] and several other sister circuits, that “contingent exposure to penalties which may or may not ultimately materialize does not qualify as an ‘obligation’ under the [FCA].”

PRACTICAL TAKEAWAYS

The D.C. Circuit’s decision here is, yet, another example of federal circuit courts drawing the line at “potential” penalties being considered obligations under the FCA.

Therefore, if a provider can show that an alleged monetary penalty is merely a contingent possibility and not an established duty to the government, such potential penalty may not qualify as an obligation under the FCA and, thus, may not form the basis of a relator’s qui tam action.

If you have any questions, please contact:

• Laetitia Cheltenham at lcheltenham@hallrender.com or (919) 447-4968;
• David Honig at dhonig@hallrender.com or (317) 977-1447; or
• Your regular Hall Render attorney.

The Tenth Circuit’s recent decision in United States ex rel. Little v. Triumph Gear Sys., Inc. refines its definition of “intervene” in light of the Supreme Court’s decision in United States ex rel. Eisenstein v. City of New York. In doing so, the Tenth Circuit also seems to indicate that the original filing by the initial relator equates to a public disclosure, thus precluding subsequent relators who do not meet the requirements of 31 U.S.C. 3730(e)(4)(A).

Background

The defendant was a government contractor that manufactured aerospace gear systems.^[1] The initial complaint, filed by Joe Blyn and three “John Does,” claimed the defendant violated the False Claims Act.^[2] Before the initial complaint could be served plaintiff’s counsel of record, Donald Little filed an amended complaint that named himself and a third person, Kurosh Motaghed, as the sole relators.^[3] All references to Mr. Blyn and the John Does were inexplicably removed from the complaint.^[4] The new relators amended the complaint twice more, and the defendant filed a motion to dismiss on multiple grounds, including that the district court lacked jurisdiction over the amended complaint under the FCA’s first-to-file rule.^[5]

The district court denied the defendant’s motion to dismiss, citing the Tenth Circuit’s decision in Precision Company v. Koch Industries, Inc.^[6] The district court determined that Little and Motaghed were not considered “interveners” for the purpose of § 3730(b)(5). Because they intervened through Fed. R. Civ. P. 15, and not Fed. R. Civ. P. 24^[7] on appeal, the Tenth Circuit distinguished this case from Precision and reversed the district court’s decision, stating that the first-to-file rule bars the new relators because they were not added by an existing plaintiff.^[8] Rather, Little and Motaghed added themselves and completely removed the initial relator.^[9] The Tenth Circuit’s decision not only clarifies the definition of “intervene” and an intervener’s ability to amend the initial complaint but raises the public disclosure bar that a plaintiff must clear.

Analysis 

Neither the Tenth Circuit, nor the district court, were able to ascertain why Mr. Blyn vanished from the action entirely. In fact, the Tenth Circuit noted that Little, “simply substituted his name for Blyn’s without regard for the resulting incongruities.”^[10] In respect to the second relator, “none of the amended complaint’s substantive allegations pertain to Motaghed, despite his status as a putative relator.”^[11] This wholesale removal of the initial relator required the court to determine how the two new relators could be considered to have “intervened” as contemplated in § 3703(b)(5) of the FCA.

The Tenth Circuit did not have to delineate between addition and intervention Rules 15 and 24.^[12] Little and Motaghed entered the action through no procedural method the court could identify.^[13] The court indicated that, because Fed. R. Civ. P. 15(a)(1) only allows amendments by parties and not non-parties, Little and Motaghed, as non-parties, had no right to amend the complaint.^[14]

Practical Takeaways

The Tenth Circuit’s justification for avoiding a debate between Rule 15 addition and Rule 24 intervention seems to indicate that relators, who attempt to intervene in this rather unique situation, are not an original source of the allegations and therefore cannot survive the public disclosure bar. Additionally, the Tenth Circuit has indicated that, in light of the Supreme Court’s decision in Eisenstein, the Tenth Circuit’s previous decision in Precision may no longer be good law.

If you have any questions, please contact:

• David Honig at dhonig@hallrender.com or (317) 977-1447;
• Matthew Schappa at mschappa@hallrender.com or (317) 429-3604; or
• Your regular Hall Render attorney.

 

 

The public disclosure bar remains one of the most important tools for disposing of False Claims Act (“FCA”) claims. The Seventh Circuit’s recent decision in United States ex rel. Bellevue v. United Health Services of Hartgrove, Inc. clarified the effect of the 2010 amendments to the public disclosure bar and affirmed the dismissal of whistleblower allegations built upon inferences and publically available information.

Background

The defendant was a psychiatric hospital focused on caring for children and teens. Authorized by Illinois to maintain 150 beds, the Hospital would occasionally place patients on one or two rollout beds in a group room to care for children until a traditional bed became available. A former nursing counselor alleged this practice continued from August 2005 through the present and that it violated the FCA because the Hospital exceeded its 150-bed capacity and thereby either explicitly or implicitly certified its compliance with all federal and state laws. Both the federal and state governments declined intervention.

The district court granted the Hospital’s motion to dismiss for failure to state a claim of fraud with particularity as required by Federal Rules of Civil Procedure 12(b)(6) and 9(b). The Hospital successfully argued that Illinois and CMS each issued an audit letter in 2009 notifying the Hospital that its patient count exceeded the permitted number under its license. The district court ruled that the public disclosure bar prevented any claims prior to the 2009 letters but not claims through the present. Despite this, the court went on to rule that the allegations failed on their merits and it dismissed the action. On appeal, the Seventh Circuit revisited the public disclosure analysis, affirming the district court’s ruling for pre-2009 claims but also expanding it to bar all of the whistleblower’s claims.

Analysis

The Seventh Circuit carefully parsed the 2010 amendments’ substantive changes to the FCA’s public disclosure bar, which removed the jurisdictional bar language. This required the court to treat the public disclosure bar as a jurisdictional challenge for the pre-amendment claims but not the post-amendment claims. The 2010 amendments also clarified what constitutes a public disclosure. The court considered this clarification nonsubstantive and therefore applied it retroactively to all of the whistleblower’s claims. Applying these analyses, the Seventh Circuit walked step by step through the three-step framework of the public disclosure bar, concluding that all of the whistleblower’s claims failed to clear it.

The claims were publicly disclosed. The Seventh Circuit concluded that the audit letters publicly disclosed the critical elements of the alleged fraud: more patients than beds. The inference the whistleblower claimed was unique—the knowing misrepresentation—did not save the claims. The court reiterated that inferences and logical consequences of the disclosed information are sufficient to trigger the public disclosure bar.

The claims were substantially similar to the disclosed allegations. The Seventh Circuit concluded that the disclosed audits were substantially similar to the alleged fraud. Even though the whistleblower alleged continuing fraud past the date of the audit letters, the court made clear that such “unimpressive” differences do not save claims related to the same entity and regarding the same conduct.

The whistleblower was not an original source. Finally, the Seventh Circuit concluded that the whistleblower was not an original source of the allegations and therefore could not survive the public disclosure bar. The whistleblower’s claims were built upon inferences—not direct knowledge of the Hospital’s billing practices. Inferences are not “independent of [and cannot] materially add to the publicly disclosed allegations or transactions.”

The Seventh Circuit affirmed dismissal with prejudice, expanding the district court’s public disclosure bar analysis.

Practical Takeaways

Health care providers facing whistleblower actions have two exit ramps in litigation: a motion to dismiss and a motion for summary judgment. The first of these must be quickly compiled and crafted to leverage the unique contours of FCA litigation. Here, the Hospital’s invocation of the public disclosure bar prevented long and drawn out discovery and motion practice and quickly disposed of meritless allegations. Similarly situated providers should confer with counsel on how to implement a defense strategy that maximizes their ability to challenge such claims early in litigation.

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

David B. Honig at dhonig@hallrender.com or (317) 977-1447;

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

Laetitia L. Cheltenham at lcheltenham@hallrender.com or (919) 447-4968; or

Your regular Hall Render attorney.

 

Please visit the Hall Render Blog or sign up to receive Hall Render alerts on topics related to health care law.

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.

2. 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.

3. 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.

4. 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:

• Adele Merenstein at amerenst@hallrender.com or (317) 752-4427;
• Sevilla P. Rhoads at srhoads@hallrender.com or (425) 278-9335;
• David B. Honig at dhonig@hallrender.com or (317) 977-1447; or
• Your regular Hall Render attorney.

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 (9^th Cir. 2015).

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

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

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.