Category: Government Intervention

Whistleblower’s Dismissal with Prejudice Not the End of the Road for Qui Tam Action

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The Fifth Circuit ruled that a whistleblower’s voluntary dismissal with prejudice cannot affect the Government’s ability to pursue related litigation. When the Government has not yet intervened, and thus is not a yet a party, a case cannot be dismissed with prejudice as to the Government by a whistleblower.

Background

In Vaughn, ex rel. v. United Biologics, L.L.C.,[1] the four Vaughn relators brought a qui tam action alleging that defendant violated the False Claims Act (“FCA”) and the Anti-Kickback Statute (“AKS”) by improperly billing for unnecessary and unapproved medical treatments and paying illegal kickbacks to contracting physicians. The Vaughn relators sued in the Southern District of Texas, and the Government declined intervention.

Subsequently, a second qui tam action against the same defendant and for related claims was unsealed in the Northern District of Georgia. The Vaughn relators chose to join their efforts with the second action’s relator. Simultaneously, the defendant moved for early summary judgment. While the motion was pending, the Vaughn relators moved to voluntarily dismiss their original action with prejudice to themselves and without prejudice to the Government.

The court ordered the Government to explain its intervention decision in order for the court to determine whether it should dismiss with prejudice as to the Government. The Government resisted, providing a full explanation to protect future litigation in the Georgia action, but consented to the dismissal without prejudice.

On appeal, the defendant challenged the court’s decision not to dismiss the case with prejudice as to the Government.[2]

Analysis

The Government holds protected interests regardless of intervention and cannot be voluntarily dismissed with prejudice by a whistleblower. Only a final judgment on the merits binds it. The Fifth Circuit affirmed the lower court.

The Fifth Circuit affirmed that a relator’s voluntarily dismissal only requires the Government to explain its consent to the dismissal—not its intervention determination. Any more detailed explanation could harm the Government’s ability to pursue future actions.

The Fifth Circuit thus held the district court did not abuse its discretion by granting the voluntary dismissal despite the pending motion for three reasons. First, the defendant’s pending motion for summary judgment did not preclude dismissal. The defendant filed the motion early in the litigation and before any extensive discovery by the parties. Second, dismissal did not strip the defendant of any viable defenses in the Georgia litigation. Third, by dismissing the Vaughn relators with prejudice, the court prevented any possibility that they could refile their case if they were unsatisfied with the outcome in the Georgia litigation.

Practical Takeaways

Although the Government and relators have related interests in FCA actions, it is important for defendants to understand that binding decisions on the whistleblowers will not always bind the Government. Defendants should work closely with experienced counsel who can navigate the unique challenges of FCA litigation.

If you have any questions, please contact:


Ripping the Veil Off the Government’s Qui Tam Investigations

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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, 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.

 


A Timely Split – Eleventh Circuit Strays from Common Application of the False Claims Act’s Statute of Limitations

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:

 

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

 


Government Challenges “Materiality” Standard of Escobar

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Ever since the Supreme Court’s June 16, 2016 decision in Universal Health Services, Inc. v. United States ex rel. Escobar, a False Claims Act (“FCA”) case upholding the theory of implied certification, significant discussion has commenced regarding the Court’s “new” FCA materiality standard. How the appellate courts define materiality under the FCA, post-Escobar, will have a significant impact on the future of FCA litigation. Recently, the United States government (the “Government”) argued for an expansive definition of materiality through the filing of an amicus brief in the Eleventh Circuit.

Background: Escobar

In Escobar, as explained in a previous post, the Court placed the focus of an implied certification analysis on whether compliance with the requirement that was violated was “material to the Government’s payment decision….” [1]. With regard to the FCA’s materiality requirement, the Court stated that “[t]he materiality standard is demanding,” that “materiality looks to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation” and that a “misrepresentation is material only if it would likely induce a reasonable person to manifest his assent.”[2]

The Government’s Take

In an amicus brief submitted in U.S. ex. rel. Marsteller v. Tilton,[3] the Government argued that the term “material” is already defined under the FCA as “having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property” (31 U.S.C. § 3729(b)(4)) and that the Escobar decision did nothing to change this definition. The Government stated that:

Although the Court in Escobar described the materiality requirement as “demanding,” and clarified that a violation is not material because the government has the legal right to refuse payment because of that violation, no matter how insubstantial, nothing in Escobar actually imposed a heightened test beyond the “natural tendency” test codified in the False Claims Act, entrenched in the common law, and applied in numerous courts of appeals…. [4]

Regarding the “natural tendency” test, the Government argued that a court should take a “holistic” approach, focusing on the “tendency or capacity of the undisclosed violation to affect the government decision maker.” [5] The Government stressed that “there is no requirement that the misrepresentation be likely to affect the ultimate decision itself.” Id. In fact, in the Government’s view, “a FCA plaintiff need not demonstrate that the government would in fact have refused payment, nor need a plaintiff even show that refusal was likely to result.” [6] Moreover, under the Government’s approach, the factors enunciated in Escobar are neither exhaustive nor individually dispositive and should only be evaluated as part of the overall materiality assessment to determine whether the violation had a natural tendency to influence the decision to pay a claim. The Government also stated its belief that under this approach, a determination on materiality will “likely…be a determination for a jury.” [7]

Discussion

The Government’s amicus brief does not seek clarification of Escobar. Rather, it asks the Court of Appeals to reject the clear pronouncement in Escobar and instead adopt its preferred definition. The court already rejected the Government’s proposed interpretation, stating:

We need not decide whether §3729(a)(1)(A)’s materiality requirement is governed by §3729(b)(4) or derived directly from the common law. Under any understanding of the concept, materiality “look[s] to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation.”[8]

The Government’s new amicus brief appears to be a request that the Eleventh Circuit Court of Appeals disregard the clear language of Escobar in favor of its preferred interpretation of the statute. At a minimum, it seems, the Government is hoping for a ruling that materiality is always a jury question with full knowledge that most FCA cases end in settlement if they cannot be successfully challenged by a motion to dismiss or a motion for summary judgment.

Practical Takeaways

  • The Government is arguing for a materiality requirement that is significantly less demanding than outlined by the Supreme Court, which would significantly increase the scope of potential FCA liability.
  • The Government’s view of materiality being a determination for a jury would have a large implication for the future progress of FCA litigation as, if adopted, it would be difficult to challenge materiality by a motion to dismiss (although the sufficiency of a pleading under Federal Rule of Civil Procedure 9(b) could still be challenged) or even by a motion for summary judgment.
  • As the appellate and district courts interpret Escobar, it is even more vital that a provider facing potential FCA liability be represented by experienced counsel who will advocate for a straightforward interpretation of Escobar and the FCA’s materiality requirement.

If you have any questions, please contact:


DOJ Seeks to Nearly Double Health Care Fraud Litigation Budget for 2016

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Just three months ago, the Department of Justice announced a record year for False Claims Act recoveries totaling more than $5 billion – including $2.3 billion from health care defendants alone. Helping contribute to these recoveries was another record: over 700 whistleblower cases filed in 2014.

Yesterday, as part of the President’s budget proposal announcements, the DOJ has requested “Investments for Litigation Enforcement” in the amount of $5.5 million for FY 2016 – an increase $1 million for the hiring of 15 positions to help the Civil Division’s enforcement strategy. The DOJ justifies the request as part of an effort to “expand on” past success of its health care fraud initiative. Further, the DOJ notes the extra staff and funding is needed in order to handle “the increasing number of whistleblower cases” weighing down the DOJ’s enforcement efforts. The increase of $1 million would nearly double the DOJ’s current health care fraud enforcement budget of $1.2 million.

The position of the DOJ further solidifies what experts have previously speculated: that whistleblower cases filed against health care providers are increasing – especially in light of the Affordable Care Act’s expansion of the FCA’s reach and the DOJ’s aggressive enforcement of ‘reverse’ false claim actions.

Rather than a long shot, it is likely that this request will be greeted with bipartisan support as both sides of the aisle have shown longstanding enthusiasm for increasing the reach of the False Claims Act and providing the necessary funding to enforce it. The latest show of such support came after the DOJ’s announcement of record 2014 recoveries when both Senator Leahy and Senator Grassley issued press releases touting the effectiveness of the FCA.

Health Care Takeaway

Health care fraud cases filed by whislteblowers can remain under seal for years before a defendant is made aware of them. The DOJ’s announcement of a record 700 such claims being filed last year, its aggressive pursuit under expanded provisions of the FCA in 2014, and its request to nearly double the budget for litigating health care fraud claims all point to another record year for the DOJ.

Should you have any questions regarding the False Claims Act or defense against whistleblower actions, please contact:


Eastern District of Tennessee Denies Interlocutory Appeal of Order Permitting Sampling to Prove Liability

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In September, the District Court for the Eastern District of Tennessee issued an order denying Defendants’ motions for summary judgment and permitting the government to use statistical sampling to determine liability in a False Claims Act case. The decision – a first in FCA jurisprudence – was immediately the subject of a motion for interlocutory appeal by the Defendants. … Continue Reading →


DOJ Announces that 2014 Sees Record FCA Recoveries and Whistleblower Lawsuits

Yesterday, November 20, the Department of Justice (“DOJ”) announced that the United States had recovered almost $6 billion from False Claims Act (“FCA”) litigation in 2014 – marking the first time the DOJ has recovered more than $5 billion in a single year.

With these recoveries, the DOJ reached several milestones. Not only was this the largest recovery year for the DOJ, but it makes 2014 the third consecutive year that the DOJ has announced record recoveries. The record recoveries were bolstered by over 700 whistleblower lawsuits filed on the government’s behalf in 2014. Of the total $5.69 billion recovered, almost $3 billion was recovered in lawsuits filed by whistleblowers in qui tam actions under the FCA…. Continue Reading →


Qui Tam Complaints to Be Reviewed by Criminal Division

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Leslie R. Caldwell, Assistant Attorney General for the Criminal Division, announced recently that all new qui tam complaints would be “shared by the Civil Division with the Criminal Division as soon as the cases are filed.” Fraud prosecutors will now review all qui tam complaints to determine whether to open a parallel criminal investigation.

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DOJ Intervenes in Retained Overpayment Suit

With the passing of the Affordable Care Act (“ACA”), False Claims Act (“FCA”) observers noted the imminent filing of cases alleging violations of the ACA’s amendments to the FCA or “reverse” false claims. Such claims are per se false claims under the FCA and arise when a government contractor or health care provider becomes aware of a government overpayment and improperly fails to reimburse the government within 60 days. While these cases have remained largely out of sight – and most assuredly under seal – the Department of Justice (“DOJ”) has found its test case in the Southern District of New York and intervened: U.S. v. Continuum Health Partners, Inc., et al.

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