Category: Legal Updates

Government Traps, Zaps and Zingers


In an opinion loaded with linguistic hooks, the United States District Court for the Middle District of Florida recently reinforced the Supreme Court’s holding in Escobar, enthusiastically highlighting the importance of materiality and scienter in FCA cases.


In U.S. ex rel. Ruckh v. Salus Rehabilitation, LLC, et al., Relators were successful in a qui tam action against Defendants, who own and operate 53 specialized nursing facilities.[1] Relators brought their case based on a theory of upcoding and a failure to maintain care plans.[2] After Defendants received a verdict against them for almost $350 million, they moved for judgment as a matter of law and requested a new trial under Federal Rules of Civil Procedure 50 and 59, respectively.[3] Defendants argued that Relators failed to offer evidence of materiality as required by the United State Supreme Court’s holding in Universal Health Services, Inc. v. Escobar.[4] Defendants also argued that Relators failed to prove that Defendants submitted claims for payment with knowledge that the governments would refuse to pay the claims had they known about the disputed practices.[5]

The Court granted Defendants’ requests stating that the evidence shows that “the federal and state governments regard the disputed practices with leniency or tolerance or indifference or perhaps with resignation to the colossal difficulty of precise, pervasive, ponderous, and permanent record-keeping in the pertinent clinical environment.”[6]


The Court’s order emphatically states, “Escobar is the unquestionably controlling and guiding authority on materiality and scienter under the False Claims Act” and diligently examines key holdings from the Supreme Court’s opinion.[7] The Court dramatically articulates Escobar’s purpose, stating, “Escobar rejects a system of government traps, zaps, and zingers that permits the government to retain the benefit of a substantially conforming good or service but to recover the price entirely – multiplied by three – because of some immaterial contractual or regulatory non-compliance.”[8]

This rejection of the system of “traps, zaps, and zingers” is accomplished through Escobar’s requirement of materiality and scienter. Specifically, the False Claims Act requires the relator to prove both that a misrepresentation (or form of non-compliance) was material to the government’s payment decision and that the defendant knew at the moment the defendant sought payment that the misrepresentation was material to the government’s payment decision. Worded another way, a misrepresentation (or non-compliance) subjects a defendant to liability under the False Claims Act only if it is knowingly “material to the other party’s course of action.”[9]

In upholding the importance of this analysis, and examining what the government believes to be material, the Court stated, “…the government that continues to pay full fare for a product or service despite knowledge of some disputed practice, some non-compliance, or some other claimed defect, relentlessly works itself into a steadily tightening bind that at some point becomes disabling because the government…must prove that had the government known the facts the government would have refused to pay.”[10] Stated more succinctly, the government’s continued payment, despite knowledge of some claimed defect, evidences a lack of materiality.

Moving on from materiality and scienter, and tucked away near the end of the Court’s order, is another holding beneficial to system-wide defendants of qui tam actions. The order holds that a “scattering of claims in a smattering of facilities is a wholly insufficient basis from which to infer the existence of a massive, authorized, cohesive, concerted, enduring, top-down, corporate scheme to defraud the government.”[11]

Practical Takeaways

  • The Supreme Court’s holding in Escobar continues to be reinforced by various courts throughout the United States. Relators in FCA cases must prove both that a claimed defect was material to the government’s payment and that the defendant knew that the claimed defect was material to the government’s payment.

  • The government’s continued payment for goods and/or services, despite knowledge of some sort of non-compliance, strongly supports an argument that the non-compliance is not material to the government’s payment decision.

  • In actions against systems or corporations, cherry-picked evidence is insufficient to evidence the existence of system-wide or corporate schemes. There needs to exist some corporate knowledge with a directive relating to the submission of a specific false claim.


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Second Circuit Falls in Line for FCA Pleading Requirements


On September 7, 2017, the Second Circuit realigned its stance on false certifications under the False Claims Act (“FCA”) in light of the Supreme Court’s decisions in Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S.Ct. 1989, 195 L.Ed.2d 348 (2016).


In the initial action, relators brought a qui tam action under the FCA against Wells Fargo alleging the company falsely certified its compliance with banking laws in order to borrow money at favorable rates from the Federal Reserve System.[1] In Bishop v. Wells Fargo & Co., 823 F.3d 35 (2nd Cir. 2016), the Second Circuit relied on its previous holding in Mikes v. Straus, 274 F.3d 687 (2nd Cir. 2001) in upholding the district court’s dismissal of the relator’s complaint.[2] The court’s rationale for dismissing the complaint rested on two separate points: (1) an implied false certification is appropriately applied only when the underlying statute or regulation relied upon by the relator expressly states the provider must comply in order to be paid; and (2) an expressly false claim is a claim that falsely certifies compliance with a particular statute.[3] The Supreme Court granted certiorari, vacated and remanded the matter back to the Second Circuit in light of its opinion in Escobar.[4]


The Supreme Court’s holding in Escobar nullifies the Second Circuit’s holding in Mikes. In Escobar, the Supreme Court held that “a statement that misleadingly omits critical facts is a misrepresentation irrespective of whether the other party has expressly signaled the importance of the qualifying information.[5] This directly contradicts the Second Circuit’s holding that an express statement of compliance must be included in the underlying statute or regulation.

The Supreme Court also indicated that limitations on liability under the FCA must be grounded in the text of the FCA, including the well-settled meaning of common-law terms the FCA uses but does not expressly define.[6] In vacating the previous holding, the Second Circuit stated “we detect no textual support in the FCA for Mikes’s particularity requirement.”[7] The Second Circuit also acknowledged that the Escobar holding addressed Mikes’s particularity requirement in other ways.[8] Specifically, Escobar states, “Instead of adopting a circumscribed view of what it means for a claim to be false or fraudulent, concerns about fair notice and open-ended liability can be effectively addressed through strict enforcement of the FCA’s materiality and scienter requirements.”[9]

The Supreme Court’s holding in Escobar not only nullified the Second Circuit’s holding in Mikes, it created a new standard.[10] The Supreme Court stated, “A misrepresentation about compliance with statutory, regulatory, or contractual requirement must be material to the Government’s payment decision in order to be actionable under the FCA.”[11] The Supreme Court further refined this standard stating, “materiality…cannot be found where noncompliance is minor or insubstantial.”[12]] Perhaps most significantly, the Supreme Court noted, “…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.”[13]


The Supreme Court’s new “materiality” standard in Escobar replaces the Second Circuit’s previous holding in Mikes. The practical effect of Escobar’s holding requires that qui tam actions brought on the basis of a false certification, whether expressed or implied, must be material to the government’s decision to pay a provider. However, if a provider can show that the government made a payment knowing that a provider was violating certain requirements, those requirements may not be considered material.

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[[12]] Id. at 2003.[[12]]

Fourth Circuit Addresses Expanded Definition of “Original Source”

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

60-Day Overpayment Rule Released

CMS has released its final 60-Day Overpayment Rule, providing clarity to the 2010 Affordable Care Act (“ACA”) amendment to the False Claims Act (“FCA”) that created FCA liability for failure to repay identified overpayment within 60 days. This is a long-awaited rule that provides essential clarity to an amendment that, until now, has vastly expanded FCA liability without any guidance.

The 2009 Fraud Enforcement Recovery Act amended the False Claims Act to create a new type of false claim known as the “retained overpayment false claim.” A retained overpayment false claim occurs when a government contractor identifies an overpayment from the government even if innocent at the time received. In 2010, the ACA added a 60-day time limit for repayment once an overpayment has been identified. This has been discussed extensively, both in terms of what it means and what doubts surround the application of the new rules.

Continue Reading →

The 60-Day Vulture Comes Home to Roost


In a judicial opinion certain to rock the provider world, Judge Edgardo Ramos of the Federal District Court for the Southern District of New York denied a New York Health System’s (“Health System”) motion to dismiss the U.S.’s and New York State’s complaints in intervention under the federal False Claims Act (“FCA”) and state counterpart, holding that requiring the return within 60 days of a “potential” Medicare/Medicaid overpayment before it is “conclusively ascertained” is compatible with the legislative history of the FCA and the Fraud Enforcement and Recovery Act of 2009 (“FERA”). Accordingly, the case[1] will proceed to the discovery phase.


Three New York hospitals (“Hospitals”) were members of the Healthfirst hospital network and provided care to many patients enrolled in Healthfirst’s Medicaid managed care plan. Under a contract between the New York State Department of Health (“DOH”) and Healthfirst, Healthfirst provided hospital and physician services (“Covered Services”) to its Medicaid-eligible enrollees for a monthly payment from DOH. All Healthfirst participants, including the Hospitals, agreed that the payment they received from Healthfirst for the Covered Services would constitute payment in full (except for applicable co-pays).

Beginning in 2009, due to a software glitch, Healthfirst’s payments to participating providers, including the Hospitals, erroneously indicated vis-a-vis certain electronic codes that the participants could seek additional payment for Covered Services from secondary payors such as Medicaid or other insurance carriers. As a result, electronic billing programs used by participating providers, including the Hospitals, automatically generated and submitted claims to secondary payors including Medicaid.[2] In 2009, on behalf of the Hospitals, the Health System submitted claims to DOH seeking additional payment for Covered Services provided to Healthfirst enrollees, and DOH mistakenly paid the Hospitals for many of these improper claims.

In 2010, auditors from the New York State Comptroller’s office (“Comptroller”) questioned the Health System regarding incorrect billing. After the discovery of the billing errors, the Health System directed its employee and the whistleblower in this case to determine which claims had been improperly billed to Medicaid. In early 2011, about five months after the Comptroller alerted the Health System about the billing errors, the whistleblower emailed the Health System’s management a spreadsheet detailing more than 900 claims totaling over $1,000,000 that the whistleblower had identified as containing an erroneous billing code. In the email, he stated that “further analysis would be needed to confirm his findings” and that the spreadsheet gave “some insight to the magnitude of the issue.” There was no issue of material fact that the whistleblower’s spreadsheet was inaccurate as roughly half of the claims listed never were actually overpaid. Shortly after the whistleblower sent his email, he was terminated. The whistleblower filed a qui tam suit under the FCA and under state false claims act statutes in April, 2011. The U.S. and New York State intervened asserting violations of federal and state FCA reverse false claims provisions (i.e., retention of an overpayment).

According to the federal government and the State of New York, the Health System “‘did nothing further'” with the whistleblower’s analysis or the claims he identified. In the same month (February 2011) as the whistleblower’s termination, the Health System reimbursed DOH for five improperly submitted claims. Then in a period spanning April 2011 through March 2013, the Health System reimbursed DOH for the remainder of the improperly billed claims.

The United States and New York allege that the Health System “fraudulently delay[ed] its repayments for up to two years after the Health System knew of the extent of the overpayments.” Further, the Health System did not repay DOH over 300 of the affected claims until June 2012, when the government issued a civil investigative demand. Therefore, by “intentionally or recklessly” failing to take the necessary steps to identify the claims affected by the Healthfirst software glitch, or timely reimbursing DOH for the overbilling, the Health System violated the federal and New York FCAs and, in particular, the Affordable Care Act’s (“ACA”) 60-day repayment rule, which requires a provider to report and repay any overpayments to the federal or state government within 60 days of the “date on which the overpayment was identified.”

The Health System filed a motion to dismiss the case under FRCP Rule 12(b)(6) and under FRCP Rule 9(b) requiring a statement supporting “fraud with particularity.” The Health System argued that the U.S.’s Complaint in Intervention could not meet the high bar established by Rule 9(b) in part because it failed to allege that the Health System had an “obligation” under the FCA.

The central question in the case is whether the whistleblower’s email and spreadsheet cataloging the alleged overpaid claims (many of which turned out not to be overpayments) properly “identified” overpayments within the meaning of the ACA and whether those overpayments matured into obligations in violation of the FCA when they were not reported and repaid within 60 days. The ACA did not define the term “identify” in the Statute and CMS, to date, has not finalized the 60-day repayment rule, which, when finalized, most certainly will define the term at issue.

The Health System argued that the whistleblower’s email only provided notice of potential overpayment and did not identify actual overpayments so as to trigger the ACA’s 60-day report and return clock. The government proposed that a provider has “identified an overpayment” when it “determined or should have determined through the exercise of reasonable diligence that it has received an overpayment.” This is the first case to interpret the crucial undefined language in the ACA.

Court’s Analysis

Judge Ramos’s decision not to dismiss the complaint in intervention hinged on the definition of the term “identified.” He applied the canons of statutory construction[3] to reach his conclusion that the Health System’s failure to act quickly enough to report and return overpayments, could well have fallen outside the 60-day return and repayment rule as well as the language and intentions of the FCA, the FERA and the ACA. He wrote:

To define “identified” such that the sixty day clock begins ticking when a provider is put on notice of a potential overpayment, rather than the moment when an overpayment is conclusively ascertained, is compatible with the legislative history of the FCA and the FERA highlighted by the Government. . . Congress intended for FCA liability to attach in circumstances where, as here, there is an established duty to pay money to the government, even if the precise amount due has yet to be determined. [emphasis added]. Here, after the Comptroller alerted Defendants to the software glitch and approached them with specific wrongful claims, and after [the whistleblower] put Defendants on notice of a set of claims likely to contain numerous overpayments, Defendants had an established duty to report and return wrongly collected money. To allow Defendants to evade liability because [the whistleblower’s] email did not conclusively establish each erroneous claim and did not provide the specific amount owed to the Government would contradict Congress’s intentions as expressed during the passage of the FERA.

Judge Ramos also noted that the Health System’s interpretation of the 60-day return and repayment rule would make it “all but impossible to enforce the reverse false claims provision of the FCA” in the health care fraud context. He quoted the government as saying, “[p]ermitting a healthcare provider that requests and receives an analysis showing over 900 likely overpayments to escape FCA liability by simply ignoring the analysis altogether and putting its head in the sand would subvert Congress’s intent.”

In a nod of empathy for the universe of potential defendants in FCA qui tam cases and the difficulty of doing all the work that must be done to establish the existence of an overpayment in under 60 days, Judge Ramos suggested that prosecutors will exercise discretion in pursuing enforcement actions against well-intentioned providers working with “reasonable haste” to address overpayments. This may not reassure providers faced with the discovery of possible overpayments and the prospect of would-be whistleblowers.

Practical Takeaways

1. This opinion is the first and only judicial opinion interpreting the ACA’s 60-day report and return rule term “to identify.” It is only binding on the Southern District of New York, but it is likely that other jurisdictions will reference and consult this case for guidance in interpreting other potential FCA situations.

2. At least until the case law is better developed and CMS issues a final rule defining what it means to identify an overpayment, providers should act with all reasonable haste when they are notified of the existence of even a potential overpayment.

3. Providers should reassess their normal compliance protocols in analyzing potential overpayments and making any necessary refunds. Providers may need to consider revamping these internal processes for compliance with this new standard.

4. Providers should further recognize that under this reasoning of the court, they may need to set the 60-day alarm even where there is incomplete and underdeveloped evidence of an overpayment.

5. Hopefully, the Court’s opinion will serve as the impetus for CMS to finally issue a final rule on this subject to satisfactorily address the many challenging questions this ruling raises for providers only trying to do the right thing when potential overpayments are brought to their attention.

6. Finally, when faced with any potential overpayment situation, providers should work with their experienced compliance counsel to consider the best response and management plan that will take into account the complexity of the situation and the risks of different action plans. Particularly complex situations may in certain circumstances call for placing allegations of billing errors under the protection of the attorney-client privilege to provide enough time to reach a conclusion on the overpayment issue.

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

  • Adele Merenstein at (317) 752-4427 or;
  • David B. Honig at (317) 977-1447 or;
  • Scott W. Taebel at (414) 721-0445 or; or
  • Your regular Hall Render attorney.

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

CMS Proposal to Limit Incident to Billing


This week, CMS released the proposed Medicare Physician Fee Schedule Rule for CY 2016 (“Proposed Rule”).  In an effort to ensure that billing physicians/practitioners have a “personal role in, and responsibility for, furnishing services for which they are billing and receiving payment as an incident to their own professional services,” CMS proposed to remove the language from the “incident to” regulation that specifies that the physician/practitioner supervising the auxiliary personnel need not be the same physician/practitioner upon whose professional service the incident to service is based.  Currently, any physician/practitioner present in the office can provide the direct supervision for the incident to services of another physician/practitioner.  If finalized, this change would eliminate the ability of a physician group to bill for incident to services unless the physician/practitioner who originally saw the Medicare beneficiary is also in the office providing the supervision for each incident to service.  This proposal represents a substantial departure from current practices and will create additional administrative burdens for scheduling and billing compliance issues.

The Proposed Rule is scheduled to be published in the Federal Register on July 15 and is available here.  Comments to the Proposed Rule are due by 5:00 PM EDT on September 8, 2015.

If you have questions about the Proposed Rule, the impact of this proposal or how to submit comments, please contact David Honig at or Regan Tankersley at

CMS proposes new “incident to” rule

“Incident to” billing is a significant False Claims Act risk for Medicare and Medicaid providers. A new proposed rule will change how physicians and physician practices are supposed to bill for services provided in their offices.

CMS Proposal to Limit Incident to Billing This week CMS released the proposed Medicare Physician Fee Schedule Rule for CY 2016 (“Proposed Rule”). In an effort to ensure that billing physicians/practitioners have a “personal role in, and responsibility for, furnishing services for which they are billing and receiving payment as an incident to their own professional services,” CMS proposed to remove the language from the “incident to” regulation that specifies that the physician/practitioner supervising the auxiliary personnel need not be the same physician/practitioner upon whose professional service the incident to service this based. Currently, any physician/practitioner present in the office can provide the direct supervision for the incident to services of another physician/practitioner. If finalized, this change would eliminate the ability of a physician group to bill for incident to services unless the physician/practitioner who originally saw the Medicare beneficiary is also in the office providing the supervision for each incident to service. This proposal represents a substantial departure from current practices and will create additional administrative burdens for scheduling and billing compliance issues. The Proposed Rule is scheduled to be published in the Federal Register on July 15th and is available HERE. Comments to the Proposed Rule are due by 5:00 pm EST on September 8, 2015. If you have questions about the Proposed Rule, the impact of this proposal, or how to submit comments please contact David Honig at or Regan Tankersley at

The FCA, Advice of Counsel Defense and CMS Commentary Meets the Jury

A recent court decision had highlighted two issues on the cutting edge of health care and False Claims Act (“FCA”) law. Both address what happens in the transition from health care advice to health care litigation. The first is the application of the attorney client privilege and the advice of counsel defense. The second is the application of CMS advisory opinions beyond the regulatory sphere and in the courtroom. Continue Reading →

Self-Disclosure, the Public Disclosure Bar and the FCA – Uncertainty, Circuit by Circuit

Written by David B. Honig and Ritu Kaur Cooper.

On February 3, 2015, the Fourth Circuit Court of Appeals ruled that disclosures to the public officials responsible for managing the subject of a False Claims Act lawsuit did not qualify as “public disclosures” for the purpose of the FCA’s public disclosure bar. US ex rel. Wilson v. Graham County Soil And Water Conservation Dist. In so ruling, the Fourth Circuit expressly rejected the Seventh Circuit’s ruling that such disclosures meet the bar as defined in the statute. This means that whether a report to a government oversight official is a public disclosure depends, for the time being at least, upon the location of the events in question.

The defendants, soil and water conservation districts in North Carolina’s Graham and Cherokee counties, entered into Cooperative Agreements with the National Resources Conservation Service for participation in the Emergency Watershed Protection Program for storm relief. The NRCS is a subdivision of the U.S. Department of Agriculture.

Graham County Soil & Water Conservation District was audited by county auditors, who reported program violations to several entities, including the USDA. The relator, unsatisfied with the audit results, made a written statement to a USDA Special Agent, who completed a Report of Investigation concluding additional program violations. That report was distributed to certain state and federal law enforcement agencies but was not to be further distributed “without prior clearance from the Office of Inspector General, USDA.”

The relator filed a qui tam lawsuit. The Defendants moved to dismiss the action, arguing the relator’s claim was based upon a “public disclosure,” the county audit report and the USDA Report of Investigation.[1]

At the time the action was filed, the FCA stated:

No court shall have jurisdiction over an action under this section based upon the public disclosure of allegations or transactions in a criminal, civil, or administrative hearing, in a congressional, administrative, or Government Accounting Office report, hearing, audit, or investigation, or from the news media, unless the action is brought by the Attorney General or the person bringing the action is an original source of the information.[2]

The court found that both the county audit report and the USDA Report of Investigation qualified as audits or investigations under the controlling law. The only question, therefore, was whether they were publicly disclosed.

The Seventh Circuit considered the same question in US v Bank of Farmington (1999). In that case, the defendant bank, which learned of an error during unrelated litigation with the woman who would become the relator, disclosed that error to the federal Farmers’ Home Administration (“FmHA”). The bank separately negotiated and settled with the FmHA for the loss due to its error.

The relator filed a qui tam lawsuit under the FCA, and the bank moved to dismiss, arguing that the report to the FmHA was a qualifying public disclosure under the statute. The Court of Appeals agreed, reasoning that the purpose of a public disclosure is to bring an action to the attention of the government, “not merely to educate and enlighten the public at large about the dangers of misappropriation of tax money.”[3] It determined that a disclosure to a public official with the appropriate managerial responsibility over the issue at hand qualifies as a public disclosure, as that official is authorized to act on behalf of the public.

The Fourth Circuit Court of Appeals refused to follow the reasoning in Bank of Farmington. It focused not upon the public nature of the official but upon the public nature of the disclosure. That public nature, the court determined, required that the disclosure is something in the public domain and available outside the government. Otherwise, it said, the words “public disclosure” would be superfluous to the language in the statute related to reports to the government. In ruling this way, the court joined the First, Ninth, Tenth, Eleventh and D.C. Circuits. The Second, Third, Fifth, Sixth and Eighth Circuits have yet to rule on the issue.

Self-Disclosures and the Public Disclosure Bar

The government encourages its contractors to self-report when it discovers errors or overpayments. Such self-disclosures often include an audit by a government agency as part of the reporting process. As the law now stands, such a self-disclosure could also protect a contractor from a parasitic lawsuit filed by a person with knowledge about it but only in the Seventh Circuit and perhaps in the Second, Third, Fifth, Sixth and Eighth Circuits. In the other Circuits such a self-disclosure may satisfy the government oversight agency but would not bar an opportunistic whistleblower from bringing an action even if he or she only learned about it as a result of that disclosure.

Contractors, such as health care providers and suppliers, routinely make their self-disclosures to such government oversight agencies as the Office of Inspector General, the Centers for Medicare & Medicaid Services, U.S. Attorney’s office or the federal government contractor, depending on the circumstances involved in the alleged violation of the fraud and abuse laws.  According to the Fourth Circuit, none of these agencies are considered to be the public.  It is not common practice for contractors to publish press releases or the like to inform the public domain of their voluntary disclosure submission.

When determining whether to make a voluntary disclosure, contractors weigh the risks versus the benefits of disclosing.  In addition to the opportunity to avoid the costs and disruptions associated with a government-directed investigation and civil or administrative litigation, self-disclosures are motivated by the possibility of reducing FCA exposure by relying on the public disclosure bar as a potential defense.  The Fourth Circuit’s decision reiterates that contractors cannot rely on self-reporting as protection against whistleblower suits.  Protection will only be afforded if the contractor also issues some type of notice to the public domain of the self-disclosure.

One of the purposes of making a self-disclosure is to quietly resolve alleged errors, overpayments or other violations without drawing broad attention to the entity.  Now, contractors will have to reevaluate their policies and procedures related to conducting internal investigations and self-reporting.  Certainly their cost/benefit analysis will change.  Whereas in the last five years since the enactment of the Patient Protection and Affordable Care Act of 2010, many more health care providers have been making voluntary disclosure submissions, that trend may change if more Circuits adopt the holding of the Fourth Circuit.

We close with one final note of caution. Given the split between the Circuits, as well as the lack of decision in several Circuits, the law remains fluid. What appears to be permissible today in one Circuit could change before the actions get challenged by the government or a qui tam whistleblower. It could change because a Circuit Court is persuaded by a new decision or what comes to be a clear majority view, or it could change if the Supreme Court accepts a case to resolve the conflict. Therefore, it is important to have up-to-the-minute advice about what the law is, and what it might be in the future, when making these important decisions.

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

Should you have any questions regarding contracting, compliance or government advice and assistance, please contact:



Court Awards Prevailing FCA Defendant Costs

with Drew B. Howk

On Monday, February 2, well-respected Federal District Court Judge Jed S. Rakoff awarded costs to the prevailing Defendant in US ex rel. Associates Against Outlier Fraud v. Huron Consulting, Case No. 09 Civ. 1800(JSR).

The case had a long history. The Complaint was originally filed in February 2009. It was unsealed ten months later in December. The Complaint alleged that the Defendants, “motivated by their own greed and corrupt practices,” “turned to Medicare and Medicaid as [their] piggy bank to generate the unwarranted fees.”

Ultimately, these breathless accusations came to naught, and the court granted summary judgment for all Defendants on March 8, 2013.

The relator appealed, and the Second Circuit Court of Appeals affirmed, finding, “as the district court concluded… relator has failed to identify any statute or regulation prohibiting Huron’s claim submission practices.”

At the conclusion of the case, after a bill of costs hearing, the Defendants were awarded costs in the amounts of $7,886.95 and $5,839.80. The relator challenged that award, arguing that, under the explicit language of the FCA, costs were not to be awarded, as the word “costs” should be considered synonymous with the word “expenses.”

The Federal Rules of Civil Procedure, at rule 54(d)(1), state “costs .. should be allowed to the prevailing party … [u]nless a federal statute … provides otherwise.” The FCA states, courts may not award “reasonable attorneys’ fees and expenses” without first finding that the lawsuit was “clearly frivolous, clearly vexatious, or brought primarily for purposes of harassment.” If, as the relator argued, costs and expenses mean the same thing, the FCA would bar recovery of costs by a defendant.

Judge Rakoff disagreed. The FCA, elsewhere in the statute, uses costs and expenses differently. For example, where the government intervenes and the defendant prevails, the defendant is entitled to “fees and other expenses, in addition to any costs awarded pursuant to” Rule 54(d). In order to give each word of the statute meaning, Judge Rakoff concluded, costs and expenses must have different meanings.

Expenses, the court concluded, included expert witness expenses, the cost of studies and other projects “necessary for the preparation of the party’s case.” Costs, on the other hand, referred to “relatively minor, incidental expenses,” and awarded court reporter fees and costs for deposition transcripts.

While imposition of only costs can lead to nominal awards, in some FCA cases those costs can be substantial. Further, this case should put qui tam plaintiffs on notice that they have some risk, starting with costs and escalating, should the lawsuit be frivolous, to include attorneys fees and expenses as well.

Health Care Takeaway

In light of the DOJ’s recent request to double its budget for litigation related to health care FCA actions, this case highlights the importance in selecting knowledgeable FCA litigators who have the ability to guide health care providers through the thickets of defending against FCA actions – including in part – how to recoup costs when possible.

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