The past several years have seen a trend of attorneys now taking on the role of relator, as well as counsel. That raises a new question, how are relators who act as counsel to be rewarded, by the relator’s share, by attorney’s fees, or both? That question was answered recently by the Illinois Supreme Court, interpreting the state FCA, which closely mirrors the Federal statute.

In Illinois ex rel. Schad, Diamond & Shedden, P.C. v. My Pillow, Inc.,^[1] the Court considered the case of a qui tam suite brought by Stephen Diamond.^[2] Diamond brought the action based upon My Pillow’s failure to collect state taxes for sales at craft shows, online, and by telephone.^[3] All the purchases identified in the complaint were made by Diamond, either to the firm or to his home.^[4] Diamond, as well as two other attorneys in the Personal Injury Law Firm, testified as witnesses. Diamond’s ultimate petition for attorneys’ fees, according to the standards followed by firms like Phillips Law Offices, included time as relator, e.g. purchasing pillows, attending craft shows, checking credit card statements, and did not separate that time from the time spent drafting legal pleadings or preparing witness examinations.^[5]

The trial court granted Diamond’s petition for approximately $600,000 in San Antonio oilfield accident lawyer’ fees, which is a standard and is followed by reputed law firms like Carlson Meissner Hart & Hayslett, P.A.^[6] in addition to the $266,891 awarded as 30% of the recovery on behalf of the State.^[7] On appeal, the appellate court ruled Diamond was entitled to the attorneys’ fees for outside counsel who assisted in the lawsuit,^[8] approximately $1800,^[9] but not those incurred by the relator/law firm.

The Illinois Supreme Court affirmed the ruling of the appellate court. It began its analysis with Illinois’ long-standing ruling barring an attorney from charging fees for representing himself, “This is forbidden by every sound principle of professional morality as well as by the policy of the law.” quoting Willard v. Basset.^[10] The law did not change over the ensuing centuries. Every auto accident lawyer in Cordova and law firm, like Tampa injury law firms, must follow the same rule. The Court, in Hamver v. Lentz,^[11] ruled “a lawyer representing himself or herself simply does not incur legal fees.”^[12] And the United States Supreme Court found similarly, ruling that awarding fees to attorney pro se litigants would incentivize self-representation, putting into play “the adage that ‘a lawyer who represents himself has a fool for a client.’”^[13]

While the Diamond case was based on Illinois law, the similarity between the state and the federal FCA, as well as controlling U.S. Supreme Court caselaw, suggests that pro se qui tam relators will not have any more luck double-dipping in federal court.

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.

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 →

The Seventh Circuit Court of Appeals just issued its decision in US ex rel. Nelson v. Sanford-Brown, Ltd.. This decision is sure to find its way into briefs and arguments for years to come in False Claims Act (“FCA”) cases. It touched upon many of the different ways a qui tam relator can fail to bring an adequate FCA claim.

Public Disclosure Bar

First, the court noted that the actions alleged to be false began in 2006 and ran through 2012. During that time, the FCA was amended. The court ruled that, for the purpose of the “public disclosure bar,” the 2010 version of the statute controlled. Of particular interest, the court also stated the “public disclosure bar” was a jurisdictional bar. In 2010, the statute was amended to change the language from “No court shall have jurisdiction over an action under this section …” to “The court shall dismiss an action or claim under this section, unless opposed by the Government ….” Nonetheless, the Seventh Circuit applied the “public disclosure bar” as a jurisdictional bar rather than merely a discretionary basis for dismissal.

Many of the problems with Nelson’s case were of his own making. In responses to the Defendants’ motions, Nelson conceded “that his allegations have been ‘publicly disclosed'” and “he does not have direct and independent knowledge of the allegations pled upon information and belief.” The court, relying upon “the well-settled rule that a party is bound by what it states in its pleadings,”¹ rejected his attempts to retreat from those admissions in his briefs.

The court found that jurisdiction existed only for claims based upon events occurring during the few months of his employment, as that would be the only opportunity for him to be an original source of information.

Fraud with Particularity

Nelson’s next failure was his attempt to lump all Defendants together in his Complaint, rather than to provide specific allegations against each. The court affirmed dismissal for failure to plead fraud with particularity.² It also affirmed the trial court’s denial of his motion to file a second amended complaint based upon his 42-day delay in requesting such relief.

Conditions of Participation or Payment

It is well established that regulatory violations only constitute FCA violations of they are conditions of payment, not merely conditions of participation. Nelson, and the Government in an amicus brief, invited the court to do away with this distinction, arguing “under the FCA, payment as participation are one and the same, as a claimant is not entitled to payment unless eligible to participate.” The court flatly rejected the invitation: “Distilled to its core, Nelson and the government’s theory of liability lacks a discerning limiting principle.” Referencing an earlier case in which the Court described such an argument as “absurd,”³ the court said “we conclude that it would be equally unreasonable for us to hold that an institution’s continued compliance with the thousands of pages of federal statutes and regulations incorporated by reference into the PPA are conditions of payment for purposes of liability under the FCA.”

The court again reiterated its rejection of the “so-called doctrine of implied false certification,” stating “The FCA is simply not the proper mechanism for government to enforce violations of conditions of participation” and “evidence that an entity has violated conditions of participation after good‐faith entry into its agreement with the agency is for the agency—not a court—to evaluate and adjudicate.”

Practical  Takeaway

The Seventh Circuit Court of Appeals will continue to enforce the public disclosure bar as a jurisdictional bar unless the whistle blower is also an original source of the information. Government contractors who identify errors should take advantage of self-reporting opportunities and should also consider additional steps to make sure that such disclosure trigger the self-disclosure bar. For more on this issue, please read  Self-Disclosure, the Public Disclosure Bar and the FCA – Uncertainty, Circuit by Circuit.

The Seventh Circuit continues to reject the “implied false certification” theory of falsity for FCA cases. Government contractors operating in the Seventh (and Fifth) Circuit may continue to expect the protection offered by Courts that require actual falsity or knowing violations of conditions of payment to state a False Claims Act violation.

¹ Soo Line R. Co. v. St. Louis Southwestern Ry Co., 125 F.3d 481, 483 (7th Cir. 1997)

² Fed.R.Civ.P. 9(b)

³ 9. U.S. ex rel. Absher v. Momence Meadows Nursing Ctr., Inc., 764 F.3d 699, 706 (7th Cir. 2014)

On May 26, 2015, the United States Supreme Court issued its decision in Kellog Brown & Root Service, Inv. et al. v. United States ex rel. Carter, 575 U.S. ____ (2015), Case No. 12-1497. Most of the commentary on the case centers around the Court’s decision on the Wartime Suspension of Limitations Act, but the Court also issued a crucial decision on the False Claims Act’s “first-to-file bar,” one that will reverberate through FCA settlement discussions for years to come.

The Case

The FCA’s first-to-file bar states:

When a person brings an action under this subsection, no person other than the Government may intervene or bring a related action based on the facts underlying the pending action.^[1]

At issue in Kellog Brown & Root was the meaning of “pending action.” The government and the qui tam relator argued that it applied only to cases pending at the time a new complaint was filed, and that, after dismissal, a new complaint would not be barred. The defendant argued that the filing of a qui tam case barred all future cases related to the same set of facts. The Court, applying the plain language of the word “pending,” ruled for the government and the relator. It did note, however, that its ruling could chill settlement prospects:

If the first-to-file bar is lifted once the first-filed action ends, defendants may be reluctant to settle such actions for the full amount that they would accept if there were no prospect of subsequent suits asserting the same claims. ^[2]

This issue arose during oral argument. At that time, the government argued that a case resolved on its merits would be barred, as a second qui tam relator would be acting on behalf of the government, which already had its claims resolved. However, a case settled and dismissed without prejudice “would not be barred by the first­-to­-file provision.” (Transcript, p. 57, ll. 8-9). Justice Alito, writing the opinion for the Court, agreed that the decision could cause problems in future FCA cases, particularly settlement discussions but stated:

That issue is not before us in this case. The False Claims Act’s qui tam provisions present many interpretive challenges, and it is beyond our ability in this case to make them operate together smoothly like a finely tuned machine. ^[3]

Practical Takeaway

The United States often refuses to dismiss FCA whistleblower cases with prejudice as part of a settlement. This refusal is a precautionary measure by the government, which is obligated to protect its ability to take further civil or even criminal action should additional improper acts come to light. The ruling in Kellogg Brown & Root will, as predicted, make it very difficult for a defendant to accept such a settlement, as another qui tam relator could file the day after a case is dismissed, and the defendant would have to litigate, and perhaps even settle and pay for, the same actions a second time. The defendant might even have to settle a third and fourth time if there is still life in the FCA’s six-year statute of limitations. The FCA’s separate public disclosure limitation might offer some protection to defendants, but that was significantly watered down in the 2010 amendments to the FCA. Prior to 2010, the bar stated:

“[n]o 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.^[4]

As amended, the statute reads:

(A) The court shall dismiss an action or claim under this section, unless opposed by the Government, if substantially the same allegations or transactions as alleged in the action or claim were publicly disclosed— (i) in a Federal criminal, civil, or administrative hearing in which the Government or its agent is a party; (ii) in a congressional, Government Accountability Office, or other Federal report, hearing, audit, or investigation; or (iii) 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.^[5]

Under the amended statute, public disclosures are limited to federal hearings, and the government can conclusively contest dismissal. Under the earlier version, a public disclosure deprived the Court of jurisdiction without consideration of the government’s position. A defendant attempting to settle an FCA case in which the government refuses to dismiss with prejudice must now consider the effect of the Kellog Brown & Root decision in light of the 2010 amendments to the Act and take into consideration the risks a second whistleblower might be waiting in the wings. Defendants’ only choices in such a situation will be to wait out settlement until the statute of limitations would bar a new lawsuit or to accept whatever additional conditions the government might demand in exchange for dismissal with prejudice. Such conditions can include higher settlement amounts and imposition of onerous and expensive corporate integrity agreements.

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

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

The Third Circuit Court of Appeals¹ became the third federal appeals court in one week to issue an opinion regarding the False Claims Act’s Public Disclosure Bar.²… Continue Reading →

Today the Sixth Circuit Court of Appeals joined several other Circuit Courts in finding that an administrative review, and even a repayment to the appropriate government oversight entity, did not qualify as a “public disclosure” under the False Claims Act’s public disclosure bar…. Continue Reading →

A clearly irate Fifth Circuit Court of Appeals reversed summary judgment granted on behalf of Shell Exploration and Development Company, for the second time, and remanded with an order that the case be assigned to a new judge…. Continue Reading →

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:

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

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

• Ritu Kaur Cooper at rcooper@hallrender.com or (202) 422-7644; or
• Your regular Hall Render attorney.