Supreme Court To Disclose Meaning Of “Public Disclosure”

The Supreme Court recently granted certiorari to hear an important case regarding the False Claims Act.  In Graham County Soil & Water Conservation District v. United States ex rel. Wilson, the Court will address a circuit split regarding the interpretation of a particular clause within the Act known as the “public disclosure” bar.

As courts have recognized, the “public disclosure” bar is intended to “further the twin goals of rejecting suits that the Government is capable of pursuing itself, while promoting those which the government is not equipped to bring on its own.”  (This quote comes for a 1994 decision by the D.C. Circuit.)  The relevant section of the False Claims Act states that no court has jurisdiction over a qui tam action “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 relator “is an original source of the information.”

If that makes you head spin, don’t worry because you are in good company.  The Ninth and Eleventh Circuit Courts of Appeals have interpreted the clause to mean one thing, while the Third and Fourth Circuits have interpreted the clause to mean something entirely different.  Basically, the clause functions to prevent individuals from bringing qui tam suits once the government has already learned about an alleged False Claim.  But this begs the question:  which government?

Both sides of the circuit split agree that the “public disclosure” bar applies to federal government reports and audits; so the issue boils down to whether the bar also applies to state and local reports and audits.  The Ninth and Eleventh Circuits have determined that the clause applies not only to federal reports and audits, but also to state and local audits.  The Third and Fourth Circuits have determined that the clause applies only to federal reports and audits. 

 Here’s why this matters — if the Supreme Court determines that the clause applies only to federal reports and audits, then this means an individual can still bring a qui tam suit, even after a state or local report or audit has disclosed an alleged violation of the False Claims Act.  If, instead, the Supreme Court determines that the “public disclosure” bar is held to apply to state and local reports and audits (in addition to federal audits), then this means that once a state or local report or audit had disclosed an alleged violation of the False Claims Act, it is too late for an individual to bring a qui tam suit (unless of course that individual was an original source of the information). 

 The Supreme Court’s decision – which likely will come in late-2009 or early-2010 – will define the scope of the bar.  Stay tuned for more updates on this case.  Meanwhile, if you want to read up on this case, check out the briefs posted on SCOTUSBLOG.

Abbott Labs Seeks Sanctions For Destruction Of Government Documents

A dispute brewing in a False Claims Act lawsuit against Abbott Laboratories and other defendants could have wide-ranging implications for how the Department of Justice handles investigations of qui tam whistleblower complaints.  At issue is whether DOJ has an obligation to instruct government agencies to preserve emails and other documents that might eventually become relevant to defenses raised by defendants in a lawsuit that DOJ has not yet even decided to join.  

In the Abbott Labs case, a qui tam relator filed a False Claims Act lawsuit under seal in 1995.  The case involved the “average wholesale pricing,” or AWP, requirements of Medicare and Medicaid.  DOJ, with the help of other government agencies, investigated the claims for 11 years before intervening and unsealing the case.  Abbott Labs alleges that, during that 11-year period, numerous potentially relevant documents — including huge numbers of emails among employees of relevant government agencies — were destroyed (or, as lawyers like to say, spoliated), and that DOJ never gave any instructions to the agencies to preserve documents that might be relevant to the case.  Abbott Labs now claims that its defense of the case has been prejudiced by the destruction of those emails and other documents.  That’s the short version of the story; for the full story, you can read the brief filed by Abbott Labs.

DOJ has not yet responded to the Abbott Labs motion for sanctions, and the court’s decision on this issue is likely a long way off.  But the Abbott Labs motion certainly raises some thorny issues for DOJ.  A broad, general rule that DOJ must routinely instruct agencies not to destroy records that might potentially be relevant to qui tam cases would likely be completely unworkable and unrealistic.  At least two practical problems comes to mind.  First, the DOJ investigations are often conducted in a very confidential way, for a host of good reasons.  If DOJ was forced to routinely send out instructions to government agencies about these investigations, this confidentiality would be jeopardized.  Second, the DOJ investigations are conducted for the purpose of determining whether the government will intervene, and the government declines to intervene a majority of the time.  So, a general requirement for document prevervation instructions would mean that the burden of complying with such instructions would be visited upon government agencies even where the qui tam cases have little merit, or turn out to be of no intest to the government for a variety of reasons.

While it may be that the court will need to take some action to alleviate the prejudice claimed by Abbott Labs, one would hope that the court does not overreact to the facts of the case before it by laying down a standard that makes DOJ’s investigations in more routine qui tam cases more burdenson, slow or expensive for taxpayers.

Failure To File Under Seal Leads To Dismissal

When a qui tam plaintiff files a complaint in federal court under the False Claims Act, the statute requires that the complaint be filed “under seal.”  This means that the defendant company is not made aware of the filing, and the case does not appear on the court’s publicly available docket (which is essentially the court’s index of all the cases pending before it).   To satisfy the “under seal” requirement, the qui tam plaintiff must file his or her complaint with a motion to the court asking to have the complaint filed and maintained under seal.  In the absence of such a motion, the clerk’s office (the branch of the court that is responsible for maintaining the court’s docket and files) may file the case on the public docket, thereby making the existence of the case known to the public. 

So, what happens if a qui tam relator files a complaint, but does not file a motion to seal?  An answer was provided by Senior Judge Wiseman of the United States District Court for the Middle District of Tennessee.  In a decision issued on June 11, 2009 in United States ex rel. Summers v. LHC Group, Inc., Civil Action No. 09-CV-277, Senior Judge Wiseman ruled that the failure of the relator’s lawyer to file a motion to seal — which resulted in the public docketing of the case — required dismissal of the case entirely.

According to the court’s opinion, when the relator’s lawyer filed the case on a Friday, someone from the clerk’s office called him to discuss whether the case needed to be filed under seal.  The lawyer, however, took no action, and by the following Tuesday the case was publicly docketed.  A few days later, the lawyer finally filed a motion to seal, but that motion was denied because the lawyer failed to include an explanation for why the case needed to be filed under seal.  The defendant subsequently learned of the case, and filed the motion to dismiss, which the court granted.

The False Claims Act has a series of unusual procedural requirements, including the “under seal” requirement.  Even attorneys who are very experienced litigators may be unaware of these requirements if they have not handled qui tam cases before.   The lesson of this decision is that the False Claims Act contains many traps for the unwary.  Both qui tam whistleblowers, and their attorneys, need to be aware of these traps, and be fully prepared to avoid them.

Supreme Court Decides Appeals Deadline Case

The United States Supreme Court issued its decision today in United States ex rel. Eisenstein v. City of New York, a case we have been tracking in this blog.  At issue is whether a qui tam relator in a non-intervened False Claims Act case (in other words, a case in which the government declines to intervene) has 30 days or 60 days to file an appeal from an adverse judgment entered by a federal trial court.  In a unanimous decision, the Supreme Court today ruled that the 30-day deadline applies.   Any qui tam relators with pending appeals who filed their appeals more than 30 days after the trial court decision are now going to be out of luck, and likely will have their appeals dismissed.  On a going-forward basis, the Supreme Court has cleared up the confusion on this issue in the lower courts, and created a simple, bright-line rule:  unless the government has formally intervened in the case, a qui tam relator needs to appeal within 30 days.

Aventis To Pay Through The Nose For Misreporting Price Of Nasal Spray

The Department of Justice announced last week that it has entered into a multi-million dollar civil settlement agreement with Aventis Pharmaceutical, Inc., a subsidiary of Sanofi Aventis U.S. LLC.  Under the agreement, Aventis will pay more than $95 million to settle allegations that it violated the False Claims Act by misreporting drug prices to reduce its Medicaid Drug Rebate obligations. 

 The Medical Drug Rebate statute required Aventis to report its lowest prices charged to commercial customers and to pay quarterly rebates to Medicaid participating states based on those reported prices.  Allegedly, between 1995 and 2000 Aventis and its corporate predecessors knowingly misreported prices of three steroid-based nasal sprays (Azmacort, Nasacort, and Nasacort AQ) by repackaging the identical products under a different label and selling them to the HMO Kaiser Permanente at a reduced price.  By selling the products for reduced prices under different labels, Aventis allegedly avoided paying millions of dollars in rebates to the Medicaid system and overcharged certain public health service entities. 

 Under the settlement agreement, Aventis will pay approximately $49 million to the federal government, over $40 million to the Medicaid participating states, and over $6 million to certain public health service entities who allegedly paid inflated prices for the drugs.  Tony West, Assistant Attorney General for the Justice Department’s Civil Division stated that, “This agreement reflects our commitment to ensuring that Aventis and other drug companies fulfill their obligations under the Drug Rebate Statute to accurately report pricing information and pass the savings along to the Medicaid program.”  He went on to say that the Department of Justice “will continue to ensure that programs for the most vulnerable portions of our population do not pay any more for pharmaceutical products than they should under the law.”

 Although most False Claims Act cases are initiated by qui tam relators who blow the whistle on corporate fraud, the Aventis case appears to have been initiated by the government itself.  The Aventis case was handled by the Justice Department’s Civil Division, the Department of Health and Human Services Office of Inspector General and Office of Counsel to the Inspector General, and the National Association of Medicaid Fraud Control Units.

Amendments to False Claims Act Become Law

We’ve previously posted about the progress through Congress of bills to amend the False Claims Act.  Despite a fierce lobbying campaign by the government contractor and health industries, the Fraud Enforcement and Recovery Act of 2009, or FERA, was signed into law by President Obama on May 20, 2009.  FERA includes the first major amendments to the False Claims Act in more than 20 years, and significantly strengthens the law.   Here are the major provisions of FERA, as it relates to the False Claim Act:

1.  FERA effectively overturns the Supreme Court’s decision in Allison Engine Co. v. United States ex rel. Sanders, a case that established additional barriers for attaching False Claims Act liability to subcontractors who commit fraud, but who do not have directly contractual obligations to the government.  FERA amends the False Claims Act to explicitly cover any claims for money that “is to be spent or used on the Government’s behalf or to advance a Government program or interest.”

2.  Under the False Claims Act, fraud must be “material” to the government’s decision to pay money, but the exact meaning of the term “material” has been a subject of dispute among the lower courts.  FERA adopts a specific definition of “material” as “having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property.”  That standard had been adopted by many courts, and is now incorporated into the text of the False Claims Act.

3.  FERA expands liability for so-called “reverse false claims.”  False Claims Act liability now extends to “knowingly and improperly avoid[ing] or decreas[ing] an obligation to pay or transmit money or property to the Government.”  In other words, under this provision, if a company owes money to the government, and knowingly falls to pay that money, it violates the False Claims Act.

4.  The False Claims Act’s anti-retaliation provision has also been expended by FERA.  It now applies not only to employees, but also to “contractors” and “agents.”  And it defines “retaliation” to include any adverse action taken against an employee, contractor or agent because of that person’s “efforts to stop” a violation of the False Claims Act.  This is now one of the broadest anti-retaliation provisions in federal law.

These and other changes and clarifications made by FERA are long overdue, and should be welcomed by anyone concerned about fraud on the federal fisc.  The government, and the qui tam whistleblowers who help the government fight fraud, have some new arrows in their quiver.

Director Of IRS Office Offers Advice On Tax Whistleblower Cases

For those of you interested in tax whistleblower cases, the April 2009 edition of the False Claims Act & Quit Tam Quarterly Review (published by and available from TAF) contains a lengthy interview with Stephen A. Whitlock, the Director of the IRS Whistleblower Office.  He discussed the procedures for submitting tax whistleblower claims, and how the IRS makes decisions about whether or not to pursue those claims.  He offers a number of practical tips for whistleblowers and their attorneys.  And, in a particularly interesting passage, he offers his take on the type of cases that the IRS would most like to see.

He was asked, “are there particular types of cases that the IRS is interested in, or particular industries that are more attractive to the IRS?”

He answered: “We try to touch a little bit of everything in different ways because the tax system is that complex. We try to have some presence in every aspect of the tax law.The largest corporations tend to be under audit nearly continuously. Issues on international tax noncompliance are getting more attention in recent years because of globalization of the economy. There have been some congressional hearings recently about those kinds of questions where large corporations –multinationals–have the ability to take advantage of the tax code and their business structure to reduce their tax liability. Sometimes that is permitted by the tax code, and sometimes it is not. That is an area of focus—to identify those areas where it is not permitted, but somebody is pushing the envelope.

Someone who is not filing and paying—that is always of interest to us. High-income non-filers are especially interesting to us. Define ‘high income’ how you want to, but we generally look at six figures, $200,000, $250,000 in gross income.

We have concerns in the areas of ‘trust funds,’ where a taxpayer is an employer and is withholding from their employees, in order to cover the employees’ personal tax liability. When you have someone who is acting in effect as a trustee for the federal government by withholding tax from employee wages, but then says ‘You know, I’m having a little trouble with the business. I’m going to pay my bills before I pay the tax bill.’ That’s an area that has been an enforcement priority for many years.”

Mr. Whitlock went on to note that these issues are not the only ones of interest to the IRS. As he put it, “if there is serious tax noncompliance, if there’s evidence that there is real money involved in it, the Service is going to be interested.”

 

FCA-Related Legislation Winding Its Way Through Congress

Last week, the Senate passed S. 386, the Fraud Enforcement and Recovery Act (“FERA”) of 2009, by a vote of 92-4. FERA was designed to revise portions of the False Claims Act to make recovery of funds easier. The bill specifically targets the misuse of economic stimulus and TARP funds. While the False Claims Act already targeted the submission of fraudulent claims based on a government contract, FERA extended the law to include liability for conspiring to submit “reverse false claims.” An example of a reverse false claim would be the misuse of stimulus or TARP funds awarded by the government, or the knowing retention of an overpayment from the government.

Still pending in the Senate is S. 458, the False Claims Act Clarification Act of 2009, which was previously discussed in a March 9 post. The Hose counterpart to S. 458, H.R. 1788, the False Claims Correction Act of 2009, recently passed the House Judiciary Committee. While the House and Senate bills are quite similar in their aim to allow government employees to file qui tam suits and narrow the public disclosure bar, the House version has some distinctions. For example, the House version seeks to extend the statute of limitations for qui tam actions to eight years, while the Senate version specified 10 years. Additionally, the House bill expands the level of protection from retaliation afforded to whistleblowers, and it significantly weakens the requirement that relators identify specific false claims in filing their complaint.

Quest, NID To Pay More Than $300 Million For Unreliable Test Kits

The Department of Justice announced last week that it had entered into a civil and criminal settlement with Quest Diagnostics, Inc., and its subsidiary, Nichols Institute Diagnostics (NID). Quest and NID will pay a total of over $300 in a multi-part settlement: $262 million plus interest to settle civil allegations under the False Claims Act that NID knowingly manufactured and sold five test kits that produced unreliable results from 2000 to 2006; approximately $6.2 million to various state healthcare programs related to similar civil claims; and a $40 million criminal fine for violating the Food, Drug and Cosmetic Act in its false marketing of NID’s Advantage Intact Parathyroid Hormone (PTH) Immunoassay. Thomas Cantor, the founder of Scantibodies Laboratory Inc., was the qui tam relator who blew the whistle on Quest and NID and will receive approximately $45 million for his efforts.

The False Claims Act settlement also focuses on the Advantage Intact PTH test kit, along with the Bio-Intact PTH kit, and three other test kits manufactured by NID. All five of the kits manufactured by NID were found to be materially inaccurate and unreliable at various times between May of 2000 and April of 2006. The faultiness of these test kits caused laboratories and healthcare providers to submit false reimbursement claims to federal health programs like Medicare for the diagnostics and the unnecessary treatments prompted by the erroneous diagnostics. As part of the civil settlement, Quest has also signed a Corporate Integrity Agreement with the Department of Health and Human Services Office of the Inspector General.

Cantor, the qui tam relator, filed the case in federal court in Brooklyn in 2004, but he had been trying since 2000 to bring the problems with these diagnostics to the attention of the medical community. He had little success convincing healthcare providers of this problem through correspondence, articles, and presentations. It was only through online research that Cantor learned that the False Claims Act could prompt a government investigation of his allegations, and that is precisely what took place, leading up to one of the largest settlements in U.S. history in a case involving medical devices.

Fifth Circuit Weighs In On The Rule 9(b) “Particularity” Quandry

Here is a common dilemma for qui tam relators and their counsel: a whistleblower inside a company knows that the company is involved in a fraud scheme, but does not know all of the details, including precisely how the fraudulent claims are transmitted to the government, because the whistleblower’s role in the company only provides access to information about one part of the scheme. For example, someone working in a hospital may know that the hospital encourages routine “upcoding” by its doctors, but may not know precisely how, when or in what amount that “upcoding” results in specific bills to Medicare or Medicaid. When the relator files the qui tam lawsuit, the defendant hospital seeks dismissal of the case under Rule 9(b) of the Federal Rules of Civil Procedure, which requires that claims of fraud be alleged with “particularity.” Some courts have granted such motions, reasoning that a qui tam relator who is not able to allege the details of when and in what amount fraudulent bills were actually sent to the government is not entitled to pursue the case, even if the relator otherwise has compelling evidence of an ongoing fraudulent scheme.

On April 8, 2009, the U.S. Court of Appeals for the Fifth Circuit weighed in on this issue in its decision in U.S. ex rel. Grubbs v. Kannegati, reversing the trial court’s dismissal of a False Claims Act qui tam lawsuit brought by psychiatrist Dr. Grubbs against his former employer, Memorial Hermann Baptist Hospital, and several doctors at the hospital. In ruling in favor of Dr. Grubbs, the Fifth Circuit held that, even under Rule 9(b), a qui tam relator can proceed even if he or she does not know the details of the fraudulent billing.

In his complaint, Dr. Grubbs alleged that doctors at the defendant hospital were billing all of the time worked on their on-call weekend shifts as “face-to-face” hospital visits with patients when, in fact, the doctors were only getting updates from nursing staff on patients and then, if necessary, visiting those patients with acute problems. Grubbs alleged that the workings of this scheme were explained to him by his fellow doctors during a dinner meeting prior to Grubbs’ first on-call weekend shift. In addition to describing this overall scheme, Grubbs’ complaint included additional details regarding at least one instance of false billing for each of the allegedly fraudfeasing doctors, including the date of the specific false billing. In the trial court, the defendants moved to dismiss Grubbs’ complaint, arguing that Grubbs failed to plead his claims with sufficient particularity under Rule 9(b). The trial court agreed and dismissed the case.

But the Fifth Circuit reversed that dismissal. The Court noted that “fraudulent presentment requires proof of only the claim’s falsity, not of its exact contents.” Thus, “a plaintiff does not necessarily need the exact dollar amounts, billing numbers, or dates to prove to a preponderance that fraudulent bills were actually submitted.” Indeed, the Fifth Circuit stated that “to require these details at pleading is one small step shy of requiring production of actual documentation with the complaint, a level of proof not demanded to win at trial and significantly more than any federal pleading rule contemplates.” In a key passage, the court held that “a relator’s complaint, if it cannot allege the details of an actually submitted false claim, may nevertheless survive by alleging particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted.” Because Grubbs’ complaint alleged in detail the fraudulent billing scheme (including the date, place, and participants) as well as the specific dates that each doctor falsely claimed to have provided services to patients, the “logical conclusion” of Grubbs’ allegations was that false claims were, in fact, submitted.

The Fifth Circuit’s decision in Grubbs is a refreshing, reasonable, and practical approach to the Rule 9(b) “particularity” quandary. Under the reasoning of Grubbs, a qui tam relator who knows of a scheme to defraud the government is not deterred from pursuing valid and valuable cases under the False Claims Act merely because he or she knows some – but not all – of the details of the fraud. Hopefully, other courts around the country will follow Grubbs in future similar cases.