There have been several significant rulings on various provisions of the False Claims Act (FCA) in the first quarter of this year, which we highlight in this post.
Government Dismissal Authority
To start the year, in U.S. ex rel. Borzilleri v. Bayer Healthcare Pharmaceuticals, Inc., 24 F.4th 32 (1st Cir. 2022), the First Circuit weighed in on the split over the standard governing the government’s dismissal authority under 31 U.S.C. § 3730(c)(2)(A). The First Circuit adopted a deferential standard permitting the government to dismiss a qui tam action over a relator’s objection as long as the government articulates its reasons for seeking dismissal and the relator does not show any transgression of the government’s constitutional limits or fraud on the court.
The FCA authorizes the government to dismiss a qui tam action over a relator’s objection “if the [relator] has been notified by the Government of the filing of the motion and the court has provided the [relator] with an opportunity for a hearing on the motion.” 31 U.S.C. § 3730(c)(2)(A). The Ninth Circuit requires the government to demonstrate that dismissal bears a “rational relationship” to a valid government interest (the strict Sequoia Orange standard), while the D.C. Circuit gives the government unfettered discretion to dismiss. The Seventh and Third Circuits adopted yet a third standard, relying on the voluntary dismissal standard under Federal Rule of Civil Procedure 41.
In Borzilleri, the relator alleged that several pharmaceutical manufacturers and pharmacy benefit managers colluded to drive up the price of certain therapeutics and defraud Medicare Part D. The government declined to intervene in the case, and the defendants moved to dismiss the relator’s complaint. Shortly thereafter, the government moved to dismiss under § 3730(c)(2)(A), citing (1) the resources needed to oversee and participate in the relator’s litigation, (2) its investigatory conclusion that many of the relator’s allegations were unsupported, and (3) actions by the relator that convinced the government he was not an appropriate advocate for the United States’ position in the action. Following a hearing, the district court granted the government’s motion to dismiss.
The First Circuit affirmed the dismissal, adopting a deferential standard akin to the D.C. Circuit’s Swift standard and finding that the Sequoia Orange standard inappropriately places the burden on the government to justify its decision to dismiss the action. The First Circuit held that, although the government must articulate its reasons for dismissal so that the relator can attempt to convince the government to withdraw its motion to dismiss, district courts should grant the government’s motion unless the relator can demonstrate that the government’s decision to seek dismissal “transgresses constitutional limits” or “perpetuat[es] a fraud on the court.” Here, the relator proved neither but merely disagreed with the government’s judgment.
In U.S. ex rel. Cho v. Surgery Partners, Inc., 2022 WL 982126 (11th Cir. 2022), the Eleventh Circuit addressed the False Claims Act’s first-to-file bar, which prohibits a later relator from bringing a related action based on the same facts as a pending action. 31 U.S.C. § 3730(b)(5). The Eleventh Circuit first held that a relator’s original complaint, not an amended complaint, is the proper point of reference for a first-to-file analysis. It then held that the relators’ action in the case before it was “related” to an earlier-filed action, affirming the dismissal.
The relators alleged that Surgery Partners, Logan Labs, and a PE firm that had acquired Surgery Partners and Logan Labs were engaged in a fraudulent scheme of pressuring providers to order a more expensive and often unnecessary quantitative urine drug test when a cheaper qualitative urine drug test was sufficient. In another qui tam action (the Ashton Action), the relators made the same allegations against Surgery Partners and Logan Labs, though the Ashton Action did not name the PE firm entities as defendants. The timeline for both actions is critical to the first-to-file analysis:
- August 2016: Ashton Action was filed.
- April 2017: Relators filed this action.
- January 2019: Relators filed an amended complaint in this action.
- April 2020: A settlement with the United States was announced involving both the Ashton Action relators and these relators, releasing Logan Labs and its owners from FCA liability and separately releasing the PE firm from liability for their independent conduct outside their status as the owner of Logan Labs.
After the settlement, the relators filed a second amended complaint, narrowing the allegations to focus on the PE firm’s conduct. The district court dismissed the second amended complaint under the first-to-file bar, holding that the relevant inquiry was whether the Ashton Action was pending when the relators filed their original complaint in 2017, not when they filed the second amended complaint after the settlement. The district court also held that the two actions were related within the meaning of the first-to-file bar, since they alleged the same essential facts regarding urine drug testing fraud.
The Eleventh Circuit affirmed both holdings. First, the Eleventh Circuit held that a first-to-file defect cannot be cured by the filing of an amended complaint, reasoning that it is the date the FCA action was initiated that matters and relators cannot “evade the first-to-file bar by amending their pleading” after a related action is dismissed. Second, the Eleventh Circuit adopted the “same material elements” test applied in other circuits and rejected relators’ argument that their action was not related to the Ashton Action because they named additional PE firm defendants and alleged an additional conspiracy claim.
Rule 9(b) Pleading Requirements
Two district courts denied defendants’ motions to dismiss False Claims Act claims, finding that the relators in those cases had satisfied the heightened pleading requirements of Rule 9(b).
In U.S. ex rel. Chao v. Medtronic PLC, 2022 WL 541604 (C.D. Cal. Feb. 23, 2022), the district court allowed a relator to proceed with his allegations that medical device manufacturer Medtronic paid improper kickbacks to physicians to induce them to order more of Medtronic’s Pipeline device used to treat brain aneurysms. The relator alleged four forms of kickbacks:
- Paying physicians proctoring fees in excess of fair market value to teach other physicians how to perform Pipeline procedures.
- Paying above fair market value to acquire companies in which high-volume physicians had ownership interests.
- Overpaying Pipeline physicians to provide patient and procedure data to Medtronic databases.
- Awarding fellowships, grants, and research funds based on physicians’ or hospitals’ volumes of Pipeline usage.
In considering the motion to dismiss, the district court first held that allegations that Medtronic paid $3,200 proctoring fees ($400/hour for an eight-hour day) for a two-hour procedure were sufficient to plead an Anti-Kickback Statute violation at this stage, declining to consider Medtronic’s argument that the payment could plausibly be fair market value for an eight-hour day of proctoring and ancillary services. Second, the district court held that the personal services safe harbor did not defeat the relator’s claims at this stage. The district court explained that the relator “must allege [with particularity] facts that make it plausible that the safe harbor will not defeat his claim,” but it drew a fine line between this obligation and Medtronic’s argument that the relator must “set forth the negation of one or more of the elements of the affirmative defense with particularity.” After finding that the relator satisfied his burden, the district court commented that “even some fair-market-value payments will qualify as illegal kickbacks.”
In United States v. Curo Health Services Holdings, Inc., 2022 WL 842937 (M.D. Tenn. Mar. 21, 2022), the district court denied a hospice provider’s motion to partially dismiss a complaint in intervention. The government intervened in part with respect to allegations in two consolidated qui tam actions that Avalon Hospice and its parent companies over the course of 10 years and across 27 or more locations in Tennessee falsely certified that patients were eligible for hospice care when they were not in fact terminally ill over the course of ten years and across Avalon’s twenty-seven or more locations in Tennessee. The government pleaded examples of patients from some, but not all, of Avalon’s locations when it alleged a system-wide scheme of supervisory pressure, monetary incentives, and corporate policies designed to encourage falsely certifying more patients for hospice eligibility in order to increase the government’s per diem reimbursement. Avalon and its parent companies sought to narrow the case under Rule 9(b) to those locations and periods for which the government provided example patients.
Although the Sixth Circuit strictly enforces Rule 9(b)’s requirement that plaintiffs plead example false claims with sufficient particularity, the district court rejected the approach urged by the defendants as going beyond what Rule 9(b) requires, declining to “treat the governments’ examples as, in essence, fenceposts erecting an artificial boundary outside of which the plaintiffs’ claims, no matter how otherwise well-pleaded, can extend.”
Finally, the district court granted the defendants’ motion to dismiss non-intervened kickback claims that one set of qui tam relators sought to pursue. The district court explained, “It is not enough merely to have alleged that [the identified patients] happened to have received care from two entities with an improper relationship.” Rather, the district court determined that the relators must allege that the example patients they identified were referred pursuant to a kickback relationship to survive a motion to dismiss.
In U.S. ex rel. Sheldon v. Allergan Sales, LLC, 24 F.4th 340 (4th Cir. 2021), the Fourth Circuit held that the objective knowledge standard from the Supreme Court’s opinion in Safeco (interpreting the “willful” knowledge standard in the Fair Credit Reporting Act) applies to the False Claims Act, even at the pleading stage. The court held that a plaintiff cannot satisfy the FCA’s scienter element where: (1) a defendant’s interpretation of an applicable statutory or regulatory requirement is objectively reasonable; and (2) there is no authoritative guidance from a circuit court or a government agency to warn the defendant away from its reasonable interpretation.
Applying this test, the Fourth Circuit affirmed the district court’s dismissal of the relator’s complaint, concluding that the defendant pharmaceutical manufacturer’s interpretation of how to calculate and report its “lowest price available” under the Medicaid Rebate Statute and related Centers for Medicare & Medicaid Services (CMS) regulations was objectively reasonable and there was no authoritative guidance warning the manufacturer that it had to aggregate certain rebates as the relator alleged. This holding aligns with the Seventh Circuit’s last year in U.S. ex rel. Schutte v. Supervalu, Inc. For more details on the Fourth Circuit’s ruling, check out our previous post on this case.
In U.S. ex rel. Jehl v. GGNSC Southaven, LLC, No. 3:19-cv-091 (N.D. Miss. Mar. 30, 2022), the district court granted summary judgment to the defendants, holding that the entities that owned and operated Golden Living, a nursing facility in Southaven, Mississippi, demonstrated a failure of proof on each element of the relator’s FCA claims. The relator’s claims centered on his allegations that Golden Living’s former director of nursing services held a Virginia nursing license but lacked valid multi-state credentials to work in Mississippi as a result of abandoning Virginia as her “primary state of residence” to live in Tennessee, and thus all claims submitted during her tenure falsely certified compliance with applicable licensure laws in their reimbursement requests. The district court first held that the relator could not satisfy the falsity or scienter elements of the FCA because CMS’s unambiguous guidelines showed that the nurse’s licensure was indeed valid and the defendants’ certifications were, therefore, true and proper.
Then, examining the relator’s lack of summary judgment evidence showing that the defendants knowingly violated a requirement they knew to be material to the government’s payment decision, the district court highlighted several pieces of evidence:
- The licensing regulations the relator alleged that the defendants breached were expressly characterized only as Conditions of Participation, a factor Escobar instructed was fair to consider though not dispositive.
- Due to CMS’s unambiguous guidance on when a license becomes invalid, the defendants could not have known that the government would characterize the nurse’s license as invalid.
- There was no precedent to support the relator’s assertion that the government would demand repayment of claims upon learning of the supposedly defective license, and there was no evidence linking nurse licensure to the amount the government would pay to defendants on claims.
To learn more about any of these cases, contact a member of the firm’s Healthcare Fraud Task Force, and subscribe to the Inside the False Claims Act blog to receive future case updates. Please also check out other posts on this blog where we dive deeper into specific elements of the False Claims Act and case law developments that affect the showing that each element requires.