False Claims Act Focus - December 2012

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    Recent reports from the Department of Justice that it collected a record $4.9 billion under the False Claims Act in fiscal year 2012 only underscore what we’ve been seeing in our practice and elsewhere in the news: the government continues to aggressively and actively pursue these cases against companies doing business in a variety of industries, particularly health care, defense procurement and financial services.

    In this final 2012 edition of False Claims Act Focus, we examine a recent court decision that applies the War Statute of Limitations Act in a non-war-related procurement case to indefinitely toll the statute of limitations. The potential ramifications of extending the FCA statute of limitations from 6 years to an indefinite number of years across all industry segments could be staggering. In addition, given that the Dodd-Frank statute’s whistleblower provisions were inspired by, and to some extent modeled after, the FCA whistleblower provisions, take a close look at the similarities and differences of the two statutes’ constructs. We also compare and contrast the FCA’s whistleblower provisions against those of the Dodd-Frank statute. And finally, we will review a health care-related FCA case that put the government to its proof at trial and resulted in a defense win.

    Best wishes for a wonderful 2013!


    Financial Services Industry

    On October 24, 2012, the U.S. Attorney for the Southern District of New York (Manhattan) filed a suit under the civil False Claims Act (FCA) against the Bank of America for alleged mortgage fraud. The U.S. Attorney alleged that, after the collapse of the subprime lending market in 2007, Countrywide’s loan origination process eliminated “every significant checkpoint” on loan quality which led to “rampant instances of fraud” that caused more than $1 billion in losses to Fannie Mae and Freddie Mac, the Government Sponsored Entities (GSEs) that purchased the “defective” loans. The U.S. alleged that the conduct continued after Bank of America acquired Countrywide in 2008, and that the Bank of America “compounded the harm” by refusing to repurchase the loans or reimburse the GSEs for their losses. Bank of America said it “has stepped up and acted responsibly to resolve legacy mortgage matters. At some point, Bank of America can’t be expected to compensate every entity that claims losses that actually were caused by the economic downturn.”

    Significantly, this is the first FCA suit brought by the Department of Justice (DOJ) concerning mortgage loans sold to Fannie Mae or Freddie Mac. Also of note is that the U.S. is relying on the FCA as amended by the Fraud Enforcement and Recovery Act (FERA) of 2009, which expanded the FCA’s jurisdiction over any expenditure of funds that is “on the Government’s behalf or to advance a Government program or interest” and involves federal funding or reimbursement. The Complaint seeks treble damages and penalties under the FCA, as well as civil penalties under the Financial Institutions Reform, Recovery and Enforcement Act, for more than $1 billion in losses allegedly suffered by Fannie Mae and Freddie Mac. This case is related to a filing by a qui tam whistleblower, a former Countrywide employee, in February 2012. The U.S. Attorney’s Office, to date, also has brought five other FCA lawsuits against major lenders alleging reckless residential mortgage lending in connection with loans insured by the Federal Housing Administration.

    Settlement of some of these other lawsuits helped contribute to the DOJ’s significant recoveries for FY 2012. Earlier this year, DOJ settled for $202.3 million with Deutsche Bank AG and its subsidiary Mortgage IT Inc.; $158.3 million with CitiMortgage Inc.; and $132.8 million with Flagstar Bank.

    For questions on this Recent Development, please contact Larry Freedman.

    Health Care Industry

    As the Department of Justice (DOJ) also announced in a December 4, 2012, press release, its False Claims Act (FCA) recoveries relating to health care topped $3 billion for the first time in a single year. Much of that derived from settlements with pharmaceutical and medical device manufacturers. Those included the payment by GlaxoSmithKline LLC (GSK)of $1.5 billion to resolve allegations that GSK promoted certain drugs for off-label use and paid kickbacks to physicians to prescribe those and other drugs; made false and misleading statements regarding the drug Avandia’s safety; and reported inaccurate best prices, and underpaid rebates owed, under the Medicaid Drug Rebate Program. That $3 billion total also included a $441 million resolution by Merck, Sharp & Dohme in connection with its off-label and other promotion of its drug Vioxx. It did not include the $561 million FCA settlement with Abbott Laboratories (which was part of an overall $1.5 billion global resolution), which will be reflected in FY 2013 numbers.

    In our inaugural False Claims Act Focus, we analyzed the D.C. Circuit’s decision, and the Supreme Court’s denial of certiorari, in Blackstone Medical, Inc. v. U.S. ex rel. Hutcheson, 11-269 (December 5, 2011). The government in that qui tam action alleged that Blackstone Medical Inc., a subsidiary of Orthofix International NV, paid kickbacks to spinal surgeons to induce them to order (or to cause hospitals to order) Blackstone’s spinal devices. The parties settled this case in November 2012 for $30 million under the FCA.

    This was by no means the only medical device-related settlement this year. For example, in early December, Orthofix again entered into a settlement with the United States, this time for $7.6 million in criminal fines and $34 million under the civil FCA. The judge also sentenced the company to five years’ probation. In this case, the government had accused Orthofix of obstructing a federal audit of the company’s policies relating to certificates of medical necessity submitted to a Medicare contractor and submitting false claims to various federal health care programs in connection with bone-growth simulators. The government had alleged that Orthofix paid kickbacks to doctors in the form of “fitter fees” and “referral fees” to induce them to recommend the Orthofix products to their patients and to encourage them to purchase the products without informing them that they could rent the products for the three-six months that a patient typically uses the device.

    And just as we were finalizing this newsletter, the DOJ announced that on December 19, U.S. District Judge Sterling Johnson, Jr. accepted a guilty plea by Amgen Inc. (Amgen) for illegally introducing a misbranded drug (the anemia drug Aranesp) into interstate commerce. The plea is part of a global settlement with the United States in which Amgen has agreed to pay $762 million to resolve criminal and civil liability arising from its sale and promotion of certain drugs. Of this total, $150 million is represents criminal fines and penalties while the remaining $612 million represents the civil resolution. Although details regarding the civil settlement had not yet been released when we went to press, we anticipate that the $612 million will be apportioned between the United States and various State Medicaid programs. According to DOJ, the settlement represents the single largest criminal and civil False Claims Act settlement involving a biotechnology company in U.S. history.

    For questions on this Recent Development, please contact Laura Laemmle-Weidenfeld.

    Procurement Fraud

    The Department of Justice (DOJ) stated in its December 4 press release that it also recovered $427 million under the False Claims Act (FCA) for goods and services purchased by the federal government, of which $73 million related to the wars in Iraq and Afghanistan . The largest of those procurement settlements was the $199.5 million settlement with Oracle Corp. and Oracle USA (collectively “Oracle”) in what DOJ characterized as the biggest FCA settlement ever under a General Services Administration (GSA) contract. That settlement, announced on October 6, 2012, resolved allegations that the contractor knowingly failed to meet its contractual obligations to provide GSA with current, accurate and complete information about its commercial sales practices; made false statements to GSA about its sales practices and discounts; and failed to comply with the price reduction clause of its GSA contract. These practices, the United States alleged, resulted in the country ultimately paying significantly more than it should have for Oracle products.

    In another very recent case that the DOJ is less likely to tout publicly, however, it abruptly voluntarily withdrew from a case it was litigating actively against defense contractor KBR in federal district court in the District of Columbia. In the FCA suit filed by the government on April 1, 2010, DOJ initially sought $100 million in damages and penalties against KBR regarding billings for armed private security contractors under its logistics support contract with the Army, LOGCAP III. Earlier this year, the district court had dismissed KBR’s counterclaims against the United States and denied KBR’s motion to dismiss, endorsing the implied certification theory of claims submission advocated by the DOJ. Nevertheless, for reasons not announced publicly, DOJ voluntarily dismissed the case in November 2012.

    For questions on this Recent Development, please contact Laura Laemmle-Weidenfeld.


    War-Time Tolling of Statute of Limitations in Agriculture Case

    Using an obscure World War I and II-era statute, the Department of Justice (DOJ) recently opened a gaping hole in the False Claims Act’s (FCA) statute of limitations when it successfully argued, in a response to a defendant’s motion to dismiss, that the statute of limitations was suspended because the United States was at war. An August Southern District of Texas decision held that the War Statute of Limitations Act (WSLA), as amended by the War-time Enforcement of Fraud Act of 2008 (WEFA), 18 U.S.C. § 3287, suspended the statute of limitations applicable to a civil FCA claim. United States of America v. BNP Paribas SA et al., Civil Action No. H-11-3718, 2012 U.S. Dist. LEXIS 110293 (S.D. Tex., August 6, 2012), motion for interlocutory appeal denied, United States v. BNP Paribas SA, 2012 U.S. Dist. LEXIS 143890 (S.D. Tex., Oct. 4, 2012).

    Initially enacted as a temporary measure during the first two World Wars, the WSLA was codified in 1948 as permanent legislation. Prior to 2008, the statute suspended the running of a statute of limitations applicable to any offense involving fraud or attempted fraud against the United States while the country was “at war.” The suspension lasted for a period of three years after the termination of hostilities as proclaimed by the president or a Congressional resolution. In 2008, Congress amended the act to expand the suspension period to five years. The 2008 amendments also broadened the statute’s operation to times “[w]hen the United States is at war or Congress has enacted a specific authorization for the use of the Armed Forces, as described in section 5(b) of the War Powers Resolution (50 U.S.C. 1544(b)).” 18 U.S.C. § 3287.

    The defendants in Paribas moved to dismiss the case on statute of limitations grounds and argued in their motion that the United States was not “at war” in Iraq and Afghanistan when the conduct underlying the suit occurred, because the 2008 amendments had not been enacted. The Paribas court rejected the argument. It found that Congress’s post-September 11, 2001 Authorization for Use of Military Force, and the 2002 Authorization for the Use of Military Force Against Iraq, both provided a sufficient basis on which to conclude that the United States was “at war” as of the dates on which those authorizations were issued and that the war was ongoing when the conduct occurred.

    The government has argued in relatively few cases that the WSLA trumps the FCA’s statute of limitations. Thus, the government’s choice of the Paribas case to test the reach of the WSLA raises a number of interesting issues. The WSLA does not provide that the triggering fraud must relate to a military contract. In contrast, the statute’s suspension of limitations statutes applicable to contract actions only applies to war-related contracts. The alleged fraud in Paribas was not war-related, but instead arose in connection with the United States Department of Agriculture’s Supplier Credit Guarantee Program, which issues guarantees to United States commodity exporters. Did the amount at stake (allegedly $78 million before trebling) and a good fact pattern influence the government’s decision to raise the WSLA defense in Paribas? Or does Paribas signal a new turn in DOJ strategy for expanding FCA recoveries by raising the defense in a case unrelated to prosecution of a war? The decision in Paribas was a denial of defendants’ motion to dismiss, and the case is now back before the District Court as defendants’ motion for an interlocutory appeal similarly was denied. Accordingly, an appellate decision on the issue is not expected any time soon, and DOJ’s long-term intention with respect to the WSLA may take a similarly long time to reveal itself.

    Other issues complicate the degree to which we may see the WSLA used as a means to avoid limitations statutes in future FCA cases. Despite both the FCA’s and WSLA’s longevity, there remain significant open questions about interpretation of the interrelation of the two statutes. The Paribas defendants raised an argument that has not yet been settled, by claiming that the WSLA’s reference to an “offense” involving fraud limits the statute’s applicability to criminal cases only. Citing a handful of district court cases that came down on both sides of the argument, the Paribas court ultimately held that the WSLA did reach to civil FCA cases.

    Application of the WSLA to FCA civil cases begs the question of whether it is available to relators or limited to cases brought by the United States Government. In United States ex rel. Carter v. Halliburton Co., Civil Action 1:11cv602, 2011 U.S. Dist. LEXIS 145236 (E.D. Va., Dec. 12, 2011), the United States District Court for the Eastern District of Virginia dismissed an FCA suit against Halliburton alleging false billing for water purification services in Iraq. The court based the dismissal on the FCA’s first-to-file rule, which bars FCA cases having the same allegations and transactions as prior-filed actions. However, the court also proceeded to analyze Halliburton’s statute of limitations argument.

    The government did not intervene in Halliburton. In looking at the issue of whether a relator in a non-intervened-in case could use the WSLA to avoid a statute of limitation problems, the district dourt cited the relatively small number of cases examining the question of whether the WSLA applied to civil FCA cases. Only one, United States ex rel. McCans v. Armour & Co., 146 F. Supp. 546, 550-51 (D.D.C. 1956), was a relator-only case. It did not distinguish between actions in which the government intervened and actions in which it did not. The Halliburton decision held that the WSLA did not apply to relators, because to expand its scope would permit relators to sit on their claims for many years.

    Given that a small but growing group of district court cases now agree that the WSLA applies in the civil FCA context, and that only one case has addressed its applicability to non-intervened cases, we should expect relators to raise the statute to contest statute of limitations defenses while the issue is making its way to the appellate level. The government, in contrast, may be more circumspect in its reliance on the WSLA, notwithstanding its victory before the trial court in Paribas. Whether relator- or government-driven, the interplay between the WSLA and the FCA is an unfolding development well worth tracking.

    For questions on this Practice Analysis, please contact Mary Beth Bosco.

    Comparison of the Whistleblower Provisions under the False Claims Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

    Government enforcement activity driven by information provided by whistleblowers continues to increase, both under the False Claims Act (FCA) and also under the relatively new provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which was enacted as Section 21F of the Securities Exchange Act of 1934 (Dodd-Frank or Section 21F). This new law, enacted July 21, 2010, established a whistleblower program that requires the Securities Exchange Commission (SEC) to pay an award to eligible whistleblowers who voluntarily provide the SEC with original information about a violation of the federal securities laws that leads to the successful enforcement of a judicial or administrative action resulting in monetary sanctions exceeding $1 million. See 15 U.SC. §78u-6-7. On May 25, 2011, the SEC issued a final rule with an effective date of August 12, 2012, implementing the new Section 21F. Although the Dodd-Frank whistleblower provision was modeled in part on the FCA, the provisions of the two statutes differ in significant aspects.

    Scope of the Fraud: The FCA applies only to fraud allegations relating to government funds. Dodd-Frank imposes a broader scope, applying to all cases involving an alleged violation of federal securities laws over which either the SEC or CFTC has jurisdiction; government funding is unnecessary.

    Private Right of Action: Under the FCA, the whistleblower or “relator” files a case on behalf of the United States and, if the Department of Justice (DOJ) decides not to intervene in the litigation, has the right to litigate the case on the United States’ behalf unless DOJ dismisses the case. See 31 U.S.C. §3730(b)(1). Dodd-Frank provides no private right of action for an individual; rather, the action must be brought by the commission. See Section 21F(a)(1).

    Public Disclosure: Both statutes limit the whistleblower’s ability to bring an action where the allegations previously were disclosed, but Dodd-Frank is slightly more permissive. The FCA bars actions where the allegations were already publicly disclosed, unless the relator is an “original source.” See 31 U.S.C. §3730(e)(4). The definition of “original source” is “an individual who either (i) prior to a public disclosure under subsection (e)(4)(a), has voluntarily disclosed to the government the information on which allegations or transactions in a claim are based, or (2) who has knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions, and who has voluntarily provided the information to the government before filing an action under this section.”

    Under Dodd-Frank, the definition of “original information” requires the information to be derived from independent knowledge or analysis; to not be known to the SEC from another source, unless that whistleblower is an original source; and to be “not exclusively derived from an allegation made in a judicial or administrative hearing, in a governmental report, hearing, auditor investigation, or from the news media, unless the whistleblower is the source of the information.” 15 U.S.C. §78u-6(a)(3). The implementing regulation allows a whistleblower to use publicly disclosed information but conduct some “independent analysis” to reveal information that is not generally known or publicly available. See 17 C.F.R. §240.21F-4(b)(3).

    Anti-Retaliation Provisions: Both the FCA and Dodd-Frank prohibit retaliation against whistleblowers and give the certain whistleblowers a private right of action for retaliation. The FCA limits this protection to actions taken in furtherance of an FCA action or for efforts to stop an FCA violation and provides protection not only to employees but also to contractors and agents of the retaliating entity. 31 U.S.C. §3730(h). Dodd-Frank protects only actual employees, but it protects them more broadly not only in connection with actions taken in furtherance of initiating/assisting the SEC in action under Dodd-Frank, but also for making any disclosures, required or protected by law, over which the SEC has jurisdiction. 15 U.S.C. §78u-6(h)(1)(A); see also 17 C.F.R. §240.21F-2(b).

    Monetary Award: Both statutes entitle a whistleblower to receive a percentage of the United States’ recovery. Under the FCA, when the government intervenes in an action and subsequently recovers from the defendant, the relator generally shall receive between 15 and 25 percent of the proceeds. If the government elects not to intervene and the relator pursues the case by himself or herself, the relator receives between 25 and 30 percent of the proceeds. The court has some discretion to determine the appropriate amount within the ranges; for example, the court can reduce the relator’s share if the action was brought by a person who planned and initiated the violation. See 31 U.S.C. §3730(d).

    Under Dodd-Frank, eligible whistleblowers shall receive between 10 and 30 percent of the monetary sanctions that the SEC or other authorities are able to collect. See 17 C.F.R. §240.21F-5. The SEC has the discretion over determining the amount of the award, but the regulation lists factors that the SEC will consider, such as the significance of the information provided, the assistance provided by the whistleblower, whether the whistleblower participated in the internal compliance systems or instead interfered with internal compliance reporting, and the culpability of the whistleblower. See 17 C.F.R. §240.21F-6.

    Excluded Whistleblowers: Under the FCA, courts have grappled with who constitutes a “person” for purposes of bringing a civil action on behalf of the government under the qui tam provisions. The Eleventh, Tenth, Ninth, Sixth and Fifth Circuits have held that federal government employees can be relators under the FCA. See United States ex rel. Williams v. NEC Corp., 931 F.2d 1493, 1501-02 (11th Cir. 1991); United States ex rel. Holmes v. Consumer Ins. Grp., 318 F.3d 1199, 1208-12 (10th Cir. 2003); United States ex rel. Fine v. Chevron U.S.A., Inc., 72 F.3d 740, 743-44 & n.5 (9th Cir. 1995); United States ex rel. Burns v. A.D. Roe Co., 186 F.3d 717, 722 & n.5 (6th Cir. 1999); United States ex rel. Little v. Shell Exploration & Prod. Co., No. 11-20320, --- F.3d ----, 2012 WL 3089777, *1 (5th Cir. July 31, 2012). The First Circuit has held that some federal employees may not be qui tam relators. United States ex rel. LeBlanc v. Raytheon Co., 913 F.2d 17, 19-20 (1st Cir. 1990). Like Dodd-Frank, the FCA bars relators convicted of criminal conduct related to the violation of the FCA from receiving a share of the proceeds. See 31 U.S.C. §3730(d)(3).

    Dodd-Frank explicitly excludes certain whistleblowers from obtaining an award. This exclusion applies to members, officers or employees of an appropriate regulatory agency, DOJ, self-regulatory organization, Public Company Accounting Oversight Board, or a law enforcement organization; whistleblowers convicted of a crime related to the action; and whistleblowers who gain information through a required audit of financial statements. See Section 21F(c)(2).

    First-to-File Rule: Under the FCA, only the first relator or relators jointly to file a complaint can reap the rewards. Unlike the FCA, Dodd-Frank expressly allows more than one person to be the source of the same information and to be considered an original source. 17 C.F.R. §240.21F-4(b)(5).

    Confidentiality of Whistleblower’s Identity: Under the FCA, a relator must file in federal district court a civil complaint which, although filed under seal and kept under seal pending DOJ’s investigation and intervention decision, will eventually become a public document. See 31 U.S.C. §3730(b)(2).

    Under Dodd-Frank’s statutory and regulatory provisions, however, the SEC may not disclose information that could reasonably be expected to reveal the identity of the whistleblower, except under certain circumstances. In addition, a whistleblower may submit information to the SEC anonymously through an attorney, only needing to reveal his or her identity just before receiving payment from the SEC. See 17 C.F.R. §240.21F-7.

    Enforcement Statistics: For FY 2011, DOJ recoveries under the FCA topped $3 billion. The DOJ reported that $2.8 billion of that amount is related to qui tam filings under the FCA, and the United States awarded relators in those matters more than $530 million. In FY 2011, there were a record number of new qui tam filings (638) and the lowest number of non-qui tam new matters (agency initiated proceedings) since 2006.

    In FY 2011, the first full year after Dodd-Frank was enacted, the SEC brought 217 award-eligible Covered Actions—meaning 217 cases with settlements or judgments in excess of one million dollars. In fiscal year 2012, the SEC received 3,001 whistleblower tips; posted 143 Notices of Covered Action for enforcement judgments and orders issued during the applicable period that included the imposition of sanctions exceeding the statutory threshold of $1 million; and made its first award under the whistleblower program, at the maximum percentage of 30 percent.

    Conclusion: Based on the similarity between the whistleblower provisions of the two statutes, and the historical success of the FCA as a result of its whistleblower provisions, we can reasonably conclude that the whistleblower provisions of Dodd-Frank similarly will spurn a significant amount of enforcement activity at the SEC. Indeed, the enforcement numbers cited above indicate that such success already has begun. Whether the similar provisions of the two statutes will lead to an increase in general awareness of whistleblower actions and thus encourage exponential growth in whistleblower activity in both arenas remains to be seen but is, we predict, highly likely.

    For questions regarding this Practice Analysis, please contact Susan Baldwin Hendrix or Hannibal Kemerer.


    N.D. Miss: Defendants Take It All the Way to Trial and Win in a False Claims Act Case Premised on a Violation of the Anti-Kickback Statute

    On September 28, 2012, the Northern District of Mississippi issued judgment in favor of the defendants after a 14-day bench trial, finding that the government failed to carry its burden of proof that the defendants violated the Anti-Kickback Statute (AKS) or the False Claims Act (FCA). See United States ex rel. Jamison v. McKesson Corp., No. 2:08cv214-SA-JMV, 2012 WL 4499136 (N.D. Miss. Sept. 28, 2012).

    The Allegations

    The relator filed a qui tam action in December 2004 against approximately 450 nursing home- and DME-related defendants. The government intervened against the defendants affiliated with McKesson Corporation and Beverly Enterprises. At trial, the issues focused on whether the arrangements between the Beverly and McKesson affiliates constituted illegal remuneration under the AKS, and whether those alleged AKS violations then rendered the claims submitted to Medicare false under the FCA. The AKS imposes criminal liability on any person who “knowingly and willfully offers or pays any remuneration (including any kickback, bribe or rebate) directly or indirectly, overtly or covertly, in cash or in kind to any person to induce such person to refer an individual to a person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part under a Federal health care program.” 42 U.S.C. § 1320a-7b(b)(2008).

    Procedural History

    Various motions preceded the trial. As a result of those motions, the relator was dismissed after the court found that the claims were based on publicly disclosed information and the relator was not an original source. That dismissal was affirmed by the Fifth Circuit. The district court also dismissed claims based on alleged supplier standard violations, finding that the defendants’ good faith reliance on National Supplier Clearinghouse and Centers for Medicare and Medicaid Services’ determinations of compliance with the supplier standards precluded those claims from being “false.” However, despite the defendants’ motions to dismiss the allegations based on AKS violations, the district court found genuine disputes of material fact as to the defendants’ liability under the FCA for alleged AKS violations and those claims continued forward to trial.

    The Outcome after Trial

    Two transactions were at issue in the trial – (1) a 2003 agreement between Ceres Strategies Medical Services (CSMS), the in-house DME supplier organized within the Beverly nursing home conglomerate, and McKesson Medical-Surgical MediNet, Inc. (MediNet), a subsidiary of McKesson Corporation (McKesson), and (2) a 2006 agreement between CSMS and MediNet. Both agreements resulted from successful bids by Medi-Net in response to requests for proposal by CSMS, for DME contract billing services.

    Regarding the 2003 agreement, the Government alleged that CSMS “dangled” the prospect of McKesson receiving the Beverly nursing homes’ general medical supply contract in order to get the contract billing services below fair market value, below actual costs, or at a discounted price. Similarly, the Government argued that MediNet lowered its price on contract billing to below fair market value or actual costs, or offered a discount on those services. After hearing the evidence at trial, the district court found that, prior to MediNet submitting its final bid for contract billing in October 2002, CSMS had already awarded the general medical supply contract, including the provision of enteral supplies, to another entity, Gulf South. MediNet knew, at the latest, in January 2003, that it would not be awarded a contract that involved the distribution of enteral nutrition products. Therefore, according to the factual record, CSMS could not have “dangled” the general medical supply contract to get MediNet to lower its bid, as the Government argued. Ultimately, CSMS concluded that MediNet offered the best value for the price, even though it did not offer the lowest bid, due to factors such as MediNet’s experience as a contract biller, the number of patients serviced, the days sales outstanding, and a low rejection rate of submitted claims to Medicare.

    Regarding the 2006 transaction, the government argued that CSMS separated the enteral supply distribution from its general medical supply contract in order to induce MediNet to provide below fair market value, below actual cost, or discounted prices on its contract billing services proposal. Then, the government asserted that MediNet offered below fair market value, below actual cost, or discount pricing to induce CSMS to award McKesson the general medical supply or enteral supply business. After hearing the evidence at trial, the court found that, in September 2005, Gulf South abruptly informed CSMS that it would no longer service the general medical supply contract signed in October 2002. After this, CSMS issued an RFP and received five bids. CSMS awarded the general medical supply contract to MedLine on February 15, 2006. Enteral nutrition products had been included in Beverly’s general medical supply contract, but because of Gulf South’s sudden termination and concern over such an important part of the business being subject to one company, CSMS separated out enteral supply from the general medical supply contract. On February 27, 2006, CSMS added enteral supply distribution to the RFP for contract billing services and received two bids, one from MedLine and one from MediNet. CSMS ultimately awarded the contract for billing services and enteral supply distribution to MediNet in June 2006. Proof at trial showed that both MediNet and McKesson became aware that the general medical supply contract had been awarded to MedLine prior to their bidding on the contracts with CSMS.

    Evidence showed that between 2002 and 2008 when the contract between CSMS and MediNet was terminated, various profit analyses of the CSMC/MediNet contract had been performed by MediNet or McKesson, but there was no evidence that MediNet outright lost money on the contracts. The court found that MediNet’s use of an incremental cost model to project profitability was reasonable. Witnesses testified that they believed the CSMS contract would be profitable and the court found those witnesses credible when they testified that the prices submitted to CSMS were not below fair market value, below actual costs or discounted. Thus, the court concluded that the business negotiations were “fair, reasonable, and warranted under the facts of this case.”

    The government’s theory was that, because the defendants violated the AKS, all claims submitted to Medicare for payment were false under the FCA. The district court distinguished between legal falsity and factual falsity, noting that to establish legal falsity, the government had to prove the defendant knowingly falsely certified compliance with a statute or regulation with which compliance is a condition of payment. The district court further examined the categories of express false certification and implied false certification. Under the express false certification theory, the government conditions payment on a claimant’s explicit certification of compliance. Under the implied false certification theory, the representation of compliance is implied by submitting the claim to the government, rather than by making the representation in writing. The district court noted that the Fifth Circuit has not recognized the implied false certification theory and, on a couple of occasions, has refused to acknowledge that theory as supporting a viable cause of action. This goes against the majority of circuits that have now recognized the implied false certification theory, including the Second, Third, Sixth, Ninth, Tenth, Eleventh, and D.C. Circuits.[1] Interestingly, the First Circuit recently rejected using such categorical rules. See United States ex rel. Hutcheson v. Blackstone Med., Inc., 647 F.3d 377, 385-86 (1st Cir. 2011).

    The district court found an express certification in this case – the signed certification in CSMS’s applications for a DME supplier number that acknowledged that payment of a claim by Medicare was conditioned on the claim and underlying transaction complying with laws, regulations and program instructions, including the AKS. While an allegedly false certification of the AKS may render claims false, the district court found no violation of the AKS, and therefore it found no violation of the FCA.

    With respect to the alleged AKS violation, the district court found that the government failed to put on sufficient proof of remuneration offered or paid as required to establish an AKS violation. The government did not prove that MediNet offered its contract billing services below fair market value, below actual costs or at a discount, nor did it prove that CSMS intended to induce MediNet to offer a lower price by “dangling” the general medical supply contract in 2003 or separating the enteral supply from the general medical supply contract in 2006. While the government suggested that McKesson’s overarching goal was to work with Beverly nursing homes, the court stated: “Indeed, in order to violate the AKS, it is not enough to covet the business of another, there must actually be some bad intent to violate the law.” 2012 WL 4499136, at *13 (citing United States v. David, 132 F.3d 1092, 1094 (5th Cir. 1998)). The government also failed to show any quid pro quo in the dealings between CSMS and MediNet. The court also noted: “When analyzing alleged violations of the AKS, a key distinction is that the law ‘does not criminalize for services paid for by Medicare or Medicaid – it criminalizes knowing and willful acceptance of remuneration for such referrals.’” 2012 WL 4499136, at *12 (quoting United States v. Ctr. for Diagnostic Imaging, Inc., 787 F. Supp. 2d 1213, 1218 (W.D. Wash. 2011)).

    Important for defendants defending against a FCA case premised on an AKS violation, the court used fair market value as the “gauge” when assessing the remuneration element of an AKS violation. The district court noted that, because the government failed to define fair market value, show that MediNet’s bid was below fair market value, prove the actual costs were above MediNet’s bid, or show that MediNet’s bids were discounted, they had no reliable benchmark against which to determine whether Medi-Net provided “remuneration.” The district court looked to the definition of “fair market value” in Black’s Law Dictionary and those from other courts, namely the Northern District of Illinois in Klaczak v. Consolidated Medical Transport, 458 F. Supp. 2d 622, 678 (N.D. Ill. 2006). The district court also looked to testimony from a project officer for the National Supplier Clearinghouse opining that fair market value could be determined through competitive bidding. The Government failed to prove that the bidding process was not competitive or was tainted, such that it was not an arms-length transaction that would reveal the fair market value. The district court affirmatively stated that the 2003 and 2006 transactions were fair market value to the extent that the bidding process was at arms-length and other bidders offered to provide the same services for similar, or lower, prices.

    Finally, the district court found that the evidence at trial showed the defendants lacked the intent required under the AKS to commit a violation. While MediNet did engage in numerous profit analyses, sometimes inserting incorrect numbers, the government did not prove that the defendants did this intentionally or deliberately. The court concluded that the MediNet defendants thought the prices quoted in negotiations were reasonable, fair and profitable for MediNet. The CSMS defendants were not made aware of these profit analyses and did not know of MediNet’s actual cost of contract billing; therefore, they were not aware of any alleged kickback. The government thus failed to prove that the defendants had knowledge or acted willfully to be liable under the AKS.

    Notably, the district court analyzed the AKS claims under the “preponderance of the evidence” standard in civil cases, as opposed to the criminal standard of “beyond a reasonable doubt.” Because the government failed to meet the lower standard, it did not reach the question of which standard would be the proper one to consider for civil liability to attach under the AKS. But the court stated that “if this case were a closer call, the proper course would likely be to use criminal intent to prove a civil AKS violations[sic].” 2012 WL 4499136, at *12 n.7.

    For questions regarding this Case Analysis, please contact Susan Baldwin Hendrix.

    FCA Practice Tip

    Few items are more unwelcome to a company (or an individual) than a subpoena or Civil Investigative Demand seeking documents for a False Claims Act (FCA) investigation. The inclination of many is to try to minimize the significance of the event, by treating it as “just an administrative request” or some other normal course request that requires minimal attention, in the hopes that the investigation will just go away. Some investigations do go away, but in order to increase the likelihood of that result, it often pays significant dividends to bring in the legal experts to handle the subpoena/CID immediately and to assertively or even aggressively engage the agency that issued it. Not only can this approach lead to a significantly reduced document production demand, it also can provide an opportunity to learn more about the investigation early on and to respond by explaining to the government why they should decline to pursue the investigation further. This approach is particularly useful in cases in which the government has a misperception of the facts, the law, or both, that can be quickly dispelled. Even in more problematic situations, though, this approach can effectively circumscribe the scope of the government’s investigation. Thus the investment of resources early in the case often reduces the investment needed further down the road.

    [1] Mikes v. Straus, 274 F.3d 687, 699-700 (2d Cir. 2001); United States ex rel. Wilkins v. United Health Group, Inc., 659 F.3d 295, 306 (3d Cir. 2011); United States ex rel. Augustine v. Century Health Servs., Inc., 289 F.3d 409, 415 (6th Cir.2002); Ebeid ex rel. United States. v. Lungwitz, 616 F.3d 993, 996-98 (9th Cir. 2010); United States ex rel. Conner v. Salina Reg’l Health Ctr., Inc., 543 F.3d 1211, 1217-18 (10th Cir. 2008); McNutt ex rel. United States v. Haleyville Med. Supplies, Inc., 423 F.3d 1256, 1259 (11th Cir. 2005); United States v. Sci. Applications Int'l Corp., 626 F.3d 1257, 1266, 1269 (D.C. Cir. 2010).