Ethan P. Davis, Jamie Allyson Lang, Matthew V.H. Noller, King & Spalding LLP
This week’s top False Claims Act (FCA) developments include: a Ninth Circuit decision addressing the FCA’s materiality and scienter requirements; a federal district court decision interpreting the “good cause” standard for allowing the government to belatedly intervene in qui tam actions; and a new petition for certiorari asking the Supreme Court to decide the standard for analyzing scienter under the FCA.
1. Ninth Circuit reverses grant of summary judgment to defendant in qui tam action
Overview: On August 9, 2022, the Ninth Circuit in U.S. ex rel. Hartpence v. Kinetic Concepts, Inc., reversed a district court decision granting an FCA defendant summary judgment on materiality and scienter grounds. The Ninth Circuit held that the relator had introduced enough evidence for a jury to conclude that the defendant knowingly made materially false statements to the government.
The Decision:The relator claimed that the defendant, a medical device manufacturer, falsely certified to Medicare its compliance with criteria governing the use of its devices for treating wounds. Specifically, those criteria required the defendant to certify that its device caused “progressive wound healing” during each month for which the defendant sought payment. The relator alleged that the defendant fraudulently used a billing code certifying its compliance with this requirement during “stalled cycles,” i.e., periods when healing did not occur during one month but began again in the following month.
The district court granted the defendant’s motion for summary judgment, holding that the relator had not introduced sufficient evidence to create a triable issue over (1) whether the defendant’s false certifications were material to the government’s payment decisions and (2) whether the defendant acted with scienter. The Ninth Circuit reversed.
As to materiality, the Ninth Circuit held that a jury could conclude that the defendant’s use of a billing code certifying compliance with payment criteria would be material to the government’s payment decision. Under Medicare’s “coverage determination system” for the defendant’s device, the defendant’s use of the certification code usually triggered an automatic payment with no further review. In contrast, if the defendant had not used the certification code, it would have triggered a denial of the claim that could be reviewed in case-specific appeals. That two-track review system, the court held, showed that the government treated a provider’s use of the certification code as important to its payment decisions. The court acknowledged that if the government routinely paid for “stalled cycles” after case-specific review, that would disprove materiality. But the court held that the evidence, interpreted in the relator’s favor, did not establish a government practice of routinely paying stalled-cycle claims after case-specific review.
As to scienter, the Ninth Circuit held that the evidence would support a finding that the defendant deliberately used the certification code to avoid a costly appeal process that would sometimes result in the denial of its claim. The court also held that the jury could find that the defendant knew its certifications were false, based on evidence that the defendant’s employees raised concerns about its billing practices and on communications with Medicare contractors that rejected the defendant’s interpretation of the certification code.
Our Take:The FCA’s materiality and scienter requirements are important limitations on qui tam actions. Although specific to the factual circumstances of the case, the Ninth Circuit’s decision is notable for its interpretation and application of these requirements.
2. Tennessee federal district court interprets “good cause” standard for allowing late government intervention in qui tam actions
Overview: On August 2, a federal district court in Tennessee allowed the government to intervene in a qui tam action in which it had originally declined to intervene. In so doing, the court conducted a thorough analysis of the FCA’s “good cause” standard for such late interventions.
The Decision: When a private relator files a qui tam action, the FCA gives the government 60 days to decide whether to intervene and take over the case. Before the expiration of the deadline—which may be extended—the government must inform the court whether or not it is intervening. 31 U.S.C. § 3730(b)(4). If the government initially declines to intervene, the court may still allow the government “to intervene at a later date upon a showing of good cause.” Id. § 3730(c)(3).
In this case, after the relator filed his complaint, the government received more than two years’ worth of extensions beyond the 60-day statutory period. It used that time to investigate the relator’s allegations that the defendants had fraudulently billed Medicare for certain medical services provided by nurse practitioners. The government ultimately declined to intervene, though it continued to investigate the relator’s allegations. Almost two years later, the government moved for permission to partially intervene to pursue one of the relator’s theories of liability.
The district court adopted a three-part balancing test for “good cause” previously applied by a federal district court in New York. That test instructs the court to weigh three factors: “(1) whether intervention would be in the public interest, (2) whether new, probative evidence has been discovered, particularly as to the magnitude of the fraud, and (3) whether intervention would unfairly prejudice the relator or the defendant.” Applying this standard, the court granted the government’s motion to intervene.
The court first rejected the defendants’ argument that the discovery of “new and significant evidence” is a requirement for intervention, holding instead that it is merely a factor to be considered. In any event, the government represented that it had discovered new evidence after it declined to intervene, and the court found that it was not appropriate to second-guess that representation on a motion to intervene.
The court next found that the public interest—defined as “the Government’s reasons for late intervention plus any separate interests of the public favoring intervention”—supported intervention. The court held that the government’s generalized interest in enforcing the FCA could not establish good cause, but that the government had a case-specific interest based on its representation that it had discovered new evidence substantiating some of the relator’s claims. The court also held that the government had adequately justified its delay in seeking to intervene, which was explained by the government’s investigation, settlement negotiations with the defendants, and procedural developments in the case.
Finally, the court held that the public interest outweighed any prejudice to the parties. The relator supported intervention, so the court found no prejudice to the relator. The court also found no unfair prejudice to the defendants. The court held that the government’s delay did not unfairly prejudice defendants because the government had explained its delay and because any loss of evidence due to the delay would disadvantage the government as much as (if not more than) the defendants. The court also relied on the fact that the defendants would have to defend themselves against the same claims whether or not the government intervened because the relator would pursue those claims on his own.
Our Take: Few courts have analyzed the “good cause” standard for late intervention as extensively as the court here. The court’s discussion of that standard likely will inform future decisions addressing late intervention.
3. Relator files petition for certiorari seeking Supreme Court review of FCA scienter standard
Overview: On August 3, the relator in U.S. ex rel. Proctor v. Safeway, Inc., filed a petition for certiorari asking the Supreme Court to decide “[w]hether and when a defendant’s contemporaneous subjective understanding or beliefs about the lawfulness of its conduct are relevant to whether it ‘knowingly’ violated the False Claims Act.”
The Petition: As we discussed in a previous post, the Seventh Circuit in U.S. ex rel. Proctor v. Safeway, Inc. held that the relator had failed to prove that the defendant acted with scienter, and dismissed the relator’s claims. Applying the scienter test from the Supreme Court’s decision in Safeco Insurance Co. of America v. Burr, 551 U.S. 47 (2007), the Seventh Circuit held that the relator could not prove that the defendant “knowingly” violated the FCA where the defendant’s conduct was consistent with an objectively reasonable interpretation of federal law and no authoritative guidance from the government had “warned it away from that interpretation.”
The relator’s cert petition asks the Supreme Court to reverse the Seventh Circuit’s approach to scienter. The petition argues that the federal circuits have disagreed over how to interpret the FCA’s scienter requirement, and that the Seventh Circuit was wrong to hold that a defendant’s subjective beliefs are irrelevant to scienter as long as the defendant’s interpretation of federal law was objectively reasonable.
The Seventh Circuit’s decision in Proctor followed its previous decision in U.S. ex rel. Schutte v. SuperValu Inc., which had also applied Safeco to the FCA’s scienter requirement. The relator in Schuttehas also filed a petition for certiorari, which the Supreme Court will consider at its conference on September 28. In addition, the Fourth Circuit recently granted rehearing en banc of a 2-1 panel decision applying Safeco to the FCA.
Our Take:The Supreme Court now has two pending petitions asking it to decide the standard for analyzing scienter under the FCA. If the Supreme Court grants one or more of the petitions, it will set the stage for an important FCA decision next year.
In the News:
Jury issues $61 million FCA verdict against pharmaceutical company. On August 3, a jury found in favor of the relator in a qui tam action against Eli Lilly, finding that the defendant violated the FCA by omitting retroactive drug price increases from its Medicaid drug rebate calculations. Lilly indicated that it will seek to vacate the jury’s verdict, and the entry of judgment in its favor, through a post-trial motion.
Aircraft parts manufacturer agrees to pay $500,000 to settle FCA allegations. On August 5, the government announced a $500,000 settlement with an Iowa aircraft-parts manufacturer accused of violating the FCA in connection with a government contract for aircraft parts. The government alleged that the defendant failed to conduct contractually required tests on its products, then falsified test results in its claims for payment.
Pharmacy settles FCA claims related to illegal distribution of opioids. On August 3, the government announced that a New Jersey pharmacy had pleaded guilty to criminal charges that it had conspired to illegally distribute prescription opioids and pay kickbacks to healthcare providers. At the same time, the defendant settled a civil FCA action arising out of the same allegations. In the civil settlement, the defendant agreed to pay up to $50 million over the next five years if it generates future revenue.
Neurology practice agrees to pay $850,000 to resolve FCA allegations. On August 3, the government announced a $850,000 settlement with a New York neurology practice accused of improperly billing the government for medical services. The government alleged that the defendant (1) billed Medicare for services provided by unsupervised nurse practitioners as though they had been supervised by physicians and (2) billed Medicare for Botox even though the same Botox had already been paid for by other insurers.
Ethan P. Davis is a partner in the Special Matters and Government Investigations Practice Group in the firm’s San Francisco office, Jamie Allyson Lang is a partner in the Special Matters and Government Investigations Group in the firm’s Los Angeles office, and Matthew V.H. Noller is a senior associate in the Trial and Global Disputes Practice Group in the firm’s San Francisco office.