Jeffrey S. Bucholtz, Tamra Moore, Matthew V.H. Noller, King & Spalding LLP
This week’s report on top False Claims Act (FCA) developments includes: a Fourth Circuit decision holding that a defendant cannot “knowingly” commit fraud under the FCA if it acts consistent with an objectively reasonable reading of federal law; a First Circuit decision adopting a deferential standard for reviewing government dismissals of qui tam FCA actions; a Sixth Circuit decision reversing a denial of attorneys’ fees to relators; and an FCA settlement involving allegations of illegal kickbacks.
1. Fourth Circuit affirms dismissal of FCA suit based on application of the Safeco scienter test
Overview: On January 25, the Fourth Circuit affirmed the dismissal of United States ex rel. Sheldon v. Allergan Sales, LLC., holding that the relator had failed to plead scienter as required under the FCA. Applying the Supreme Court’s scienter analysis in Safeco Insurance Co. of America v. Burr, 551 U.S. 47 (2007), the Fourth Circuit held that the relator failed to allege that the defendant “knowingly” violated the FCA where the defendant’s conduct was consistent with an objectively reasonable reading of federal law and no authoritative guidance from the government had warned the defendant away from that reading. In so holding, the Fourth Circuit joined five other circuits in applying Safeco’s scienter test to FCA claims.
The relator, a former employee of Forest Laboratories, alleged that Forest violated the FCA by submitting false “best price” reports to the Centers for Medicare & Medicaid Services (CMS) and thus underpaying Medicaid rebates. The complaint alleged that Forest reported a fraudulently high “best price” by not aggregating the distinct discounts that it provided to customers at different levels of the distribution chain.
The district court granted Forest’s motion to dismiss, holding that the relator failed to plead facts showing that Forest “knowingly” overstated its best price. A divided panel of the Fourth Circuit affirmed. It held that the Supreme Court’s decision in Safeco, which interpreted the Fair Credit Reporting Act’s scienter requirement, applies “with equal force” to the FCA’s scienter requirement. The Safeco decision established a two-part test to assess scienter: (1) did the defendant act consistent with an “objectively reasonable” interpretation of the underlying statute; and (2) did “authoritative guidance” warn the defendant away from that interpretation?
Applying this test to the relator’s FCA claim, the Fourth Circuit agreed with Forest that “the plain language [of the Medicaid rebate statute] conveys that Forest was not required to aggregate discounts given to separate customers.” The court thus reasoned that Forest’s price reporting approach was not only objectively reasonable but reflected “the best reading of the text.”
Turning to the second prong of the Safeco test, the court held that CMS never warned Forest away from its interpretation because CMS “never clearly stated that discount aggregation to different entities was required.” To the contrary, manufacturers had asked CMS to clarify its view on that precise question, and CMS had refused to do so. Under these circumstances, the court concluded, Forest did not have “sufficient warning” that its approach to calculating “best price” would expose it to FCA liability. Judge Wynn, in dissent, believed that the Safeco test should not apply in FCA actions and that the relator had adequately pleaded scienter.
Our Take: This is an important decision that helps ensure that defendants will not be subjected to FCA liability without receiving fair notice that their conduct is unlawful – a particularly important principle for the many companies that are subject to complex and ambiguous statutes and regulations.
2. First Circuit adopts deferential standard to assess government motions to dismiss relators’ qui tam actions
Overview: On January 21, the First Circuit addressed the meaning of the FCA provision that entitles the relator to a hearing when the government moves to dismiss the relator’s suit. InBorzilleri v. Bayer Healthcare Pharmaceuticals, Inc., the First Circuit held that a district court should grant the government’s motion to dismiss unless the relator, having failed to convince the government to withdraw its motion, demonstrates that the government’s decision to dismiss the relator’s suit violates the Constitution or perpetrates a fraud on the court.
The Decision: When a relator brings a private FCA action, the government “may dismiss the action notwithstanding the objections of the [relator] 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). As the First Circuit observed in its decision, courts disagree regarding the burden, if any, that this statutory language places on the government to justify its dismissal. The Ninth Circuit has held that the government must identify “a valid government purpose” and show “a rational relation between dismissal and accomplishment of the purpose.” In contrast, the D.C. Circuit has held that the government has an essentially “unfettered right to dismiss an action.”
In this case, the First Circuit adopted a standard very similar to the D.C. Circuit’s. Although the First Circuit did not grant the government an “unfettered” right to dismiss, it rejected the Ninth Circuit’s holding that the government bears “the burden of justifying its motion to dismiss.” The First Circuit also rejected the approach of the Third Circuit and Seventh Circuit, which apply Federal Rule of Civil Procedure 41 to government motions to dismiss FCA actions. Instead, the First Circuit held that the government need only “provide its reasons for seeking dismissal so that the relator can attempt to convince the government to withdraw its motion.” The district court then must grant dismissal “unless the relator can show that, in seeking dismissal, the government is transgressing constitutional limitations or perpetrating a fraud on the court.”
Applying this standard, the First Circuit affirmed the district court’s grant of the government’s motion to dismiss because the relator had not shown a constitutional violation or fraud on the court.
Our Take: This decision adopts a highly deferential standard for reviewing government dismissals of FCA actions, making it difficult for relators in the First Circuit to succeed in challenging government motions to dismiss. The government historically has exercised its dismissal authority only in rare cases. As courts clarify the government’s broad authority to dismiss qui tam actions brought in its name and on its behalf, the government may be more willing to exercise its dismissal authority in the future.
3. Sixth Circuit holds that the FCA’s “first-to-file” and “public-disclosure” rules do not preclude relators’ request for attorneys’ fees following the parties’ global settlement
Overview: In a January 25 decision in United States ex rel. Bryant v. Community Health Systems, Inc., the Sixth Circuit reversed the district court’s denial of the relators’ attorneys’ fees request. The Sixth Circuit held that the FCA’s “first-to-file” and “public disclosure” provisions do not bar relators’ entitlement to fees in a case in which the government intervened in the relators’ cases, collaborated with the relators, and then encouraged the relators to share the proceeds of the global settlement reached by the parties.
The Decision: This consolidated appeal involves the relators’ request for attorneys’ fees under the FCA following a global settlement reached among the defendant, the relators, and the government to resolve several qui tam actions brought by different relators. The settlement expressly reserved the relators’ claim for attorneys’ fees and the defendant’s right to oppose the same. In its decision reversing the district court’s denial of attorneys’ fees, the Sixth Circuit rejected the defendant’s argument that the FCA’s “first-to-file” and “public disclosure” bars defeated the relators’ entitlement to attorneys’ fees. According to the Sixth Circuit, there is “no reason to apply . . . [these] rules” given that the parties reached a settlement agreement only after a multi-year, “collaborative effort” in which relators’ counsel billed 7,000 hours working with the government in its prosecution of the underlying FCA claims.
Our Take:This decision underscores the difficulty of avoiding payment of the relator’s attorneys’ fees after settling a qui tam action. If a defendant does not want to pay the relator’s attorneys’ fees, it may wish to litigate its defenses to the relator’s claims before agreeing to settle with the government. Or the defendant may wish to specifically address fees in the settlement agreement.
In the News:
Seven Texas doctors and a hospital CEO agree to pay over $1.1 million to settle kickback allegations - On January 20, the United States Attorney’s Office for the Eastern District of Texas announced a $1.1 million settlement with seven Texas doctors and a hospital executive. The settlement resolves allegations that the defendants received illegal kickbacks, disguised as investment returns, for referring patients to testing laboratories. This case is another example of how DOJ uses the Anti-Kickback Statute in conjunction with the FCA to pursue healthcare providers who allegedly receive kickbacks, as well as companies that allegedly pay kickbacks.
Jeffrey S. Bucholtz is a partner in the Trial and Global Disputes Practice Group in the firm’s Washington, D.C. office, Tamra Moore is a partner in the Healthcare Practice Group in the firm’s Washington, D.C. 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.