Jeffrey S. Bucholtz, Tamra Moore, Yelena Kotlarsky, King & Spalding LLP
This week’s top False Claims Act (FCA) developments include: a published Fourth Circuit decision affirming dismissal of an FCA suit on Rule 9(b) and materiality grounds; a district court decision dismissing several relators from an FCA suit based on the public disclosure bar, the first-to-file bar, and Fed. R. Civ. P. 10(b), which requires clarity in complaints; and three government settlements of FCA claims.
1. Fourth Circuit affirms dismissal of qui tam action on Rule 9(b) and materiality grounds
Overview: On June 29, in a precedential opinion, the Fourth Circuit affirmed a decision holding that a qui tam relator failed to adequately allege scienter, materiality, and the presentment of false claims in an action alleging that defendants upcoded to overbill Medicare and otherwise improperly billed Medicare.
The Decision: The relator alleged that the defendants – doctors, medical companies, and an accounting firm – engaged in a fraudulent medical upcoding scheme and submitted false claims to Medicare following the dissolution of one company’s corporate charter and the revocation of its certificate of corporate authorization.
The relator, a patient at a medical center owned by the defendants, claimed that the defendants directed doctors to sign off on medical charts for patients even though the patients were seen not by the doctors but by mid-level providers (such as a nurse practitioner). The relator alleged that the defendants engaged in this upcoding scheme to receive a higher reimbursement rate than the rate that they would have received had they billed for a visit by a mid-level provider.
The relator further alleged that the clinical care staffing and management company submitted claims to Medicare for reimbursement after one company had dissolved and had its certificate of authorization to operate as a medical corporation revoked, without reporting the dissolution and revocation to CMS. According to the relator, those claims were knowingly false because the defendants knew that it was unlawful to provide medical care without a valid corporate charter and certification of authorization.
The district court granted the defendants’ motion to dismiss, holding that the relator failed to allege scienter, materiality, and the presentment of false claims. The Fourth Circuit affirmed, in a decision that addresses multiple recurring issues under the FCA.
First, applying Rule 9(b)’s requirement to plead the circumstances constituting fraud with particularity, the Fourth Circuit held that the relator’s allegations of upcoding were insufficient. The relator had alleged that the company directed doctors to sign medical charts for a fraudulent purpose but had not alleged that defendants actually presented false claims to the government as required to state a claim under the FCA. We have previously reported on the circuit split that exists concerning how Rule 9(b) applies in FCA cases and the three pending petitions asking the Supreme Court to resolve that split. This decision further confirms that the Fourth Circuit is on the side requiring particularized allegations regarding actual false claims and holding that allegations of an underlying scheme do not suffice.
Second, the Fourth Circuit held that the relator’s claims based on the corporate dissolution and certificate of authorization revocation failed because the relator had not adequately alleged materiality. The court emphasized that the Supreme Court’s Escobar decision requires looking at whether the government consistently denies payment based on a given type of violation. Because that inquiry turns on what happens in the real world, it was insufficient that the relator alleged that continued compliance with state licensure requirements was a “condition of payment” under Medicare such that CMS would have had authority to deny payment. And the court held that the relator had failed to allege facts showing that CMS consistently denies payment based on similar alleged violations. In particular, the Fourth Circuit characterized the defendants’ alleged failures as “bureaucratic” and noted that the relator did not allege that they “impacted or influenced the medical services provided.”
Our Take: This decision reinforces the importance of robust enforcement of Rule 9(b) to require allegations about actual false claims, as well as robust application of the Supreme Court’s Escobar decision at the pleading stage to require sufficient allegations concerning materiality. On the Rule 9(b) issue, the Supreme Court may provide greater clarity if it grants certiorari, in one or more of the pending cases noted above, after the Court returns from its summer recess. On the materiality issue, Escobar explicitly instructs that its interpretation of the FCA’s materiality requirement is to be applied at the pleading stage, but some courts have allowed qui tam actions to survive motions to dismiss based on thin allegations of materiality. The Fourth Circuit’s decision is a welcome reminder that whether a complaint satisfiesEscobar’s materiality standard can and should be decided at the pleading stage.
2. N.D. Cal. dismisses claims from FCA suit based on public disclosure bar, first-to-file bar, and rule of civil procedure that requires clarity in complaints
Overview: On June 28, the U.S. District Court for the Northern District of California dismissed two complaints filed by two groups of relators alleging FCA violations against contractors that the government hired to clean up radioactive contamination in the soil at a naval shipyard. The court dismissed one complaint based on the first-to-file bar and the other for failure to satisfy Fed. R. Civ. P. 10(b), which requires clarity in complaints. The court also barred two other relators in the same consolidated FCA case from asserting certain claims that had previously been disclosed in the news.
The Decision: Several groups of relators filed separate FCA suits alleging that the defendant contractors engaged in fraud in connection with contracts to remediate radiation contamination at Hunters Point Naval Shipyard in San Francisco. The relators alleged that the defendants falsified soil sample data and other records to demonstrate that they had fulfilled their remediation obligations under the contract.
The court dismissed the complaints of two groups of relators and barred two others from asserting certain allegations. The court dismissed the first of the consolidated FCA claims as barred by the statute’s first-to-file rule, which provides that “when a person brings an action under [the FCA], no person other than the Government may intervene or bring a related action based on the facts underlying the pending action.” 31 U.S.C. § 3730(b)(5). The relators argued that the first-to-file bar did not apply because their claims described fraudulent conduct related to different parcels remediated by the defendants not implicated by the first FCA suit. The district court disagreed with the relators, concluding that they had not identified two independent, distinct frauds.
The court dismissed the second FCA suit based on Fed. R. Civ. P. 10(b), which requires a “practicable” organization of a complaint by numbered paragraphs and other measures to “promote clarity.” Although this rule rarely comes into play, the relators’ complaint consisted entirely of substantive paragraphs, such that it was impossible to tell how many claims they intended to prosecute. The court made clear that the relators could file an amended complaint to fix this problem.
The court also barred two groups of relators from asserting certain allegations in their complaint based on the public disclosure bar, which provides for dismissal of qui tam claims based on conduct that was previously publicly disclosed. 31 U.S.C. § 3730(e)(4)(A). The court held that the bar applied to claims that were substantially similar to conduct described in three local media reports. Further, the court rejected the relators’ allegations that they were original sources of those reports, concluding that those allegations were conclusory and implausible.
Our Take: This decision demonstrates that the FCA’s relator-specific rules like the public disclosure bar and the first-to-file bar can be potent defenses, especially where multiple relators have filed suit.
In the News:
Health system pays $1.75 million to settle pandemic-related claims. On June 30, DOJ announced a $1.75 million settlement with MorseLife Health System Inc., a nursing home health system, for alleged FCA violations in connection with COVID-19 vaccination clinics under the Pharmacy Partnership for Long-Term Care Program, which was designed to prioritize the vaccination of residents and staff at long-term care facilities when doses of COVID-19 vaccine were in limited supply. The government alleged that MorseLife invited and facilitated the vaccination of hundreds of ineligible people at its facility and then submitted claims for payment to the government in which the company described the ineligible individuals as eligible “staff” and “volunteers.”
Airline pays $10.5 million to resolve claims of falsely reported package delivery times. On June 30, DOJ announced a $10.5 million settlement with Delta Airlines for alleged FCA violations in connection with reports to the government about the transfer of U.S. mail to foreign locations. Specifically, the government alleged that Delta falsely reported to the United States Postal Service the time that mail was delivered and the facts regarding Delta’s transfer of possession of the mail at various locations.
Fifteen Texas doctors pay $2.8 million to settle kickback allegations. On June 28, DOJ announced a $2.8 million settlement with fifteen Texas doctors to resolve FCA allegations that the doctors received thousands of dollars in remuneration from nine management service organizations in exchange for ordering laboratory tests from several diagnostic centers. As part of the settlement, the physicians agreed to cooperate in DOJ’s investigation of other parties.
Jeff Bucholtz is a partner on the Appellate, Constitutional and Administrative Law team in the Washington, D.C. office of King & Spalding LLP, Tamra Moore is a partner in the Special Matters and Government Investigations Practice Group in the Washington, D.C. office of King & Spalding LLP, and Yelena Kotlarsky is a Senior Associate in the Special Matters and Government Investigations Practice Group in the firm’s New York office.