Jeffrey S. Bucholtz, Ethan P. Davis, Jamie Lang, Amy Boring, King & Spalding LLP
This biweekly blog will explore top False Claims Act (FCA) developments. We’ll cover the waterfront, including significant resolutions with DOJ, important judicial decisions, speeches by government officials, and much more. Most of our posts will be high level and designed for a quick read, but we’ll occasionally publish in-depth pieces on specific topics.
In this inaugural edition, you can read about a Fifth Circuit decision addressing DOJ’s authority to dismiss qui tam FCA suits brought by private relators; an uptick in enforcement against skilled nursing facilities; a D.C. Circuit decision involving fraudulent inducement liability; and an interesting concurring opinion from D.C. Circuit Judge Neomi Rao.
1. Fifth Circuit Affirms DOJ Dismissal
Overview: Since the Granston memo in January 2018, DOJ has started exercising its authority to dismiss qui tam FCA suits with somewhat greater frequency. There is now a three-way circuit split regarding whether and to what extent DOJ must explain itself before DOJ’s motion to dismiss a case may be granted. The Fifth Circuit recently allowed DOJ to dismiss two qui tam suits but turned down the government’s invitation to adopt the standard most deferential to DOJ.
Current Circuit Split: The D.C. Circuit’s Swift precedent holds that the government has a virtually unfettered right to dismissal of qui tam actions and that little, if any, judicial review of DOJ’s motion to dismiss is permitted. The Ninth and Tenth Circuits have held that the government must identify a valid governmental purpose and a rational relationship between the purpose and the dismissal—an approach often called the Sequoia Orange standard. Most recently, the Seventh Circuit articulated a new standard that emphasizes the need to give the relator notice and an opportunity to be heard.
The Opinion: On July 7, the Fifth Circuit affirmed the dismissal of two qui tam suits accusing Bayer Corp. and Eli Lilly & Co. Inc. of participating in a kickback scheme by providing free patient-education services to providers in exchange for prescribing their products. The Fifth Circuit acknowledged that there is a “deeply entrenched circuit split” but said it did not need to determine the exact bounds of DOJ’s dismissal authority because the relator had an opportunity for an evidentiary hearing and the dismissal was proper even if the “more burdensome” Sequoia Orange test applied.
Our Take: It is unfortunate that the Fifth Circuit did not take the opportunity to follow the D.C. Circuit’s standard for DOJ dismissals, which the U.S. Chamber, as amicus in the Fifth Circuit case, argued appropriately respects the Constitution’s exclusive assignment to the Executive Branch of the responsibility to “take Care that the Laws be faithfully executed.” Nonetheless, the court’s decision helpfully continues the pattern of courts upholding DOJ’s dismissal authority.
2. DOJ Increases FCA Enforcement Efforts against Skilled Nursing Facilities as Pandemic Recedes
Overview: In February, Brian Boynton, the Acting Assistant Attorney General in charge of the DOJ Civil Division, vowed to “actively and aggressively” use the FCA to combat fraud involving skilled nursing facilities (SNFs). Since then, DOJ has announced at least three FCA settlements involving SNFs and intervened in another SNF case.
DOJ Settlements: On July 2, DOJ announced that Select Medical Corporation agreed to a $8.4 million settlement to resolve allegations that it caused 12 SNFs to submit claims to Medicare for services that were not “reasonable, necessary or skilled.” This follows DOJ’s May 21 announcement of a similar settlement with SavaSeniorCare LLC for $11.2 million, as well as a June 29 announcement of a settlement with California’s second largest SNF operator for $450,000 to resolve fraudulent billing allegations.
DOJ Intervenes: In addition to these settlements, DOJ on June 14 intervened in a qui tam action against Paksn Inc., one of its owners, and seven SNFs owned and operated by Paksn in the Central District of California. DOJ alleges that the defendants used medical directorship agreements as vehicles for prohibited referral payments. The qui tam action was initially filed in 2015 by a former Paksn executive.
Our Take:There appears to be an uptick in DOJ enforcement activity against SNFs. This may signal the end of what appeared to be an unofficial grace period provided by DOJ to SNFs during the COVID-19 pandemic. As the pandemic continues to recede, this type of enforcement is likely to accelerate.
3. D.C. Circuit: But-for Causation Necessary for Fraudulent Inducement Claims
Overview: Under the “fraudulent inducement” theory of FCA liability, a defendant who tricks the government into a contract is liable for every claim submitted under that contract. In a recent case, a former IBM employee named Paul Cimino alleged that IBM fabricated audit findings to fraudulently induce the IRS to enter into a new contract for IBM’s services. DOJ declined to intervene. On appeal, the key question was whether the relator had to show that IBM’s alleged misrepresentations were a “but-for” cause of the IRS agreeing to the contract. Cimino argued that only materiality—and not actual but-for causation—is required. On that view, even if the IRS would have entered into the contract anyway regardless of the alleged fraud, FCA liability would exist if the fraud was capable of inducing the IRS to enter into the contract. In other words, IBM would be liable for fraudulent inducement even if the alleged fraud did not induce anything. The court squarely rejected this attempt to substitute materiality for causation and held that “but-for causation is necessary to establish a fraudulent inducement claim under the FCA.”
Our Take: It should go without saying that fraudulent-inducement FCA liability requires inducement, but there are few cases that clearly articulate that common-sense point. It is welcome news that the D.C. Circuit now has squarely rejected a relator’s attempt to water down fraudulent inducement by substituting materiality for causation.
4. Separation of Powers and Fraudulent Inducement Under the FCA
Overview: Judge Neomi Rao’s concurring opinion in Cimino has the potential to reignite separation of powers challenges to the FCA. Judge Rao invoked those challenges at the same time that she questioned whether the FCA creates a cause of action at all for fraudulent contract inducement. Courts have generally assumed that the FCA imposes liability where a company submits truthful invoices for work actually done—in other words, where there’s nothing false about the claims themselves—but won the contract through fraudulent inducement. Judge Rao questions whether such truthful invoices can fairly be deemed “false claims” and links that concern to the separation of powers issues at play when private citizens bring qui tam claims on behalf of the government. In Judge Rao’s view, “[f]raudulent inducement under the FCA thus may reflect a judicial expansion of a statutory cause of action layered on top of congressional expansion of prosecution outside the executive branch.”
Our Take: Separation-of-powers challenges to the FCA have been largely dormant since the mid-2000s, but Judge Rao’s concurring opinion may give them new life and new form, as defendants consider whether separation-of-powers challenges could be used to challenge particular interpretations of the FCA, in addition to the FCA as a whole.
Also in the News
Medical Device Companies Settle FCA Allegations. On July 8, DOJ announced a $38.75 million settlement with medical device manufacturers Alere Inc. and Alere San Diego Inc., to resolve allegations that the entities had billed and caused others to bill Medicare for defective blood coagulation monitors.
Health System Settles FCA Allegations. In early July, Akron General Health System agreed to pay $21.25 million to resolve allegations that it violated the Anti-Kickback Statute, the Stark Law, and the False Claims Act by paying physician groups compensation above fair market value in exchange for referrals. The settlement underscores DOJ’s continued focus on using the kickback statute, and specifically physician arrangements, to drive enforcement under the False Claims Act.
Jeff Bucholtz is a partner on the Appellate, Constitutional and Administrative Law team in the Washington, D.C. office of King & Spalding LLP. Ethan Davis is a partner in the Special Matters and Government Investigations Practice Group in the San Francisco office of King & Spalding LLP. Jamie Lang is Counsel in the Special Matters and Government Investigations Practice Group in the firm’s Los Angeles office, and Amy Boring is a Senior Associate in the Special Matters and Government Investigations Practice Group in the firm’s Atlanta office.