Articles Posted in False Claims Act

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MelaleucaAlternifoliaEssOil.jpgThe Federal Rules of Civil Procedure (FRCP) require any party claiming fraud to provide specific allegations in their complaint. This includes lawsuits brought under the False Claims Act (FCA), which by definition include allegations of fraud. Last year, the Third Circuit Court of Appeals considered the question of how specific a plaintiff’s allegations must be in a qui tam FCA lawsuit. Foglia v. Renal Ventures Mgt., LLC, 754 F.3d 153 (3rd Cir. 2014). The court held that the plaintiff met the FRCP’s requirement of “particularity.”

The plaintiff is a registered nurse who worked for the defendant, a dialysis care services company, from March 2007 until his termination in November 2008. He filed a qui tam FCA complaint in April 2009. After the United States declined to intervene, the plaintiff filed an amended complaint, followed by a second amended complaint. He alleged that the defendant falsely certified compliance with state quality-of-care regulations, submitted fraudulent reimbursement claims for the drug Zemplar, and reused Zemplar vials intended for single use. He also claimed retaliation, although that claim was not addressed by the appellate court.

The defendant moved the district court to dismiss the second amended complaint under FRCP 12(b)(6), arguing that the plaintiff had not met FRCP 9(b)‘s heightened pleading requirements for fraud claims. The district court granted the motion and dismissed the lawsuit with prejudice. It found that the plaintiff had failed to provide a “representative sample” of false claims submitted by the defendant. Foglia, 754 F.3d at 155. The plaintiff appealed the dismissal of the claim related to overbilling for Zemplar.
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files-313733_640.jpgIn order to bring a whistleblower claim under the False Claims Act (FCA), someone has to take the risk of reporting information they have obtained from their employer regarding fraud. The law protects people from various forms of retaliation for making a report, but it is still a difficult process that takes courage and resolve. In many cases, the act of reporting may put a whistleblower at risk of a counterclaim by a qui tam defendant for breaching a confidentiality agreement or violating their trade secret rights. Businesses need the ability to maintain some amount of confidentiality and protect their trade secrets, but what happens when that interest conflicts with an FCA claim? A Pennsylvania federal court recently considered a qui tam plaintiff’s argument that counterclaims against her went against public policy. United States, ex rel. Notofransesco v. Surgical Monitoring Assoc. Inc., et al, No. 09-1703, memorandum (E.D. Pa., Dec. 12, 2014). The court discussed the limits on a qui tam defendant’s ability to counterclaim against a whistleblower, but it found that it was too early in this particular proceeding to make a ruling on the issue.

The plaintiff worked for the defendant, a healthcare services company, from 2006 to 2008, first as a Billing and Collections Specialist and later as a Billing Manager. In June 2008, she signed a written confidentiality agreement that described a wide range of materials deemed confidential. The defendant claimed that the plaintiff removed confidential information from its premises, in violation of the confidentiality agreement, at some point during the time it employed her.

In April 2009, the plaintiff filed a qui tam complaint, under seal, alleging that the defendant had submitted false claims for federal healthcare reimbursements. The federal government declined to intervene in March 2014, almost five years after the plaintiff filed the lawsuit. She filed an amended complaint the following month, which was no longer under seal. The defendant filed an amended answer in October, along with counterclaims for breach of contract, breach of implied contract, and promissory estoppel. It argued that the plaintiff violated the confidentiality agreement by filing the amended complaint and placing confidential information into the public record.
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clipphotosct.pngDavid Stone, of Stone & Magnanini LLP, argued an important civil war fraud False Claims Act case on behalf of whistleblowers in the United States Supreme Court on January 13, 2015. The Solicitor General joined the argument with Stone & Magnanini and supported ruling in favor of the whistleblower. Kellogg Brown & Root Services, Inc. v. United States, ex rel. Carter, No. 12-1497, is the first case in which the Supreme Court will consider how the first-to-file bar should be applied. It is also the first case to consider whether civil FCA actions are tolled during wartime.

The False Claims Act may appear to be relatively simple as it is only a few pages long, but in practice the law is extremely complex. When Congress passed (and subsequently updated) the False Claims Act, the goal was to strike a balance between encouraging whistleblowers with knowledge of fraud to come forward and partner with the government, while discouraging so-called “parasitic” lawsuits which added nothing.
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whitedialysis3.jpgDaVita Kidney Care is known for two things: first, for it’s “Core Values” which include aspirational terms such as “Service…Excellence…Integrity…[and] Accountability,” and second, for engaging in a sophisticated kickback scheme designed to pay doctors for patient referrals. As healthcare has become an increasingly lucrative market, certain types of patients and illnesses are more valuable than others because they allow providers to freely bill insurance companies and Medicare/Medicaid for treatment. It turns out that patients suffering from kidney disease or failure provide such an opportunity, because they require frequent rounds of kidney dialysis.

DaVita recognized this business opportunity, and for nearly 10 years paid doctors for referring patients to their dialysis clinics. First, DaVita would search out doctors or practices who treated large number of patients with renal disease, preferring health care providers who were young or in debt. Next, DaVita would make an impossibly good offer for the doctors to either buy a share of a DaVita dialysis clinic, or else DaVita would offer to buy a share of an existing clinic. Once a deal had been struck, DaVita would then sign non-compete agreements with the doctors, ensuring that all of their patients would be referred to their clinics. This guaranteed DaVita easy profits. Unfortunately, this kickback scheme was also highly illegal.
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red 2014 desk calendar dimensionalcanstock17590196.jpgAs a new year begins, it’s worth taking a look back at 2014 to see how the False Claims Act (FCA) has performed. Thanks to the brave actions of whistleblowers, the Justice Department was able to recover nearly $6 billion this year from FCA cases. This amazing sum was due largely to settlements with Bank of America and JPMorgan Chase, who were finally held accountable for selling mortgage-backed securities designed to blow up in investors’ faces–one of the primary causes of the 2008 financial crisis. Each action resulted in settlements of $17 billion and $13 billion, respectively, which never would have been recovered without the aid of whistleblowers capable of providing the Department of Justice with insider knowledge of the fraud.

While mortgage and housing fraud represented lion’s share of settlements this year at $3.1 billion, the Department of Justice also recovered $2.3 billion in health care fraud, which has remained a persistent issue over the past decade. Despite aggressive efforts to combat Medicaid and Medicare fraud, experts believe that approximately $6 billion in fraud and overcharging occurs annually. However, as the False Claims Act has become more effective at prosecuting such illegal practices, more whistleblowers have stepped forward, leading to record numbers of qui tam lawsuits, with approximately 700 having been filed this year alone.
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170px-Seal_of_New_Jersey_svg.pngOn December 11, 2014, New Jersey State Senator Nicholas P. Scutari introduced S. 2645, a bill that would make the provisions of the New Jersey False Claims Act, N.J.S.A. 2A:32C-1 to -15 and N.J.S.A. 2A:32C-17 to -18 (“NJ FCA” or the “Act”), retroactive under certain circumstances (available at http://www.njleg.state.nj.us/). Senator Scutari introduced the bill to amend the NJ FCA in response to the New Jersey Superior Court, Appellate Division’s October 2011 opinion finding that the NJ FCA did not apply retroactively. State ex rel. Hayling v. Correctional Medical Services, Inc., 422 N.J. Super. 363 (App. Div. 2011). Provided S. 2645 is enacted, the State and private individuals will have a greater ability to hold accountable those who defraud the State and to recover additional funds for New Jersey taxpayers.

Governor Jon Corzine signed the NJ FCA into law on January 13, 2008, with an effective date of March 13, 2008. P.L. 2007, c. 265. Similar to False Claims Act statutes in other states, the Act was modeled after the Federal False Claims Act and has a “remedial and deterrent purpose,” N.J.S.A. 2A:32C-17, aimed at fighting and reducing fraud perpetrated against the State. In order to accomplish its goal of reducing fraud, the NJ FCA provides for civil penalties and treble damages. N.J.S.A. 2A:32C-3. Additionally, similar to the Federal False Claims Act, the NJ FCA contains a qui tam provision to encourage private individuals, known as “relators,” to report fraud and to bring actions on behalf of the State. N.J.S.A. 2A:32C-5. If the State “proceeds with and prevails in an action brought by a person” under the Act, the relator shall receive between 15% and 25% “of the proceeds recovered under any judgment obtained by the Attorney General under this act or of the proceeds of any settlement of the claim . . . .” N.J.S.A. 2A:32C-7(a). In cases in which the Attorney General does not intervene and the relator prosecutes the action, “the person bringing the action or settling the claim shall receive” between 25% and 30% “of the proceeds of the action or settlement of a claim under th[e] act.” N.J.S.A. 2A:32C-7(d). Provided that a fraud was perpetrated against both the State and Federal governments, a relator may bring an action under both the Federal False Claims Act and the NJ FCA and recover a relator’s share under both statutes.
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The use of statistical sampling has long been an effective tool of prosecutors and plaintiffs for calculating damages in highly complex cases in which vast amounts of data must be considered in assessing the extent of the harm caused by a defendant’s conduct. Given the increasing sophistication and scale of frauds committed against the Government, the method has proven increasingly reliable in prosecutions under the FCA, and in FCA cases involving extensive Medicare claims in particular. More recently, prosecutors have employed statistical sampling not just to calculate damages in FCA cases, but to prove liability. The new approach to demonstrating liability of companies for claims on a wide scale expands substantially the Government’s ability to pursue bigger and more complex frauds, and should encourage the pursuit of even greater recoveries. A federal district court for the Eastern District of Tennessee recently blessed the use of statistical sampling for this purpose, marking a change in the landscape for the Government’s pursuit of FCA cases, and for the companies defending them.

Statistical sampling involves the use of a small universe of data to predict outcomes for a much larger universe of data. In U.S. ex rel. Martin v. Life Care Centers of America, Inc., No. 1:08-cv-251 (E.D. Tenn.), the Government sought to use statistical sampling to demonstrate liability against Life Care, owner and operator of almost 200 skilled nursing facilities across the county alleged to have committed widespread Medicare fraud. The Government’s allegations include the false and fraudulent billing of Medicare through the knowing provision of therapy that was not “medically reasonable or necessary” as required under the government healthcare program. The Government alleges that Life Care maximized Medicare revenues by instituting inappropriate treatment regimes for patients and by keeping patients longer than necessary to treat their particular condition. The Government seeks to prove liability using a sample 400 patient admissions at 82 Life Care facilities where more than 65% of the facilities therapy days were performed at the highest billing level under Medicare.
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AWWBlogquestion-sign-1326249-m.jpgWhile not always as drastic as deciding between life and death, as in Hamlet, False Claims Act cases are no different from other civil actions where the parties proceed to trial while strategically weighing the probabilities of a favorable outcome or a huge loss. This past year has been no different and there are a few noteworthy examples that demonstrate the litigation risks that parties encounter in qui tam cases.

As happened recently in a case in the Eastern District of Texas, United States ex rel. Joshua Harman v. Trinity Industries, Inc., No. 12-cv-0089 (E.D. Tex.), a case in which Stone & Magnanini LLP had some involvement, a federal jury determined, following an initial mistrial, that a manufacturer of highway guardrail components was liable for violations of the False Claims Act. The relator alleged, in part, that certain components of the guardrails were materially modified without notice to the Federal Highway Administration and, as a result, caused false certifications regarding compliance with government standards. The jury concluded that the guardrail manufacturer cheated the government out of $175 million, which could be trebled and added to a penalty.
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193967_pill_bottles.jpgOff-label marketing cases under the False Claims Act have always been complex and difficult to bring. Unlike more straight forward cases involving $10,000 hammers or non-existent medical procedures, off-label marketing cases involve a complicated web of relationships. Such cases are usually brought against pharmaceutical manufacturers promoting the off-label use of drugs to physicians. However, the pharmaceutical companies do not seek any reimbursement directly from Medicare; rather, the physicians prescribe these drugs for off-label uses to their patients who then fill those prescriptions at pharmacies. It is those pharmacies that seek reimbursement from Medicare. However, the Government has continually taken the position, and Courts have agreed, that pharmaceutical companies can be found liable under the False Claims Act for improperly off-label marketing drugs and, as a result, causing false claims to be submitted by pharmacies and other drug purchasers. The theory behind such cases is that the Government considers off-label marketing by pharmaceutical companies to be illegal and were it aware that the physician prescribing the drug has been influenced by improper off-label marketing, it would never reimburse the pharmacy for the drug. Although these cases are complex, they are also extremely lucrative. Some of the largest healthcare recoveries under the False Claims Act have been against pharmaceutical companies for off-label marketing. See for example, Cephalon, GSK, Bayer, Forest, Pfizer, Abbott and Merck.

However, off-label marketing cases have rarely been tested in court and, when the Government has brought such cases, it has achieved mixed results. A recent decision in the criminal context in United States v. Caronia, 703 F.3d 149 (2d Cir. 2012) by the Second Circuit creates even more complications for the Government and for relators seeking to bring False Claims Act cases based on off-label marketing.

In Caronia, the Second Circuit held that the United States could not base a criminal conviction for misbranding under the U.S. Federal Food, Drug and Cosmetic Act (“FDCA”), 21 U.S.C. § 301 et seq. solely upon a drug rep promoting the drug for off-label uses. The court held that such a prosecution violated the First Amendment rights of the drug rep to free speech and it vacated his conviction as a result.
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David S. Stone.jpgDavid S. Stone, the Managing Partner of Stone & Magnanini LLP will speak at the Knowledge Congress’ webcast entitled: False Claims Act: Enforcement and Compliance Issues Explored.” This event is a two-hour LIVE interactive webcast that is scheduled for March 13, 2013 from 12:00pm – 2:00pm (ET) where you have the opportunity to ask the speakers questions.

Event Synopsis:

Since January 2009, the Department of Justice has pulled in more than $13 billion in False Claims Act recoveries and there is no indication the Department will slow enforcement actions any time soon. In recent remarks, Tony West, the acting associate attorney general of the DOJ, told reporters that “the False Claims Act is, quite simply, the most powerful tool that we have to deter and redress fraud.” In 2013, we can likely expect new and expanded DOJ enforcement actions seeking stiff penalties and possible suspension and debarments for firms doing business with the federal government. It is essential for companies to not only understand the False Claims Act, but to be current on the latest enforcement and compliance trends and developments to avoid potential pitfalls and mitigate risk.
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