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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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graduates.jpgIn another blow to qui tam defendants on a motion to dismiss, a Missouri federal court recently held in favor of the relators’ fraud and retaliation claims. United States ex rel. Miller v. Weston Educ. Inc., No. 4:11-CV-00112-NKL, 2012 U.S. Dist. LEXIS 175637 (W.D. Mo. Dec. 12, 2012). The relators/plaintiffs, two former employees of Heritage College, alleged that they had been retaliated against and wrongfully terminated for complaining to defendant’s corporate office about their concerns that fraud was occurring in and questioning whether the government needed to be put on notice of the alleged fraud.

The district court first denied the defendant’s motion to dismiss the relators’ claims arising under the false claims act, regarding an agreement defendant entered into with the Department of Education and the procurement and use of financial aid funds. Heritage College is a for-profit post-secondary higher education school with campuses in seven states and is required to comply with Title IV of the Higher Education Act of 1965, 20 U.S.C. §§ 1070, et seq. The court next denied defendant’s motion to dismiss the relators’ retaliation and wrongful termination claims under both federal and Missouri law.

Turning to the relators’ requested relief under 31 U.S.C. § 3730(h), which provides a remedy for an employer’s unlawful retaliation against an employee for the employee’s attempts to blow the whistle on a False Claims Act (“FCA”) violation, the court recognized the defendant’s attempt to minimize the full extent of the retaliation alleged by the relators. The relators’ retaliation claims extended beyond defendant’s portrayal of the allegations being that relators “were criticized and experienced stress.” In fact, one relator alleged that she was prevented from performing her duties, her project was reassigned to another employee, and she was denied a promotion. As a result she alleged she was forced to resign and was constructively discharged. While the other relator did claim that she was “criticized,” she further alleged that she was terminated approximately eleven days after writing her most scathing letter in an attempt to stop the allegedly fraudulent practices. The Missouri federal court held that, on a motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6), this was sufficient to allege claims for retaliation and wrongful termination under 31 U.S.C. § 3730(h).
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US Capitol Building.jpgIn November, the Securities & Exchange Commission (“SEC”) released its second “Annual Report on the Dodd-Frank Whistleblower Program” (“Whistleblower Report”), the first full-year report of its kind, announcing the achievements of the SEC and its Office of the Whistleblower in enforcing the Whistleblower Program created by the 2010 enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). The most notable information coming out of the report, the sheer volume of formal whistleblower complaints that were filed and the complexity of the fraud reported by whistleblowers, highlights the significant impact of the new law and the importance of streamlining the burden on the SEC when coming forward with information about securities fraud.
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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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Whistle.jpgWelcome to the Whistleblower Legal Update, a forum for thoughts, analysis, and ideas on the pressing issues facing whistleblowers today. With the advent of the SEC Whistleblower Program just over a year ago, and the recent resurgence of the IRS Whistleblower Program, the climate for reporting fraud on the Government by concerned and engaged citizens has never been more lively. For whistleblowers, the incentives are greater, the protections are stronger, their potential impact is much deeper, and the stigma for blowing the whistle has all but disappeared. For attorneys, we now have substantially more opportunities to protect whistleblowers, and face increasingly challenging legal issues in our role as facilitators of the laws that requires us to ensure that they work correctly and effectively.

This blog will serve as a forum for attorneys from the Stone & Magnanini LLP law firm to both share their views on current issues facing whistleblowers and informally educate people about the many challenges facing individuals that are contemplating blowing the whistle on fraud. From significant decisions and changes in the statutory regime to new actions and substantial victories for whistleblowers, we will endeavor to cover the evolving whistleblower landscape in a responsive and thought provoking manner that we hope will keep regular citizens abreast of the current issues involving corporate fraud and the legal community engaged in the broader objective of making things better. The Whistleblower Legal Update is not intended to be a source of legal advice for any purpose, but rather contains general information and the opinions of the authors in a blog-style format. Potential whistleblowers are strongly encouraged to seek experienced counsel to assist them in navigating the legal web of the various statutory procedures and should not rely upon the contents of this blog.
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