By Jason C. Lynch

DOJ’s prerogative to dismiss qui tam complaints is center stage after the much-discussed “Granston Memo.”  On April 3, 2019, the Eastern District of Pennsylvania granted DOJ’s motion to dismiss a qui tam complaint brought by two relators, one of which was a shell company formed for the purposes of bringing the suit.

The company, SMSPF, LLC, was part of a group of entity-relators that had brought 12 qui tam actions in eight districts, alleging substantially the same kickback scheme to induce doctors to prescribe Rebif, a multiple sclerosis medication.  The government investigated the case for 18 months—relatively quick in the FCA world—and concluded that the case lacked merit.  The government moved to dismiss the case because “continuing to monitor, investigate, and prosecute the case will be too costly and contrary to the public interest.”  Op. at 3.[1]

The court first observed a split in authority over the government’s prerogative to dismiss qui tam complaints under 31 U.S.C. § 3730(c)(2)(A).  The Ninth and Tenth Circuits require the government to justify its decision by showing that dismissal is related to a valid governmental purpose, whereas the D.C. Circuit gives the government unfettered discretion.  The Third Circuit, which includes E.D. Pa., has not weighed in

The district court adopted the “rational relationship” test from the Ninth and Tenth Circuits.  The statutory requirement for a hearing would be meaningless, the court reasoned, if the government had unfettered discretion.  And in this case, the court found that DOJ had articulated legitimate government interests: “litigation costs” and “conflict with important policy and enforcement prerogatives of the federal government’s healthcare programs.”  Op. at 8, 9.  The court rejected the relators’ argument that DOJ was merely hostile to the corporate relator as a “professional relator.”

This issue may go to the Third Circuit and, if the split deepens, eventually to the Supreme Court.  We shall see.

[1] DOJ rejected anticipatorily the relators’ attempt to amend: “Having had the opportunity to review substantially similar amendments in numerous other cases filed by [SMSPF’s parent company], [DOJ] d[id] not believe the newly-added details w[ould] change its analysis or request for dismissal.”  Op. at 3 n.11 (quoting motion to dismiss).

By Jason C. Lynch

On March 29, 2019, the district court in the Northern District of Illinois dismissed a False Claims Act suit against numerous defendants, including one represented by Nichols Law partner Bob Rhoad, alleging fraud under Medicare Part C.  See United States ex rel. Nedza v. Am. Imaging Mgmt., Inc., No. 15-C-6937, 2019 WL 1426013 (N.D. Ill. Mar. 29, 2019).

A number of Medicare Advantage (MA) plans had contracted with American Imaging Management (AIM), a specialty health benefits management corporation, for utilization-management services.  Because AIM was in a position to review authorizations requested by providers in advance of treatment, it could theoretically deny those providers’ requests even where they were medically necessary.  The plans were accused of boosting profits “by denying care to Medicare beneficiaries in violation of Medicare Rules.”  Slip. Op. at 4.

The whistleblower in this case alleged two claims: (1) that CMS had been fraudulently induced to contract with the MA plans; and (2) that the plans had submitted false claims for capitation payments under the MA system.  The court read relator’s claims as “most closely resembl[ing] implied false certification” and analyzed the complaint under that rubric.  Slip Op. at 11.  The complaint still failed.

First, the court read Escobar to require “misleading half-truths” in order for an implied false certification to be actionable.  As we have previously reported, courts have split on this question.  The most notable case to require specific representations was United States ex rel. Rose v. Stephens Institute, in which the Supreme Court recently denied certiorari.

Second, irrespective of whether the defendants had made such specific representations, the court reasoned that no such statements could be material under Escobar.  In the MA realm, the court rightly observed that “[a] utilization management review process is not in itself contrary to the Medica[re] Rules.”  Slip Op. at 13.  More fundamentally, the capitation payments made by CMS were not tied to the alleged misrepresentations.  There was no link, in other words, between the utilization review and the decision whether—or how much—to pay the MA plans.  CMS had audited several of the defendant MA plans but never ceased payments or terminated a contract.  As we have suggested and as DOJ seems to acknowledge, one of the most important questions in the wake of Escobar is the government’s prior reaction to knowledge or suspicion of the kind of fraud later alleged by a relator.  In this case, the relator failed “to plead any factual support to the allegation that AIM’s UM review process would be material to the government’s decision to pay.”  Slip Op. 16.

The court dismissed claims against all defendants—including Nichols Law’s client.  Prevailing in these cases requires attention to the ever-changing jurisprudential landscape—especially as Escobar continues to work its way through the lower courts—and an ability to apply current cases to the unique contexts, e.g. Medicare Advantage.  We are proud to add this victory to our proven experience in FCA litigation and investigations.

By Jason C. Lynch

On Tuesday, March 19, 2019, the Supreme Court heard oral argument in Cochise Consultancy, Inc. v. United States ex rel. Hunt, No. 18-315.  We previously summarized the case, which involves a provision in the False Claims Act’s statute of limitations that allows the default six-year limitation to be extended by three years, up to 10 years, in certain circumstances.  See 31 U.S.C. § 3731(b)(2).  There is a three-way split among circuit courts over how to read the statute, with the principal questions being (1) whether the additional-three-years provision applies in declined qui tam cases; and (2) if so, whether a relator qualifies as an “official of the United States charged with responsibility to act.”  Here are our four takeaways from the oral argument:

1. On the merits, the Court seemed to side with the relator and government. It was clear to us that the defendants (now petitioners) in Cochise had a worse morning at the lectern.  We predict that the Court will rule that Section 3731(b)(2) applies in declined cases and that a relator cannot qualify as an “official of the United States,” i.e., that the three additional years is not triggered unless a Department of Justice official learns of the fraud.
   Justice Gorsuch was immediately skeptical that “civil action” could mean different things under 31 U.S.C. §§ 3731(b)(1) and (b)(2), which is required by the defendants’ interpretation.  Tr. 9:17-23.  Nor was he moved by the defendants’ atextual arguments: “This common sense we keep coming back to, I — I guess I’m struggling to get my head around it.”  Tr. 20:21-23.  His fellow textualist, Justice Kavanaugh, similarly found the statute “very clear as written.”  Tr. 19:12-13.  He later asked rhetorically, “Where — where is the ambiguity? I’m not seeing ambiguity.”  Tr. 30:15-16.  Justice Kagan found the defendants’ argument hard to swallow, in part because the statute of limitations could “change in the middle of the lawsuit.”  Tr. 10:21-24.
   In response to defendants’ policy argument—that the relator’s and government’s reading would allow a relator to leave fraud un-addressed for years, piling up damages—the Chief Justice pointed out several countervailing considerations: “The relators, for example, they know if they don’t move promptly, another relator might preempt them. They know that if they don’t move promptly, the government itself might find out before they have a chance to file, and that would preempt their action as well. The — the theory of a relator just sort of, as you say, waiting in the weeds I think is not a realistic one.”  Tr. 15:4-12.
2. “Real party in interest.” We suggested in our prior post that the Court’s opinion on the relationship between government and relator may be more important, in the long term, than the statute-of-limitations issue on appeal in this case. Although there was no breaking news on this point, some justices did address the relator-government relationship.
   For example, Justice Ginsburg suggested in the first question of the argument that the government was still “in some sense a party” in declined cases.  Tr. 5:19-25.  The defendant conceded that the government had “certain rights,” Tr. 6:2, while the Relator argued that “in every case, the real party in interest is the United States,” Tr. 32:20-21, and the Department of Justice unsurprisingly agreed: “The United States is the injured party in all of these cases. The United States is a real party in interest regardless of whether or not it elects to intervene in the action.”  Tr. 58:12-15.
   No justice challenged, or suggested disagreement with, the notion that the government is the real party in interest.  Justice Sotomayor asked rhetorically, “why should it matter that it’s the government’s knowledge that is at issue when it’s the government who stands to benefit from a longer statute of limitations?”  Tr. 12:17-21.  Justice Kagan referred in passing to the government as a “special kind of third party, which is going to get most of the money from the suit.”  Tr. 28:22-23.  And Justice Alito suggested that because the “relator is, in effect, representing the United States,” she has certain attendant “responsibilities.”  Tr. 46: 22-24.
   In short, there was no news on the question whether the United States remains the real party in interest in declined cases—or how that might bear on the government’s right to dismiss cases or settle over relators’ objections, the parties’ rights to discovery, etc.
3. “This is a terribly drafted statute.” 23:10-11 (Alito, J.).  Some of us have been saying it for years.  Justice Sotomayor later echoed that it is “poorly written.”  Tr. 44:14.  Will these comments garner enough attention on Capitol Hill to amend the statute?
4. Who’s the relevant “official of the United States”? Finally, there was a brief but interesting discussion about the definition of “the official of the United States charged with responsibility to act in the circumstances” of the fraud.”  31 U.S.C. § 3731(b)(2).
   It began when Justice Sotomayor confirmed that Relator and ASG both think it’s only DOJ officials.  Tr. 42:18-23.  She did acknowledge, however, that the issue wasn’t addressed below.  There was no more discussion of this until the defendants’ rebuttal, when counsel addressed their “alternative argument.”  Tr. 62:8.  Essentially, the defendants argued that even if the three-year tolling provision applied in declined cases, the relator’s discovery of the fraud should trigger those three years.
   Although Justice Sotomayor had opened this line in inquiry, she threw cold water on defendants’ argument.  Tr. 62:25-63:10.  It seems that Justice Sotomayor had non-DOJ officials in mind, not private relators.  In response to Petitioner’s argument, Justice Ginsburg similarly noted that “Agent” is a different word than “official.”  Tr. 64:1-2.  The argument did not find traction, further leading us to believe that the relator and government will prevail.

By Jason C. Lynch

Another opportunity to revisit Escobar has come and gone.  On Monday, March 18, 2019, the Supreme Court denied certiorari in Brookdale Senior Living et al. v. United States ex rel. Prather, No. 18-699.

The district court in Prather had dismissed the relator’s claim for failure to adequately allege materiality under Escobar, despite concluding that compliance with a home-healthcare-timing regulation (obtaining physician certification at the time of care “or as soon thereafter as possible”) was an express condition of payment.  United States ex rel. Prather v. Brookdale Senior Living Communities, Inc., 892 F.3d 822 (6th Cir. 2018).  The district court faulted the relator’s “inability to point to a single instance where Medicare denied payment based on violation of § 424.22(a)(2), or to a single other case considering this precise issue.”  Id. at 834.

The Sixth Circuit reversed, declining to draw the same “negative inference from the absence of any allegations about past government action.”  Id.  The court of appeals held that an FCA plaintiff is “not required to make allegations regarding past government action.” Id.  Absent allegations that the government had actual knowledge of the fraud alleged, its past payment practices were irrelevant to materiality.  Id.  According to the Sixth Circuit, the relator in Prather had adequately pled materiality—based in no small part on the fact that the timing requirement was an express condition of payment.  Id. at 836.

Defendants filed a petition for certiorari at the Supreme Court, asking it to answer two questions: (1) whether the failure to plead facts relating to past government practices can weigh against a finding of materiality; and (2) whether an FCA allegation fails when the pleadings make no reference to the defendant’s knowledge that the alleged violation was material to the government’s payment decision.

The first question is particularly important in the wake of Escobar, as we explained in a recent Law360 Expert Analysis on two other FCA cases that the Supreme Court declined to hear.  Yet they will go unanswered a while longer, as the Supreme Court seems in no hurry to revisit Escobar.

March 12, 2019

By Jason C. Lynch

On March 1, 2019, Michael Granston, Director of DOJ’s Civil Fraud Section, addressed attendees at the Federal Bar Association’s Qui Tam Conference.  His remarks shed additional light on DOJ’s willingness to dismiss cases under his namesake memorandum—and why.

We previously reported on Gilead Sciences, a case in which DOJ filed an amicus brief urging the Supreme Court not to take a case concerning a central issue in the wake of Escobar: how courts should treat the government’s awareness of the very fraud later alleged by qui tam relators.  Escobar addressed “actual [government] knowledge that certain requirements were violated,” 136 S. Ct. at 2003, but what about facts from which the government could have concluded there was a violation?  What about prior, credible allegations that the government never pursued?  These are the disputes that will continue to play out in the lower courts, since certiorari was denied in Gilead Sciences.

Like most FCA lawyers, we zeroed in on DOJ’s two stated reasons for wanting Gilead Sciences dismissed: the merits of the case and “burdensome discovery and Touhy requests” that might follow if the case proceeded.  That latter caught our eye because these sorts of discovery burdens seem inevitable after Escobar has put “the effect on the likely or actual behavior of the recipient of the alleged misrepresentation” (i.e., the government) front and center.  Id. at 2002.  It seemed to many that this logic would open the door to more dismissals.

Mr. Granston’s remarks could be read as dispelling that notion.  “Just because a case may impose substantial discovery obligations on the government does not necessarily mean it is a candidate for dismissal,” he said.  He also discouraged defendants from using discovery as a tactic: “Defendants should be on notice that pursuing undue or excessive discovery will not constitute a successful strategy for getting the government to exercise its dismissal authority,” adding that DOJ “has, and will use, other mechanisms for responding to such discovery tactics.”

In our experience, that means simply refusing the party(ies) the discovery they seek.  The only “mechanism” available uniquely to the government is to hide behind the Touhy regulations.[1]  The “Touhy regulations,” named after the progenitor case, U.S. ex rel. Touhy v. Ragen, 340 U.S. 462 (1951), prescribe the requirements that private parties must satisfy in order to obtain discovery from the government.  Each agency has its own regulations, and almost all courts review an agency’s determination of whether to comply with discovery requests under the deferential Administrative Procedure Act (APA) framework.[2]  Until courts affirm that that the relevant scope of discovery should not differ based on whether the government intervenes, the government’s position (and judicial deference thereto) will continue to disadvantage both defendants and relators seeking discovery.

This is the fault line under which pressure is building.  Materiality is front-and-center after Escobar, which attaches particular significance to the government’s reaction (or likely reaction) to knowledge of allegations or violations.  Yet at the same time, DOJ enjoys a discovery regime under which it can deny parties the ability to to discover those reactions.  Courts may not abide this for long, and may revisit either (1) whether the government really is a “third party” for discovery purposes in declined cases; or (2) even if so, whether to keep deferring to agencies’ determinations under their Touhy regulations.

[1] The government could move to quash a subpoena, of course, but that option is available to any third party. (DOJ takes the position that it is a “third party” in non-intervened cases for the purposes of discovery, which most courts have accepted—perhaps incorrectly, in our view.)

[2] See John A. Fraser III, 60 Years of Touhy, The Federal Lawyer 77 & n.39 (Mar. 2013) (“The U.S. Court of Appeals for the First, Second, Third, Fourth, Fifth, Seventh, Tenth, and Eleventh Circuits have held that courts may review an agency’s refusal to comply with a subpoena under the Administrative Procedure Act (APA)”); but see id. at 77 & n.45 (“the D.C. and Ninth Circuits have held that a litigant may challenge an agency’s refusal to comply with a subpoena by filing a motion to compel compliance under Rule 45 of the Federal Rules of Civil Procedure.”).