FALSE CLAIMS ACT YEAR IN REVIEW: 2017 A YEAR OF SIGNIFICANT RECOVERIES, GOVERNMENT ENFORCEMENT REFORM AND SHIFTING JURISPRUDENCE POST-ESCOBAR

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1 FALSE CLAIMS ACT YEAR IN REVIEW: 2017 A YEAR OF SIGNIFICANT RECOVERIES, GOVERNMENT ENFORCEMENT REFORM AND SHIFTING JURISPRUDENCE POST-ESCOBAR

2 INTRODUCTION In 2017, False Claims Act (FCA) recoveries totaled more than $3.7 billion, down from more than $4.7 billion in total recoveries in More than $3.4 billion of the 2017 recoveries came from settlements and judgments in matters commenced under the qui tam provisions of the FCA, up from $2.9 billion in In contrast, recoveries in non-qui tam matters totaled $265 million, a significant decrease from the more than $1.8 billion in nonqui tam recoveries in Industry specific data reflects recoveries holding steady for the healthcare industry at more than $2.4 billion (down from $2.6 billion in 2016), while recoveries in cases involving the defense industry nearly doubled to $219 million (up from $122 million in 2016), and were cut in half for all nonhealthcare and non-defense industries at $1 billion (down from more than $2 billion in 2016). Whether these figures are reflective of enforcement trends or merely cyclical remains to be seen. The Department of Justice (DOJ) under Attorney General Jeff Sessions early on expressed a commitment to root out fraud on government programs, 2 but then trimmed its corporate strike force numbers, reigned in aggressive theories of recovery under the FCA by limiting reliance on agency guidance documents and expressed willingness to exercise with greater frequency its authority to seek dismissal of meritless qui tam claims. 3 Perhaps a factor in DOJ s evolving enforcement shift was the increasing trend of cases with outcomes favorable to the defense bar. Post-Escobar rulings applying the Supreme Court s rigorous and demanding materiality requirement resulted in major defense victories. So, too, have cases addressing the pleading requirements under Federal Rule of Civil Procedure 9(b), the reverse false claims doctrine, the causation element, the public disclosure and first to file bars, and whistleblower retaliation allegations largely favored of the defense. Now two months into 2018, a look ahead suggests the enforcement and jurisprudential trends may remain on their current trajectories. 02 FALSE CLAIMS ACT YEAR IN REVIEW: 2017

3 AN EVOLVING GOVERNMENT ENFORCEMENT LANDSCAPE DOJ AND HHS Enforcement initiatives and processes On January 12, 2017, the Department of Health and Human Services Office of Inspector General issued a final rule granting OIG authority to exclude individuals or entities for knowingly making or causing to be made any false statement, omission, or misrepresentation of material fact in any application, agreement, bid, or contract to participate or enroll as a provider of services or supplier under a Federal health care program. 4 This expansion of OIG s permissive exclusion authority may prove to be a strong weapon in the government s arsenal to protect federal programs. Also in January 2017, DOJ s incoming leadership expressed its continued focus on aggressively pursuing and prosecuting fraud. DOJ drew criticism for subsequently downsizing the Health Care Corporate Fraud Strike Force and gutting a critical tool to combat healthcare fraud. Nonetheless, according to DOJ, the Corporate Strike Force continues to vigorously investigate and hold accountable individuals and companies that engage in fraud 5 and the Medicaid Fraud Strike Force remains intact. On October 30, 2017, speaking at a compliance conference in Washington, DC, Michael Granston, Director of DOJ s Civil Fraud Section, suggested DOJ would make more frequent use of its authority to seek dismissal of meritless qui tam actions, a curious shift given that FCA recoveries in qui tam cases in which the United States declined to intervene totaled $425 million in 2017, a 400 percent increase over the $106 million in recoveries in Of course, DOJ may have any number of reasons for declining to intervene in a qui tam case. A determination that a qui tam case lacks merit would certainly be one consideration although, under this new policy, we may see more of these matters become the subject of DOJ motions to dismiss before costs and burden on defendants begin to appreciably mount. On November 16, 2017, Attorney General Sessions issued a Memorandum on Prohibition on Improper Guidance Documents. Such guidance documents have been seen as creating new obligations and have increasingly formed the basis for claims of wrongdoing in civil enforcement actions alleging violations of the FCA. Circumventing the formal APA notice and comment rulemaking requirements, DOJ was seen to have promulgated new rules through these guidance documents which, in turn, imposed new obligations on those involved in government payor and procurement programs. Speaking at a conference in Washington, DC, the Attorney General made clear DOJ would no longer engage in informal and unchecked rulemaking that could impose new obligations and change, rather than clarify, existing rules and regulations. On January 25, 2018, Associate Attorney General Rachel Brand issued a Memorandum on Limiting Use of Agency Guidance Documents in Affirmative Civil Enforcement Cases directed to DOJ attorneys litigating affirmative civil enforcement cases. The Brand Memo echoed the Attorney General s directive, although leaving open the possibility that guidance documents could be used for proper purposes, such as simply explain[ing] or paraphras[ing] legal mandates from existing statutes or regulations or as evidence that a party read such a guidance document to help prove that the party had the requisite knowledge of the mandate. The impact on FCA enforcement actions is not yet known. Finally, despite uncertainty over the breadth and scope of enforcement action in the wake of the Yates memo, and early grumblings from DOJ signaling the memo was under review, the frequency of actions against individuals has not spiked, but we have seen significant individual fines and penalties, as well as individuals being held jointly and severally liable with an entity for amounts ranging from $18 million to $20 million figures that more than doubled the largest individual liability seen in See Justice Department Recovers Over $3.7 Billion from False Claims Act Cases in Fiscal Year 2017, Justice News, Department of Justice (Dec. 21, 2017) pr/justice-department-recovers-over-37-billion-false-claims-act-cases-fiscal-year-2017 ( DOJ FCA 2017 Recoveries Press Release ). 2. Attorney General Hearing Confirmation, Day 1, Part 1, C-SPAN (Jan. 10, 2017), attorney-general-nominee-jeff-sessions-testifies-confirmation-hearing 3. See David M. Glaser, Developing Story: DOJ Will Dismiss Qui Tam Cases Lacking Merit, RACMONITOR (Nov. 2, 2017), developing-story-doj-will-dismiss-qui-tam-cases-lacking-merit. 4. Health Care Programs: Fraud and Abuse; Revisions to the Office of Inspector General s Exclusion Authorities, 82 Fed. Reg. 4100, 4100 (Jan. 12, 2017), available at 5. Sue Reisinger and Kristen Rasmussen, As Priorities Shift at DOJ, Health Care Corporate Fraud Strike Force Gutted (July 10, 2017), THE NATIONAL LAW JOURNAL, DLAPIPER.COM 03

4 NOTABLE DEFENSE VICTORIES While the government and qui tam relators had substantial settlements and judgments in 2017, so too did the defense bar in the wake of Universal Health Services, Inc. v. United States ex rel Escobar. Two in particular stand out and were based on Escobar s guidance that if the Government regularly pays a particular type of claim in full despite actual knowledge that certain requirements were violated, and has signaled no change in position, that is strong evidence that the requirements are not material. 6 In U.S. ex rel. Harman v. Trinity Indus., the Fifth Circuit overturned a $663 million jury verdict. The relator failed to, and in the court s view, would be unable as a matter of law to, satisfy Escobar s heightened materiality requirements in light of the Federal Highway Administration s unwavering position that it had not been defrauded, that it knew of certain guardrail design deviations and nonetheless continued to pay the claims. 7 The other case U.S. and State of Fla. ex rel. Ruckh v. Salus Rehabilitation, LLC was an early 2018 decision from the US District Court for the Middle District of Florida in which it overturned a $347 million judgment relying on the Escobar materiality requirements, finding that government officials paid and continue to pay to this day despite the disputed practices, long ago known to all who cared to know. 8 This decision is significant for several reasons. First, briefing on summary judgment predated the Escobar decision. On the day the Escobar decision was handed down, the defendants moved for leave to submit supplemental briefing in light of the decision. The plaintiffs opposed the motion and the court denied the motion for additional briefing. A jury later returned a $347 million verdict against the defendants. In response to post-trial briefing, the court reversed the verdict in light of Escobar, finding the record devoid of any evidence of materiality and scienter. In so holding, the court noted that Escobar necessarily means that if a service is non-compliant with a statute, a rule, or a contract; if the noncompliance is disclosed to, or discovered by, the United States; and if the United States pays notwithstanding the disclosed or discovered non-compliance, the False Claims Act provides a relator no claim for implied false certification. Both Harman and Ruckh bode well for the defense bar in 2018, showing the growing trend among courts to find as a matter of law that when the government continues to pay claims, despite knowledge of alleged misrepresentations, the relator cannot satisfy the FCA s demanding materiality requirement. In the next section, we discuss developments post-escobar and other trends favoring the defense. 6. Universal Health Servs., Inc. v. U.S. ex rel Escobar, 136 S. Ct. 1989, (2016). 7. U.S. ex rel. Harman v. Trinity Indus. Inc., 872 F.3d 645, (5th Cir. 2017). 8. U.S. and State of Fla. ex rel. Ruckh v. Salus Rehabilitation, LLC, No. 8:11-cv-1303-T- 23TBM, 2018 WL at *4 (M.D. Fla. Jan 11, 2018). 04 FALSE CLAIMS ACT YEAR IN REVIEW: 2017

5 JURISPRUDENCE IS LARGELY TRENDING IN FAVOR OF THE DEFENSE MATERIALITY Escobar s rigorous and demanding materiality requirement As expected, 2017 saw an increasing number of courts interpreting the Supreme Court s landmark 2016 decision in Escobar and further defining the contours of the implied certification theory. In Escobar, the Supreme Court ruled an implied certification theory for establishing liability under the FCA was viable where two conditions are met: (i) the claim does not merely request payment, but also makes specific representations about the goods or services provided, and (ii) the defendant s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths. The most hotly contested issues involved interpreting and applying the FCA s rigorous and demanding materiality requirement as enunciated in Escobar, that is, determining whether any alleged misrepresentation about compliance with a statutory, regulatory or contractual requirement was material to the government s decision to pay, and continue to pay, on claims submitted. Mere minor or insubstantial matters were insufficient to satisfy this element. In assessing materiality, courts focused principally on the government s actions after becoming aware of the alleged fraudulent activity at issue. Perhaps the most dramatic development in materiality jurisprudence came from the Fifth Circuit overturning a $663 million verdict in Harman, discussed above. Circuit courts, applying a strict materiality requirement in line with Escobar, also weighed the full balance of facts obtained through discovery and overwhelmingly affirmed summary judgment in favor of the defense where the evidence showed the government continued to pay on claims despite knowledge that the claims did not comply with federal statutory or regulatory requirements. Such circuits included the DC Circuit, 9 Third Circuit, 10 Fourth Circuit, 11 Fifth Circuit 12 and Ninth Circuit, 13 which joined the Tenth Circuit 14 from Indeed, the Ninth Circuit held that payment of claims notwithstanding actual knowledge that the costs reports submitted did not comply with federal regulation requirements constitutes strong evidence that such requirements were not material to the government s payment decision. In contrast, the Seventh Circuit held the United States satisfied Escobar s heightened materiality requirement in light of evidence that the government terminated its relationship with the defendant after discovery of the false certification that he had no criminal history (a prerequisite to participation in a government insurance program). And, despite evidence that the government issued new loans for a period after learning of this omission, the court found persuasive that it began debarment proceedings against the defendant evidence that the misrepresentation was material. 15 It, thus, affirmed summary judgment in favor of the United States. With the exception of a Ninth Circuit decision, circuit courts uniformly have upheld dismissal of FCA claims at the pleadings stage under a heightened materiality standard. The First Circuit affirmed dismissal of FCA claims on grounds that any misrepresentation was immaterial to the government s payment decision. In reaching this decision, it relied upon evidence that, after learning of the design defect in the hip devices, the FDA allowed the device to stay on the market and the government continued to pay claims associated with the devices. 16 The Second Circuit rejected conclusory allegations about the materiality of misrepresentations to the government s payment decision and affirmed dismissal, 17 while the Third Circuit affirmed dismissal on grounds that the plaintiff failed to plead any facts showing the materiality of the alleged misrepresentation and that the relator conceded the government had determined the alleged violations were insubstantial. 18 The Fourth Circuit found that common sense and [defendant s] own actions in covering up the noncompliance, as well as allegations that the government cancelled a security contract after learning the defendant falsified marksmanship credentials of its contract guards who were to be detailed to provide security services at a US airbase in Iraq, was sufficient to satisfy Escobar s demanding materiality standard and 9. U.S. ex rel. McBride v. Halliburton Co., 848 F.3d 1027, 1028 (D.C. Cir. 2017). 10. U.S. ex rel. Spay v. CVS Caremark Corp., 875 F.3d 746, (3d Cir. 2017). 11. U.S. ex rel. Searle v. DRS C3 & Aviation Co., 680 Fed. App x 163, 166 (4th Cir. 2017). 12. Abbott v. BP Expl. & Prod., Inc., 851 F.3d 384, (5th Cir. 2017). 13. U.S. ex rel. Kelly v. Serco, Inc., 846 F.3d 325, 333 (9th Cir. 2017). 14. See U.S. ex rel. Thomas v. Black & Veatch Special Projects Corp., 820 F.3d 1162, 1172 (10th Cir. 2016). 15. U.S. v. Luce, 873 F.3d 999, 1008 (7th Cir. 2017). 16. U.S. ex rel. Nargol v. DePuy Orthopaedics, Inc., 865 F.3d 29, 36 (1st Cir. 2017). 17. U.S. ex rel. Coyne v. Amgen, Inc., No. 17-cv-1522, 2017 WL at *3 (2d Cir. Dec. 18, 2017). 18. See U.S. ex rel. Petratos v. Genentech Inc., 855 F.3d 481, (3d Cir. 2017). DLAPIPER.COM 05

6 reversed dismissal. 19 Although the claimant survived a motion to dismiss, the Fourth Circuit s reasoning is in line with the First, Second and Third Circuit cases discussed above: the factual allegations here plausibly establish that the misrepresentation at issue was material to the government s payment decision given that the contract was thereafter cancelled. The one outlier appears to be U.S. ex rel. Campie v. Gilead Scis., Inc., in which the Ninth Circuit reversed dismissal under Rule 12(b)(6) for failure to state a claim, holding that questions of materiality remained even where the FDA had continued payments despite knowledge of the alleged non-compliance. Notably, the Court recognized certain significant distinguishing factors: (1) questions remained as to whether the approval by the FDA was itself procured by fraud; (2) there existed other potential reasons for continued approval that prevent judgment for the defendant on 12(b)(6); and (3) the continued payment came after the alleged noncompliance had terminated and the government s decision to keep paying for compliant drugs does not have the same significance as if the government continued to pay despite continued noncompliance. 20 The case is currently pending a certiorari before the Supreme Court. As the developments post-escobar make clear, under the heightened materiality requirement, with few exceptions, a developing body case law is trending decidedly in favor of the defense bar. RULE 9(B) PLEADING STANDARD Trending toward a stricter application It is well settled that Federal Rule of Civil Procedure 9(b) applies to FCA fraud claims. Rule 9(b) requires a claimant to plead with particularity the circumstances the who, what, when, where and how of the alleged fraud. Traditionally, courts have required claimants to identify specific false claims in order to satisfy Rule 9(b). More recently, some courts appear to apply a more relaxed pleading standard in holding that the FCA s particularity requirements may be satisfied without particularized details regarding the submission of a false claim in certain circumstances. Such circumstances include where a relator alleges particular details of a scheme to submit false claims coupled with reliable indicia that give rise to a strong inference that claims were actually submitted. 21 In 2017, the First Circuit, 22 Second Circuit, 23 Fifth Circuit 24 and Sixth Circuit 25 addressed whether a relaxed or strict pleading standard is appropriate under Rule 9(b) and, in early 2018, the Eleventh Circuit did so as well. 26 In Booker, an off-label promotion case, the First Circuit adhered, on the one hand, to prior circuit precedent applying a stricter pleading standard under Rule 9(b) in affirming dismissal of claims under the reverse false claims provision of the FCA for failure to plead with particularity the facts and circumstances surrounding the actual submission of a false claim (in this case, the purported failure to report a probable violation of its corporate integrity agreement stemming from its off-label promotion). In Nargol, in which a medical device manufacturer allegedly sold defective models to physicians and induced those physicians to file false claims for reimbursement, the First Circuit rejected the notion that more particularized pleading was required because the complaint alleges the details of a fraudulent scheme with reliable indicia that lead to a strong inference that claims were actually submitted. The court justified application of a more flexible standard in actions where the claimant provided factual or statistical evidence to strengthen the inference of fraud beyond possibility without necessarily providing details as to each false claim. In Chorches, the Second Circuit applied a relaxed pleading standard under Rule 9(b) such that allegations may be based on information and belief when facts are peculiarly within the opposing party s knowledge. In cases where a relator is unable to plead specific facts detailing an actual false submission, a relator 19. See U.S. ex rel Badr v. Triple Canopy, Inc., 857 F.3d 174, 178 (4th Cir. 2017), cert. dismissed, 138 S. Ct. 370 (2017). 20. U.S. ex rel. Campie v. Gilead Scis., Inc., 862 F.3d 890, 906 (9th Cir. 2017). 21. See U.S. ex rel. Grubbs v. Kanneganti, 565 F.3d 180, 190 (5th Cir. 2009); U.S. ex rel. Heath v. AT & T, Inc., 791 F.3d 112, 126 (D.C. Cir. 2015); U.S. ex rel. Thayer v. Planned Parenthood of the Heartland, 765 F.3d 914, (8th Cir. 2014); Foglia v. Renal Ventures Mgmt., LLC, 754 F.3d 153, (3d Cir. 2014); Ebeid ex rel. U.S. v. Lungwitz, 616 F.3d 993, (9th Cir. 2010); U.S. ex rel. Lemmon v. Envirocare of Utah, Inc., 614 F.3d 1163, 1172 (10th Cir. 2010); U.S. ex rel. Duxbury v. Ortho Biotech Prods., L.P., 579 F.3d 13, (1st Cir. 2009); U.S. ex rel. Lusby v. Rolls-Royce Corp., 570 F.3d 849, 854 (7th Cir. 2009). 22. U.S. ex rel. Booker v. Pfizer, Inc., 847 F.3d 52, (1st Cir. 2017) (citing U.S. ex rel. Karvelas v. Melrose-Wakefield Hosp., 360 F.3d 220, 233 (1st Cir. 2004)); U.S. ex rel. Nargol, 865 F.3d at 41 (quoting U.S. ex rel. Duxbury, 579 F.3d at 29). 23. U.S. ex rel. Chorches for Bankr. Estate of Fabula v. Am. Med. Response, Inc., 865 F.3d 71, (2d Cir. 2017) 24. U.S. ex rel. Colquitt v. Abbott Labs., 858 F.3d 365 (5th Cir. 2017) 25. U.S. ex rel Hirt v. Walgreen Co., 846 F.3d 879, 881 (6th Cir. 2017); U.S. ex rel. Bledsoe v. Community Health Sys., Inc., 501 F.3d 493, 504 n.12 (6th Cir. 2007); U.S. ex rel. Ibanez v. Bristol-Myers Squibb Co., 874 F.3d 905 (6th Cir. 2017). 26. U.S. ex re. Nancy Chase v. HPC Healthcare, Inc., 2018 WL (11th Cir. Jan. 24, 2018). 06 FALSE CLAIMS ACT YEAR IN REVIEW: 2017

7 must detail specific and plausible facts from which we may easily infer that false claims were submitted to the government noting that [s]uch an inference of falsity is central to alleging the submission of false claims. Thus, a complaint can satisfy Rule 9(b) s particularity requirement by making plausible allegations creating a strong inference that specific false claims were submitted to the government and that the information that would permit further identification of those claims is peculiarly within the opposing party s knowledge. In Colquitt, the Fifth Circuit considered claims that the defendant misrepresented facts in its FDA approval application, violated the Anti-Kickback statute for marketing and encouraging off label use of stents, and caused those physicians to present false claims to the government reimbursements. While the court affirmed dismissal of the fraudulent inducement and false presentment claims under the public disclosure bar, discussed below, it also affirmed dismissal of the Anti-Kickback claim under Rule 9(b) for failure to plead facts establishing causation. a prescription reimbursement submitted to the government for a tainted prescription. In early 2018, the Eleventh Circuit in Nancy Chase applied a stricter pleading standard and affirmed dismissal of an FCA complaint in part because the relator did not allege with sufficient particularity that false claims were actually submitted for payment. The court noted that the complaint did not give examples of specific patients who were ineligible for care, details about why they were ineligible, who at Chapters made particular falsifications, when the falsifications occurred, or when the fraudulent bills were submitted to Medicare. Because the relator was unable to provide specific examples of the alleged fraudulent conduct, the complaint lacked the indicia of reliability to support the allegation that an actual false claim was submitted. In Hirt, the Sixth Circuit applied a stricter Rule 9(b) standard in dismissing an FCA claim alleging violations of the Anti-Kickback Statute for offering gift cards to government program participants in exchange for transferring prescriptions to Walgreens. The Sixth Circuit noted that the qui tam relator did not identify an affected customer or specify dates of filed prescriptions or resulting claims submitted to the government for reimbursement. Indeed, identification of at least one false claim with specificity is an indispensable element of any FCA complaint. In Bledsoe, the Sixth Circuit made clear that it is has no authority to relax the pleading standard any more than it has authority to increase it, marking a limitation of prior precedent in which the Court applied a relaxed pleading standard on the facts of that case. 27 Then, in Ibanez, the Sixth Circuit affirmed dismissal of claims that the defendant violated the Anti-Kickback statute for failure to plead facts with requisite particularity. The court held that Rule 9(b) requires relators to adequately allege the entire chain from start to finish to fairly show defendants caused false claims to be filed. The relator failed to plead facts about a representative claim that describes each step with particularity: 27. U.S. ex rel. Prather v. Brookdale Senior Living Comtys, 838 F.3d 750, 768 (6th Cir. 2016). DLAPIPER.COM 07

8 REVERSE FALSE CLAIMS Contingent v. affirmative obligations A reverse false claim occurs where a defendant receives overpayments from the government and fails to refund those payments, or alternatively, where a defendant makes a false record or statement at a time that the defendant owed to the government an obligation a duty to pay money or property continued 2016 trends in which most courts addressing this scenario rejected an overly expansive construction with particular focus on differentiating between affirmative and contingent obligations. To illustrate, in Booker, the First Circuit affirmed dismissal of a relator s reverse false claim predicated on allegations that the company failed to report a probable violation of its Corporate Integrity Agreement (CIA) stemming from off-label promotion activities and to pay monies in the form of penalties triggered by the probable violation. Because the complaint did not allege the company determined that a violation probably occurred (whether through an investigation or otherwise), which was a condition precedent under the CIA for self-reporting to the government, no reporting or payment obligation was in fact triggered and, thus, no reverse false claim could survive. And, in Ibanez, the Sixth Circuit considered a similar issue involving an alleged breach of a CIA and corresponding reporting and payment obligations. The court differentiated between contingent and affirmative obligations in the context of a reverse false claims violation, noting that even a breach of a CIA did not, by itself, constitute an obligation to pay the government... because the penalties for a breach of the agreements were subject to discretionary enforcement and thus is the type of non-obligation that fails to satisfy 31 U.S.C.A. 3729(a)(1)(G). Booker and Ibanez signify a growing trend that reverse false claims likely premised on a contingent or indeterminate obligation to pay (or re-pay) the government will not survive. SCIENTER Statutory ambiguity negates intent... except perhaps in the Eleventh Circuit In Safeco Ins. Co., of America v. Burr, the Supreme Court held that when the statutory text and relevant court and agency guidance allow for more than one reasonable interpretation, it would defy history and current thinking to treat a defendant who merely adopts one such interpretation as a knowing or reckless violator. 29 The Safeco holding is clear. The Eleventh Circuit, in softening the standard, held that although an ambiguity may be relevant to a scienter analysis, it does not definitively foreclose a finding of scienter ; instead, a court must determine whether the defendant actually knew or should have known that its conduct violated a regulation in light of any ambiguity at the time of the alleged violation U.S.C.A. 3729(a)(1)(G). 29. Safeco Ins. Co., of America v. Burr, 551 U.S. 47, 70 n.20 (2007). 30. U.S. ex rel. Phalp v. Lincare Holdings, Inc., 857 F.3d 1148, 1155 (11th Cir. 2017). 08 FALSE CLAIMS ACT YEAR IN REVIEW: 2017

9 PROXIMATE CAUSATION The Seventh Circuit aligns with its sister circuits Until 2017, the Seventh Circuit was the outlier in its application of a but for standard of causation in FCA cases. Under a but for causation standard, otherwise known as cause in fact, a plaintiff need only show that the defendant s conduct was a material element and a substantial factor in bringing about the injury. In Luce, the Seventh Circuit finally reversed course, refining its causation interpretation and adopting a proximate causation standard that requires evidence of foreseeability, that is, the injury is of a type that a reasonable person would see as a likely result of his or her conduct. The Fifth Circuit affirmed summary judgment for the defense due to the relator s failure to demonstrate that any alleged off-label marketing proximately caused the submission of false claims, particularly in light of the fact that a common and permissible practice of physicians to prescribe medication for off-label uses undermines proximate causation. 31 PUBLIC DISCLOSURE BAR AND ORIGINAL SOURCE EXCEPTION Relaxed standards for applying the bar, and limits on the original source exception The FCA s public disclosure bar remains a powerful defense tool even after the Affordable Care Act amended it to become less restrictive for qui tam relators. By its terms, a court must dismiss a relator s FCA action if substantially the same allegations or transactions were previously publicly disclosed, unless the relator qualifies as the original source of the information. 32 A relator qualifies as an original source if he has knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions. 33 In Abbott, the Fifth Circuit joined the Third Circuit, Fourth Circuit and Eleventh Circuit in holding that the post-2010 public disclosure bar was non-jurisdictional, 34 while the Seventh Circuit questioned (but declined to answer) whether the post-2010 amended version of the public disclosure bar is jurisdictional. 35 Substantively, the Fifth Circuit, 36 Eighth Circuit 37 and Ninth Circuit 38 addressed the public disclosure bar s application and application of the original source exception. In Colquitt, the Fifth Circuit affirmed dismissal of a false inducement claim on grounds that alleged misrepresentations in the publicly available FDA approval application presented sufficient information to discern the nature of any fraud, and that relator did not qualify as an original source of the information because his job responsibilities were entirely unrelated to the FDA approval process. Relator s knowledge was limited, then, to what he had reviewed and digested in the publicly available FDA approval application. The court relied on the original source exception to dismiss those claims that pre-dated or post-dated relator s employment with the company on grounds that relator did not have independent knowledge of those claims. In Lager, the Eighth Circuit affirmed dismissal of claims under the public disclosure bar. Prior public disclosures by both the government and media need not explicitly identify the defendant in order for the bar to apply, according to the court; rather, the public disclosure bar applies where the disclosure provides enough information about the participants in the scheme such that the defendant is identifiable. The disclosures at issue provided, in the court s view, sufficient information to identify the defendant and general framework of the alleged fraud and, thus, barred relator s claims. Despite this ruling, in In re Baycol, the court relaxed the original source exception by holding that a relator is not required to have direct and independent knowledge of all elements of an FCA claim, but need only have direct knowledge of the true state of the facts in order to qualify as an original source. In Amphastar, the Ninth Circuit found that pleadings or public filings from previous litigations may trigger the public disclosure bar, including even counterclaims made by the same claimant in an earlier patent litigation. Notably, even though the counterclaims 31. U.S. ex rel. King v. Solvay Pharm., Inc., 871 F. 3d 318, 328 (5th Cir. 2017) U.S.C.A. 3730(e)(4)(A) U.S.C.A. 3730(e)(4)(B). 34. Abbott, 851 F.3d at 387 n.2 (citing U.S. ex rel Moore & Co., P.A. v. Majestic Blue Fisheries, LLC, 812 F.3d 294, 300 (3rd Cir. 2016); U.S. ex rel. Osheroff v. Humana, Inc., 776 F.3d 805, 810 (11th Cir. 2015); U.S. ex rel. May v. Purdue Pharma, LP, 737 F.3d 908, 919 (4th Cir. 2013).) 35. Bellevue v. Universal Health Servs. of Hartgrove, Inc., 867 F.3d 712, (7th Cir. 2017) (applying pre-amendment version due to the fact that allegations related to conduct occurring prior to 2010). 36. U.S. ex rel. Colquitt, 858 F.3d at U.S. ex rel. Lager v. CSL Behring, L.L.C., 855 F.3d 935, 944 (8th Cir. 2017); In re Baycol Prods. Litig., 870 F.3d 960, 962 (8th Cir. 2017). 38. Amphastar Pharm. Inc. v. Aventis Pharma SA, 856 F.3d 696, 704(9th Cir. 2017). DLAPIPER.COM 09

10 of fraud, but rather regulatory violations, the Seventh Circuit dismissed all claims under the public disclosure bar, including those that post-dated the audit letters. The court reasoned that the audit letters provided the government with sufficient information on which to infer scienter and pursue an FCA claim had it wanted to do so. Rejecting any attempt to salvage claims relating to periods post-dating the audit letters, the Seventh Circuit noted the substantial similarity between the allegations about a continuing practice in the audit letters and relator s allegations. That relator failed to materially add to the public allegations, he would not be considered an original source. FIRST-TO-FILE RULE To cure or not to cure The first-to-file rule provides that once an FCA action is filed, no person other than the Government may intervene or bring a related action based on the facts underlying the pending action. 39 An action is related to an earlier action if it alleges a fraud scheme the government already would be able to investigate based on the earlier filed complaint. The first-to-file bar has become a powerful defense tool for defeating claims by so-called parasitic relators. in the earlier patent case did not allege fraud or false claims, the court nonetheless affirmed dismissal of the claims under the public disclosure bar, reasoning that there need not be perfect precision between the earlier allegations and those now advanced. The court considered the fact that the same claimant had advanced the earlier allegations and concluded that, while not identical, inferentially, the claims were the same. Finally, the Ninth Circuit also ruled the original source exception did not apply since the relator lacked direct and independent knowledge of allegations which were acquired only through earlier litigation. In Bellevue, the Seventh Circuit considered allegations the hospital repeatedly admitted more patients than its licensed capacity and was over census, findings that were previously disclosed in letters memorializing findings of an audit by the state agency and CMS discovered the regulatory violations. While not allegations The DC Circuit 40 and Fourth Circuit 41 each rejected relators efforts to cure a first-to-file defect via an amended pleading, as distinguished from commencement of a new action. In Shea, the DC Circuit ruled a second action filed by the same relator against the same defendant was incurably flawed at its inception because it was filed when a related case was already pending and this defect was not curable by amendment as a matter of law. The only potential cure available to the relator was filing a new action, even though in the intervening time period, the original related action resolved through settlement and was no longer pending. In Carter, the Fourth Circuit did not go quite so far. It affirmed dismissal under the first-to-file bar because the amended pleading did not reference the dismissal of the earlier-filed related actions, but left open how a relator may cure that defect. Several district courts have taken a contrary position, joining the First Circuit in holding that a relator could cure a first-to-file defect with a supplemental pleading U.S.C.A. 3730(b)(5). 41. U.S. ex rel. Carter v. Halliburton Co., 866 F.3d 199, 210 (4th Cir. 2017). 40. U.S. ex rel. Shea v. Cellco Partnership, 863 F.3d 923, 930 (D.C. Cir. 2017). 10 FALSE CLAIMS ACT YEAR IN REVIEW: 2017

11 In Brown, the Third Circuit rejected an interlocutory appeal from the Eastern District of Pennsylvania raising this question. 43 A separate interlocutory appeal was recently heard by the Second Circuit in U.S. ex rel. Wood v. Allergan, Inc. Significantly, DOJ did not intervene but nonetheless filed an amicus brief in October 2017 arguing the plain text of the FCA compels the conclusion that a matter that violated the first-to-file bar when filed must be dismissed (without prejudice), even if the earlier-filed suit is no longer pending at the time it rules on the motion to dismiss. DOJ echoed the DC Circuit that amendment of a relator s pleading cannot cure a first-to-file violation, as it cannot change the fact that the relator [commenced an action] while a related case was pending. Further to the question of whether or not the first-to-file bar is a subject matter jurisdictional bar, the Second Circuit aligned with the DC Circuit in holding that it is not jurisdictional; rather, the first-to-file bar is a defense that can be raised through a motion to dismiss. 44 This position is contrary to that held by a majority of circuits where the first-to-file rule has been recognized as a subject matter jurisdictional bar that is not waived and, thus, can be raised at any time. WHAT TO EXPECT IN 2018 Although FCA recoveries across all sectors were substantial compared to most prior years, in the aggregate, they were down from 2016 by $1 billion. DOJ s modified enforcement approach in 2017 may impact recoveries in 2018, but it is still too soon to tell has, however, already produced a significant defense victory in the Fifth Circuit based on application of a more rigorous materiality standard under Escobar, and the Eleventh Circuit s reaffirmation of the strict pleading standard under Rule 9(b), discussed above. And, we can reasonably expect 2018 to produce a progression of cases in which the Circuit and District Courts further define and solidify the bounds of the Escobar materiality standard, Rule 9(b) pleading requirements, and related FCA defenses. On a more narrow issue, the Tenth Circuit ruled that substituting relators in an amended complaint implicates the first-to-file bar. 45 What would otherwise be a routine and permissible amendment absent the substitution instead resulted in grounds for dismissal. WHISTLEBLOWER RETALIATION Necessity of nexus to submission of a false claim Under the FCA s anti-retaliation provision, an employer is prohibited from retaliating against an employee for any lawful acts done... in furtherance of an [FCA] action... or other efforts to stop... violations of [the FCA]. 46 While not widely discussed in 2017, the First Circuit in Booker adopted a strict interpretation of the FCA s whistleblower provisions, finding that the FCA s anti-retaliation provision is only implicated if relator s whistleblowing activity is related to the submission of false or fraudulent claims for payment from the United States. 42. See, e.g., U.S. ex rel. Brown v. Pfizer, Inc., Civil Action No , 2017 WL , at *3 (E.D. Pa. Apr. 12, 2017), stay granted, motion to certify appeal granted, Civil Action No , 2017 WL (E.D. Pa. June 22, 2017); U.S. v. Medco Health Sols., Inc., Civ. No RGA, 2017 WL 63006, at *12 (D. Del. Jan. 5, 2017); see also U.S. ex rel. Gadbois v. PharMerica Corp., 809 F.3d 1, 4-5 (1st Cir. 2015). 43. U.S. ex rel. Brown, 2017 WL at * See U.S. ex rel. Hayes v. Allstate Ins. Co., 853 F.3d 80, (2d Cir. 2017), cert. denied sub nom. U.S. ex rel. Hayes v. Allstate Ins. Co., 138 S. Ct. 199 (2017) (citing U.S. ex rel. Heath, 791 F.3d at 120.) 45. U.S. ex rel. Little v. Triumph Gear Sys., Inc., 870 F.3d 1242, 1248 n.8 (10th Cir. 2017) U.S.C.A. 3730(h)(1). DLAPIPER.COM 11

12 ABOUT DLA PIPER S FALSE CLAIMS ACT STRIKE FORCE LITIGATORS The lawyers of DLA Piper s False Claims Act Strike Force hail from diverse backgrounds and have extensive experience representing companies and individuals in False Claims Act cases in jurisdictions across the country. Our healthcareindustry clients include healthcare providers, pharmaceutical companies, FDA-regulated entities, medical device companies, software and medical application developers, electronic medical records enterprises, medical research companies, health insurers, health plans, health insurance brokers, and third-party administrators. Our defense and related industry clients include major defense contractors, automobile manufacturers, major steel producers, telecommunications companies, aerospace manufacturers, engineering services companies and computer services companies. DLA Piper clients also include high-level executives and employees in a wide variety of industries. Among the lawyers on our Strike Force team are former White House officials, former federal prosecutors and highlevel Department of Justice officials. Our knowledge of the investigatory process and experience in all phases of healthcare litigation enables the Strike Force to strategize and work cooperatively with our clients to reduce burdens and avoid interrupting operations and straining workforce relationships. We are experienced appellate advocates and trial attorneys, highly experienced in corporate compliance and healthcare litigation, who use our deep industry knowledge to defend our healthcare clients and help anticipate and avoid problems before they arise. We have defended individuals and entities in some of the most high-profile investigations in the US, as well as bet-the-company litigation involving allegations of fraud and abuse over such issues as reimbursement, coding and clinical documentation, fee-splitting, Stark and Anti-Kickback issues, HIPAA, red flags and other privacy law violations. Clients also turn to DLA Piper s FCA Strike Force for our experience in developing compliance programs, conducting internal investigations and representing clients in criminal, civil and administrative matters at the federal, state and local levels. ABOUT THE FIRM DLA Piper is a global law firm with lawyers located in more than 40 countries throughout the Americas, Europe, the Middle East, Africa and Asia Pacific, positioning us to help clients with their legal needs around the world. Find out more at www. dlapiper.com. LEARN MORE Find out more about developments in False Claims Act litigation by contacting any of the authors: Christopher Oprison Miami and Washington DC T T chris.oprison@dlapiper.com Courtney Saleski Philadelphia and Washington, DC T T courtney.saleski@dlapiper.com John M. Hillebrecht New York T john.hillebrecht@dlapiper.com Andrew J. Hoffman Los Angeles T andrew.hoffman@dlapiper.com Matthew Grosack Miami T matthew.grosack@dlapiper.com DLA Piper is a global law firm operating through DLA Piper LLP (US) and affiliated entities. For further information please refer to Note past results are not guarantees of future results. Each matter is individual and will be decided on its own facts. Attorney Advertising. Copyright 2018 DLA Piper LLP (US). All rights reserved. FEB18 MRS