False Claims Act Year in Review: A year of shifting enforcement policies and continuing jurisprudential uncertainty in the wake of Escobar

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1 False Claims Act Year in Review: 2018 A year of shifting enforcement policies and continuing jurisprudential uncertainty in the wake of Escobar

2 FCA YEAR IN REVIEW Introduction In 2018, False Claims Act (FCA) recoveries by the Department of Justice (DOJ) totaled $2.8 billion. 1 This marks a considerable decrease in recoveries from the more than $3.4 billion in total recoveries in 2017 and more than $4.9 billion in total recoveries in Of those 2018 recoveries, more than $2.1 billion came from settlements and judgments in matters commenced under the qui tam provisions of the FCA, a significant decrease from $3.1 billion in 2017 and $3 billion in In contrast, recoveries in non-qui tam matters in 2018 totaled $767 million a significant increase from the mere $280 million in non-qui tam recoveries during These decreases in qui tam recovery may be a byproduct of the Supreme Court s landmark 2016 decision in Universal Health Services, Inc. v. United States ex rel. Escobar and the DOJ s evolving FCA enforcement priorities (both of which are discussed in more detail below). Industry-specific data reflect recoveries holding steady for the healthcare industry at more than $2.5 billion (up from $2.18 billion in 2017), while recoveries in cases involving the defense industry were cut in half at $107 million (down from $220 million in 2017). Recoveries for all non-healthcare and non-defense industries dropped even further, to $259 million (down from more than $1 billion in 2017 and $2 billion in 2016). The most significant developments for FCA defendants in 2018 came from the DOJ, which announced three shifts in policy favorable to potential FCA defendants. First, the DOJ limited its practice of using regulatory guidance documents as a basis for finding FCA violations in affirmative civil enforcement actions. Second, the DOJ expressed a newfound willingness to move to dismiss FCA cases after declining to intervene, especially in cases where continued proceedings would be contrary to the government s interests. And third, the DOJ expanded the circumstances under which corporations can receive cooperation credit under the policy previously announced in the Yates Memo. There were significant jurisprudential developments as well. These cases reveal that continued uncertainty exists among the federal courts in the aftermath of Escobar. The uncertainty is especially apparent in decisions issued in 2018 applying the Supreme Court s rigorous and demanding materiality requirement and in cases addressing the pleading requirements under Federal Rule of Civil Procedure 9(b). 1 See Justice Department Recovers Over $2.8 Billion from False Claims Act Cases in Fiscal Year 2018, Justice News, Department of Justice (Dec. 21, 2018), available at: These numbers reflect settlements and judgments from civil cases involving fraud and false claims against the government in the fiscal year ending Sept. 30, Id. 2 See Fraud Statistics Overview Oct. 1, 1986 Sept. 30, 2018, Department of Justice, Civil Division, available at: file/ /download?utm_medium= &utm_source=govdelivery. 2

3 The evolving enforcement landscape The Brand, Granston, and Yates Memoranda Some of the most significant FCA developments in 2018 came from the DOJ. Through internal memoranda, the DOJ has begun the process of shifting policies and initiatives regarding FCA enforcement. The most significant of these initiatives involve: (i) a limitation of the DOJ s use of guidance documents as a basis for finding FCA violations; (ii) a revision of the DOJ s policy on dismissing qui tam actions after the government declines to intervene; and (iii) an expansion of the circumstances under which corporations can receive cooperation credit. Limitations on the use of guidance documents On November 16, 2017, then-attorney General Jeff Sessions issued a Memorandum entitled Prohibition on Improper Guidance Documents (the Sessions Memo). Before the Sessions Memo, guidance documents had been used to create new, binding legal obligations. In the FCA context, such documents often formed the basis for claims of wrongdoing in civil enforcement actions. Recognizing that DOJ guidance documents effectively bind private parties without undergoing the rulemaking process, the Sessions Memo declared that the DOJ will no longer engage in this practice. 3 On January 25, 2018, Associate Attorney General Rachel Brand issued a memorandum (the Brand Memo) applying the principles of the Sessions Memo to affirmative civil enforcement actions brought by the DOJ, including affirmative FCA litigation. 4 Significantly for FCA defendants, the Brand Memo declares that DOJ attorneys litigating affirmative civil enforcement cases may not use noncompliance with agency guidance documents as a basis for proving a civil violation occurred. The Brand Memo left open the possibility, however, 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 Brand Memo further clarifies that it does not create any enforceable legal rights for civil litigants. As Acting Associate Attorney General Jesse Panuccio succinctly stated, the Brand Memo stands for the proposition that agency guidance should educate, not regulate. 5 The Brand Memo appears to have curbed the DOJ s prior practice of bypassing the notice-andcomment process to create binding regulatory rules under the guise of agency guidance. Although the caveats in the Memo make it difficult for FCA defendants to enforce the Brand Memo and have watered down the seemingly bright-line prohibition announced in the Sessions Memo, members of the FCA defense bar, by certain accounts, have still been touting the Brand Memo whenever they can. 6 FCA practitioners should consider the significant implications the Brand Memo will have during the investigative phase of an FCA (or other civil enforcement) action. Government dismissal of qui tam actions The FCA vests the Attorney General with discretionary authority to dismiss a qui tam action over a relator s objection. 7 Until recently, the DOJ has seldom exercised this authority. Toward the end of 2017, however, Michael Granston, Director of DOJ s Civil Fraud Section, indicated that the DOJ would make more frequent use of its authority to seek dismissal of meritless qui tam actions. In early 2018, Granston followed through on this monumental shift in policy. 3 Prohibition on Improper Guidance Documents, Department of Justice, Office of Attorney General (Nov. 16, 2017), available at: opa/press-release/file/ /download. 4 Limiting Use of Agency Guidance Documents in Affirmative Civil Enforcement Cases, Department of Justice, Office of Associate Attorney General (Jan. 25, 2018), available at: 5 Acting Associate Attorney General Jesse Panuccio Delivers Remarks at the American Bar Association s 12th National Institute on the Civil False Claims Act and Qui tam Enforcement, Justice News, Department of Justice (June 14, 2018), available at: 6 Miriam Rozen, DOJ Memos Making More Appearances in Whistleblower Cases, The Am. Lawyer (July 27, 2018), available at: americanlawyer/2018/07/27/doj-memos-making-more-appearances-in-whistleblower-cases/ U.S.C. 3730(c)(2)(A). 3

4 FCA YEAR IN REVIEW The Granston Memo On January 10, 2018, Granston issued an internal agency memorandum 8 clarifying the seven circumstances under which DOJ civil prosecutors should consider dismissing FCA claims under Section 3730(c)(2)(A): 1. Curbing meritless qui tam actions ie, where a qui tam complaint is facially lacking merit. 2. Preventing parasitic or opportunistic qui tam actions ie, where a qui tam action duplicates a pre-existing government investigation and adds no useful information to the investigation. 3. Preventing interference with agency policies and programs ie, where an agency has determined that a qui tam action threatens to interfere with an agency s policies or the administration of its programs. 4. Controlling litigation brought on behalf of the United States ie, where dismissal is necessary to protect the DOJ s litigation prerogatives. 5. Safeguarding classified information and national security interests ie, where an FCA action, particularly those involving intelligence agencies or military procurement contracts, could require disclosure of classified information. 6. Preserving government resources ie, where the government s expected costs are likely to exceed any expected gain. 7. Addressing egregious procedural errors ie, where there are problems with the relator s action that frustrate the government s efforts to conduct a proper investigation. Application of the Granston Memo Despite early skepticism as to whether the DOJ would follow through on this policy shift biting the proverbial hand that feeds it in the process the Granston Memo has been applied in practice throughout For example, in November, the DOJ informed the Supreme Court in Gilead Sciences, Inc. v. United States ex rel. Campie a closely watched FCA case with the potential for significant liabilities that, on remand, it would move to dismiss the case on the ground that continued prosecution of the suit is not in the public interest. As the government explained, it had investigated the underlying allegations and determined that allowing the case to proceed past the pleading stage would lead to burdensome discovery requests, would distract from the [FDA s] public-health responsibilities, would impinge on agency decision-making and discretion, and would disserve the interests of the United States. 9 In December 2018, moreover, the DOJ filed a motion in a qui tam action clarifying that it would be seeking the dismissal of 11 cloned FCA complaints brought against drug manufacturers. Each of the actions alleged that patient services provided by the manufacturers, 10 such as assisting with prior authorizations and helping educate patients about prescribed therapies, constituted illegal kickbacks. The DOJ took a dim view of these cases, criticizing the investigative techniques of the whistleblowers, a series of LLCs created specifically for this litigation, and arguing that dismissal is warranted because the government has a strong interest in ensuring that patients have access to basic product support relating to their medication. The DOJ s recent filings are a significant development for FCA defendants and may portend that more dismissals are to come. FCA defendants should consider their strategy in light of the Granston Memo and these recent dismissals, perhaps using them to urge the government to exercise its authority to dismiss FCA actions even where those actions survive a motion to dismiss for failure to state a claim (as was the case in Campie). Legal standard for government dismissal motions Although these developments are promising for FCA defendants, the DOJ s success in obtaining dismissals of non-intervention qui tam actions has been somewhat less promising. Two district court decisions coincidentally filed on the same day highlight existing uncertainty regarding the standard for assessing a government motion to dismiss a qui tam action. 8 Factors for Evaluating Dismissal Pursuant to 31 U.S.C. 3730(c)(2)(A), Department of Justice, Civil Division, Commercial Litigation Branch, Fraud Section (Jan. 10, 2018), available at: 9 Amicus Br. of United States at 15-16, Gilead Scis., Inc., No In January 2019, the Supreme Court denied the petition for a writ of certiorari. 10 See, e.g., United States ex rel. Health Choice Group LLC v. Bayer Corp., No. 5:17-cv-00126; United States ex rel. Health Choice Alliance LLC v. Eli Lilly & Co., No. 5:17-cv-00123; and United States ex rel. Health Choice Advocates LLC v. Gilead Sciences Inc., No. 5:17-cv

5 On the one hand, United States v. Academy Mortgage Corporation a qui tam action involving allegations that the defendant falsely certified loans for government insurance suggests that the DOJ s ability to dismiss a qui tam action is far from certain. There, the government moved to dismiss because proceeding with the suit would drain its resources. In assessing the motion, the court set forth a two-part burden-shifting framework adopted by the Ninth Circuit in Sequoia Orange: (1) the government must identify a valid government purpose and demonstrate a rational relation between dismissal and that purpose and, if satisfied, (2) the burden shifts to the relator to demonstrate that dismissal is fraudulent, arbitrary and capricious, or illegal. 11 The court denied the motion at step one, faulting the government for failing to perform a full investigation of the allegations and for failing to consider the relator s potential recovery in the action as a benefit in its costbenefit analysis. An appeal is pending. On the other hand, in United States ex rel. Maldonado v. Ball Homes, LLC a case similarly involving an alleged fraud in the certification of government-insured loans the district court granted the government s motion to dismiss, applying a more lenient standard adopted by the D.C. Circuit in Swift. 12 Unlike the rational relation test applied by the court in Academy Mortgage, the court declared that under the FCA the government has virtually unfettered discretion to dismiss a False Claims Act case, save exceptional circumstances, such as a showing of fraud on the Court. In dismissing the case, the court acknowledged the government s interests in protecting limited resources from exacting discovery and reining in weak qui tam actions an implicit nod to the Granston Memo. Corporate cooperation The DOJ expanded the circumstances under which corporations can qualify for cooperation credit in civil enforcement proceedings. In 2015, then-deputy Attorney General Sally Yates issued a DOJ-wide memorandum (the Yates Memo) limiting the ability of DOJ prosecutors to offer cooperation credit in civil or criminal actions to only those corporations that provided all relevant facts. 13 But in November 2018, Deputy Attorney General Rod Rosenstein announced a relaxation of the DOJ s ability to grant cooperation credit. 14 In the context of civil cases, Rosenstein explained that companies no longer need to engage in the inefficient and pointless practice of admit[ting] the civil liability of every individual employee to qualify for cooperation credit. Instead, companies need only identify all wrongdoing by senior officials, including members of senior management or the board and identify all other individuals substantially involved in or responsible for the underlying misconduct. By abandoning its counterproductive, all or nothing approach to cooperation in civil cases, the DOJ has increased the flexibility of its civil prosecutors to accept settlements that remedy the harm and deter future violations, so they can move on to other important case. This shift in cooperation policy is a promising development for the ability of corporations to negotiate meaningful civil settlements with the DOJ. In light of the existing uncertainty regarding the standard for analyzing a government motion to dismiss under the FCA as shown by the dueling standards applied in Academy Mortgage and Maldonado it appears that issue will percolate through the federal appellate courts (and perhaps reach the Supreme Court) throughout the upcoming year. 11 United States v. Academy Mortg. Corp., 2018 WL , at *1, *3 (N.D. Cal. June 29, 2018) (quoting United States ex rel. Sequoia Orange Co. v. Baird- Neece Packing Corp., 151 F.3d 1139, 1145 (9th Cir. 1998)) WL , at *1 (E.D. Ky. June 29, 2018) (quoting Swift v. United States, 318 F.3d 250, 252 (D.C. Cir. 2003). 13 Individual Accountability for Corporate Wrongdoing, Department of Justice, Office of Deputy Attorney General (Sept. 9, 2015), available at: documentcloud.org/documents/ /justice-dept-memo-on-corporate-wrongdoing.pdf 14 Deputy Attorney General Rod J. Rosenstein Delivers Remarks at the American Conference Institute s 35th International Conference on the Foreign Corrupt Practices Act, Justice News, Department of Justice (Nov. 29, 2018), available at: 5

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7 Notable defense victories Although there were significant FCA recoveries in 2018 for qui tam relators and the government, the defense bar continued to experience success in the aftermath of Universal Health Services, Inc. v. United States ex rel. Escobar 15. None quite as momentous as last year s decision in United States ex rel. Harman v. Trinity Industries, 16 where the Fifth Circuit overturned a $663 million award based on Escobar s heightened materiality standard, but one notable 2018 victory bears mentioning. In United States ex rel. Ruckh v. Salus Rehabilitation, LLC, 17 the District Court for the Middle District of Florida vacated a $347 million jury verdict for FCA violations. After receiving post-trial briefing, the court overturned the jury s FCA verdict on the ground that the trial record was devoid of any evidence of materiality and scienter. Relying on the Escobar materiality requirements, the court found that the false claims judgment could not stand because evidence showed that government officials paid and continue to pay to this day despite the disputed practices, long ago known to all who cared to know. 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 non-compliance 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. The relators have appealed the district court s ruling to the United States Court of Appeals for the Eleventh Circuit, where the court will have the opportunity to clarify its understanding of Escobar and its rigorous materiality standard. The appeal has been briefed and remains pending, with a decision anticipated sometime in Both Ruckh and Harman show that Escobar marked a seismic shift in the burden on relators seeking to establish materiality for purposes of FCA liability. In particular, both cases are hard proof that courts are willing to hold that materiality is lacking as a matter of law when the government continues to pay claims, despite knowledge of alleged misrepresentations a trend seen in FCA decisions issued throughout 2017 and 2018, as discussed below Universal Health Servs., Inc. v. United States ex rel. Escobar, 136 S. Ct (2016) ( [I]f the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material. Or, if the Government regularly pays a particular type of claim in full despite actual knowledge that certain requirements were viola ted, and has signaled no change in position, that is strong evidence that the requirements are not material. ) F.3d 645, (5th Cir. 2017) F. Supp. 3d 1258, 1260 (M.D. Fla. 2018) 18 See, e.g., United States ex rel. Nargol v. DePuy Orthopaedics, Inc., 865 F.3d 29, 36 (1st Cir. 2017); United States ex rel. Campie v. Gilead Sciences, Inc., 862 F.3d 890, 895 (9th Cir. 2017); United States v. Triple Canopy, Inc., 857 F.3d 174, 175 (4th Cir. 2017); United States ex rel. McBride v. Halliburton Co., 848 F.3d 1027, 1028 (D.C. Cir. 2017); United States ex rel. Spay v. CVS Caremark Corp., 875 F.3d 746, (3d Cir. 2017); United States ex rel. Petratos v. Genentech Inc., 855 F.3d 481, 485 (3rd Cir. 2017) United States ex rel. Searle v. DRS C3 & Aviation Co., 680 F. App x 163, 166 (4th Cir. 2017); Abbott v. BP Expl. & Prod., Inc., 851 F.3d 384, (5th Cir. 2017); United States ex rel. Kelly v. Serco, Inc., 846 F.3d 325, 333 (9th Cir. 2017). 7

8 FCA YEAR IN REVIEW Jurisprudential developments Materiality As was the case in 2017, the courts in 2018 continued to grapple with questions regarding the proper application of Escobar s stringent materiality requirement. A consensus is yet to emerge among the courts of appeals as to how rigorous and demanding the materiality standard is after Escobar. In 2016, the Supreme Court in Escobar clarified that an FCA relator can pursue an implied false certification theory of liability. Under this theory, the FCA is violated when a defendant makes representations in submitting a claim but omits its violations of statutory, regulatory, or contractual requirements and those omissions render the defendant s representations misleading with respect to the goods or services provided. The Court set out a two-part test for establishing liability under an implied certification theory. First, the purportedly false claim must not merely request payment, but also make specific representations about the goods or services provided. And second, the defendant s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements must make those representations misleading half-truths. The materiality standard in prong two of the test is both rigorous and demanding, with mere minor or insubstantial matters deemed insufficient to satisfy this element. A majority of the federal appellate decisions interpreting Escobar s materiality standard were issued in 2017 many of which held that the government s continued payment of claims in the face of allegations of fraud forecloses a finding of materiality and thus precludes liability under an implied certification theory. In 2018, both the Sixth and Ninth Circuits as well as various district courts 19 issued precedential decisions on the FCA s materiality requirement. In United States ex rel. Rose v. Stephens Institute, 20 the Ninth Circuit had to decide whether the two-part standard for implied certification claims under the FCA is a mandatory test or simply a permissive set of factors that could give rise to FCA liability. The court begrudgingly held that qui tam relators must satisfy Escobar s two conditions to prove falsity See, e.g.,united States ex rel. Cressman v. Solid Waste Servs., Inc., No. 13-cv-5693, 2018 WL , at *7 (E.D. Pa. Apr. 6, 2018) (dismissing qui tam action for failure to present evidence to establish materiality under the standard in Escobar); United States ex rel. Bachert v. Triple Canopy, Inc., 321 F. Supp. 3d 613, 619 (E.D. Va. 2018) (granting summary judgment in favor of an FCA defendant on the ground the relator s claim fails because the undisputed record evidence in this case demonstrates that defendant s alleged false certification was not material to the government s decision to pay defendant ) F.3d 1124 (9th Cir. 2018). 21 Although the court observed that the Supreme Court in Escobar did not state that its two conditions were the only way to establish liability under an implied false certification theory, the panel of the Ninth Circuit deciding Rose said it was bound by existing Ninth Circuit precedent holding that Escobar s two-part test is mandatory. Id. (quoting United States ex rel. Campie v. Gilead Sciences, Inc., 862 F.3d 890, 901 (9th Cir. 2017)). 8

9 This ruling is important not only for materiality purposes, but also because the mandatory character of the first-prong of Escobar effectively limits the implied-certification theory to cases involving false claims that make specific representations about the goods or services provided. Turning to the materiality prong, the court held that the defendant a federally funded education institute had failed to establish that its failure to disclose its noncompliance with the Department of Education s incentive compensation ban was immaterial under Escobar. The incentive compensation ban prohibits schools from providing compensation to people (or entities) involved in recruiting or admissions for success in securing enrollments or financial aid. 22 The court held that failure to disclose non-compliance with the ban was material because a reasonable fact-finder could conclude: (i) government payment was conditioned on compliance with the incentive compensation ban; (ii) government enforcement activities showed that it did not allow schools to continue violating the ban while receiving federal funds; and (iii) the case involved substantial forbidden incentive payments. This ruling, at summary judgment no less, shows that Escobar is not a guaranteed barrier to recovery in implied certification cases under the FCA. In United States ex rel. Prather v. Brookdale Senior Living Communities, Inc., a panel of the Sixth Circuit reversed the dismissal of an FCA complaint at the pleading stage on materiality grounds (over a dissent), holding that the defendants claims to the government contained material omissions. 23 In this case, the relator filed a qui tam action against operators of senior living communities that allegedly submitted thousands of claims to the government for Medicare payments without timely submitting a signed physician certification for each, as required by regulation. The majority of the panel held that, despite the absence of information regarding past government payment practices, the defendants alleged noncompliance with the timing and signature requirements for the physician certifications was a material omission. The majority further held that the certification requirement which the court described as a potential mechanism for preventing fraud went to the very essence of the bargain between the defendant and the government because the certification is not a certification unless it complies with all provisions of the regulations. The mandatory nature of the certification as a pre-condition to payment, coupled with relator s allegations regarding the government s consistent emphasis on the importance of the timing requirement, was sufficient to plausibly establish that defendant s omissions were material U.S.C. 1094(a)(20); 34 C.F.R (b)(22) F.3d 822, 826 (6th Cir. 2018). 24 The majority further held that without proof that the government was aware of the alleged non-compliance with the certification requirement, the relator s failure to plead facts regarding the government s payment practices in response to the claims has no bearing on the materiality analysis. 9

10 FCA YEAR IN REVIEW The dissent, authored by Judge David McKeauge, agreed that the lack of information regarding the government s past payment practices does not technically hurt the relator and only removed one of her weapons. But Judge McKeague disagreed sharply with the majority s conclusion that the relator had stated a plausible FCA claim, arguing that the alleged regulatory violations did not go to the essence of the bargain and, in any event, were insufficient to show that any of the claims to Medicare were actually false. A petition for certiorari is pending before the Supreme Court. Whether or not the Supreme Court takes the case, Prather shows that there remains considerable differences of opinion regarding Escobar s materiality standard. Rule 9(b) pleading standard Federal Rule of Civil Procedure 9(b) imposes a heightened pleading standard of allegations of fraud, requiring a claimant to plead with particularity the circumstances ie, 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). In 2017, several circuit courts addressed whether a strict pleading standard is appropriate under Rule 9(b) or whether a more relaxed pleading standard is warranted 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. 25 In 2018, the Eleventh, Sixth, and Tenth Circuits issued decisions addressing the applicability of Rule 9(b) s particularity standard in the FCA context. In early 2018, the Eleventh Circuit in its non-precedential decision in United States ex rel. Nancy Chase v. HPC Healthcare, Inc. 26 applied a strict 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. Tracing the traditional Rule 9(b) standard, the court held the complaint deficient for failing to 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. This strict, traditional approach to the Rule 9(b) pleading standard comports with several 2018 district court rulings dismissing a relator s qui tam action for failing to identify with particularity what claims [the defendant] submitted that were impliedly false as required by Federal Rule of Civil Procedure 9(b) and thus did not provide a reasonable basis for the court to infer that claims had been submitted on behalf of any particular patient. 27 These decisions confirm that, in certain jurisdictions, a relator still must allege with particularity the existence of specific and identifiable false claims submitted by the defendant. 25 United States ex rel. Booker v. Pfizer, Inc., 847 F.3d 52, (1st Cir. 2017); United States ex rel. Nargol v. DePuy Orthopaedics, Inc., 865 F.3d 29, 36 (1st Cir. 2017); United States ex rel. Chorches for Bankr. Estate of Fabula v. Am. Med. Response, Inc., 865 F.3d 71, (2d Cir. 2017); United States ex rel. Colquitt v. Abbott Labs., 858 F.3d 365 (5th Cir. 2017); United States ex rel Hirt v. Walgreen Co., 846 F.3d 879, 881 (6th Cir. 2017); United States ex rel. Ibanez v. Bristol- Myers Squibb Co., 874 F.3d 905 (6th Cir. 2017) F. App x 783, 786 (11th Cir. 2018). 27 United States ex rel. Armstrong-Young v. Carelink Hospice Servs., Inc., No. 15-cv WHO, 2018 WL , at *3 (N.D. Cal. Oct. 1, 2018); see United States ex rel. Campos v. Johns Hopkins Health Sys. Corp., No. 17-cv-2156-CCB, 2018 WL , at *4 (D. Md. Apr. 24, 2018) (similar). 10

11 In mid-2018, the Tenth Circuit addressed the Rule 9(b) pleading standard in United States ex rel. Polukoff v. St. Mark s Hospital 28 a case involving allegations that a medical professional billed the government for medically unnecessary surgeries. At the outset, Polukoff is significant independent of its treatment of the pleading standard: the court held that [i]t is possible for a medical judgment to be false or fraudulent within the meaning of the FCA. After concluding that the FCA claims were legally viable, the Tenth Circuit reversed the district court s decision to dismiss the complaint for failure to satisfy 9(b). The Tenth Circuit took a far more relaxed view of the 9(b) standard, stating that, in determining whether a plaintiff has satisfied Rule 9(b), courts may consider whether any pleading deficiencies resulted from the plaintiff s inability to obtain information in the defendant s exclusive control. So long as the circumstances of the fraud be pled with enough specificity to put defendants on notice as to the nature of the claim, in the Tenth Circuit a qui tam action satisfies the particularity requirements of Rule 9(b) whether or not the plaintiff pleads with particularity the presentment of a false claim to the government. This broad pleading standard may be difficult to reconcile with the Supreme Court s admonition that the Federal Rules of Civil Procedure do not unlock the doors of discovery for a plaintiff armed with nothing more than conclusions. 29 Finally, the Sixth Circuit s divided decision in Prather (discussed above) shows that uncertainty exists regarding the application of the heighted pleading standard for allegations of fraud underlying FCA actions. The majority recognized that the relator bore the burden of provid[ing] examples of specific fraudulent conduct that are representative samples of the scheme, but concluded that the allegations in the complaint were sufficient. In contrast, the dissent read Escobar as strongly suggest[ing] that materiality should be subject to Rule 9(b) s pleading standard and that such a showing requires a relator to explain why the omissions were material to the government and how the government was misled by those omission. Under this standard, Judge McKeague concluded that the relator s claim should have been dismissed for failing to comport with Rule 9(b). Despite some uncertainty about the strictures of Rule 9(b) in the FCA context, and the circumstances under which its applicable, the rule remains a potent weapon for defendants seeking to dismiss qui tam actions at the pleading stage and, in the process, avoid costly and time-consuming FCA discovery F.3d 730, 741 (10th Cir. 2018). 29 Ashcroft v. Iqbal, 556 U.S. 662, (2009). 11

12 FCA YEAR IN REVIEW Although this tolling provision plainly applies where the government intervenes in an FCA qui tam action, the federal courts of appeals are divided as to (i) whether a qui tam relator can invoke Section 3731(b)(2) where the government declines to intervene and (ii) if so, whether the provision is triggered by the relator s knowledge or the government s knowledge. Statute of limitations In November 2018, the United States Supreme Court granted certiorari in Cochise Consultancy, Inc. v. United States ex rel. Hunt, signaling that it is prepared to resolve a three-way split among the federal appellate courts regarding the FCA s statute of limitations. All civil actions based on false claims, whether brought by the United States or a relator, must be timely filed in accordance with the FCA s statute of limitations provision. 30 Pursuant to that provision, an FCA action must be brought within the later of (1) six years after the date of the FCA violation or (2) three years after the official of the United States charged with responsibility to act knows or should have known of the material facts underlying the false claim, but in no event more than ten years after the FCA violation. The latter of these two potentially applicable dates can operate to extend the deadline for filing an FCA action well beyond the otherwise applicable six-year limitations period by tolling the accrual of the limitations period up to a maximum of ten years until the facts underlying the FCA violation are known (or should have been discovered) by an official responsible for acting on the fraud. The Fourth, Fifth, and Tenth Circuits have held that an FCA relator cannot invoke Section 3731(b)(2) where the government declines to intervene in a qui tam action. 31 In these jurisdictions, Section 3731(b)(2) applies only in cases in which the United States is a party. These courts take the view that not only would it be absurd for the relator s filing deadline to be dictated entirely by the knowledge of the government a nonparty to the case but also such a rule would create strong financial incentives for relators to wait as long as possible before filing suit and informing the government of the underlying fraud. The Ninth Circuit has reached the opposite conclusion, holding that a qui tam plaintiff can invoke Section 3731(b)(2) where the government declines to intervene. 32 As to the event that triggers Section 3731(b)(2), the Ninth Circuit further held that the limitations period begins to accrue when the relator knows or should have known of the material facts underlying the FCA claim. The Eleventh Circuit in Cochise Consultancy adopted a different interpretation of Section 3731(b)(2) than every other federal appellate court that has addressed the issue. 33 The court agreed with the Ninth Circuit that a relator can invoke Section 3731(b)(2) where the government declines to intervene, but disagreed that the relator s knowledge of the material facts is the relevant triggering event. According to the Eleventh Circuit, the knowledge of a government official, not the relator, is the relevant event that triggers the accrual of the limitations period. Accordingly, unlike in other jurisdictions, a relator can now file a timely FCA claim in the Eleventh Circuit within three years of the date on which the government first learns of the facts regarding the 30 See 31 U.S.C. 3731(b). 31 United States ex rel. Sanders v. N. Am. Bus Indus., Inc., 546 F.3d 288, 293 (4th Cir. 2008); United States ex rel. Sikkenga v. Regence Bluecross Blueshield of Utah, 472 F.3d 702, (10th Cir. 2006); United States ex rel. Erskine v. Baker, 213 F.3d 638, 2000 WL , at *1 (5th Cir. 2000). 32 See United States ex rel. Hyatt v. Northrop Corp., 91 F.3d 1211, 1216 (9th Cir. 1996). 33 See 887 F.3d 1081, 1089 (11th Cir. 2018), cert. granted sub nom. Cochise Consultancy, Inc. v. United States ex rel. Hunt, No , 2018 WL (U.S. Nov. 16, 2018). 12

13 Kickback schemes and tainted claims In early 2018, the Third Circuit in United States ex rel. Greenfield v. Medco Health Solutions, Inc., 35 addressed the framework for FCA claims based on Anti-Kickback Statute (AKS) violations. The AKS provides that a claim that includes items or services resulting from a violation of [that Statute] constitutes a false or fraudulent claim for purposes of [the FCA]. 36 In Greenfield, the court expounded on the so-called tainted claims theory, explaining the type of link required between the AKS violations and false claims to establish that the claims were tainted by the kickbacks. FCA violation, even if the relator knew of those facts well before the government did so long as the relator files the action within ten years of the underlying FCA violation. The need for Supreme Court intervention is illustrated by the fact that the relator in Cochise Consultancy did not file suit until more than six years after the alleged FCA violation and more than three years after he learned of that violation. As such, the relator s FCA action while timely filed in the Eleventh Circuit would have been dismissed as time-barred had it been filed in the Fourth, Fifth, Ninth, or Tenth Circuits. The tainted claims theory is based on the view that [t]he Government does not get what it bargained for when a defendant is paid for services tainted by a kickback. To establish that claims were tainted by AKS violations, relators often allege that the submission of claims during the time period in which the kickback scheme occurred is alone sufficient to establish the claims are tainted. In contrast, the AKS itself states that it covers only a claim that includes items or services resulting from an AKS violation. This limiting statutory language is favorable to FCA defendants seeking to argue that the tainted claims are only those with a close causal link to the alleged kickback scheme. These arguments played out in Greenfield. In light of these divergent views, the Supreme Court in Cochise Consultancy will have to choose among three competing interpretations of Section 3731(b)(2). The Court s decision will likely have significant implications for all FCA defendants and, regardless of the outcome, is likely to restore much-needed uniformity regarding the proper application of Section 3731(b)(2) in nonintervention actions. Potential FCA defendants should be on alert for the Supreme Court s decision, which is anticipated by no later than June 2019, because permitting relators to toll their filing deadlines by invoking Section 3731(b)(2) would impose significant financial burdens on FCA defendants. 34 In Greenfield, the district court dismissed the relator s FCA claim on the ground that he was required (but failed) to prove a direct link between the alleged scheme and each false claim. On appeal, the defendant agreed with this standard, while the relator argued that a mere temporal connection between the two was sufficient to survive summary judgment. The government (as amicus in support of neither party) argued as a third approach that all that needed to be shown was a claim that sought reimbursement for medical care that was provided in violation of the AKS. Recognizing these three competing standards, the Third Circuit framed the issue as what link is sufficient to connect 34 As the Chamber of Commerce observed in an amicus submission to the Court, FCA litigation which touch[es] on nearly every sector of the economy, including defense, education, banking, technology, and healthcare is time-consuming and costly. Amicus Br. of Chamber of Commerce 16, Cochise Consultancy Inc., No Applying a ten-year limitations period to relator-only FCA actions would therefore cause businesses to incur significant discovery expenses, including additional expense ex ante due to the longer limitations period and could cause FCA defendants to suffer reputational hardship from simply having to defend a False Claims Act action well after the alleged violation occurred. Id. at 15, 18. These concerns would become an unfortunate reality for FCA defendants nationwide if the Supreme Court affirms the Eleventh Circuit s interpretation of Section 3731(b)(2) in Cochise Consultancy F.3d 89 (3d Cir. 2018) U.S.C. 1320a-7b(g). 13

14 FCA YEAR IN REVIEW an alleged kickback scheme to a subsequent claim for reimbursement: a direct causal link, no link at all, or something in between. The court ultimately chose the middle-ground approach. At the outset, the court in Greenfield clarified that the mere fact claims were submitted during an ongoing kickback scheme is insufficient to establish that all those claims were tainted. But the Third Circuit rejected the view that an actual causal link between a claim and an AKS violation is required either, since a relator need not have proof that the underlying medical care would not have been provided but for the kickback to survive summary judgment. In the end, the court held that to survive summary judgment a relator must present specific evidence that ties the alleged kickback to a specific false claim. Because the relator failed to show that at least one of the defendants claims sought reimbursement for medical care that was provided in violation of the AKS and relied instead only on temporal proximity the court affirmed the dismissal of the qui tam action. The court s ruling is significant for tainted-claims theories of FCA liabilities. Although the court did not adopt the more exacting actual causation standard, it did clarify that a relator cannot survive summary judgment by simply hypothesizing that the claims are tainted based solely on the temporal connection between the schemes and the claims. First to file: mandatory dismissal 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. 37 An action is related to an earlier FCA action if it alleges a fraudulent 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. Although not widely discussed in 2017, both the Second Circuit and the government joined an emerging consensus by clarifying that dismissal of a complaint is required for first-to-file violations. In United States ex rel. Wood v. Allergan, Inc., the Second Circuit addressed the contours of the first-to-file bar. 38 There, the relator s complaint alleged the defendant participated in an FCA kickback scheme involving prescription drugs. At the time the relator s complaint was filed, however, two separate, sealed qui tam actions involving a similar kickback scheme were pending in other federal district courts. Those two actions were dismissed, however, several years after the action in Woods. The relator sought to file an amended pleading to avoid the first-to-file bar, arguing that the bar did not apply to the amendment because the other two, related FCA actions had been dismissed previously. Although the district court accepted that argument, the Second Circuit disagreed. First, the court held that the first-to-file bar applied to the case because the actions were related meaning the claims incorporate the same material elements of fraud in the earlier action. In so holding, the court clarified that the actions remain related regardless of whether the complaints in the earlier-filed suits had been inadequately pled. As the court recognized, this defense-friendly approach stands in stark contrast to the Sixth Circuit s approach to first-to-file claims. The Sixth Circuit has held that an earlier-filed FCA action that fails to satisfy the Rule 9(b) pleading standard cannot serve as a bar to a related, later-filed action U.S.C. 3730(b)(5) F.3d 163 (2d Cir. 2018). 39 Walburn v. Lockheed Martin, Corp., 431 F.3d 966, 973 (6th Cir. 2005). 14

15 Next, the court rejected the proposition that the relator cured his first-to-file violation by amending his complaint after the related actions had been dismissed, holding that a violation of the first-to-file bar requires the dismissal of the second-filed lawsuit. Because it cannot be remedied by amending or supplementing the complaint, the court concluded that the relator s FCA action was incurably flawed from the moment he filed it. This ruling has important implications for the timeliness of a qui tam action. As the court observed: If a violation of the first-to-file bar cannot be cured with an amended pleading after the earlier-filed action is dismissed, the statute of limitations may run on the later-filed case before the first-filed case has been disposed of. The Second Circuit s decision reflects an emerging view among the courts that dismissal is the only remedy for a first-to-file violation. That view was endorsed by the government in an amicus brief submitted to the Supreme Court in 2018, arguing that dismissal without prejudice is the required remedy for a first-to-file violation. 40 Whistleblower retaliation Under the FCA s anti-retaliation provision, an employee is entitled to relief if she was discharged, demoted, suspended, threatened, harassed, or in any other manner discriminated against in the terms and conditions of employment because of lawful acts conducted in furtherance of an FCA action. 41 In early 2018, the Third Circuit joined the majority of other jurisdictions to clarify that the retaliation claims under the FCA require proof of but-for causation. 42 Thus, a plaintiff must show that he or she would not have been discharged (or otherwise punished by the employer) but-for the plaintiff s participation in protected conduct, such as raising concerns with the employer regarding potential FCA violations. 40 Amicus Br. of United States at 14, United States ex rel. Carter v. Halliburton Co., No U.S.C. 3730(h)(1). 42 DiFiore v. CSL Behring, LLC, 879 F.3d 71, 73 (3d Cir. 2018). 15

16

17 Emerging developments Third-party liability In 2018, both the DOJ and courts signaled that thirdparties are subject to FCA liability. In February 2018, the government endorsed third-party FCA liability when it intervened in an FCA action and filed an intervenor complaint against a pharmacy and the private equity fund that had a controlling stake in the pharmacy. 43 The complaint alleges that the fund acted with the intent required to establish FCA liability because, [a]s an investor in health care companies, [it] knew or should have known that the actions of its portfolio company were subject to the AKS and other regulations designed to prevent fraud. In a press release, a DOJ prosecutor stressed that the Department will hold pharmacies, and those companies that manage them, responsible for using kickbacks to line their pockets at the expense of taxpayers and federal health care beneficiaries. 44 Motions to dismiss are pending in that case. One week later, the DOJ announced that it had reached a $149.5 million settlement with Deloitte & Touche arising from Deloitte s role as the independent outside auditor of a now-defunct mortgage originator. 45 In that case, the government contended that Deloitte s audits knowingly deviated from applicable auditing standards, a deviation that effectively enabled the mortgage originator to defraud the government with respect to the issuance of government-insured mortgage loans. In September 2018, in Massachusetts ex rel. Martino- Fleming v. S. Bay Mental Health Ctr., Inc., the District Court for the District of Massachusetts denied a private equity firm s motion to dismiss an FCA action seeking to hold the firm and its principals directly liable for false claims submitted by one of the firm s portfolio companies. The court rejected the argument that the relator failed to allege how the firm (or its principals) directly caused the portfolio company to submit false claims. In so ruling, the court held that the private equity firms could be held liable where the submission of false claims by another entity was the foreseeable result of a business practice and where the firm had direct involvement in the submission of false claims. These DOJ announcements set the tone for the year, indicating that the government is willing to aggressively pursue FCA claims against third parties. And the district court s decision in Martino-Fleming shows that this theory of liability has teeth. As a result, entities that do not directly submit claims to the government, such as private equity firms and independent auditors, should be aware of the potential for FCA liability. 43 United States ex. rel. Medrano v. Diabetic Care Rx, LLC, Case No. 15-cv (S.D. Fla.), ECF No United States Files False Claims Act Complaint Against Compounding Pharmacy, Private Equity Firm, and Two Pharmacy Executives Alleging Payment of Kickbacks, Justice News, Department of Justice (Feb. 23, 2018), available at: (emphasis added). 45 Deloitte & Touche Agrees to Pay $149.5 Million to Settle Claims Arising From Its Audits of Failed Mortgage Lender Taylor, Bean & Whitaker, Justice News, Department of Justice (Feb. 21, 2018), available at: 17

18 FCA YEAR IN REVIEW Alternative remedy rights and criminal forfeiture proceedings Under the FCA, the government may pursue any alternative remedy available in lieu of intervening in a qui tam action, such as pursuing a criminal prosecution for fraud. 46 Ordinarily, if the government does so, the qui tam relator is afforded the same rights in the alternative proceeding as it would have had if the government had intervened in the qui tam action. But when the government prosecutes the fraud and pursues criminal forfeiture instead of intervening, it is unclear whether the relator can intervene in the forfeiture proceeding. In October 2018, the Eleventh Circuit held that, even if the FCA could be read to allow intervention, the criminal forfeiture statute prohibits qui tam plaintiffs from intervening in a related criminal forfeiture proceeding. 47 The court clarified, however, that its holding would not prevent the relator from receiving a share of the recovery because the government had provided assurances that a qui tam defendant can deduct any forfeiture from the qui tam award. Although these issues do not arise frequently, it is an interesting development nonetheless. Indefinite seal and FCA claims releases After a relator files a sealed qui tam action and serves it on the government, the FCA requires the complaint to remain under seal for 60 days. 48 The purpose of the sealing provisions is to allow the government time to investigate the alleged false claim and to prevent qui tam plaintiffs from alerting a putative defendant to possible investigations. 49 A court may extend the seal period for good cause shown. 50 But in a surprising move, in October 2018, a district court rejected the government s eleventh request for an extension of the deadline and, later, denied a motion for reconsideration due to a failure to establish good cause. 51 This is significant because the government, the relator, and the defendant all joined the request for the court to extend the seal period, but the court nonetheless held the parties to their burden of showing good cause. Moreover, in another significant ruling, a district court judge held that contractual releases of FCA claims are void and unenforceable as a matter of public policy. 52 There, the relators signed Separation Agreements with the defendant (their former employer), which released the defendant from any and all claims. Despite concluding that this [contractual] language is expansive enough to include FCA claims, the court declined to enforce the release on the ground that enforcement of the release [would] interfere[] with and frustrate[] the FCA s goals of incentivizing individuals to reveal fraudulent conduct to the government U.S.C. 3730(c)(5). 47 United States v. Couch, 906 F.3d 1223, 1225 (11th Cir. 2018) U.S.C 3730(b)(2). 49 United States ex rel. Grupp v. DHL Express (USA), Inc., 742 F.3d 51, 54 (2d Cir. 2014) U.S.C. 3730(b)(3). 51 No. CV , 2018 WL , at *4 (E.D. Pa. Oct. 16, 2018) 52 United States ex rel. Class v. Bayada Home Health Care, Inc., 16-cv-680 (E.D. Pa. Sept. 24, 2018) 18

19 What to expect in 2019 In 2018, FCA recoveries fell for the second consecutive year a decline that did not affect the healthcare sector, but significantly affected defense and other federal departments. This emerging trend could be due to the DOJ s modified enforcement approach in 2018, as evidenced by the Brand and Granston Memos and the clarification of the Yates Memo. It also could be due to the difficulties that relators and the government have had in meeting their burden of satisfying Escobar s rigorous materiality standard for implied false certification claims. With evolving enforcement priorities and significant disagreements and uncertainty surrounding the proper standards for FCA liability, we can expect that at some point the Supreme Court will weigh in further on these issues. 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 healthcare-industry 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 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, who use our deep industry knowledge of corporate compliance and healthcare litigation 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 United States, 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 Statute 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. 19

20 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 companies with their legal needs anywhere in the world. Find out more at Learn more Find out more about developments in False Claims Act litigation by contacting any of the authors: Christopher Oprison Andrew J. Hoffman Miami Los Angeles T Washington, DC andrew.hoffman@dlapiper.com chris.oprison@dlapiper.com Courtney Saleski Philadelphia and Washington, DC T T courtney.saleski@dlapiper.com Brenna Kelly Philadelphia T brenna.kelly@dlapiper.com John M. Hillebrecht New York T john.hillebrecht@dlapiper.com Ben Fabens-Lassen Philadelphia T ben.fabens-lassen@dlapiper.com Ilana Eisenstein Philadelphia T ilana.eisenstein@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 2019 DLA Piper LLP (US). All rights reserved. JAN19 MRS