FALSE CLAIMS ACT UPDATE

FALSE CLAIMS ACT UPDATE A DAY ON HEALTH LAW PENNSYLVANIA BAR INSTITUTE October 9, 2014 Margaret L. Hutchinson, Esquire Assistant United States Attorney Eastern District of Pennsylvania 615 Chestnut Street, Suite 1250 Philadelphia, PA 19106 Phone: (215) 861-8282 Fax: (215) 861-8609 E-Mail: margaret.hutchinson@usdoj.gov David M. Laigaie, Esquire ECKERT SEAMANS CHERIN & MELLOTT, LLC Two Liberty Place 50 South 16 th Street, 22 nd Floor Philadelphia, PA 19102 Phone: (215) 851-8386 Fax: (215) 851-8383 E-Mail: dlaigaie@eckertseamans.com Eric W. Sitarchuk, Esquire MORGAN, LEWIS & BOCKIUS 1701 Market Street Philadelphia, PA 19103-2921 Phone: (215) 963-5840 Fax: (877) 432-9652 E-Mail: esitarchuk@morganlewis.com

Tab Description 1. United States ex rel. Edward O Donnell v. Countrywide Home Loans, Inc., et al., No. 12-cv-1422 (JSR), 2014 WL 3734122 (S.D.N.Y., July 30, 2014) 2. United States ex rel. Ralph D. Williams, United States of America, and State of Georgia v. Health Mgmt. Assocs., Inc., et al., No. 3:09-cv-130 (CDL), 2014 U.S. Dist. LEXIS 85273 (M.D. Ga., June 24, 2014) 3. Thomas Foglia, et al. v. Renal Ventures Mgmt., Inc., No.: 12-4050, 2014 U.S. App. LEXIS 14858 (3d Cir., June 6, 2014) 4. United States ex rel. Todd Heath v. Wisconsin Bell, Inc., No. 12-3383, 2014 U.S. App. LEXIS 14608 (7 th Cir., July 28, 2014) 5. United States, et al., ex rel. Peggy Ryan v. Endo Pharm., Inc., No. 11-7767 2014 U.S. Dist. LEXIS 84815 (E.D. Pa., June 23, 2014) 6. United States, ex rel. Susan Ruscher, et al., v. Omnicare, Inc., No.: 4:08-cv-3396, 2014 U.S. Dist. LEXIS 79885 (U.S.D.C. So. Dist. TX, June 12, 2014) 7. Kellogg Brown & Root Services, Inc., et al. v. United States ex rel. Benjamin Carter, United States Supreme Court, No. 12-1497 8. United States ex rel. Absher v. Momence Meadows Nursing, No.: 04-cv-02289 (7 th Cir., Aug. 20, 2014)

United States ex rel. O Donnell v. Countrywide Home Loans, Inc., 2014 WL 3734122 (S.D.N.Y. July 30, 2014) In 2009, Countrywide settled allegations filed against it by the SEC that Countrywide had falsely assured investors that in the period between 2005 and 2007 it was primarily a prime quality mortgage lender when in fact its loans were riskier and riskier. In 2012, a whistleblower, Edward O Donnell, a former vice president of Countrywide, filed a qui tam action under the FIRREA statute alleging that Countrywide launched another program known as the High Speed Swim Lane or HSSL or Hustle to perpetrate a subsequent fraudulent scheme from 2007 to 2008. O Donnell alleged that this scheme resulted in Fannie Mae and Freddie Mac paying Countrywide for these fraudulently misrepresented loans and O Donnell named as defendants Countrywide and one of its officers, Rebecca Mairone. The United States intervened in the suit and proved, as the jury found, that Countrywide and Mairone had engaged in an intentional scheme to misrepresent the quality of the mortgage loans that it processed through this program and sold to Fannie Mae and Freddie Mac. This decision contains an extensive discussion of the appropriate criteria to use to determine penalties in a FIRREA case. The Court first found that the amount of the Government s loss and the amount of the defendants gain were identical. This amount consisted of the price that Fannie Mae and Freddie Mac paid to Countrywide for all the mortgages regardless of whether some of the mortgages turned out to have actual value. The total was almost $3 billion and the Court set this amount as the maximum possible penalty. The Court then reduced the penalty by the percentage of mortgages that the Government s own expert concluded were not materially defective resulting in a penalty assessed against Countrywide of over $1.2 billion. The Court then

addressed the penalty to be assessed against the individual, Mairone. The Government sought $1.2 million but, based on an ability to pay analysis, the Court reduced the penalty to $1 million to be paid in installments.

United States ex rel. Ralph D. Williams v. Health Mgmt. Assocs., Inc., et al., 2014 U.S. Dist. LEXIS 85273 (M.D. Ga., June 24, 2014) The whistleblower, the former Chief Financial Officer of a hospital owned by Health Management Associates, Inc. ( HMA ), filed a qui tam action contending that HMA and Tenant Healthcare Corporation paid illegal kickbacks to three clinics that provided prenatal services to undocumented aliens. The kickbacks incentivized the clinics to refer undocumented aliens to the hospitals to deliver their babies, a service that can be billed to Medicaid. HMA Monroe (a hospital owned by HMA at which the whistleblower worked) contracted with the clinics to provide Spanish translation and Medicaid eligibility services for HMA Monroe s Hispanic patients. The clinics were paid between $15,000 to $20,000 per month. The whistleblower alleged that the contract was a sham designed to conceal the underlying financial motive, which was to purchase Clinic referrals by... HMA Monroe. The whistleblower further alleged that the HMA Monroe CEO told him that the contract with the clinics had been cloned from an agreement Tenant had with the Clinics and that the Clinics referrals generated large volumes of Medicaid deliveries for Tenant. The whistleblower also alleged that HMA performed a financial feasibility analysis of the contract with the clinics in which it assessed the volume and value of Medicaid deliveries expected from the clinics, that HMA hid the agreement with the clinics by keeping it out of its contract monitoring system, and that HMA Monroe did not even use the clinics for translation services. The State of Georgia and the United States intervened in the claims.

The hospitals filed a Motion to Dismiss asserting that the Complaint failed to plead violations of the Anti-Kickback Statute or the False Claims Act. As to the Anti-Kickback allegations, the hospitals argued that the Complaint did not adequately allege that the hospitals paid remuneration to the clinics to induce them to refer Medicaid patients to the hospitals. Rather, the hospitals asserted that the complaint and exhibits simply demonstrated that the hospitals contracted for certain services and that they merely hoped that the clinics might refer patients to the hospital. The hospitals also argued that the complaint did not adequately allege that the hospitals acted knowingly and wilfully. The Court rejected these arguments, noting that although the mere hope or expectation of future referrals may not make an otherwise legitimate business relationship illegal under the Anti-Kickback Statute, in this case the whistleblower alleged that the hospitals entered into the agreements for the purpose of generating referrals. The Court noted that the hospitals hyper-technical reading of the Plaintiff s Complaints is disingenuous. The Court further derided HMA Monroe s argument that the claim should be dismissed because the person who signed the challenged contract had no authority to do so: to describe this argument as unpersuasive is charitable. It would not be hyperbole to describe it as frivolous. The Court also held that the Complaint properly alleged violations of the False Claims Act. The hospitals argued that the prior to passage of the Patient Protection and Affordable Care Act on March 23, 2010, compliance with the Anti-Kickback Statute was merely a condition of participation in the Georgia and South Carolina Medicaid programs and not a condition of payment. Therefore, prior to passage of PPACA, a violation of the Anti-Kickback Statute could not give rise to False Claims Act liability. The Court disagreed.

The Complaint also alleged that the hospitals violated the False Claims Act when they submitted cost reports which included information about the patients referred by the clinics thereby increasing the hospitals disproportionate share payments. As a general matter, hospitals are paid more if they provide services to a disproportionate number of low income patients. The Court rejected the hospitals challenge to this claim noting that whether plaintiffs will produce sufficient evidence on this claim to prevail at trial or to survive summary judgment is not before the Court today.

United States ex rel. Foglia v. Renal Ventures Management, LLC, 2014 WL 2535339 (3d Cir. June 6, 2014) Foglia, a registered nurse, was employed by defendant Renal, a dialysis care services company, starting in March, 2007 and was terminated in November, 2008. Foglia filed a qui tam complaint alleging that at the Renal dialysis center where he worked, employees harvested the overfill from single use vials of Zemplar, a prescription drug used for the prevention and treatment of secondary hyperparathyroidism associated with chronic kidney disease, thereby using less than one vial per patient. Foglia alleged that the overfill was then combined with other harvested amounts and administered to other patients. Foglia also alleged that Renal nonetheless charged Medicare for one vial for every patient. The Government declined to intervene and Renal moved to dismiss under FRCP 9(b) arguing that Foglia had failed to plead with sufficient particularity because he had failed to identify specific false claims. The District Court granted Renal s motion to dismiss and Foglia appealed to the Third Circuit. The Third Circuit had not previously set a standard for 9(b) compliance in False Claims Act cases. It rejected the requirement of the Fourth, Sixth, Eighth, and Eleventh Circuits that representative samples of claims must be pled in order to satisfy 9(b). Instead the Third Circuit adopted the standard articulated in the First, Fifth and Ninth Circuits that in order to satisfy 9(b) a complaint must contain particular detailed allegations of a scheme to submit false claims paired with reliable indicia that leads to a strong inference that claims were actually submitted to the Government for payment. No specific claims need be identified to survive 9(b). Using that standard the Third Circuit concluded that Foglia s complaint contained sufficient particularity to satisfy 9(b) and it reversed the district court dismissal.

United States ex rel. Heath v. Wisconsin Bell, Inc., 2014 U.S. App. LEXIS 14608 (7 th Cir., July 28, 2014) In this case, the Seventh Circuit Court of Appeals reversed the dismissal of a nonintervened qui tam complaint based on public disclosure. The whistleblower alleged that Wisconsin Bell was overcharging school districts for telecommunication services it provided under the Education Rate Program, a Federal subsidy program. The Education Rate Program required that telecommunication providers not charge school districts rates less than the amounts charged for similar services to other parties. FCC Regulations further required the telecommunication services providers to offer schools the lowest corresponding price. The whistleblower operated a business that audited telecommunication bills to identify improper charges. His company was retained by several Wisconsin school districts. In the course of performing these audits, the whistleblower ascertained that certain schools paid much higher rates than others for the same services. As a result, the whistleblower alleged that many Wisconsin school districts were overcharged and therefore the Federal government paid subsidies that were substantially greater than they should have been. The whistleblower also located on the internet a copy of the contract between Wisconsin Bell and the Wisconsin Department of Administration, which is called the Voice Network Service Agreement or VNS Agreement. By reviewing the VNS Agreement, the whistleblower determined that Wisconsin Bell provided the state lower rates than it provided school districts, again resulting in inflated Federal subsidies.

The whistleblower sued Wisconsin Bell alleging both schemes. The United States declined to intervene. The district court dismissed the case, holding that the whistleblower s reliance on the VNS Agreement, which was published at the DOA s website, disqualified the whistleblower s suit under the public disclosure bar. The Circuit Court reversed. The Court did not reach the question of whether publication of the VNS Agreement on the internet constituted a public disclosure, instead it held that the VNS Agreement did not amount to a disclosure of the allegations or transactions of fraud contained in the Complaint. The Court concluded that no one could view the agreement in a vacuum and realize that Wisconsin Bell was overcharging school districts. While the VNS Agreement may provide a measure for the LCP or in this case damages it certainly cannot, per se, establish fraudulent behavior. The Court also explained that the whistleblower was not one of the opportunistic plaintiffs who have no significant information to contribute of their own.

United States ex rel. Ryan v. Endo Pharmaceuticals, Inc., 2014 WL 2813103 (E.D. Pa. June 23, 2014) Three separate qui tam actions were filed against Defendants, Endo Health Solutions, Inc. and its subsidiary, Endo Pharmaceuticals, Inc. for violations of the False Claims Act stemming from Endo s promotion of the drug Lidoderm for off-label uses. Ryan filed her qui tam in 2005. Weathersby filed his in 2010 and Dhillon filed his in 2011. All three alleged the off-label marketing of Lidoderm as the conduct triggering the False Claims Act liability. The Government intervened for purposes of settlement and all three whistleblowers agreed that the underlying settlement for $171.9 million was fair adequate and reasonable. However, each whistleblower reserved his or her right to claim a percentage of the proceeds of the settlement pursuant to 31 U.S.C. 3730(d)(1). In this decision Judge Kelly addressed the question of which whistleblower, if any, was entitled to a percentage of the proceeds. The first-to-file rule contained in 3730(b)(5) states: when a person brings an action under this subsection, no person other than the Government may intervene or bring a related action based on the facts underlying the pending action. Applying this rule, the Court found that all three qui tam complaints contained similar allegations of improper marketing of Lidoderm but that the Ryan complaint was clearly first. Relators Weathersby and Dhillon both argued that, although Ryan was first in time, her complaint was deficient and could not survive a 9(b) challenge. Therefore, they argued, she could not be first. The Court accepted their argument that if a first filed action does not satisfy FRCP 9(b), it does not qualify as a valid complaint. This is so even when the Government has intervened. However, the Court held that the Ryan complaint met the 9(b) standard articulated by the Third Circuit in

Foglia, and therefore only the Ryan complaint survived and only Ryan was entitled to a percentage of the proceeds of the settlement. In his conclusion Judge Kelly recognized that this result was also justified by the extensive role Ryan played during the investigation of the allegations. Finally, the Court held that the third whistleblower, Dhillon, was also barred by the public disclosure bar and that he could not show that he was an original source of his allegations.

United States ex rel. Ruscher, et al., v. Omnicare, Inc., 2014 U.S. Dist. LEXIS 79885 (U.S.D.C. So. Dist. TX, June 12, 2014) In this case, the district court largely denied a Motion to Dismiss a qui tam suit against Omnicare, Inc. (and 200 affiliated companies), a provider of prescription medication to long-term care facilities. The whistleblower, who served for several years as Omnicare s collection manager, alleged a nationwide kickback scheme in which Omnicare induced nursing homes to refer their residents Medicare Part D and Medicaid business in exchange for not charging the nursing homes for medications that they were obligated to pay for and dispense to their residents. The whistleblower alleged that the scheme had been ongoing since 1998 and that Omnicare s books included approximately $720 million of nursing home debt forgiven to induce referrals. The Government declined to intervene. The whistleblower filed three Amended Complaints, the last of which was 200 pages and included 700 paragraphs. OmniCare argued that the whistleblower failed to comply with Rule 9(b) in pleading the alleged Anti-Kickback violations because the complaint fails to identify any referrals for business that Omnicare unlawfully obtained and billed... does not sufficiently identify who allegedly violated the AKS and does not sufficiently identify when Omnicare s alleged violation of the AKS took place. The Court first held that forgiven debt can be considered remuneration under the Anti-Kickback Statute without any need for Omnicare to have formally written the debt off its books. The Court then looked at the question of whether a whistleblower must allege the who, what, when, where and how of each alleged kickback in order to allege with particularity the existence of a scheme to submit false claims resulting from the payment of kickbacks. The Court

concluded that such pleading is not necessary, to allege the particulars of a scheme to offer kickbacks, relator must sketch out how it was that defendant provided remuneration to its client, the form of that remuneration, how and why defendant believed that remuneration would induce new business, and how defendant benefitted from the remuneration. The relator also must allege the timeframe in which the scheme took place even if the relator cannot allege the exact dates on which kickbacks were provided or the names of each individual who authorized the kickback. In this case, the Court held that the whistleblower s allegations were sufficient under 9(b). The Court dismissed claims arising out of kickbacks paid prior to January 1, 2005 and after December 31, 2008, because the relator provided no factual support for the existence of kickbacks during those periods. The defendants also argued that the whistleblower s allegation that Omnicare falsely certified its compliance with all Medicare regulations in Medicaid enrollment agreements was legally deficient because certifications in enrollment agreements are only forward looking promises. The district court discussed at length the positions taken by various circuit courts concerning the implied false certification theory of FCA liability. The Fifth Circuit has not yet decided whether and what version of the implied false certification theory it would adopt. The Court held that where like here it is fairly apparent from the face of the Complaint that if the Government had been aware of the defendants violations of the Medicare laws and regulations that are the bases of a plaintiff s FCA claims it would not have paid the plaintiff s claims, an implied false certification theory of liability is acceptable. The court noted its willingness to reconsider this segment of its ruling since the Fifth Circuit had not yet embraced this theory of liability.

The Court also held that certifications contained within cost reports were sufficient to support FCA violations and allowed the whistleblower s retaliation claim to move forward. The Court dismissed claims against Omnicare s former CEO as he was not named as a defendant until the third amendment to the Complaint and the whistleblower did not seek leave to add a new defendant.

Kellogg Brown & Root Services, Inc. et al. v. United States ex rel. Carter United States Supreme Court, Docket No. 12-1497 On July 1, 2014, the Supreme Court granted the petition for certiorari in this case and will now have the opportunity to address the question of applicability of the Wartime Suspension of Limitations Act ( WSLA ) to a civil False Claims Act case. Also presented in this case is an opportunity for the Supreme Court to determine the proper application of the False Claims Act s first-to-file bar. By way of background, the statute of limitations section 3731 (b) of the False Claims Act, provides that a civil action may not be brought more than 6 years after the date on which the violation of the statute occurred with a possible extension to no more than 10 years from the date of the violation if the United States had no knowledge of the violation. Section 3730 (b)(5) of the False Claims Act provides that when a person brings an action under this subsection, no person other than the Government may intervene or bring a related action based on the facts underlying the pending action. This is commonly referred to as the first-to-file bar. The petitioners in this case are seeking review of the Fourth Circuit decision in United States ex rel Carter v. Halliburton Co. et al, 710 F. 3d 171 (4 th Cir. 2013) which suspended the FCA statute of limitations in the civil context through its application of the WSLA, and also found that the first-to-file rule only applied if the first filed case was still pending when the second qui tam was filed. The Supreme Court s decision to grant the petition runs contrary to the recommendation of the Solicitor General, who filed a brief on May 27, 2014 arguing against granting cert stating that the Fourth Circuit was correct in holding that the WSLA applied in a qui tam suit under the FCA and was also correct in holding that the FCA s first-to-file provision does not apply if a previously-filed related case is no longer pending when the new qui tam is commenced.

United States ex rel. Absher v. Momence Meadows Nursing, No.: 04-cv-02289, 7 th Cir., Aug. 20, 2014 In this case, the Seventh Circuit Court of Appeals reversed a jury verdict against Momence Meadows Nursing Home. The jury awarded $3 million in compensatory damages which were tripled to $9 million, and $19 million in fines. The district court set aside the fines on the grounds that they violated the Excessive Fines Clause of the Eighth Amendment. Momence owned a 140 bed long-term care facility in Kankakee County, Illinois. Almost all of Momence s residents were supported by Medicare and/or Medicaid, which paid Momence a per diem amount for each resident. To receive reimbursement, Momence was required to provide government regulators with a completed minimum data sheet ( MDS ) form on behalf of each resident at 5, 14, 30, 60 and 90 day intervals after admission. The MDS forms contain a certification which states, inter alia, I further understand that payment of such federal funds and continued participation in the Government funded healthcare program is conditioned on the accuracy and truthfulness of this information and that I may be personally subject to or may subject my organization to substantial criminal, civil and/or administrative penalties for submitting false information. Momence was also required to comply with a wide variety of regulations and standards of care that are part of Medicare s and Medicaid s complex regulatory scheme. This regulatory scheme provides a variety of remedies or sanctions for the provision of deficient or non-compliant care, including fines or termination from the Medicare and Medicaid programs. Between 1998 and 2006, government regulators surveyed Momence 117 times and when deficiencies were discovered, the regulators required Momence to take remedial action, including implementing plans of correction and paying administrative fines.

The whistleblowers were two nurses who worked at Momence between 1997 and 2003. The whistleblowers ultimately amended their complaint six times and the United States and Illinois declined to intervene in the matter. The whistleblowers brought the case to trial and presented evidence of numerous instances of non-compliant care and resulting harm to residents. This evidence included problems relating to infection and pest control, pressure sore management, medication, food and water temperatures, the facility s cleanliness, and accidents such as falls and other similar problems. The whistleblowers also offered expert testimony that Momence systematically violated Medicare and Medicaid regulations concerning the duties of personnel at the facility, protocols for addressing patient care issues, and the standard of care. The jury concluded that Momence submitted 1,729 false claims, imposed an $11,000 penalty for each false claim and awarded compensatory damages at $3 million. The jury also awarded amounts to the whistleblowers for their employment retaliation claims. On appeal, Momence argued that the trial court lacked subject matter jurisdiction under the first-to-file and the public disclosure bars. Both of these bars operate only when a qui tam action is based upon allegations or transactions which either are the subject of a governmental civil action or penalty proceeding or have been publicly disclosed. The Circuit Court denied both of Momence s challenges because no prior allegations of fraud had been leveled against Momence either by the government or in publicly disclosed sources. The alleged disclosures that Momence pointed to, government survey reports that gave rise to administrative penalty proceedings did not disclose all of the misconduct alleged by the whistleblowers and more importantly did not disclose facts establishing that Momence misrepresented the standard of care

in submitting claims for payments to the government. Thus, since the government survey reports did not disclose the essential elements of fraud under the False Claims Act, they did not bar the suit under either statutory bars. Momence also argued that the qui tam claims failed as a matter of law because the evidence did not support liability under the worthless services or false certification theories. The Seventh Circuit noted that the worthless services theory of FCA liability had been adopted by a few sister circuits. The theory allows a qui tam relator to bring claims for violations of the FCA premised on the theory that the defendant received reimbursement for products or services that were worthless. The Seventh Circuit noted that the evidence must show that the services were so deficient that for all practical purposes they amounted to no service whatsoever. In this case, the district court improperly instructed the jury that it could find liability if it determined that the services provided had some value but less value then a service that met all regulatory requirements. In the Court s pithy summary, Services that are worth less are not worthless. The Seventh Circuit noted that it had never adopted the worthless services theory of liability and did not need to do so in this case because the relators failed to offer evidence establishing that Momence s services were truly or effectively worthless. Indeed, the Court noted that a claim that Momence s services were worthless would be absurd in light of the undisputed fact that Momence was allowed to continue operating and rendering services of some value despite regular visits by government surveyors. The surveyors would certainly have noticed if Momence was providing no or effectively no care to its residents. The Court noted that the whistleblower s mother resided at Momence for 7 years and that at trial the Whistleblower

acknowledged that the mother received good care at Momence. Since no reasonable jury could have found that Momence provided truly or effectively worthless nursing services to its residents, as a matter of law, the worthless services theory could not support the jury s verdict. The Seventh Circuit next assessed the false certification theory of liability. In order to prevail under this theory, the whistleblowers had to produce a preponderance of evidence that Momence certified that it had complied with particular statutes or regulations that were conditions of or prerequisites to government payment, that Momence did not actually comply with those conditions, and that Momence knew that it had failed to comply with those conditions. On appeal, the whistleblowers argued that Momence made express false certifications on MDS forms and plans of corrections, as well as implied false certifications in certifying that Momence was eligible for continued participation in Medicare and Medicaid. The Court first looked at the implied certification theory, which had never been adopted within the Seventh Circuit. It decided that it did not need to determine whether such theory was appropriate since the whistleblowers did not argue to the jury that the purported implied certifications were conditions of payment. Since the whistleblowers did not argue to the jury that Momence committed fraud by impliedly certifying compliance with applicable regulations, the Circuit held that the argument was waived on appeal. Nor did the whistleblowers argue to the jury that compliance with the various regulations must have been a condition of payment because a failure to comply could result in termination from the Medicare and Medicaid programs. Thus, this argument was also waived on appeal. The Court noted further that because under that theory a single regulatory violation could result in

losing all payments, this theory would lead to absurd results. The Court next addressed whether the evidence supported express certification liability. First, the Court noted that the whistleblowers never argued to the jury that Momence committed fraud by making false certifications of compliance in its plans of correction and held that the express certification theory based on the plans of correction is waived on appeal. The Court then assessed whether the evidence supported a conclusion that Momence violated the FCA by certifying compliance in the MDS forms. Since the certification contained in the MDS form expressly states that payment is conditioned on the accuracy and truthfulness of the information contained in the MDS forms, these forms could support a express certification case under the FCA. The Court held that the evidence did not support such a theory in this case, however, because the whistleblowers did not offer any evidence regarding how many, even roughly, of the MDS forms contained false certifications. Given the lack of evidence of specific false MDS forms, the jury s finding of 1,729 false certifications had to have been based on mere speculation. The problem is not simply that the relators failed to come forth with evidence that particular MDS forms contained false certification or evidence of precisely how many of the MDS forms contain false certifications. Rather the relators have failed to offer evidence establishing even a roughly approximate number of forms contain false certifications. The Court vacated the judgment and remanded the matter to the district court with instructions to enter judgment in favor of the defendants.