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Court Finds That Labs Must Ensure That the Tests They Perform are Medically Necessary

By Russell Paul

On June 9, 2017, the United States District Court for the District of Columbia denied the defendant’s motion to dismiss in the False Claims Act lawsuit titled U.S. et al. ex rel. Tina D. Groat v. Boston Heart Diagnostics Corp., No. CV 15-487 (RBW), 2017 WL 2533341, at *1 (D.D.C. June 9, 2017).

In his opinion, Judge Reggie Walton held that a lab has an independent duty to certify that the tests it performs and for which it seeks government reimbursement are medically necessary. The lab cannot rely on the fact that a doctor ordered the lab test. If the tests are, in fact, not medically necessary, then the lab may have violated the False Claims Act when submitting claims for those tests to government health insurance providers.

The lawsuit alleges that Boston Heart, a Massachusetts-based diagnostic laboratory, performed medically unnecessary genetic and non-genetic cardiac-related tests, which the lab bundled into easy-to-order test panels and marketed to general practitioners. Relator alleges that the tests were not medically necessary when the patient had certain diagnoses because the test results do not and cannot screen for current heart disease, do not predict the risk of future heart disease, and have no bearing on the treatment of the current health condition of a patient with those enumerated diagnoses. Relator alleges that Boston Heart wrongly billed government healthcare insurers such as Medicare and Medicaid for these unnecessary tests.

The Court found that a lab “has an obligation to establish that the tests for which it seeks government reimbursement are medically necessary because when it submits the CMS-1500 form, it certifies that the tests performed were medically necessary.” CMS Form 1500 requires the billing entity to certify that, among other things, “the services on this form were medically necessary”.

The Court pointed out that the government’s regulatory scheme “places the burden of establishing the medical necessity of diagnostic tests on the entity submitting the claim.” Garcia v. Sebelius, No. CV 10-8820 PA (RZx), 2011 WL 5434426, at *7 (C.D. Cal. Nov. 8, 2011) (citing 42 C.F.R. §§ 410.32(d) (2)(ii), (d)(3))

In support of its holding that a lab has an independent duty to certify that its tests are medically necessary, the Court noted that there were many other court decisions reviewing Medicare coverage determinations for claims submitted by laboratories in which the government determined that the tests at issue were not medically necessary, and the laboratories, not the ordering physicians, argued to the contrary.  The Court also noted that there were other False Claims Act actions against laboratories for allegedly submitting claims for medically unnecessary tests.

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When Does a Drug Manufacturer’s Savings Card Program or Discount Coupon Violate the Anti-Kickback Statute?

By Russell Paul

A drug manufacturer’s savings card program or discount coupon under which individuals who have Medicare Part D prescription drug coverage receive discounts may violate the Anti-Kickback Statute (“AKS”), unless the drug being purchased is statutorily excluded from Part D coverage.  The key here is that the drug must be excluded from Part D coverage for there to be no AKS violations.  If the drug is covered by Part D, there is a great possibility that the discount program could generate prohibited remuneration under the AKS if the manufacturer intends to induce or reward referrals of Federal health care program business.

The Anti-Kickback Statute

The AKS makes it a criminal offense to knowingly and willfully offer, pay, solicit, or receive any remuneration to induce or reward referrals of items or services reimbursable by a Federal health care program. See 42 U.S.C. 1320a–7b. The AKS has been interpreted to cover any arrangement where one purpose of the remuneration was to obtain money for the referral of services or to induce further referrals. See, e.g., United States v. Borrasi, 639 F.3d 774 (7th Cir. 2011)

Drug Manufacturer’s Savings Card Program or Discount Coupon May Violate the AKS

Individuals who have prescription drug coverage through Medicare Part D (“Part D Beneficiaries”) may receive a savings card or discount coupon issued by a drug manufacturer to receive discounts when they fill their drug prescriptions.

Part D Beneficiaries present the card or coupon to their pharmacists along with their drug prescriptions to receive discounts on out-of-pocket costs, including copayments and deductibles that they incur when purchasing the drug.

Copayment coupons constitute remuneration that is offered to consumers to induce the purchase of specific items. When the item in question is one for which payment may be made, in whole or in part, under a Federal health care program (including Medicare Part D), the anti-kickback statute is implicated. See Special Advisory Bulletin on Pharmaceutical Manufacturer Copayment Coupons (Sept. 2014), (the “Bulletin”).[1]

Copayment coupons may induce the purchase of federally payable items in two ways.

  • First, as described in the Bulletin, copayment coupons may induce the purchase of the specific items that are the subject of the coupons by reducing or eliminating Federal health care program beneficiaries’ out-of-pocket costs for those items.
  • Second, copayment coupons may induce the Federal health care program beneficiaries who receive them to purchase other federally payable products manufactured, marketed, or distributed by the manufacturer that issued the coupon.

Purchasing Drugs That are Statutorily Excluded From Part D Coverage

Some drugs are covered by many private insurance plans and by some Federal health care programs, including state Medicaid programs and TRICARE, while being statutorily excluded from coverage under Medicare Part D.

If the drug is statutorily excluded from coverage under Medicare Part D, individuals who are enrolled in Medicare Part D may purchase the drug with a manufacturer’s savings card or discount coupon because such individuals are, in effect, cash-paying customers when filling their drug prescriptions. When this is the case, the Office of Inspector General (“OIG”) will not impose administrative sanctions under the AKS. See OIG Advisory Opinion No. 16-07 (drug for the treatment of erectile dysfunction is statutorily excluded from coverage under Medicare Part D).

This statutory exclusion serves as an effective backstop that prevents the discount card or coupon from inducing the purchase of a drug payable by Medicare Part D.

Furthermore, the risk that the Part D Beneficiaries who use the discount card or coupon will purchase other federally payable products manufactured, marketed, or distributed by the same drug manufacturer is low, especially where the manufacturer certifies that it does not and will not use the discount given on the Part D excluded drug as a vehicle to market other products it manufactures, markets, or distributes to Federal health care program beneficiaries.

 

[1] available at: http://oig.hhs.gov/fraud/docs/alertsandbulletins/2014/SAB_Copayment_Coupons.pdf

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Pharmacy Discount Programs Can Lead to a Violation of the False Claims Act

By Russell Paul

Retail pharmacies that offer a discount drug pricing program to consumers must charge Medicare the same prices for drugs that they charge consumers who participate in those programs. To do otherwise violates the False Claims Act (“FCA”).

The specific question is whether a pharmacy that offers a discount drug pricing program for customers paying for drugs in cash can exclude the discounted prices that those customers pay when computing the “usual and customary” price that the federal Centers for Medicare and Medicaid Services (“CMS”) requires retail pharmacies to charge Medicare Part D beneficiaries for drugs.

“Usual and Customary” Drug Prices and Medicare

The answer is no, according to a Seventh Circuit ruling last year in United States ex rel. Garbe v. Kmart Corp., 824 F.3d 632 (7th Cir. 2016), cert. denied sub nom. Kmart Corp. v. U.S. ex rel. Garbe, 137 S. Ct. 627, 196 L. Ed. 2d 517 (2017).  Federal regulations provide that for most drugs, Medicare Part D will only pay the “usual and customary charges to the general public” and defines “usual and customary” as “the price that an out-of-network pharmacy or a physician’s office charges a customer who does not have any form of prescription drug coverage for a covered Part D drug.” 42 C.F.R. §§ 423, 100, 447.512.

The Seventh Circuit found that participants in such discount programs are considered the “general public,” and the discounted prices charged to those participants are considered the pharmacy’s “usual and customary” charges, which the pharmacy must also charge Medicare.  The pharmacy cannot exclude such discounted pricing when calculating its “usual and customary” charges so as to increase the amount it charges to and is paid by Medicare.

United States ex rel. Garbe v. Kmart Corp.

Pharmacist James Garbe began working at a Kmart pharmacy in Ohio in 2007. One day, Garbe picked up a personal prescription at a competitor pharmacy and received a surprise: the competitor pharmacy charged his Medicare Part D third-party private insurer much less than Kmart ordinarily charged for the same prescription. When Garbe began inspecting Kmart’s pharmacy reimbursement claim, he discovered that Kmart routinely charges customers with insurance – whether private or public – higher prices than customers who paid out of pocket.

Not all cash customers were charged the same price; people in Kmart’s “discount programs” paid much less. Kmart recognized that it was “financially beneficial to maintain the Usual and Customary price higher than reimbursement rates.” Kmart set out to accomplish this goal by instituting a policy of setting low “discount” prices for cash customers who signed up for one of its discount programs, while charging higher “usual and customary” prices to non-program cash customers, “to drive as much profit as possible out of [third-party] programs.”

Garbe’s investigation also revealed that nearly all cash customers received the lower discount program prices. Significantly, those discount program sales were ignored when Kmart calculated its “usual and customary” prices for its generic drugs for purposes of Medicare reimbursement. This omission was significant. For example, Kmart allegedly sold a 30-day supply of a generic version of Zocor for $5 but told the CMS that the usual and customary price was $152.97.

The Seventh Circuit rejected Kmart’s contention that the term “general public,” as found in the definition of CMS’s “usual and customary pricing,” excludes customers who join a discount program. The Seventh Circuit held that the usual and customary price is defined as the “cash price offered to the general public” unless state regulations provide otherwise. Furthermore,, the Seventh Circuit stated that the “CMS Manual has long noted that ‘where a pharmacy offers a lower price to its customers throughout a benefit year’ the lower price is considered the ‘usual and customary price’ rather than a ‘one time lower cash price,’” including when the cash purchaser uses a discount card.

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Common Challenges With the Qui Tam Seal Requirement: What Whistleblowers Can Expect

By Susan Schneider Thomas

One of the various procedural requirements imposed on whistleblowers is that they file their cases “under seal.”  Not much is explained in the False Claims Act (“FCA”) as to what that means, other than the general understanding that no notification of the filing to the defendant takes place, what is commonly referred to as “service” of the complaint.  The seal stays in place automatically for 60 days, and the Government has the ability to seek extensions of the seal from the court.  Typically, the government seeks multiple extensions, generally for six months at a time, resulting in a case remaining under seal for more than a year and often up to three or four years.

What happens during that time period?  What can the relators or their lawyers say about the cases?  What does it mean to “breach” the seal? What happens if the seal is breached?  Although the False Claims Act statute says very little about the seal (other than requiring a case to be filed that way and not served upon the defendant), there is a whole body of case law that has developed about what it means to preserve the seal.

Seal Requirement Challenges

In many instances, though, there can be real challenges to relators to maintain the confidentiality that the seal requires.  For example, in various types of unrelated legal proceedings, parties can be required to divulge contingent assets – which is what a filed, but unresolved, lawsuit can be.  This frequently occurs in bankruptcy cases, in divorce proceedings, in partnership dissolutions and sometimes in other instances.  How do relators satisfy those disclosure obligations while maintaining the secrecy that the FCA seal requires?

This problem also arises in other types of litigation or legal proceedings, most frequently in unemployment compensation hearings if the whistleblower was fired and the employer is contesting entitlement to unemployment benefits, or in retaliation lawsuits (if retaliation claims are not limited to those filed as part of an FCA case).

Outside of the litigation context, issues can arise with a former defendant-employer at an exit interview or in connection with signing for severance benefits. Employees departing from a company are sometimes asked to certify that they did not observe any practices that they thought were illegal, for example.

Challenges for Whistleblowers Who Remain Employed at the Defendant Company

For whistleblowers who continue to work for the defendant company, the challenges can be even harder to predict, such as meetings at which “some government investigation” is discussed or memos are circulated to employees directing them to collect or preserve documents pertaining to the subject of the qui tam suit.  Although the case itself may remain under seal for several years, the government often begins to investigate during the time period, frequently including the issuance of a Civil Investigative Demand (similar to a subpoena) on the company.  Although the company is not officially notified that there was a whistleblower suit filed, many companies recognize what is happening and have immense concerns about whether a whistleblowing employee is still employed within the company and still has access to additional documents or ongoing internal discussions.

Tensions can become high among employees or management and speculation and accusations may lead to awkward situations for continuing employees. When it appears that certain employees’ conduct is the subject of a government investigation, there can be discussions of cover-ups or document destruction.  The emotional toll of continuing to work for a company while being a whistleblower can be quite pressing, and may require the whistleblower to conceal or actively deceive fellow employees about that whistleblower’s role in the case.  Although it is probably illegal for a company to directly ask a group of employees whether anyone reported anything to government regulators or prosecutors, we have seen instances where that happened and, of course, it would be difficult for even a responsible employer to be able to control all of the water cooler talk that occurs.

Challenges for Whistleblowers Who Have Left the Defendant Company

Even for someone who has left the defendant company’s employ – whether voluntarily or not – concerns can arise about subsequent employment. It can be difficult to explain either a voluntary or not-so-voluntary departure from a prior job if the whistleblower cannot explain what happened.  We’ve had clients express real reluctance to accept a new job in the same industry, wondering what will happen once it becomes known that the person filed a lawsuit against his prior employer.  Even if the person wanted to get that out on the table ahead of time – before relocating cross-country, for example – the seal provisions would bar or hamper such discussions.  Employees wonder if they would be protected against retaliation from a subsequent employer who learns of the person’s past whistleblowing activity and decides to discharge the employee.

And what about a situation where the whistleblower is seriously worried about public harm during the seal period — whether due to questionable financial practices or safety issues relating to continuing off-label marketing of drugs or medical devices or continued distribution of faulty products?  Although one would hope the government would act quickly in those circumstances, that does not always happen.  Often the government needs to conduct an in-depth investigation of the whistleblower’s allegations, but the whistleblower is firmly convinced that there is ongoing bad conduct occurring.  In a recent case involving questionable mortgage loans being made to veterans, the relators ended up knowingly violating the seal by going public with their allegations because they were so frustrated that the fraud was ongoing even four years after they filed their case under seal.

Conclusion

We believe that our job in representing whistleblowers includes counseling about these different challenges that might arise.  We discuss with our clients the types of situations that might occur and the ways to navigate through the problems.  Perhaps most importantly, we discuss these possible concerns with potential clients even before they file a case, to help them evaluate and understand what might be involved as a result of their filing.  There can be many rewards to being a whistleblower – both moral and financial – and our goal is to help our clients make well-informed decisions about whether and how to proceed.

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District Court Rejects the Industry-Wide Public Disclosure Bar, Part II

By Jonathan DeSantis

In Part I of this blog series, we discussed the False Claims Act (“FCA”)’s public disclosure bar and the so called industry-wide public disclosure bar. In this blog post, we will examine a recent qui tam case that discusses and rejects the industry-wide public disclosure bar.

An industry-wide public disclosure bar is difficult to reconcile with the language of the public disclosure bar, which requires that the allegations in a relator’s complaint be “substantially similar” to the publicly disclosed materials.   It is hard to see how public disclosures that do not mention a specific company be “substantially similar” to allegations that the company committed fraud.

United States ex rel. Rahimi v. Zydus Pharm. (USA), Inc.

A recent decision in the District of New Jersey is illustrative.  In United States ex rel. Rahimi v. Zydus Pharm. (USA), Inc.,[1] a relator alleges that Zydus manufactured various generic drugs.  Zydus allegedly committed fraud by submitting inflated pricing information to third-parties that created publications providing the average wholesale prices of drugs.  Medicaid used these publications to set the rates at which it reimbursed pharmacies for dispensing drugs to Medicaid beneficiaries.  Thus, the relator alleges that Zydus provided false and inflated pricing information so that pharmacies that dispensed Zydus drugs received increased compensation.  This allegedly assisted Zydus in marketing its products to pharmacies by ensuring pharmacies that the products would generate increased revenue.  As a result of Zydus’ conduct, the Government allegedly lost money by providing more in reimbursements than it would have had Zydus reported accurate pricing information.

Zydus filed a motion to dismiss and raised various arguments, including an argument that the relator’s claims were barred by the public disclosure bar.   Zydus pointed to many publicly available materials discussing fraud in report average wholesale prices across the pharmaceutical industry.   None of these materials mentioned Zydus, but Zydus nonetheless contended that the public disclosure bar applied because it is a relatively large pharmaceutical company and thus could be readily identified from the public disclosures.

The Government filed a powerful statement of interest in which it argued that “disclosures of industry-wide fraud do not automatically constitute public disclosures as to specific industry members.”[2]  In support of that argument, the Government asserted:

Many False Claims Act cases, including qui tam cases, focus on types of fraud that are common to particular industries (for example, Medicare overbilling or underpayment of oil and gas royalties) and familiar to the government. Nonetheless, a relator who brings particular instances of such fraud to light performs a valuable service, one that the False Claims Act’s qui tam provisions were intended to encourage. The identity of the entity that perpetrated a fraud and the method by which it did so are among the most fundamental elements of an allegation or a transaction under the False Claims Act. Courts have made clear that general allegations of fraud in such a large industry will not necessarily bar subsequent, specific fraud claims against a particular defendant.[3]

Moreover, the Government asserted that the purpose of the public disclosure bar “is ill-served by a reading of the public disclosure bar that allows the existence of qui tam actions against one set of actors in a large industry to automatically foreclose future actions raising similar fraud allegations against unrelated members of that industry.”[4]

In a decision on April 26, 2017, the district court agreed with the relator’s and the Government’s position and denied the motion to dismiss.[5]   First, the court noted that none of the public disclosures mentioned Zydus.  The court suggested that it may be possible for the public disclosure to apply if Zydus was readily identifiable from the public disclosures even if it was not mentioned by name.  However, the court found that Zydus was not readily identifiable from the public disclosures for various reasons, including that the generic drug manufacturing industry is quite large and that Zydus is not one of the largest pharmaceutical companies in the country.   Accordingly, the district court concluded that the public disclosures cited by Zydus did not trigger the public disclosure bar.

Conclusion

In conclusion, there is tension between application of an industry-wide public disclosure bar with the requirement that public disclosures be substantially similar to a relator’s claims to implicate the public disclosure bar.   While not all courts addressing an industry-wide public disclosure bar argument have done so, many have applied the “readily identifiable” rule such that public disclosures that do not name the specific company at issue can only trigger the public disclosure if the company is “readily identifiable” from the public disclosures.

[1] 2017 WL 1503986 (D.N.J. Apr. 26, 2017)

[2] Statement of Interest of the United States, 2016 WL 2341694 (D.N.J. Apr. 13, 2016).

[3] Id.

[4] Id.

[5] 2017 WL 1503986 (D.N.J. Apr. 26, 2017).

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District Court Rejects the Industry-Wide Public Disclosure Bar, Part I

By Jonathan DeSantis

The False Claims Act (“FCA”) permits private individuals, known as relators, to sue on the Government’s behalf to recover funds that were fraudulently or falsely obtained from the Government.  If a relator successfully recovers money for the Government, the FCA provides that the relator is entitled to a substantial percentage of the recovery, known as a relator’s share.[1] In Part I of this two-part blog series, we will discuss a section of the FCA called the public disclosure bar and generally discuss the so-called industry-wide public disclosure bar. In Part II, we will discuss a recent case in which a district court rejected a defendant’s attempt to apply the industry-wide public disclosure bar.

The Public Disclosure Bar

Given this economic incentive to pursue FCA claims, the FCA has a few mechanisms to discourage unworthy individuals from serving as relators.  One of these is the public disclosure bar, under which a person cannot pursue FCA claims if the claims are substantially similar to information that is already publicly available through a list of public sources such as government reports and media stories.[2]  In this way, the public disclosure bar “is designed to strike a balance between empowering the public to expose fraud on the one hand, and preventing parasitic actions on the other.”[3]

Specifically, the public disclosure bar provides:

The court shall dismiss an action or claim under this section, unless opposed by the Government, if substantially the same allegations or transactions as alleged in the action or claim were publicly disclosed–

(i) in a Federal criminal, civil, or administrative hearing in which the Government or its agent is a party;

(ii) in a congressional, Government2 Accountability Office, or other Federal report, hearing, audit, or investigation; or

(iii) from the news media.[4]

Under this framework, the prototypical public disclosure is a newspaper article saying that a specific company defrauded the Government.  Under these circumstances, a relator would not be permitted to pursue FCA claims against the company that are substantially similar to the fraud disclosed in the newspaper article.

False Claims Act Defendants Pushing for an Industry-Wide Public Disclosure Bar

Defendants in FCA cases are increasingly attempting to expand the scope of the public disclosure bar.  One example of this is the so-called industry-wide public disclosure bar, under which defendants contend that public disclosure of industry-wide fraud implicates the public disclosure against specific companies in the industry even when those companies are not mentioned in the disclosures.[5]   As a general rule, “[i]n order to bar claims against a particular defendant, the public disclosures relating to the fraud must either explicitly identify that defendant as a participant in the alleged scheme, or provide enough information about the participants in the scheme such that the defendant is identifiable.” [6]  Put differently, even if a public disclosure does not mention a specific company, it may implicate the public disclosure bar if the company can be readily identified from the disclosure.  For example, if a public document disclosed fraud in an extremely consolidated industry, it is more likely that courts will find the fraud has been publicly disclosed than if it disclosed fraud in a large industry with lots of companies in the industry.[7]

 

[1] 31 U.S.C. § 3730(d).

[2] 31 U.S.C. § 3730(e)(4).

[3] U.S. ex rel. Wilson v. Graham Cty. Soil & Water Conservation Dist., 777 F.3d 691, 695 (4th Cir. 2015) (internal quotation marks omitted).

[4] 31 U.S.C. § 3730(e)(4).

[5] See United States v. CSL Behring, L.L.C., 855 F.3d 935, 941 (8th Cir. 2017) (describing the industry-wide public disclosure bar and describing several cases interpreting and applying it).

[6] U.S. ex rel. Kester v. Novartis Pharm. Corp., 2015 WL 109934, at *8 (S.D.N.Y. Jan. 6, 2015).

[7] U.S. ex rel. Zizic v. Q2Administrators, LLC, 728 F.3d 228, 238 (3d Cir. 2013) (describing “an industry of one”).

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The Unwritten Nexus Requirement: Requiring a Connection Between Federal Funds and False Claims Under the False Claims Act

By Jonathan DeSantis

The federal government provides funding to an incredible number of non-government entities through direct spending and grants.  The False Claims Act (“FCA”) provides that anyone who presents “false or fraudulent claims” or who commits other similar offenses is subject to substantial penalties. “Claim” is defined as including any request for payment where the federal government provided “any portion” of the requested funds, meaning many false claims presented to non-government entities will be subject to FCA liability.[1]  Indeed, under one reading of the “any portion” language of the FCA, any false claim presented to a non-government entity that receives any federal funding may be subject to FCA liability. As discussed below, courts have largely rejected this reading and instead require that there be a nexus (aka connection) between the federal funding provided to the non-government entity and the false claim.

The FCA Covers False Claims Made to Non-Government Entities for Government Funds

Prior to 1986, the FCA did not define “claim.”  In response to a concern that courts were improperly limiting the scope of FCA liability, Congress added a definition of “claim” to expressly provide that FCA liability existed when false claims were made for government funds even if such claims were made to non-government entities.  “Claim” was defined as:

[A]ny request or demand, whether under a contract or otherwise, for money or property which is made to a contractor, grantee, or other recipient if the United States Government provides any portion of the money or property which is requested or demanded, or if the Government will reimburse such contractor, grantee, or other recipient for any portion of the money or property which is requested or demanded.[2]

However, the FCA still only imposed liability for persons who “knowingly presents, or causes to be presented, to an officer or employee of the United States Government . . .  a false or fraudulent claim for payment or approval.” [3] The interplay of these definitions created a seeming ambiguity: the definition of “claim” contemplated claims made to non-government entities using government money while the liability provision required that the claim be made “to an officer or employee of the United States Government.”   Courts interpreted the FCA as only creating liability where a claim was presented to the Government, i.e. that liability did not exist in situations where claims were presented to recipients of government funds, even where government funds were used to pay the false claims.[4]

In 2009, Congress reconciled this ambiguity by enacting more amendments to the FCA.  Specifically, Congress eliminated the language “to an officer or employee of the United States” from the substantive liability provision of the FCA such that it now provides that anyone who “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval” is subject to liability.  It is now clear that false claims presented to recipients of government funds are actionable under the FCA.  As one court explained, “[t]he new language underscored Congress’s intent that FCA liability attach to any false claim made to an entity implementing a program with government funds, regardless of whether that entity was public or private.”[5]

Courts Interpret the FCA to Require a Nexus Between False Claims and Federal Funds

As described above, “claim” includes any request for payment where the federal government provides “any portion” of the requested money.   This creates potentially vast liability under the FCA given that the federal government provides funding to a wide variety of institutions and programs.  For example, school districts in the United States are largely funded through state and local funding, although the federal government still provides a substantial amount of funding.   One reports estimates that schools receive about 90% of their funding through state and local sources with the remaining 10% coming from the federal government.[6]  Applying the “any portion” language of the FCA, any and all false claims presented to school districts are potentially subject to liability given that the federal government provides every school with some funding.

Courts have largely rejected relators’ attempts to contend that the “any portion” language of the statutory definition of “claim” means that a false claim presented to an entity is automatically actionable under the FCA so long as the entity receives any federal funding irrespective of whether the claim itself involves any federal funds.   Put differently, courts have generally held that there must be some nexus between an entity’s receipt of federal funding and the false claims.

For example, in Garg v. Covanta Holding Corp., 478 F. App’x 736 (3d Cir. 2012), the Third Circuit held that the “FCA requires that there be some greater nexus between the alleged fraud and the government funds.”  In another recent case, a court similarly held that the FCA “requires a connection between government funds and the funds used to pay a false claim.” United States ex rel. Todd v. Fid. Nat’l Fin., Inc., 2014 WL 4636394, at * 10 (D. Colo. Sept. 16, 2014).  Other courts have reached similar conclusions. See United States v. McMahon, 2016 WL 5404598, at *12 (N.D. Ill. Sept. 28, 2016) (“Although under the amended FCA, Relators are not required to show that any false statement or claim was presented directly to the federal government, Relators are still required to sufficiently allege a nexus to federal funds.”).

Conclusion

While courts have generally construed the “any portion” language to require a nexus between the false claims at issue, it is important to carefully evaluate each individual case under the specific facts and circumstances.  This is particularly true given that there is not a wide body of law on this issue, and it is possible that interpretations of the “any portion” language could change and evolve in the coming years.

[1] 31 U.S.C. § 3729(b)(2).

[2] 31 U.S.C. § 3729(c) (1986).

[3] 31 U.S.C. 3729(a)(1) (1994) (emphasis added).

[4] See e.g. U.S. ex rel. Totten v. Bombardier Corporation, 380 F.3d 488 (D.C. Cir. 2004).

[5] United States ex rel. Garbe v. Kmart Corp., 824 F.3d 632, 638 (7th Cir. 2016).

[6]U.S. Dep’t of Education, Revenues and Expenditures for Public Elementary and Secondary School Districts: School Year 2011–12 (Fiscal Year 2012) (Jan. 2015), available at  https://nces.ed.gov/pubs2014/2014303.pdf.

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Fraud in Connection With Contract Preferences or Set-Asides for Small Businesses or Businesses Owned by Veterans, Service-Disabled Veterans, Women or Disadvantaged Minorities, Part II

By Susan Schneider Thomas

In Part I of this blog series, we identified various government programs that are often the target of fraud. In this blog post, we will examine the types of fraud that are committed against these programs, as well as recent case examples of fraud.

Types of Fraud

Cases alleging violations of the various preference or set-aside programs generally involve misrepresentations about a business’ eligibility to participate in the program.  This can involve false certifications about the actual ownership or affiliates of the company or false representations about the amount of work that the small or minority business will perform on a given contract or project.

Fraudulently Formed Businesses

Sometimes companies are fraudulently formed specifically to take advantage of set-aside or preference programs, and other times there was at least a semblance of eligibility but it wasn’t maintained over time. Misrepresentations regarding average annual gross revenue, number of employees, ownership, or other qualifying characteristics to obtain a set-aside contract or preference is subject to a fine up to $500,000, imprisonment up to 10 years, penalties under the Program Fraud Civil Remedies Act of 1986, ineligibility to participate in any program or activity under the Small Business Act for up to three years – and potential liability under the False Claims Act, with its possibility of treble damages and very substantial penalties per false claim or statement.

Large Businesses Fraudulently Aligning With Small Businesses

Also, since there are circumstances in which large and small companies can work together as joint venturers, especially through the SBA Mentor-Protégé project, there are temptations for large businesses to fraudulently align themselves with small qualified entities in order to get those contracts.

Since set percentages of work must actually be done by the small business, the large business is not permitted to usurp the contract and take all of the federal funding. Basically, pursuant to rules promulgated by the SBA, funding must be split according to the percent of work performed, which has to include a set percent done by the qualified entity.

Misrepresenting the Allocation of Work or Profits

Misrepresentations about the allocation of work or profits is a frequent form of fraud in these instances.  Just this week, a bill was introduced on the floor of the House, with bipartisan sponsorship, to address this issue concerning the passing-through of contract work to ineligible companies by abusing a program intended to aid veteran-owned small businesses. H.R. 2749, the Protecting Business Opportunities for Veterans Act, would require participants in the VA’s Vets First Contracting Program to certify they are performing the requisite minimum amount of work. The VA would have the ability to refer suspected violators to its Office of Inspector General.

Additionally, false or fraudulent statements or schemes that do not pertain specifically to the special eligibility qualifications of the company can lead to FCA actions, such as misrepresentations about the ability of the company to perform the tasks, tainted bids or falsified billing.

Recent Allegations of Fraud in the Specially-Qualified Arena

In December 2016, Rhode Island-based Rosciti Construction Corporation and Wallace Construction Corporation, and several of the companies’ current and former owners, paid $1 million dollars for FCA violations involving the submission of claims for reimbursement for funding earmarked for minority, women-owned, or small businesses that they were not entitled to receive.  The contracts were issued by the Environmental Protection Agency, the United States Department of Education, and the United States Department of Transportation. Each of the contracts contained requirements that subcontractors on these projects must include disadvantaged business enterprises, specifically minority-owned, women-owned, or small businesses.  Rosciti Construction was the prime contractor for the projects and joined with subcontractor Wallace Construction, which misrepresented itself as a disadvantaged business enterprise.

Another FCA example involved Hayner Hoyt Corporation, a Syracuse, New York based contractor that agreed to pay more than $5 million to resolve allegations that it intentionally exploited the Service-Disabled Veteran-Owned Small Business (SDVOSB) Program for contracting opportunities.

The government alleged that Hayner Holt officials placed a service-disabled veteran figurehead at the head of the operation, while in fact the responsibilities of the service-disabled veteran were limited to tool inventory and snow removal tasks.  The true control and management was handled by non-veteran employees of Hayner Hoyt.

The scheme was allegedly carried out through a front company known as 229 Constructors, which was created and controlled by and subcontracted for Hayner Hoyt and its affiliates.  A Hayner Hoyt executive established an email account in the figurehead president’s name and set it up so that all emails received by the veteran were automatically forwarded to him.

In addition to the fact that control and management was by non-veterans, Hayner Hoyt also provided substantial resources to 229 Constructors, giving it a competitive advantage over legitimate service-disabled veteran-owned small businesses that are often small, not well-funded entities.

2017 Fraud Allegations

Two examples from 2017 involve non-FCA cases, but the substance of the frauds was the same.  A federal jury in Boston convicted a Chelmsford, Massachusetts man who won over $100 million in federal contracts that gave preference to disabled veteran-owned companies, finding that he lied when he represented that the companies were owned by disabled vets.  The government contended that David Gorski recruited two veterans to stand in as the majority owners and top executives of his construction firm so it could win those federal contracts.  Gorski was sentenced to 30 months in prison and fined $1 million by the federal court.

A Kansas City veteran and the owner of a construction company were indicted by a federal grand jury in January 2017 for their roles in a “rent-a-vet” scheme to fraudulently obtain more than $13.8 million in federal contracts.

Patriot Company was a pass-through or front company that was allegedly set up using Paul Salavitch’s veteran and service-disabled veteran status in a “rent-a-vet” scheme to bid on at least 20 government contracts and receive approximately $13.8 million to which Patriot Company would not have otherwise been entitled. Although Salavitch is legitimately a service-disabled veteran, he worked full-time as a federal employee with the Department of Defense in Leavenworth, Kansas, and did not work full time for Patriot Company.  Jeffrey Wilson, who is not a service-disabled veteran, set Salavitch up as a front man so that Wilson’s non-qualified company could compete for the contracts.

The scheme allegedly included decorating the office rented for the front company with some personal items reflecting Salavitch’s military service.  The fraud allegedly involves 20 contracts with the U.S. Department of Veterans Affairs and the U.S. Army.

Conclusion

Be on the lookout for these types of frauds, which seem to be increasing and which funnel money away from the people and enterprises that the government is trying to encourage.

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Fraud in Connection With Contract Preferences or Set-Asides for Small Businesses or Businesses Owned by Veterans, Service-Disabled Veterans, Women or Disadvantaged Minorities, Part I

By Susan Schneider Thomas

For decades now, the federal government has had various programs in place to provide preferences to businesses owned by groups to which the government wants to provide special opportunities. We wrote about this in a previous post and write now to expand on and update that post. In Part I of this blog series, we identify some of these government programs, and in an upcoming Part II, we will discuss some of the types of fraud that are prevalent in this area, as well as some recent cases.

Section 8(a) of the Small Business Act

The Section 8(a) business development program, named after Section 8(a) of the Small Business Act (“SBA”), is intended to foster business ownership by individuals who are both economically and socially disadvantaged.  The goal is to give these individuals the opportunity to participate fully in the free enterprise system, through a variety of measures, including loans, training, assistance with marketing, executive development and counseling. The most common assistance for 8(a) participants is given through sole source and set-aside contracts. The qualifications for the 8(a) program are essentially the same as those for a Small Disadvantaged Business except: (1) to meet the economic disadvantage test, all owners must have a net worth below $250,000 (excluding the business and personal residence) and (2) the business must have been operating for at least two years (with possible exceptions if the socially and economically disadvantaged owners demonstrate substantial technical and business management experience).

Disadvantaged Business Enterprise Program

A program very similar to SBA’s 8(a) program is the Department of Transportation (DOT) Disadvantaged Business Enterprise (DBE) Program. The DBE program provides contracting opportunities in the transportation industry for small businesses owned and controlled by socially and economically disadvantaged individuals for projects through the Federal Highway Administration, the Federal Transit Administration, and the Federal Aviation Administration.  Other programs of this ilk include the HUBZone Program, for Historically Underutilized Business Zones. The focus there is small businesses operating in economically distressed communities. A HUBZone is an area of high unemployment or low income. The businesses eligible for assistance must be small, 51% owned and controlled by U.S. citizens, have the primary office in a HUBZone, and have at least 35% of its employees reside in that zone.

Small Business Innovation Research Program

Three other programs are worth mentioning. The Small Business Innovation Research (SBIR) Program focuses on channeling funds from federal agencies with significant research and development budgets to small businesses. In effect, the SBIR program is a research and development small business set-aside.  As explained on its website, “Through a competitive awards-based program, SBIR enables small businesses to explore their technological potential and provides the incentive to profit from its commercialization. By including qualified small businesses in the nation’s R&D arena, high-tech innovation is stimulated and the United States gains entrepreneurial spirit as it meets its specific research and development needs.”

Vets First Contracting Program

Under the Vets First Contracting Program, competing VA contractors must certify that they are eligible for Service-Disabled Veteran-Owned Small Business (SDVOSB) or Veteran-Owned Small Business (VOSB) status, allowing them to participate in both VA small-business set-aside contracts and small-business subcontracts with large VA prime contractors. The Department of Veterans Affairs estimates that this market involves more than $3 billion in contracts each year.  Under those contracts, SDVOSBs and VOSBs may subcontract some work but must conduct a certain percentage of the contracted work themselves.

Women-Owned Small Businesses Federal Contracting Program

Finally, in 2011, Congress implemented the Women-Owned Small Businesses (WOSB) Federal Contracting Program, with the goal of expanding the number of industries where WOSBs can compete for business from the federal government.  It allows set-asides for WOSBs in industries where women-owned small businesses are substantially underrepresented. There are also special considerations for Economically Disadvantaged WOSBs in certain industries.

 

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The “Government Knowledge Inference” Under the False Claims Act

By Joy Clairmont

Government knowledge no longer serves as an absolute bar to False Claims Act (“FCA”) actions as it did in the past.  Now, the focus is on the defendant’s state of mind.  Courts consider whether at the time of submitting the “false” claims to the government, the defendant fully cooperated and shared all information as to the claims, sufficient to show that the defendant did not intend to trick the government.  If the defendant did not fully communicate and cooperate with the government, then the defendant is not entitled to the “government knowledge inference” in refuting scienter (intent or knowledge of wrongdoing)

Fraud Went Unprosecuted Prior to the 1986 Amendments to the False Claims Act

Prior to the 1986 amendments to the FCA, most qui tam cases were dismissed based on a broadly-applied government knowledge bar.  As a result, fraud against the government skyrocketed and went unprosecuted.  With the 1986 amendments to the Act, Congress repealed the absolute government knowledge defense.  Since that time, courts have instead applied a much narrower government knowledge inference.

The Government Knowledge Inference Only Applies in the Rare Cases of Defendant’s Complete Communication and Cooperation with the Government

As seven different Circuit Courts have ruled, the government knowledge inference applies only in those rare cases where the defendant has completely communicated and cooperated with the government regarding its conduct and false claims.  See United States v. Bollinger, 775 F.3d 255, 264 (5th Cir. 2014), United States ex rel. A+ Homecare, Inc. v. Medshares Mgmt. Grp., Inc, 400 F.3d 428, 454 n.21 (6th Cir. 2005); United States ex rel. Becker v. Westinghouse Savannah River Co., 305 F.3d 284, 289 (4th Cir. 2002); Shaw v. AAA Eng’g. & Drafting, Inc. 213 F.3d 519, 534 (10th Cir. 2000); United States ex rel. Durcholz v. FKW Inc., 189 F.3d 542, 544-45 (7th Cir. 1999); United States ex rel. Kreindler & Kreindler v. United Techs. Corp., 985 F.2d 1148, 1157 (2d Cir. 1993); United States ex rel. Hagood v. Sonoma Cnty. Water Agency, 929 F.2d. 1416, 1421 (9th Cir. 1991).

Government Knowledge Inference Does Not Automatically Negate Scienter

Moreover, even in those unusual circumstances where there has been complete communication and cooperation from the defendant, the government knowledge inference functions not as an absolute defense, as during the pre-1986 Amendment time period, but rather as one of the ways in which a defendant may try to rebut scienter.  See Bollinger, 775 F.3d at 264 (holding that the government knowledge inference “serves simply as a factor weighing against the defendant’s knowledge, as opposed to a complete negation of the knowledge element.”).

A defendant is liable under the FCA if the defendant has knowledge (i.e., acts with deliberate ignorance or reckless disregard) that its claims are false.  In analyzing a defendant’s knowledge of the falsity of its claims, the Courts have looked to whether the defendant “completely cooperated and shared all information” with the government as to the facts underlying its false claims sufficient to show the defendant lacked the requisite intent to deceive.  Shaw, 213 F.3d at 534 (quoting United States ex rel. Butler v. Hughes Helicopters, Inc., 71 F.3d 321, 327 (9th Cir. 1995))).  The focus of the Court’s inquiry remains on the defendant’s knowledge and not on the government’s. See United States v. Incorporated Village of Island Park, 888 F. Supp. 419, 442 (E.D.N.Y.1995) (“[T]he government’s knowledge as to the falsity of a claim does not automatically bar the claim for a False Claim Act violation”).

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