Skip to Content

Blog

How to Calculate Damages for False Claims Act Cases Based on Research Grant Fraud

By Joy Clairmont

The federal government, through its agencies, offers grant funding opportunities to private individuals and entities.  Numerous federal agencies offer grants, including the Department of Defense, Health and Human Services and the Department of Energy.  Often federal grants are aimed at funding innovative research.

In a nutshell, the grant process involves applying for the grant, obtaining the grant award and then conducting the research required under the grant.  Grant fraud can occur during any stage of this process.  A grant recipient may make false and misleading statements to the federal agency in order to obtain the grant award or may deceive the government as to how the award funding is being used.  As a result, grant recipient entities may be liable under the False Claims Act (“FCA”) and subject to treble damages for any violations of the FCA.

One question may arise with regard to grant fraud under the FCA:  How are damages calculated?  When the government funds a research grant, the end result is abstract and not easily measurable, as compared to the classic FCA case involving non-conforming products or goods.  As discussed below, courts have found that the government is entitled to the full amount of the funding under the research grant in calculating single damages.  And, the FCA provides for trebling of single damages for FCA violations.

The Government is Entitled to Recover the Full Amount of the Research Grant in Single Damages 

When a defendant obtains grant money under false pretenses, the measure of single damages under the FCA is the amount the government actually paid to the defendant under the research grant. United States ex rel. Laymon v. Bombardier Transp. United States, 656 F. Supp. 2d 540, 546 (W.D. Pa. 2009) (“where there is no tangible benefit to the government and the intangible benefit is impossible to calculate, it is appropriate to value damages in the amount the government actually paid to the Defendants.”); see also United States ex rel. Feldman v. van Gorp, 697 F.3d 78, 88 (2d Cir. 2012) (holding same).

Put slightly differently, “when a third-party successfully uses a false claim regarding how a grant will be used in order to obtain the grant, the government has entirely lost its opportunity to award the grant money to a recipient who would have used the money as the government intended.” Feldman, 697 F.3d at 88. “[T]he government receives nothing of measurable value when the third-party to whom the benefits of a governmental grant flow uses the grant for activities other than those for which funding was approved.” Id.

The Fifth Circuit First Addressed How to Calculate Damages Under the False Claims Act for Fraudulently Induced Research Grants

In 2009, the Fifth Circuit became the first circuit court to address the proper method of calculating damages for a fraudulently induced research grant. U.S. ex rel. Longhi v. Lithium Power Techs., Inc. 575 F.3d458, 472-73 (5th Cir. 2009). In that qui tam case, the defendants had been found liable for violations of the FCA based on false and misleading statements made in grant proposals to obtain federal funds aimed at supporting small businesses’ research and commercial development of thinner battery technology. Id. 575 F.3d at 462.  The district court assessed damages in an amount equal to three times the total amount the government had paid to defendants for the research grants. Id. at 575 F.3d, at 472.

On appeal, the defendants argued that because the government had suffered no actual injury, as the grant program’s intended purpose was to support small businesses to conduct research and advance commercial development, and not to provide anything to the government, the government was not entitled to any damages. Id. In rejecting this argument, the Court held that “where there is no tangible benefit to the government and the intangible benefit is impossible to calculate, it is appropriate to value damages in the amount the government actually paid to the Defendants.” Id. 575 F.3d at 473; see also United States ex rel. Feldman v. van Gorp, 697 F.3d 78, 88 (2d Cir. 2012) (holding same).

In finding that defendants owed the government the full amount paid under the research grants, the Court reasoned,

The contracts entered into between the government and the Defendants did not produce a tangible benefit to the BMDO or the Air Force. These were not, for example, standard procurement contracts where the government ordered a specific product or good. The end product did not belong to the BMDO or the Air Force. Instead, the purpose of the SBIR grant program was to enable small businesses to reach Phase III where they could commercially market their products. The Government’s benefit of the bargain was to award money to eligible deserving small businesses. The BMDO and the Air Force’s intangible benefit of providing an “eligible deserving” business with the grants was lost as a result of the Defendants’ fraud.

Longhi, 575 F.3d at 473.

Other Circuit Courts Have Agreed that the Government Should Receive the Full Amount of the Grant

The Second Circuit case of United States ex rel. Feldman v. van Gorp, 697 F.3d 78, 88 (2d Cir. 2012) held that “when a third-party successfully uses a false claim regarding how a grant will be used in order to obtain the grant, the government has entirely lost its opportunity to award the grant money to a recipient who would have used the money as the government intended.”  “[T]he government receives nothing of measurable value when the third-party to whom the benefits of a governmental grant flow uses the grant for activities other than those for which funding was approved. Id.

The Feldman court further explained that, in other FCA cases, whether it be “medical care, security on mortgages, or subsidized housing,” the government got “what it bargained for but it did not get all that it bargained for” whereas in the third-party benefit grant context, the government bargains for “something qualitatively, but not quantifiably, different from what it received. Id. (emphasis in the original).

It is free to speak with our nationally recognized whistleblower attorneys:


Another Court Provides Strong Support for Whistleblower Use of Confidential Employer Documents to Expose Alleged Fraud

By Susan Schneider Thomas

One of the ways in which companies attempt to discourage whistleblowing or to punish actual whistleblowers is by asserting legal claims against them for using company documents, sometimes in violation of employment agreements or other company employee policies or under various tort laws.[1]  In one recent case, for example, the corporate employer brought a whole host of claims against an employee it had just terminated. Erhart v. BOFI Holding, Inc., Case No. 15-cv-02287-BAS-NLS, Order Granting in Part and Denying in Part BOFI Federal Bank’s Motion for Summary Adjudication, S.D.Cal. 2/14/2017.

This can be a powerful silencing device, since employees are worried about possible liability, or even just the notion of having to defend their conduct.  Especially when an employer asserts claims like this in conjunction with having terminated the employee, the risks and costs to the now-unemployed employee can be daunting.  And the intimidation against other employees considering similar reporting can be very strong.

In an effort to encourage whistleblowing activities so as to cut back on corporate fraud on the government, a number of statutes and regulations provide specific protection against these types of retaliatory suits by employers.  See, e.g,, Defend Trade Secrets Act of 2016, Pub. L. No. 114-153, 130 Stat. 376 (2016) (amending 18 U.S.C. § 1833(b) and providing immunity from civil and criminal liability for individual who discloses a trade secret either to a government official or attorney in confidence to report a violation of law, or in a legal complaint filed under seal); An Act To enhance whistleblower protection for contractor and grantee employees, Pub. L. No. 114- 261, 130 Stat 1362 (2016), (extending protections from retaliation for employees of federal contractors, subcontractors, grantees, and sub-grantees who report a host of problems relating to federal contracts and funds); see also Press Release, Off. of Rep. Mike Coffman, Reps. Coffman, Rice, Speier and Blum Create House Whistleblower Protection Caucus (Apr. 26, 2016), (House Whistleblower Protection Caucus “will work to build bipartisan support for strong whistleblower protections [and] raise awareness about retaliation against whistleblowers.”).

On an even broader basis, however, courts have dismissed these types of claims by employers on general public policy grounds.  A recent opinion from the United States District Court for the Southern District of California relied on both statutory and public policy grounds in severely cabining the intimidating claims of the whistleblower’s former employer.  The court ruled that employer confidentiality agreements do not supersede federal whistleblower rights and warned that retaliatory lawsuits against whistleblowers are unlikely to succeed. Significantly, the court also provided concrete guidance to potential whistleblowers in terms of evaluating their risks and taking certain precautions so as to maximize the likelihood that their conduct will be deemed protected.

Erhart’s Whistleblower Claims

Charles Erhart worked as an internal auditor for BofI Federal Bank (BofI) and observed conduct that he believed was illegal in connection with the Bank’s decision to withhold responsive information to an SEC subpoena.  He sued BofI under the Sarbanes-Oxley Act and other whistleblower protection laws when he was fired in retaliation for his disclosing the alleged misconduct to federal regulators.  He also disclosed information to The New York Times, which resulted in a substantial decline in BofI’s stock price and general adverse publicity.

In response to Erhart’s retaliation suit, BofI further retaliated against him by suing him for alleged theft and dissemination of BofI’s confidential information, specifically 1) breach of contract; (2) conversion; (3) breach of the duty of loyalty; (4) negligence; (5) fraud; (6) violation of California Penal Code Section 502; (7) violation of the Computer Fraud and Abuse Act, 18 U.S.C. § 1030(a)(5); and (8) unfair business practices ….   BofI sought a ruling that Erhart’s whistleblowing activities were not a defense to BofI’s claims.

Key Provisions of Court Decision

  • Overall, the court held that “both federal and state law reflect a strong public policy in favor of whistleblowing and protecting whistleblowers from retaliation.” Slip op. at 19.  More specifically, the court concluded that “there is merit to a public policy exception to confidentiality agreements to protect whistleblowers who appropriate company documents. As discussed above, the Court recognizes the strong interest in the enforcement of confidentiality agreements like the one signed by Erhart. But at the same time, whistleblowers often need documentary evidence to substantiate their allegations.”  at 23.
  • Importantly, the court concluded that “if an employee is permitted to provide information regarding believed wrongdoing to the government, including documents, the employer cannot then seek to impose … liability on the employee for the same conduct.” at 33.
  • The court specifically recognized the importance of allowing documents to be taken or copied because of a concern that the documents might otherwise be destroyed before any investigation is commenced. Id. at 23.
  • In order to achieve a proper balancing between legitimate rights of employers to protect the confidentiality of their documents and the need of the government for private parties to report suspected fraud, the court reiterated the position taken by most courts that the whistleblower has to justify the need to have taken the documents. Hence the burden is on the party seeking to invoke the public policy exception “to justify why removal of the documents was reasonably necessary to support the allegations of wrongdoing.” Id. at 24 (internal quotations omitted).
  • Further, the court essentially set out guidelines for employees to follow to gain maximum protection for their activities. For example, if an employee is contemplating transmitting information to another’s computer or server, the employee should be prepared to demonstrate that the information taken was relevant to the reported wrongdoing, the information was transmitted out because there was a concern that the information would have been destroyed and the motivation for sending the information to another person was to support the allegations of wrongdoing. at 27-28.  Overall, the whistleblower should be careful to restrict copying of documents to only those closely related to the allegations of wrongdoing and to documents that the employee had appropriately accessed in the first instance. Id. at 26.

This is a welcome ruling providing support for whistleblowers who need to take company documents in order to support their allegations of corporate fraud on the government.

[1] See, e.g., Scott R. Grubman et al., Fighting Back: Asserting Counterclaims Against False Claims Act Relators, 27 THE HEALTH LAWYER 4, at 14 (Apr. 2015) (“Until recently, FCA Relators seldom, if ever, faced repercussions for taking and sharing what might otherwise be considered proprietary and confidential information to support their qui tam complaint. Recently, however, as more FCA cases work their way through litigation (particularly where the government declines to intervene and the Relator is left to pursue the case on behalf of the government), healthcare providers and their attorneys have become more willing to assert counterclaims against FCA Relators who appropriate confidential information to support an FCA qui tam.”).

 

It is free to speak with our nationally recognized whistleblower attorneys:


The Federal Anti-Kickback Statute

By Shauna Itri

The federal Anti-Kickback Statute, 42 U.S.C. § 1320a-7b(b), (“AKS”) arose out of congressional concern that remuneration provided to those who can influence health care decisions would result in goods and services being provided that are medically unnecessary, of poor quality, or harmful to a vulnerable patient population. To protect the integrity of the Medicare and Medicaid programs from these harms, Congress enacted a prohibition against the payment of kickbacks in any form. First enacted in 1972, Congress strengthened the statute in 1977 and 1987 to ensure that kickbacks masquerading as legitimate transactions did not evade its reach.

The AKS prohibits any person or entity from offering, making, soliciting, or accepting remuneration, in cash or in kind, directly or indirectly, to induce or reward any person for purchasing, ordering, or recommending or arranging for the purchasing or ordering of federally funded medical goods or services:

(i)            Whoever knowingly and willfully solicits or receives any remuneration (including any kickback, bribe, or rebate) directly or indirectly, overtly or covertly, in cash or in kind–

(a)          in return for referring an individual to a person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part under a Federal health care program, or

(b)          in return for purchasing, leasing, ordering, or arranging for or recommending purchasing, leasing, or ordering any good, facility, service, or item for which payment may be made in whole or in part under a Federal health care program,

shall be guilty of a felony and upon conviction thereof, shall be fined not more than $25,000 or imprisoned for not more than five years, or both.

(ii)           Whoever knowingly and willfully offers or pays any remuneration (including any kickback, bribe, or rebate) directly or indirectly, overtly or covertly, in cash or in kind to any person to induce such person–

(a)          to refer an individual to a person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part under a Federal health care program, or

(b)          to purchase, lease, order, or arrange for or recommend purchasing, leasing, or ordering any good, facility, service, or item for which payment may be made in whole or in part under a Federal health care program,

shall be guilty of a felony and upon conviction thereof, shall be fined not more than $25,000 or imprisoned for not more than five years, or both.

42 U.S.C. §§ 1320a-7b(b).  Violation of the statute can also subject the perpetrator to exclusion from participation in federal health care programs and, effective August 6, 1997, civil monetary penalties of $50,000 per violation and three times the amount of remuneration paid, regardless of whether any part of the remuneration is for a legitimate purpose.  42 U.S.C. §§ 1320a-7(b)(7) and 42 U.S.C. §§ 1320a-7a(a)(7).

The legislative and administrative history of the AKS safe harbors indicate that anything of value should be considered remuneration. In promulgating final rules on the AKS, the Office of the Inspector General of the Department of Health and Human Services stated that “the meaning of two of its [the AKS statute’s] terms deserve comment (1) ‘any remuneration (including any kickback, bribe, or rebate) directly or indirectly, overtly or covertly, in cash or in kind;’ and (2) ‘to induce.’ These terms demonstrate congressional intent to create a very broadly worded prohibition.” 56 FR 35952 (1991).

The OIG continued,

Congress’s intent in placing the term “remuneration” in the statute in 1977 was to cover the transferring of anything of value in any form or manner whatsoever. The statute’s language makes clear that illegal payments are prohibited beyond merely “bribes,” “kickbacks,” and “rebates,” which were the three terms used in the original 1972 statute. The language “directly or indirectly, overtly or covertly, in cash or in kind” makes clear that the form or manner of the payment includes indirect, covert, and in kind transactions …. The meaning of the term “to induce,” which describes the intent of those who offer or pay remuneration in paragraph (2) of the statute, is found in the ordinary dictionary definition: “to lead or move by influence or persuasion”

Id. (citing The American Heritage Dictionary (2d College Ed. 1982)).

As the sponsor of the bill explained,

[K]ickbacks are wrong no matter how a transaction might be constructed to obscure the true purpose of a payment … We are in a complex area where right and wrong are often clouded with shades of gray. In such situations, the committee stresses the need to recognize that the substance rather than simply the form of a transaction should be controlling.

123 Cong. Rec. 30,280 (1977).

An opportunity to bill or earn money is remuneration that could induce a person “to channel potential Medicare payments towards a particular recipient.” Bay State Ambulance & Hosp. Rental Serv., 874 F.2d at 29; see also, United States ex rel. Fry v. Health Alliance of Greater Cincinnati, 2008 U.S. Dist. LEXIS 102411, * 17-*23 (S.D. Ohio Dec. 18, 2008) (accepting the government’s argument that an opportunity to bill is remuneration and that a doctor being “handed a stream of patients … is like receiving a voucher.”).

As the Court wrote in Fry,

Giving a person an opportunity to earn money may well be an inducement to that person to channel potential Medicare payments towards a particular recipient … Congress’s intent in placing the term ‘remuneration’ in the statute in 1977 was to cover the transferring of anything of value in any form or manner whatsoever. Id. at 21-23 (internal citations omitted).

Furthermore, a person who offers or pays remuneration to another person violates the Anti-kickback Act so long as one purpose of the offer or payment is to induce Medicare or Medicaid patient referrals. United States v. Borrasi, 639 F.3d 774 (7th Cir. 2011) (“We join our sister circuits in holding that if part of the payment compensated past referrals or induced future referrals, that portion of the payment violates [the Anti-kickback Act]”).

Specific intent is not required to establish a violation of the AKS. That is, “a person need not have actual knowledge of [the AKS] or specific intent to commit a violation of [the AKS].” 42 U.S.C. § l 320(a)-7b(h)).

A “Federal health care program” is defined at 42 U.S.C. § 1320a-7b(f) as any plan or program providing health benefits funded, whether directly or indirectly, by the United States Government. The Anti-Kickback Statute applies to claims submitted to Medicare, Medicaid, and the other government payers listed in this case. 42 C.F.R. § 405.207.

Violations of the Anti-Kickback Statute Form the Basis of False Claims Act Liability

Congress has long viewed the elimination of kickbacks as central to any efforts to combat Medicare and Medicaid fraud and abuse. See United States v. Greber, 760 F.2d 68, 70-71 (3d. Cir. 1985). Because kickback schemes negatively affect the integrity of federal health care programs, the United States has a strong interest in ensuring the continued viability of False Claims Act (“FCA”) actions to deter and redress health care fraud predicated upon kickbacks.  United States ex rel. Charles Wilkins and Daryl Willis v. United Health Group, Inc. et al., (3d Cir. Oct. 2010)(No. 10-2747) (Brief for the United States as Amicus Curie Supporting Appellant)(“Amicus Brief”).

To protect against the erosion of patient care and patient safety, courts uniformly agree that compliance with the AKS is a material condition of payment under the Medicare/Medicaid programs.

These and other courts have held that a person or entity who violates the and causes another to submit claims to the government has violated the FCA regardless of what form the claim or statement takes.  Many of these courts have reasoned that the claims are false, and thus violate the FCA, because there is a false certification – either express or implied – as to compliance with the AKS each time a claim is submitted.

Moreover, the AKS was recently amended to expressly state what these courts had already held, namely, that a violation of the AKS constitutes a “false or fraudulent” claim under the FCA.  42 U.S.C. § 1320(a)-7b(g).

It is free to speak with our nationally recognized whistleblower attorneys:


Meeting the Materiality Requirement of the False Claims Act in Cases Brought by Qui Tam Whistleblowers

By Daniel Miller

The False Claims Act’s Materiality Requirement

Under the express language of the False Claims Act (“FCA”), material means having a “natural tendency to influence or be capable of influencing” the government’s decision to pay a claim.  31 U.S.C. § 3729(a)(4).

The Escobar Decision

Under the recent Supreme Court case of United Health Servs., Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989, 2002-2003 (2016), a false statement is material if “either (1) a reasonable person would likely attach importance to it or (2) the defendant knew or should have known that the government would attach importance to it.”  Miller, 840 F.3d at 503 (citing Escobar). In other words, the focus of the analysis is whether the false statement or violation had the natural tendency to “affect a reasonable government funding decision or if the defendant had reason to know it would affect a government funding decision.”  Miller, 840 F.3d at 503 (citing Escobar); see also United States ex rel. Escobar v. Universal Health Servs., Inc., 842 F.3d 103, 110 (1st Cir. 2016).

Escobar endorsed a multi-factored approach in analyzing materiality and made clear that no one factor is disposition.  In determining whether the violation is material, courts may consider a variety of factors including, but not necessarily limited to, “whether the provision violated is expressly labeled as a condition of payment, whether the violation is significant or ‘minor or insubstantial,’ whether the violation goes to the ‘essence of the bargain’ and whether the government took action in this or other cases where the government had knowledge of similar violations.” United States’ Statement of Interest, at 5 (United States. ex rel. Williams v. City of Brockton, No. 1:12-12193-IT (D. Mass. Sept. 19, 2016)) (internal quotation marks and citations omitted).

Applying the Escobar Standard in a Qui Tam Case Involving Fraud on the FDA

In a whistleblower case involving alleged fraud on the FDA, the questions are whether the misleading statements to the FDA influenced or were capable of influencing the FDA’s approval of the devices or in delaying a recall, and whether FDA approval (or lack thereof) would affect a “reasonable government funding decision or if the defendant had reason to know it would affect a government funding decision.” Miller, 840 F.3d at 503.

The first question – whether the false statements were capable of influencing the FDA approval – is easily proven if the drug or device is recalled.   The recall is highly probative evidence that, had the FDA known the truth about the drug or device at the outset, the FDA would not have granted approval.

The second question – regarding the link between withdrawal of FDA approval and the government’s decision to pay – is essentially irrefutable: CMS will not pay for devices which do not have valid FDA approval. See 42 C.F.R. § 411.15(o); 42 C.F.R. § 405.211(C); see Medicare Program; Revised Process for Making Medicare National Coverage Determinations, 2003 WL 22213011, 68 FR 55634-01 (Sept. 26, 2003).   Moreover, if a device is not reimbursable, the medical and hospital costs of the related surgery are also not reimbursable.  42 C.F.R. § 405.207 (“[P]ayment is not made for medical and hospital services that are related to the use of a device that is not covered because CMS determines that the device is not ‘reasonable’ and ‘necessary’ . . . or because it is excluded from coverage for other reasons”).

Conclusion

With the right set of facts, a qui tam whistleblower suing under the False Claims Act can easily meet the materiality requirement set forth by the Supreme Court in Escobar.

It is free to speak with our nationally recognized whistleblower attorneys:


Fraudulent Inducement as a Legal Theory Under the Qui Tam Provisions of the False Claims Act

By Daniel Miller

While many defendants may assert that fraudulent inducement is not a viable theory of liability in a qui tam case under the False Claims Act (“FCA”), the truth is that the plentiful and better-reasoned authorities to consider this issue support FCA liability for defrauding the FDA.  See United States  v. Pfizer, Inc., 2016 WL 807363, at **8-10 (E.D. Pa. Mar. 1, 2016) (relator’s allegations that defendant submitted a false and misleading application to the FDA were upheld as sufficient under the False Claims Act); United States ex rel. Krahling v. Merck & Co., 44 F. Supp. 3d 581, 593 (E.D. Pa. 2014) (denying defendant’s motion to dismiss relator’s FCA case alleging fraud-on-the-FDA related to the efficacy of its mumps vaccine); United States’ Statement of Interest, at 3 (Krahling, No. 2:10-cv-4374 (E.D. Pa. May 20, 2013)) (“[T]he False Claims Act expressly authorizes private citizens to bring suits on behalf of the Government, and carving out an exception for suits arising from allegations of fraud on the FDA or conduct in violation of FDA regulations is not supported by the statutory text or case law and is inconsistent with the purposes of the False Claims Act”).

Liability under the FCA for fraud in the inducement is established when eligibility to receive funds under a government program was procured by misstatements or other misleading actions.  See United States ex rel. Miller v. Weston Educ., Inc., 840 F.3d 494, 498 (8th Cir. 2016); Baycol, 732 F.3d at 876.  In these cases, “FCA liability attaches to each claim submitted to the government under a contract so long as the original contract was obtained through false statements or fraudulent conduct.” Miller, 840 F.3d at 498 (internal quotation marks omitted).[1]

In Miller, relators alleged that a college fraudulently induced the Department of Education to provide funding by falsely promising to keep accurate grade and attendance records.  Construing the evidence in favor of relators, the Miller court found that defendant’s promise to keep accurate grade and attendance records influenced the government’s decision to provide funding.  Id. at 503.

The theory has been used in FCA cases with regard to fraudulently inducing a variety of different government agencies’ actions:  the Department of Defense to enter into contracts for the purchase of a drug, see Baycol, 732 F.3d at 876; the Department of Education to obtain federal subsidies, United States ex rel. Hendow v. Univ. of Phoenix, 461 F.3d 1166 (9th Cir. 2006); and the Department of Energy for the award of a subcontract, Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 786-87 (4th Cir. 1999).

Turning back to FDA-specific authorities, courts have held that FCA liability can be predicated based on a defendant’s alleged promotion of a device not approved by the FDA.  United States ex rel. Bui v. Vascular Solutions, Inc., No. 1:10-cv-00883 (W.D Tex. March 7, 2013) (denying motion to dismiss where defendant promoted product for use not approved by the FDA); United States ex rel. Colquitt v. Abbott Labs, 2012 WL1081453, at *31 (N.D. Tex. March 30, 2012) (denying motion to dismiss and finding relator stated FCA claims because defendant promoted devices for non-FDA-approved uses).  Commenting on these two qui tam cases in connection with the fraud-on-the-FDA theory being litigated in the Krahling case cited above, the Department of Justice has observed that “[t]here is nothing unique about a case involving false statements to the FDA that would warrant creating a special rule precluding such cases from going forward.  To the contrary, allowing relators to prosecute such False Claims Act suits (as long as sufficiently pleaded) serves the primary purpose of the qui tam provisions.”

Conclusion

Fraudulent inducement has long been recognized as a viable legal theory in qui tam cases brought by whistleblowers under the False Claims Act.  The evolution of this theory into cases where the FDA has been defrauded is a positive development for whistleblowers.

 

[1] It is well established that fraud at the outset of a series of dealings with the government can render all subsequent claims false under the FCA.  See S. Rep. No. 99-345, at 9, reprinted in 1986 U.S.C.C.A.N. at 5274 (“each and every claim submitted under a contract, loan guarantee, or other agreement with was originally obtained by means of false statements or other corrupt or fraudulent conduct . . . constitutes a false claim”).

It is free to speak with our nationally recognized whistleblower attorneys:


Pleading Standards in the Eighth Circuit

By Daniel Miller

Federal Rule of Civil Procedure Rule 9(b)

Relators in qui tam cases under the False Claims Act (“FCA”) face considerable challenges in meeting pleading requirements in many circuits, including the 8th Circuit.

The Rule 9(b) standard in the Eighth Circuit is well described by the Court in United States ex rel. Joshi v. St. Luke’s Hospital, Inc., 441 F.3d 552 (8th Cir. 2006):

Because the FCA is an anti-fraud statute, complaints alleging violations of the FCA must comply with Rule 9(b).  Under Rule 9(b), the circumstances constituting fraud … shall be stated with particularity. Rule 9(b)’s particularity requirement demands a higher degree of notice than that required for other claims, and is intended to enable the defendant to respond specifically and quickly to the potentially damaging allegations. To satisfy the particularity requirement of Rule 9(b), the complaint must plead such facts as the time, place, and content of the defendant’s false representations, as well as the details of the defendant’s fraudulent acts, including when the acts occurred, who engaged in them, and what was obtained as a result.  Put another way, the complaint must identify the who, what, where, when, and how of the alleged fraud.

Id. at 556 (citations and internal quotation marks omitted).  In meeting this burden, a Relator need not plead details of any specific false claims, as long as there is sufficient indicia of reliability that false claims were submitted.  See United States ex rel. Thayer v. Planned Parenthood of the Heartland, 765 F.3d 914, 917-918 (8th Cir. 2014).  When considering a motion to dismiss, the Court must view the Complaint in the light most favorable to Relator, and the facts alleged in the Complaint must be accepted as true.  Hamm v. Gruse, 15 F.3d 110, 112 (8th Cir. 1994).

Federal Rule of Civil Procedure Rule 12(b)

Recognizing that the FCA is to be applied broadly and flexibly to reach all types of whistleblower fraud that cause financial loss to the government, the Supreme Court, when evaluating claims under the Act, has “consistently refused to accept a rigid, restrictive reading.” United States v. Neifert-White Co., 390 U.S. 228, 233 (1968).  Attempts to cabin a Relator’s claims into judicially-created categories would result in exactly the kind of “rigid, restrictive reading” Congress has cautioned against and the Supreme Court “has consistently refused” to adopt. Id. at 232.

To survive a motion to dismiss under Rule 12(b)(6), a Realtor’s complaint need only “contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 547 (2007)).  In making this determination, the court accepts the Relator’s allegations as true and draws all reasonable inferences in favor of Relator.  Crooks v. Lynch, 557 F.3d 846, 848 (8th Cir. 2009).  Accordingly, when reviewing a defendant’s motion to dismiss under Rule 12(b)(6), it is error to either ignore reasonable inferences supported by the allegations in the complaint or to draw any inferences in the defendant’s favor.  See Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 595 (8th Cir. 2009).

Conclusion

The pleading standards in the 8th Circuit are similar to the pleading rules in many other circuits.  In short, Relators in qui tam cases under the False Claims Act  face considerable challenges in reaching the discovery aspect of litigation.  Engaging a whistleblower lawyer with considerable experience is critical to meeting the pleading rules.

It is free to speak with our nationally recognized whistleblower attorneys:


False Claims Act Cases Based on Fraudulent Inducement

By Joy Clairmont

Liability under the False Claims Act (“FCA”) for fraud in the inducement is established when eligibility to receive funds under a government program was procured by misstatements or other misleading actions.  Courts have repeatedly held fraudulent inducement is a viable theory of liability under the FCA.  See United States ex rel. Miller v. Weston Educ., Inc., 840 F.3d 494, 498 (8th Cir. 2016) (citations omitted); In re Baycol Prods. Litig., 732 F.3d 869, 876 (8th Cir. 2013).  In these whistleblower cases, “FCA liability attaches to ‘each claim submitted to the government under a contract so long as the original contract was obtained through false statements or fraudulent conduct.” See United States ex rel. Miller v. Weston Educ., Inc., 840 F.3d 494, 498 (8th Cir. 2016) (citations omitted).

It is well established that fraud at the outset of a series of dealings with the government can render all subsequent claims false under the FCA.  See S. Rep. No. 99-345, at 9, reprinted in 1986 U.S.C.C.A.N. at 5274 (“each and every claim submitted under a contract, loan guarantee, or other agreement with was originally obtained by means of false statements or other corrupt or fraudulent conduct . . . constitutes a false claim”).

Fraudulent Inducement Qui Tam Case Examples

The fraudulent inducement theory has been used in FCA cases with regard to fraudulently inducing a variety of different government agencies’ actions:  the Department of Defense to enter into contracts for the purchase of a drug, see In re Baycol Prods. Litig., 732 F.3d 869, 876 (8th Cir. 2013); the Department of Education to obtain federal subsidies, United States ex rel. Hendow v. Univ. of Phoenix, 461 F.3d 1166 (9th Cir. 2006); and the Department of Energy for the award of a subcontract, Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 786-87 (4th Cir. 1999).

In the 8th Circuit case of United States ex rel. Miller v. Weston Educ., Inc., 840 F.3d 494, 498 (8th Cir. 2016), relators allege that a college fraudulently induced the Department of Education to provide funding by falsely promising to keep accurate grade and attendance records.  The Miller court found that defendant’s promise to keep accurate grade and attendance records influenced the government’s decision to provide funding and denied defendant’s motion to dismiss. Id. at 503.

Fraud-on-the-FDA under the False Claims Act

In addition, the theory had been relied on to support FCA liability for fraud-on-the-FDA.  Courts have found FCA violations based on defrauding the FDA. See United States ex rel. Brown and Vezeau v. Pfizer, Inc., 2016 WL 807363, *8-10 (E.D. Pa. 2016) (relator’s allegations that defendant submitted a false and misleading application to the FDA were upheld as sufficient under the False Claims Act); United States ex rel. Krahling v. Merck & Co., Inc., 2014 WL 4407969, *6-7 (E.D. Pa 2014) (denying defendant’s motion to dismiss relator’s FCA case alleging fraud-on-the-FDA related to the efficacy of its mumps vaccine); Krahling, Statement of Interest from the United States Department of Justice (“the False Claims Act expressly authorizes private citizens to bring suits on behalf of the Government, and carving out an exception for suits arising from allegations of fraud on the FDA or conduct in violation of FDA regulations is not supported by the statutory text or case law and is inconsistent with the purposes of the False Claims Act”).

It is free to speak with our nationally recognized whistleblower attorneys:


Whistleblower Lawsuits Against Medicare Advantage Organizations

By Susan Schneider Thomas

In addition to the big qui tam case against UnitedHealth Group that has received so much press recently, there is a similar whistleblower case pending in federal court in Texas alleging False Claims Act (“FCA”) claims against a medical coding company, Censeo Health, L.L.C., and several Medicare Advantage organizations (“MAOs”).   Similar to the allegations in UnitedHealth Group, Censeo is alleged to have provided unsupported diagnostic codes and inaccurate risk adjustment data for the purpose of improperly inflating capitated payments to the coding company’s clients, Medicare Advantage organizations. U.S. ex rel. Ramsey-Ledesma v. Censeo Health, L.L.C., 3:14-CV-00118-M (N.D. Tx).

Medicare Advantage Organizations and Capitation Payments

The Censeo case follows a recognized theory of FCA liability for false claims presented to MAOs, where false claims result in MAOs receiving increased capitation payments from the government. Since capitation payments are largely driven by the diagnosis of chronic medical conditions, an MAO that claims it has a beneficiary with diabetes and relays this information to CMS will almost certainly lead to a substantially increased capitation payment to account for the anticipated increased costs of treating that beneficiary.

Falsely stating risk conditions or diagnosis codes leads to increased payments by the government because the capitated payments per member are adjusted based on what is called “risk adjustment data.”  The capitated payments are prospective, meaning CMS uses risk adjustment data from the prior year to establish payment amount for the following year. 42 C.F.R. §§ 422.308(c), (e), 422.310(g).  CMS’s model assumes that MAOs with higher-risk insureds will be required to pay more for their insureds’ medical care. Thus, MAOs with more high-risk insureds are compensated at a higher level than MAOs whose insureds are comparatively healthier.

Diagnosis Code Guidelines for Medicare Advantage Organizations

CMS guidelines require that MAOs use accurate diagnosis codes, following ICD-9-CM Guidelines for Coding and Reporting. See Medicare Managed Care Manual Ch. 7. The diagnosis codes must be supported by properly documented medical records, see 42 C.F.R. § 422.310(e), and the MAOs must certify that the risk adjustment data provided to CMS, including diagnosis codes, is accurate, complete, and truthful, based on an MAO’s “best knowledge, information, and belief.” See 42 C.F.R. § 422.504(l).

MAOs are permitted to subcontract with third-party vendors, such as medical coding companies, to ascertain and report their patients’ risk adjustment data.  As the New York Times recently reported, “[t]he realization that medical records could be mined for extra money appears to have given rise to a cottage industry of consulting firms offering to screen patient histories and look for indications of long-term health problems that could be used to increase Medicare reimbursements.” Walsh, M.W., Scheme Tied to UnitedHealth Overbilled Medicare for Years, Suit Says, New York Times, Feb. 16, 2017.

Censeo Whistleblower Allegations

As part of the scheme that the whistleblower in Censeo alleges, Censeo allegedly hired unqualified physicians to perform in-home assessments of members of Censeo’s MAO clients and diagnose high-risk conditions. The problems arise, according to this former coding employee, because Censeo pushed the doctors to identify high-risk conditions based on little more than historical data provided by the patients themselves.  U.S. ex rel. Ramsey-Ledesma v. Censeo Health, L.L.C., 3:14-CV-00118-M, 2016 WL 5661644, at *2 (N.D. Tex. Sept. 30, 2016).

The company was also alleged to have provided these inexperienced medical coders and physicians with assessment forms that had been prepopulated with patient information, including medical and prescription medication histories. Id. at *4.  Relator alleges that Censeo instructed those physicians to diagnose high-risk conditions based on information provided in the prepopulated assessment forms and during cursory physical examinations they conducted of members, which lasted only 45 minutes to an hour. Id. Some of these reported conditions were not true diagnoses, but instead simply showed the self-reported conditions or information that the coder gleaned from the medical history, which also included unconfirmed self-reported conditions and severity judgments generally not supported by laboratory results or diagnostic testing.  Id. at *5.

As one example, the whistleblower alleged that Censeo instructed physicians to diagnose chronic obstructive pulmonary disease (“COPD”) based on nothing more than the doctor’s observations that the MAO member used oxygen or had a chronic cough.  Physicians were allegedly pressured to code high-risk conditions through incentive payments and other employment conditions. Id. at *5.

Employees or patients who observe these types of fraudulent practices, which overburden government healthcare programs and potentially make those programs unsustainable, are in the best position to report these violations and allow the government to address that costly fraud and corruption in the industry.

It is free to speak with our nationally recognized whistleblower attorneys:


Senator Chuck Grassley and Seema Verma Discuss the Importance of the False Claims Act to CMS

By David Filbert and Daniel Miller 

On February 16, 2017, the Senate Finance Committee held a confirmation hearing for Seema Verma to become the nation’s next Administrator of the Centers for Medicare and Medicaid Services (“CMS”).  During her testimony, Senators raised wide-ranging questions about the best ways to maintain the quality of the Medicare and Medicaid programs while ensuring the programs’ financial stability.  Ms. Verma stated throughout the hearing that she would try all options and methods to protect and enhance the healthcare programs.

When it came time for Senator Chuck Grassley to ask questions, he wanted to know about Ms. Verma’s commitment to the False Claims Act (“FCA”) and fighting fraud in the programs.  He said, “Coming from an Administration that wants to drain the swamp, I would expect changes to be made under your leadership…”.[1]  Senator Grassley then prefaced his questions by mentioning discussions he has had with CMS in which the agency said it doesn’t have much authority to do anything against frauds in its own programs even if the frauds are in clear violation of the law.  This comment surprised the Senator, who then requested that Ms. Verma take a look into the CMS’ interpretation of its authority to stop fraud.  Grassley said that oftentimes money is taken wrongly from the programs and there is no way to get it back.

Senator Grassley said there are “a lot of tools available to the government to fight fraud…the most effective one is the False Claims Act.”[2]  He then pointed out that since 1987, the Department of Justice has used the FCA to recover almost $34 billion just from health care fraud alone, and that cooperation between the Justice Department and CMS is very important in these cases.  Senator Grassley asked Ms. Verma if she would commit to proactively cooperating with the Department of Justice in fraud cases and to fully support the use of the FCA to combat fraud on government healthcare programs.  Ms. Verma said “…I will absolutely do that.”[3]  She applauded Senator Grassley’s efforts on the FCA, which has been “…an integral component of preventing fraud and recovering dollars when there is fraud.”[4]   So it seems at the outset, even before her administration begins at CMS, that Ms. Verma will look to the FCA as one of her options to support and protect the Medicare and Medicaid programs.

Ms. Seema Verma is the President and founder of SVC, Inc., a national health policy consulting company, and was the architect of the Healthy Indiana Plan (HIP), the nation’s first consumer directed Medicaid program. She has worked for years in Indiana with Governors Mitch Daniels and Mike Pence managing the state’s Medicaid program and has been a consultant with extensive experience redesigning Medicaid programs in other states[5].  She holds a Masters of Public Health Degree from Johns Hopkins University and was nominated to serve as CMS Administrator on November 29, 2016.  CMS is the world’s largest health insurer, covering over one-third of the U.S. population through Medicare and Medicaid alone.  It has a budget of over one trillion dollars and it processes over 1.2 billion claims a year for services provided to some of our nation’s most vulnerable citizens.”[6]

Ms. Verma’s nomination was voted out of the Senate Finance Committee on March 2, 2017.  A vote for confirmation from the full Senate will occur in the coming days.

 

[1]  Senate Finance Committee Hearing, February 16, 2017.  Senator Grassley portion of video begins at time mark 46:48 https://www.c-span.org/video/?423823-1/cms-administrator-nominee-seema-verma-testifies-confirmation-hearing

[2] Ibid.

[3] Ibid.

[4] Ibid.

[5] Seema Verma background  See Health Affairs Blog: http://healthaffairs.org/blog/author/verma/

[6] Senator Orin Hatch press release on Confirmation Hearing of Seema Verma, February 16, 2017. https://www.finance.senate.gov/chairmans-news/hatch-statement-at-finance-confirmation-hearing-for-cms-administrator

It is free to speak with our nationally recognized whistleblower attorneys:


 

Laboratories May be Liable under the False Claims Act for Submitting Claims for Screening Tests to Medicare

By Russell Paul

Laboratory tests are not medically necessary when they do not “determine a disease or illness. . . or medically or surgically manage an illness.” Strand Analytical Labs., LLC v. Burwell, 2015 WL 4603258, at *17 (S.D. Ind. July 30, 2015) (“The plain meaning of the words diagnose and treat do not include the broader concept of ‘contribute meaningfully.’ Rather, the terms ‘diagnose’ or ‘treat’ convey that the service must determine a disease or illness, which the . . . test admittedly does not; or medically or surgically manage an illness, which the Secretary concluded the . . . test did not do.”).

Screening Tests and Medicare Reimbursement

Screening, in medicine, is a strategy used to identify an unrecognized disease in individuals without signs or symptoms, and Medicare generally does not pay for screening tests.  As the Medicare Claims Process Manual clearly provides, “[t]ests that are performed in the absence of signs, symptoms, complaints, personal history of disease, or injury are not covered except when there is a statutory provision that explicitly covers tests for screening as described.”[1]   Other Medicare guidance reinforces that screening tests are generally not covered:

Services and Supplies That Are Not Medically Reasonable and Necessary

Services and supplies that are not medically reasonable and necessary to the overall diagnosis and treatment of the beneficiary’s condition are not covered. Some examples include:

****

Screening tests, examinations, and therapies for which the beneficiary has no symptoms or documented conditions, with the exception of certain screening tests, examinations, and therapies as described below under Exceptions (Items and Services That May Be Covered)[.][2]

Local Coverage Determination (“LCD”) L35000 (effective October 1, 2015 for various jurisdictions), which governs molecular pathology laboratory procedures, succinctly states the Medicare standard:

Screening services such as presymptomatic genetic tests and services used to detect an undiagnosed disease or disease predisposition are not a Medicare benefit and are not covered. Similarly, Medicare may not reimburse the costs of tests/examinations that assess the risk of a condition unless the risk assessment clearly and directly effects the management of the patient.

(emphasis added).

Thus, whenever the lab test at issue is not related to any existing symptom or complaint, it might be used to screen for existing disease or to predict the likelihood of future disease. Such a test would not be considered medically necessary and would not covered by Medicare, and a lab submitting a claim for such a test may be liable under the False Claims Act (“FCA”).

“Reasonable and Necessary” Medical Service Factors

Chapter 13 of the Medicare Program Integrity Manual (“MPIM”)[3] sets out factors for evaluating whether a specific service is “reasonable and necessary.”  MPIM § 13.5.1 provides that for a service to be considered “reasonable and necessary,” it must be “[f]urnished in accordance with accepted standards of medical practice for the diagnosis or treatment of the patient’s condition or to improve the function of a malformed body member.”  MPIM § 13.7.1 states that the strongest evidence of medical necessity is, in order, of strength,

  • Published authoritative evidence derived from definitive randomized clinical trials or other definitive studies, and
  • General acceptance by the medical community (standard of practice), as supported by sound medical evidence based on:
  • Scientific data or research studies published in peer-reviewed medical journals;
  • Consensus of expert medical opinion (i.e., recognized authorities in the field); or
  • Medical opinion derived from consultations with medical associations or other health care experts.

Furthermore, Section 13.7.1 of the MPIM expressly rejects self-interested research as the basis for concluding that a service is reasonable and necessary:

Acceptance by individual health care providers, or even a limited group of health care providers, normally does not indicate general acceptance by the medical community. Testimonials indicating such limited acceptance, and limited case studies distributed by sponsors with financial interest in the outcome, are not sufficient evidence of general acceptance by the medical community. The broad range of available evidence must be considered and its quality shall be evaluated before a conclusion is reached.

MPIM §13.7.1 (emphasis added).

Thus, one must look to studies, data and recognized authorities in the field to determine whether a lab test is relevant to the diagnosis of a patient’s current condition, to medically or surgically manage an illness or to improve the function of a malformed body member.  If it is not, it may be for screening or predictive purposes and as such, is not covered by Medicare.  A lab that submits a claim for such a test may be liable under the FCA.

[1] Medicare Claims Processing Manual, CMS Pub. 100-4, Laboratory Services, Ch. 16, § 10 (Apr. 29, 2016), available at https://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/Downloads/clm104c16.pdf.

[2] CMS, Items and Services That Are Not Covered Under the Medicare Program, at 5, available at https://www.cms.gov/Outreach-and-Education/Medicare-Learning-Network-MLN/MLNProducts/Downloads/Items-and-Services-Not-Covered-Under-Medicare-Booklet-ICN906765.pdf (emphasis added).

[3] Medicare Program Integrity Manual (Mar. 7, 2014), available at https://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/Downloads/pim83c13.pdf.

It is free to speak with our nationally recognized whistleblower attorneys: