“Transactions of Fraud” in the Third Circuit

The Third Circuit has repeatedly held that “to constitute ‘allegations or transactions,’ the public disclosure must either allege the actual fraud, or must allege both the misrepresented state of facts and the true state of facts such that an inference of fraud may be drawn.” United States ex rel. Morgan v. Express Scripts, Inc., No. 2:05-CV-1714 DMC JAD, 2013 WL 6447846, at *5 (D.N.J. Dec. 9, 2013) aff’d sub nom. United States v. Express Scripts, Inc., 602 F. App’x 880 (3d Cir. 2015) (emphasis added).

“An allegation of fraud is an explicit accusation of wrongdoing. . . . [while a] transaction warranting an inference of fraud is one that is composed of a misrepresented state of facts plus the actual state of facts.” United States ex rel. Zizic v. Q2Administrators, LLC, 728 F.3d 228, 235-36 (3d Cir. 2013).

The Third Circuit’s “Zizic Formula” for Determining a Transaction of Fraud

The Third Circuit has adopted a formula to represent when publicly disclosed information qualifies as a “transaction of fraud”:

If X + Y = Z, Z represents the allegation of fraud and X and Y represent its essential elements. In order to disclose the fraudulent transaction publicly, the combination of X and Y must be revealed, from which readers or listeners may infer Z, i.e., the conclusion that fraud has been committed.

Zizic, 728 F.3d, at 236 (internal citations omitted).

Zizic Explained

A summary of Zizic is instructive in applying the formula to meet the “transaction of fraud” element.

In Zizic, the relator was the CEO of a company that made devices and billed Medicare.  Under Medicare regulations, in order to deny claims, among other things, the claim needs to be reviewed by a panel of healthcare professionals.

The government contracted with defendants to perform a review, on behalf of Medicare, of claims submitted by the relator’s company.   Based on defendants’ review of the relator’s claims, Medicare subsequently denied many of those claims.  The relator declared bankruptcy, and his bankruptcy trustee later sued the government seeking a reversal of the denial of claims.

In discovery, the relator reviewed documents showing that defendants did not utilize a panel of healthcare professionals to review his claims, but instead rejected many of his claims without reviewing them at all.

The trustee moved for summary judgment against the government, arguing that the defendants who were contracted by the government to review the denials did not abide by Medicare regulations, and the claims should not have been denied.

More specifically, the trustee publicly alleged in court filings that “[Defendant] is . . . funded by a contract with [HHS]. . . . [n]one of the claims . . . have any evidence of nurse or physician review [by the Defendant].” Id. at 237.

The relator subsequently filed a False Claims Act action against defendants, citing the evidence which was publicly disclosed by the bankruptcy trustee in the bankruptcy litigation.   The defendants moved to dismiss the FCA case based on the public disclosure bar.  The motion was granted. Id.

In reviewing the case on appeal, the Third Circuit, “consider[ed] whether the information publicly disclosed . . . constituted allegations or transactions of fraud.”  Id.

Using the Third Circuit’s formula (X+Y=Z), the Court found that the true state of facts (Y) was that the defendants were obligated to perform physician reviews in second level appeals under the government contracts incorporating Medicare rules. The misrepresented state of facts (X) was that defendants received payment under those contracts despite their failure to perform such services (a fact publicly disclosed in the bankruptcy litigation).

The Court found that both the true (Y) and misrepresented facts (X) were publicly disclosed, and  therefore, the public disclosure bar applied.