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Using Differences in Geographic Scope to Avoid the First-to-File Rule in False Claims Act Whistleblower Cases

By Sherrie Savett and Jonathan DeSantis

As recounted in our previous blog entry, the federal False Claims Act (“FCA”) contains a first-to-file rule, which provides that “[w]hen a person brings an action under [the False Claims Act] no person other than the Government may intervene or bring a related action based on the facts underlying the pending action.”  31 U.S.C. § 3730(b)(5).  Our previous blog entry provided an overview of various factors that courts consider when evaluating whether the first-to-file rule applies.  This blog entry provides a detailed analysis of one of the most important factors: the geographic scope of the alleged fraud.

An Earlier-Filed Local Fraud Does Not Preclude a Later-Filed National Fraud

A very strong and often effective argument for a later-filed case to avoid the first-to-file rule is that the later case alleges both a nationwide scheme and fraud at one or more specific locations, whereas the first-filed complaint alleges a fraud at only one or two specific locations.  This argument is more potent in a qui tam case where the defendant is a large nationwide company with multiple facilities.  An example would be a hospital chain with tens or hundreds of hospitals in many different states.

Several whistleblower cases support this position.  For example, in U.S. ex rel. Heath v. AT & T, Inc., 791 F.3d 112 (D.C. Cir. 2015), an earlier-filed complaint asserted FCA claims against Wisconsin Bell, a wholly-owned subsidiary of AT&T, based on allegations that Wisconsin Bell engaged in improper billing practices with respect to a federally subsidized telecommunications program.  A later-filed complaint asserted FCA claims against AT&T on an entity-wide national basis based on similar fraudulent practices.  While the earlier complaint had only alleged fraud in Wisconsin against AT&T’s Wisconsin subsidiary, the second complaint alleged fraud across the country against AT&T and various other subsidiaries.  The district court granted AT&T’s motion to dismiss on first-to-file grounds, but the D.C. Circuit reversed.  The D.C. Circuit noted that the greater fraud often includes the lesser” but “the lesser fraud does not, without more, include the greater.”  Id. at 122 (emphasis added).  In language that is extremely helpful to our position, the D.C. Circuit explained:

There simply is no hint in the [first-filed] Complaint of a country-wide, institutionalized corporate practice of [engaging in the underlying fraud] . . . To hold, as AT & T suggests, that the first-to-file bar kicks in every time an initial complaint alleges that a subsidiary of a national company violated a national law would erase a broad swath of False Claims Act coverage. The point of the first-to-file bar is not to allow isolated misconduct to inoculate large companies against comprehensive fraud liability. The point, instead, is to prevent copycat litigation, which tells the government nothing it does not already know. Because [the] complaints go after two materially distinct fraud schemes, the first-to-file bar does not apply.

Id. at 123.[1]

In U.S. ex rel. Hutcheson v. Blackstone Medical, 694 F. Supp. 2d 48 (D. Mass. 2010), rev’d on other grounds by United States ex rel. Hutcheson v. Blackstone Med., 647 F.3d 377, 394 (1st Cir. 2011), a first-filed complaint alleged that a defendant engaged in a fraudulent kickback scheme in Arkansas and also made a passing “upon information and belief” allegation that the defendants engaged in the same scheme in other states without providing any factual support with respect to the allegation of fraud outside Arkansas.  A later-filed complaint alleged, in detail, a similar kickback scheme between the defendants and doctors across the country.  The district court concluded that the later-filed complaint was not barred under the first-filed rule because it did not allege the same material facts as the first-filed complaint in that the later-filed complaint alleged a nationwide fraud while the earlier-filed complaint alleged only a fraud in Arkansas.

An Earlier-Filed National Fraud Likely Precludes a Later-Filed Local Fraud

The inverse is also true.  In U.S. ex rel. Chovanec v. Apria Healthcare Grp. Inc., 606 F.3d 361, 365 (7th Cir. 2010), the Seventh Circuit held that the first-filed rule is implicated when an earlier-filed complaint alleges a nationwide fraud and a later-filed complaint alleges fraud in only a particular locality.   In that case, the Seventh Circuit recognized that fraud alleged in a specific location would not necessarily implicate the first-filed rule with respect to other locations. The court said: “Allegations about a scam in California or Kansas . . .  would not reveal to the United States any risk of a scam in Illinois.” However, the Seventh Circuit found that allegations of a nationwide fraud necessarily subsume allegations of fraud in a particular locality in explaining that “[f]raud in Illinois . . . is within the scope of a national, continuing, scheme.”

Because the first-filed complaint referred to a nationwide fraud and the later-filed complaint only referred to fraud in a specific location, the Seventh Circuit concluded that the first-filed rule precluded pursuit of the later-filed case.

Merely Alleged Fraud at a Different Location May Implicate the First-to-File Rule

There are qui tam cases holding that alleging the same fraud at a different geographic location is insufficient to avoid application of the first-to-file rule.  However, these cases are distinguishable from the situation where the first-filed case alleges a fraud against a subsidiary or entity in one location and the later case sets forth a national scheme.

In U.S. ex rel. Branch Consultants v. Allstate Ins., 560 F.3d 371 (5th Cir. 2009), the first-filed complaint alleged that four insurance companies defrauded the government by improperly characterizing damage in connection with federally subsidized insurance policies and specifically alleged instances of the fraud in Mississippi.  The second-filed complaint alleged a very similar fraud at locations in Louisiana.  The district court dismissed the second-filed complaint as barred under the first-filed rule, and on appeal, the Fifth Circuit affirmed the dismissal.   The Fifth Circuit explained that “a relator cannot avoid [the] first-to-file bar by simply adding factual details or geographic locations to the essential or material elements of a fraud claim against the same defendant described in a prior compliant.”  Id. at 378.  It held: “Because [the second relator] cannot avoid the preclusive effect of [the first-filed case] by focusing on additional instances of fraud occurring in other geographic locations, § 3730(b)(5) applies to bar its allegations against [the defendant].” Id.

Other courts have reached similar conclusions. See U.S. ex rel. Ortega v. Columbia Healthcare, Inc., 240 F. Supp. 2d 8, 13 (D.D.C. 2003) (“If the later-filed complaint alleges the same type of wrongdoing as the first, and the first adequately alleges a broad scheme encompassing the time and location of the later filed, the fact that the later complaint describes a different time period or geographic location that could theoretically lead to a separate recovery does not save it from the absolute first-to-file bar.”) (emphasis added); Palladino ex rel. U.S. v. VNA of S. New Jersey, Inc., 68 F. Supp. 2d 455, 478 (D.N.J. 1999) (applying the first-to-file bar to a later-filed complaint alleging a similar fraud in Runnemede, New Jersey as an earlier-filed complaint had alleged in Philadelphia).

These cases involve circumstances where a later-filed complaint alleged a materially similar fraud as an earlier-filed complaint but simply alleged that the fraud occurred at a different geographic location.  This is very different from a later-filed complaint alleging a broad, nationwide scheme relative to an earlier-filed complaint’s allegations of a narrow, localized scheme.  As the D.C. Circuit explained, the greater fraud often includes the lesser” but “the lesser fraud does not, without more, include the greater.”  Heath, 791 F.3d at 122 (emphasis added).

Conclusion

In sum, differences in the geographic scope of the alleged fraud may assist whistleblowers in avoiding application of the first-to-file rule.  Specifically, there is substantial authority in support of the proposition that a later-filed case is not barred by the FCA’s first-to-file rule when it alleges a broad, nationwide scheme relative to a narrow scheme alleged at a few discrete locations in an earlier-filed complaint.

[1] See also United States v. Sanford-Brown, Ltd., 27 F. Supp. 3d 940, 948 (E.D. Wis. 2014) (finding that the first-to-file rule does not apply when an earlier-filed complaint alleges “geographically disparate” fraud, among other reasons).

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