Top False Claims Act Developments

September 1, 2022

Ethan P. Davis, Jamie Allyson Lang, Matthew V.H. Noller, King & Spalding LLP

OVERVIEW

This week’s top False Claims Act (FCA) developments include: a Ninth Circuit decision holding that patent prosecutions are “federal hearings” for purposes of the FCA’s public-disclosure bar; the Supreme Court’s request for the Solicitor General’s views on a petition for certiorari addressing the FCA’s scienter requirement; and a federal district court decision dismissing a qui tam lawsuit.

1. Ninth Circuit holds that information disclosed in patent prosecutions triggers the FCA’s public-disclosure bar

Overview: On August 25, 2022, the Ninth Circuit in U.S. ex rel. Silbersher v. Allergan, Inc., reversed a district court decision denying an FCA defendant’s motion for summary judgment. The Ninth Circuit held that because the information underlying the relator’s claims had been disclosed in the defendant’s patent prosecutions, the FCA’s public-disclosure bar applied unless the relator was an “original source” of the information.

The Decision: The relator claimed that the defendant, a pharmaceutical company, unlawfully obtained several patents on two drugs used to treat Alzheimer’s disease. By using these allegedly unlawful patents, the relator alleged, the defendant blocked the production of generic versions of its drugs, resulting in the Medicare program paying inflated prices for those drugs.

The information underlying the relator’s claims had been publicly disclosed in the patent prosecutions through which the defendant applied for and received its patents. Based on that disclosure, the defendant moved for summary judgment under the FCA’s public-disclosure bar. That bar generally requires dismissal of FCA claims based on “allegations or transactions” that were “publicly disclosed” before the relator filed suit. 31 U.S.C. § 3730(e)(4). The district court denied the defendant’s motion, concluding that the public-disclosure bar did not apply.

On appeal, the Ninth Circuit reversed, holding that information disclosed in patent prosecutions triggers the public-disclosure bar. The public-disclosure bar applies to information disclosed in, among other sources, “a congressional, Government Accountability Office, or other Federal report, hearing, audit, or investigation.” 31 U.S.C. § 3730(e)(4)(A)(ii). The Ninth Circuit reasoned that a patent prosecution is an “other Federal … hearing” for purposes of the public-disclosure bar.

The court observed that Congress intended the phrase “other Federal … hearing” to “cover a wide array of investigatory processes,” including “information-obtaining methods” conducted by federal actors other than “Congress or the Government Accountability Office.” That broad definition, the court explained, “of course includes ex parte administrative hearings before the” U.S. Patent and Trademark Office because such an administrative “hearing” is a “proceeding” in which the PTO “adjudicates the merits” of an inventor’s application for a patent.

The Ninth Circuit thus held that the public-disclosure bar applied to the relator’s claims. The public-disclosure bar contains an exception for relators who are “original source[s]” of the information, 31 U.S.C. § 3730(e)(4)(A), and the Ninth Circuit remanded for the district court to determine whether the relator was an “original source.”

Our Take: This is an important decision interpreting the scope of the FCA’s public-disclosure bar and confirming that the bar applies to information disclosed in a wide variety of federal proceedings. As a result, the decision will make it harder for professional relators to mine publicly available data to generate qui tam actions.

2. Supreme Court invites Solicitor General to express views on certiorari petition addressing FCA’s scienter requirement

Overview: On August 22, the Supreme Court invited the Solicitor General to file a brief expressing the views of the United States on the pending petition for certiorari in U.S. ex rel. Schutte v. SuperValu Inc. The petition requests that the Supreme Court determine whether, under the FCA’s scienter requirement, “a defendant’s contemporaneous subjective understanding or beliefs about the lawfulness of its conduct are relevant to whether it ‘knowingly’ violated the False Claims Act.”

The Case: As we have discussed in previous posts, the Seventh Circuit in Schutte applied the scienter test from the Supreme Court’s decision in Safeco Insurance Co. of America v. Burr, 551 U.S. 47 (2007), to hold that a relator cannot prove scienter under the FCA if (1) the defendant acted consistent with an “objectively reasonable” interpretation of the underlying statute, and (2) no “authoritative guidance” warned the defendant away from that interpretation.

The petition in Schutte is one of two currently pending petitions challenging the Seventh Circuit’s interpretation of the FCA’s scienter requirement. In addition, the Fourth Circuit recently granted rehearing en banc of a 2-1 panel decision applying Safeco to the FCA. In that case, the United States has supported the relator’s argument that Safeco does not apply to the FCA.

Our Take: The Court’s request for the views of the Solicitor General suggests that the Court is taking a close look at this petition. If the Court grants this petition, it will set the stage for the Court to resolve an important question regarding the scope of the statute’s scienter requirement in 2023.

3. Missouri federal district court dismisses qui tam lawsuit

Overview: On August 22, a federal district court in Missouri dismissed a qui tam action alleging that insurance brokers and insurance carriers violated the FCA through their use of independent sales agents. The district court held that the relator had not alleged that any defendant submitted a materially false claim for payment to the government.

The Decision: The relator’s allegations concern the marketing and sale of insurance plans under Medicare Part C, known as “Medicare Advantage” plans. Two of the defendants are insurance brokerages that market and sell Medicare Advantage plans to beneficiaries. The other defendants are insurance carriers that sponsor those plans. The brokerage defendants use independent sales agents to market and sell their plans, and the carrier defendants pay those agents’ commissions. The carriers then receive a fixed monthly payment from Medicare for medical services provided to a beneficiary. The payment of a commission to a sales agent does not affect the monthly reimbursement amount that a carrier receives from Medicare.

The relator alleged that the defendants violated the FCA through their relationship with independent sales agents. According to the relator’s complaint, the brokerage defendants (1) falsely represented that their agents were fully certified to sell Medicare Advantage plans, (2) engaged in marketing practices prohibited by Medicare regulations, and (3) wrongfully encouraged beneficiaries to raise complaints about their insurance with the brokerages instead of the federal government. The relator alleged that the carrier defendants were complicit in this misconduct.

The district court dismissed the relator’s complaint. It held that the relator had not alleged that any defendant submitted a false claim for payment to the government, which is “the sine qua non of a False Claims Act violation.” The court explained that the relator’s complaint focused on the brokerage defendants’ use of independent sales agents, but the carrier defendants—not the government—paid the agents’ commissions.  Any purported misconduct by the brokerages or their sales agents thus had no impact on the amount of reimbursement that the government paid to the defendant carriers.

The court also held that, even if the relator had alleged the presentment of false claims for payment, he had not adequately alleged that any falsehood materially affected the government’s payment decisions. Applying the Supreme Court’s decision in Universal Health Services v. U.S. ex rel. Escobar, 579 U.S. 176 (2016), the district court emphasized that materiality is a “demanding” standard that depends on several factors, including “(1) the Government’s decision to expressly identify a provision as a condition of payment; (2) whether the Government consistently refuses to pay claims in the mine run of cases based on noncompliance with the particular statutory, regulatory, or contractual requirement or pays the claim despite its actual knowledge that certain requirements were violated; and (3) whether the noncompliance is minor or insubstantial or goes to the very essence of the bargain.”

Applying these factors, the district court held that the relator had not adequately alleged materiality.  First, the government did not make compliance with Medicare marketing regulations an express condition of payment.  Second, the relator had not identified any instance of the government recouping payments from an insurance carrier based on marketing violations.  Finally, even if the relator had identified any marketing violation, it would not “go to the essence of the bargain because none of the alleged violations led to the enrollment of someone who was ineligible for Medicare, misled an enrollee about the benefits of a particular plan, or led to someone who was eligible for Medicare not receiving benefits.”

Our Take: This decision reflects a straightforward application of the FCA’s “presentment” and “materiality” requirements. As the Supreme Court held in Escobar, those requirements prevent the FCA from becoming “an all-purpose antifraud statute or a vehicle for punishing garden-variety breaches of contract or regulatory violations.”

In the News:

Optical lens manufacturer agrees to pay $16.4 million to resolve FCA and kickback allegations. On August 23, the government announced a $16.4 million settlement with a Dallas-based manufacturer of optical lenses. The government alleged that the defendants violated the FCA and Anti-Kickback Statute by paying eye-care providers to use the defendants’ products.

California county and private healthcare providers agree to pay $70.7 million to settle FCA allegations. On August 18, the government announced a $70.7 million settlement with Ventura County, the Ventura County Medi-Cal Managed Care Commission, and two private healthcare providers related to allegations that they submitted false claims to California’s Medicaid program. Under the Affordable Care Act’s expansion of Medicaid benefits, the federal government temporarily funded state Medicaid payments to beneficiaries covered by the expansion. The federal government and California alleged that the defendants violated the FCA by seeking reimbursements for excessive, duplicative, and non-reimbursable medical services provided to Medicaid expansion beneficiaries.

Helicopter training company and community college agree to pay $7.5 million to settle FCA allegations. On August 15, the government announced a $7.5 million settlement with a private helicopter flight instructor training company and a community college. The government alleged that the defendants defrauded the Department of Veterans Affairs by making false statements about enrollment in their jointly run helicopter training program to receive federal funding.

 

Jeffrey S. Bucholtz is a partner on the Appellate, Constitutional and Administrative Law team in the Washington, D.C. office of King & Spalding LLP, Tamra Moore is a partner in the Special Matters and Government Investigations Practice Group in the firm’s Washington, D.C. office, and Matthew V.H. Noller is a senior associate in the Trial and Global Disputes Practice Group in the firm’s San Francisco office.