Top False Claims Act Developments

October 27, 2022

Jeffrey P. Bucholtz, Tamra Moore, Matthew V.H. Noller, King & Spalding LLP

NOTE: This will be the last entry in our biweekly False Claims Act Developments blog. Moving forward, King & Spalding LLP will prepare in-depth discussions of particularly significant FCA developments on an ad hoc basis. 

OVERVIEW

This week’s top FCA developments include: the Supreme Court’s denial of three petitions for certiorari asking the Court to decide how Fed. R. Civ. P. 9(b) applies to qui tam cases; a Second Circuit decision affirming the dismissal of a qui tam complaint for failure to plead materiality; and the Chamber’s filing of a coalition amicus curiae brief in a Supreme Court case addressing the standard for granting government motions to dismiss qui tam actions.

1. Supreme Court denies review of three cases addressing application of Fed. R. Civ. P. 9(b) to qui tam cases

Overview: On October 17, the Supreme Court denied the petitions for certiorari in Johnson v. Bethany Hospice & Palliative Care LLC, U.S. ex rel. Owsley v. Fazzi Associates, Inc., and Molina Healthcare of Illinois, Inc. v. Prose. All three petitions asked the Supreme Court to resolve a circuit split over how Rule 9(b) applies to qui tam actions.

The Denials: As we have discussed in previous posts, the petitioners in Bethany Hospice, Owsley, and Molina asked the Supreme Court to decide whether Rule 9(b) requires relators to plead details of specific false claims. Some circuits, including the Eleventh and Sixth Circuits, hold that Rule 9(b) requires such specificity, while other circuits, including the Seventh and Ninth Circuits, hold that the submission of a false claim can be inferred from particularized allegations of a fraudulent scheme.

At the Supreme Court’s invitation, the U.S. Solicitor General filed amicus curiae briefs in Bethany Hospice and Owsley, recommending that the Court deny certiorari. The Solicitor General argued that no actual circuit split exists, and that the application of Rule 9(b) is a necessarily fact-specific question that the Court should not review.

Our Take: The Supreme Court’s denial of these petitions leaves unresolved a circuit split over how Rule 9(b) applies to qui tam actions. This may encourage forum-shopping by relators, who will prefer to file suit in circuits, such as the Seventh and Ninth, that apply the more relaxed interpretation of Rule 9(b). (Disclosure: King & Spalding LLP represents the petitioner in Molina.)

2. Second Circuit affirms dismissal of qui tam complaint for failure to plead materiality

Overview: On October 14, the Second Circuit affirmed a district court decision dismissing a qui tam complaint for failure to plead adequately that the defendant’s alleged false statements were material.

The Decision: The relator alleged that the defendant, a pharmaceutical manufacturer, violated the FCA by submitting Medicare and Medicaid claims for drugs that the defendant had not manufactured consistent with current Good Manufacturing Practices (cGMPs). The district court dismissed the relator’s complaint, holding that the relator had not pleaded that the defendant’s alleged cGMP violations were material.

The Second Circuit affirmed. The court interpreted the Supreme Court’s decision in Universal Health Services v. Escobar to require consideration of three factors to assess materiality: “(1) whether the government expressly designates compliance with a particular statutory, regulatory, or contractual requirement as a condition of payment; (2) the government’s response to noncompliance with the relevant contractual, statutory, or regulatory provision; and (3) whether the defendants’ alleged noncompliance was ‘minor or insubstantial.’”

Applying these three factors, the Second Circuit held that the relator had not alleged that defendant’s compliance with cGMP was material to the federal government’s procurement decision. First, the court held that the defendant’s contracts with the government did not “expressly condition payment” on “compliance with any specific cGMPs.” Second, the court held that the relator had not alleged any facts showing that the government would have denied the defendant’s claims if it had known about the alleged cGMP violations. Third, the court held that the relator had not established that the defendant’s alleged violations were substantial, because he had not alleged facts showing that those violations rendered any of the defendant’s drugs unsafe or ineffective.

Our Take: Escobar described materiality as a “demanding” requirement that prevents the FCA from becoming “a vehicle for punishing garden-variety breaches of contract or regulatory violations.” This decision exemplifies the “demanding” nature of Escobar’s materiality pleading standard.

3. Chamber files coalition amicus brief in Supreme Court arguing for deferential standard of review of government motions to dismiss qui tam actions

Overview: On October 24, the Chamber, the American Health Care Association, and the American Hospital Association filed an amicus curiae brief in support of the respondent in U.S. ex rel. Polansky v. Executive Health Resources, Inc. King & Spalding attorneys prepared the brief, which supports the position of respondent Executive Health Resources and the government that district courts should apply a deferential standard of review to government motions to dismiss qui tam actions.

The Brief: When a relator brings a private FCA action, the government “may dismiss the action notwithstanding the objections of the [relator] if the [relator] has been notified by the Government of the filing of the motion and the court has provided the [relator] with an opportunity for a hearing on the motion.”  31 U.S.C. § 3730(c)(2)(A). As we discussed in a previous post, Polansky asks the Supreme Court to decide “[w]hether the government has authority to dismiss an FCA suit after initially declining to proceed with the action, and what standard applies if the government has that authority.” The federal courts of appeals disagree regarding the burden, if any, the FCA places on the government to justify a motion to dismiss.

The Chamber’s coalition brief argues that the Supreme Court should adopt the D.C. Circuit’s standard, which does not require the government to intervene before moving to dismiss and gives the government a virtually “unfettered right to dismiss an action.” The brief argues that imposing more strict limits on government dismissals would raise serious constitutional questions by impinging on the executive branch’s exclusive responsibility, pursuant to the “Take Care” Clause of Article II of the Constitution, to “take Care that the Laws be faithfully executed.” The brief also argues that the D.C. Circuit’s test best serves the FCA’s purpose of encouraging qui tam suits that advance the government’s interests, but not suits that are contrary to the government’s interests.

Our Take: As the Chamber’s brief explains, the prevalence of meritless qui tam suits makes the issue presented in Polansky important to defendants, the government, and the courts. The Supreme Court is expected to issue a decision in Polansky sometime before the end of its current term in summer 2023.

In the News:

California healthcare provider agrees to pay $13 million to settle FCA allegations. On October 17, the government announced a $13 million settlement with a California healthcare provider accused of improperly billing the government for toxicology screening tests performed by outside labs. According to the government’s press release, the settlement “illustrate[s] the government’s emphasis on combating health care fraud.”

Oklahoma home health provider agrees to pay $7.2 million to settle FCA allegations. On October 18, the government announced a $7.2 million settlement with an Oklahoma-based home health provider accused of billing Medicare for medically unnecessary services. The government alleged that the defendant, along with two of its affiliates, billed Medicare for unnecessary therapies that it provided to patients in Florida.

Pharmacies agree to pay $6.9 million to settle FCA allegations. On October 12, the government announced a $6.9 million settlement with four pharmacies accused of overcharging the government for pain creams. The government alleged that the pharmacies improperly waived patient copays and misrepresented the prices that patients paid, while avoiding scrutiny by selling prescriptions to other pharmacies.

Ethan P. Davis is a partner in the Special Matters and Government Investigations Practice Group in the firm’s San Francisco office, Tamra Moore is a partner in the Healthcare 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.