Recently, our friends at the IRS instituted a far more generous program whereby those who blow the whistle on tax fraud can share in any proceeds the government collects. The old program it had utilized for years continues in operation, but the new program is far more generous and there are other advantages as well. So, as great as the new program is, how does one participate, and participate in a way that maximizes their chances for a substantial reward? One helpful guide is Joel D. Hesch's, Reward: Collecting Millions for Reporting Tax Evasion, Your Complete Guide to the IRS Whistleblower Reward Program. The goal of this inexpensive paperback, which it admirably fulfills, is to educate the general reader quickly and concisely as to how to file a report and how to do so in a fashion that avoids making costly mistakes.
The author, now a law professor in Virginia, spent more than 15 years in the Civil Fraud Section of the Civil Division, where we worked together for a number of years. As such, he has substantial experience working with the whistleblower provisions of the False Claims Act. The FCA appears to have been the model for the new IRS program, and the author's DOJ background is put to work in explaining the IRS program. According to a recent "New York Times" story, Phillips and Cohen apparently has gotten into this area as well. So FCA specialists might well consider adding this new dimension to their practices, since their qui tam backgrounds will ease mastering the IRS program.
Joel's book teaches the reader the necessary program background, how the program operates, explains various tax fraud techniques, and lays out the range of possible rewards (usually 15%-30% of any IRS recovery) and what factors determine where on the continuum a reward is likely to be designated. The author not only discusses all the procedural steps a program participant must follow, but includes in a helpful series of appendices the actual forms that must be filed, relevant IRS guidellines, and other pertinent material which is placed right at the reader's fingertips. Most importantly, since the IRS is very fussy about how reports are made, the author explains in detail how to avoid making mistakes that could send your claim to the twilight zone. To make sure costly mistakes are avoided, the book includes an 11-page, step-by-step checklist to be followed in filing a report. All of this information is included in 148 pages of text and another 30 of appendices. Virtually every page is useful--there is no fat! The book in a couple of hours certainly educated me as to the IRS program with which I was not familiar--I bet it can do the same for anyone interested in learning about it.
Familiarity with this new program seems like a must for those representing relators, for it could afford them additional methods for capitalizing on their insider knowledge of fraud.
Friday, December 11, 2009
Thursday, July 23, 2009
IQBAL AND QUI TAM RELATORS
On May 18th, 2009, the Supreme Court handed down an important decision for relators, even though it had nothing to do with the FCA. In Ashcroft v. Iqbal, --- U.S. ---, 129 S.Ct. 1937 (2009), the Court perhaps significantly enhanced the ability of defendants to succeed on motions to dismiss qui tam complaints. While it is still far too early to get a definite read as to how district courts will apply the Iqbal test to qui tam complaints, there are a few cases where that already has happened, as well as dozens of other cases reflecting the application of the Iqbal test to all manner of litigation. The bottom line, as discussed below, is that invoking Conley v. Gibson, 355 U.S. 41 (1957), may no longer afford much protection to relators facing motions to dismiss.
The Iqbal Decision
Respondent Iqbal was a Pakistani citizen and Muslim who had been arrested and detained several months after the 9/11 attacks. He subsequently sued a number of federal officials alleging that while in federal custody in this country, he was subjected to conditions of privation by being assigned to a high-security prison because he was an Arab Muslim. Motions to dismiss were filed by the defendants, including John Ashcroft and former FBI director Robert Mueller, alleging that the complaint failed to state a claim. The district court denied the motion; the Second Circuit affirmed.
Much of the Court's opinion by Justice Kennedy is concerned with the criteria for suing federal officials under Bivens. This aspect does not interest FCA litigators. The second focus of the opinion zeroed in on the standards for granting a 12(b)(6) motions. The Court developed a new test to apply in passing upon such motions, drawn apparently from Kennedy's earlier opinion in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007). The big question after Twombly had come down was whether the tests applied by the Court in that case were limited in application to antitrust matters or would be applied more generally. Iqbal resolved that issue by applying these tests in effect to all litigation in federal courts.
There are two prongs to the Iqbal test, both of which are important in qui tam cases. First, the Court was emphatic in imposing a stiffer test on complaints in order to satisfy Rule 8(a)(2). "A pleading that offers 'labels and conclusions' or 'a formulaic recitation of the elements of a cause of action will not do.' " (Iqbal at 1949, citing to Twombly at 555). "Nor does a complaint suffice if it tenders 'naked assertion[s]' devoid of "further factual enhancement.' " Id. (Twombly at 557). So the first point to bear in mind for qui tam complaint draftsmen is that you enter into a danger zone if you simply assert that defendant violated the FCA and rely upon quoting the pertinent provision(s) of the Act to substantiate the allegation. This is because the Court will consider such a tactic as asserting a legal conclusion, and district courts are not required to accept as true legal conclusions as they are factual allegations for purposes of resolving motions to dismiss. Iqbal at 1949-50.
The second prong of the Iqbal test is far more significant for relators and defendants. "[O]nly a complaint that states a plausible claim for relief survives a motion to dismiss." Id. at 1950. How, might one ask, is a district court to make such plausibility determinations? Should district judges rely upon hermeneutics, memetics, plain meaning, semiotics or phenomenology as their epistemological paradigm? The Court's answer to that query is straightforward, if somewhat disturbing: this undertaking will be "a context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Id. (emphasis added). Moreover, "where the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged-but it has not 'show[n]'-'that the pleader is entitled to relief.' " (Quoting Rule 8(a)(2)). The Court suggests that district judges start with reviewing pleadings for legal conclusions and then apply the plausibility standard to what remains.
A number of suggestive thoughts crossed my mind as I read this language. First, this gives a whole bunch of even greater discretion to district judges to bounce complaints they do not like or want to go to trial on. Next, what standard would a reviewing Circuit Court apply to such plausibility findings? Would it be something akin to "clearly erroneous" or whatever? Further, the Court seems to have rewritten or deconstructed Conley v. Gibson, supra, which was somewhat more positive in impact: unless there was no possible way the plaintiff could achieve relief, the complaint ought not to be dismissed. While generally speaking I have found district judges to be far sharper and more realistic (i.e., manifesting more "common sense") in their decision-making than Court of Appeals judges or Supreme Court Justices, if I were a relator's counsel a dark cloud of uncertainty would certainly be engulfing me at this point.
As mentioned above, there are only a few FCA-related cases so far which have applied the Iqbal standards. Many more will be forthcoming, as I expect virtually every motion to dismiss filed in a qui tam case to make the plausibility argument. The court's holding in United States ex rel. Wood v. Applied Research Associates, Inc., 2009 WL 2030240 (2d. Cir. July 13, 2009), a reverse FCA case, is extremely interesting in its handling of the Iqbal standards. This decision makes the key linkage for qui tam cases: plausibility and Rule 9(b). As I read the decision, it is evident that the court felt Iqbal justified it in applying Rule 9(b) in a very strict fashion. That is to say, it was no longer sufficient to satisfy 9(b) by the traditional "who, when, where, etc." tests, but there had to be sufficient facts plead in sufficient detail to establish plausibility of the claim as well.
By contrast, in United States ex rel. Lusby v. Rolls-Royce Corp., 2009 WL 1855179 (7th Cir. June 30, 2009), Judge Easterbrook (along with Judges Posner and Wood) cited Iqbal but hardly made a fuss over it. The panel seemed far more concerned with the usual standards of whether the complaint pled particulars of the fraud and thereby avoided unsubstantiated allegations, more in accordance with the usual 9(b) approach. As long as the allegations were not vague and clued in the defendant as to the alleged fraud, that was sufficient. Id. at *5.
Several non-FCA opinions are also interesting given the formative stage we are entering into in applying the Iqbal standards. In Fannie Mae v. U.S. Property Solutions, L.L.C., 2009 WL 1968330 (S.D. Tex. July 6, 2009), defendant had filed a fraud counterclaim against plaintiff Fannie Mae. While the gist of the case involved how properly to plead "fraudulent intent," the district court concentrated on the first prong of Iqbal (pleading legally-conclusory statements) as the basis for denying Fanny Mae's motion to dismiss the counterclaim. Again, a linkage to Rule 9(b) was evident in the court's analysis. Id. at *5. In Owens v. District of Columbia, 2009 WL 1916280 (D.D.C. July 6, 2009), a pro se employment rights case, the district court focused on a fragment from the Iqbal decision: there must be pled 'factual matter' that permits the court to infer 'more than the mere possibility of misconduct.' " Id. at *4; Iqbal at 1950. However, the district court in Ante v. Office Depot business Services, 2009 WL 1689604 (N.D. Cal. June 15, 2009), reminds us of a most important consideration: Iqbal "does not impose a 'probability requirement' "... Id. at *6.
Conclusions
So, where does all this leave us?: "probability" is not "plausibility" and Conley is either turned on its head or deconstructed entirely. Short of recommending we all become logical positivists and well versed in Wittgenstein's theories of language, what certainly early conclusions can be drawn. First, Rule 9(b) will become even more of a hurdle for relators than it is now, especially if enough facts must be pled to establish plausibility. One interesting suggestion has come from Gregory P. Joseph (JosephNYC.com; last read on 7/23/09) that Iqbal will encourage district judges to freeze or limit discovery until pending motions to dismiss are decided. See his blog article: Post-Iqbal, Limited Discovery at Best is Appropriate Pending Decision on 12(b)(6)Motion in Complex Cases. In addition, the Supreme Court's decision seems to add another argument to those seeking to dismiss qui tam complaints: courts must be the gatekeepers to prevent unnecessary and expensive discovery against defendants. And since relators are not even the government, but sometimes benighted individuals, the courts should be inclined to dismiss even borderline cases to spare this waste of resources.
All of which means your guess is as good as mine--but it should be interesting to see how courts apply the plausible standard. Each court will likely give its own unique twist to the Supreme Court's language and much litigation on this point will be the result.
The Iqbal Decision
Respondent Iqbal was a Pakistani citizen and Muslim who had been arrested and detained several months after the 9/11 attacks. He subsequently sued a number of federal officials alleging that while in federal custody in this country, he was subjected to conditions of privation by being assigned to a high-security prison because he was an Arab Muslim. Motions to dismiss were filed by the defendants, including John Ashcroft and former FBI director Robert Mueller, alleging that the complaint failed to state a claim. The district court denied the motion; the Second Circuit affirmed.
Much of the Court's opinion by Justice Kennedy is concerned with the criteria for suing federal officials under Bivens. This aspect does not interest FCA litigators. The second focus of the opinion zeroed in on the standards for granting a 12(b)(6) motions. The Court developed a new test to apply in passing upon such motions, drawn apparently from Kennedy's earlier opinion in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007). The big question after Twombly had come down was whether the tests applied by the Court in that case were limited in application to antitrust matters or would be applied more generally. Iqbal resolved that issue by applying these tests in effect to all litigation in federal courts.
There are two prongs to the Iqbal test, both of which are important in qui tam cases. First, the Court was emphatic in imposing a stiffer test on complaints in order to satisfy Rule 8(a)(2). "A pleading that offers 'labels and conclusions' or 'a formulaic recitation of the elements of a cause of action will not do.' " (Iqbal at 1949, citing to Twombly at 555). "Nor does a complaint suffice if it tenders 'naked assertion[s]' devoid of "further factual enhancement.' " Id. (Twombly at 557). So the first point to bear in mind for qui tam complaint draftsmen is that you enter into a danger zone if you simply assert that defendant violated the FCA and rely upon quoting the pertinent provision(s) of the Act to substantiate the allegation. This is because the Court will consider such a tactic as asserting a legal conclusion, and district courts are not required to accept as true legal conclusions as they are factual allegations for purposes of resolving motions to dismiss. Iqbal at 1949-50.
The second prong of the Iqbal test is far more significant for relators and defendants. "[O]nly a complaint that states a plausible claim for relief survives a motion to dismiss." Id. at 1950. How, might one ask, is a district court to make such plausibility determinations? Should district judges rely upon hermeneutics, memetics, plain meaning, semiotics or phenomenology as their epistemological paradigm? The Court's answer to that query is straightforward, if somewhat disturbing: this undertaking will be "a context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Id. (emphasis added). Moreover, "where the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged-but it has not 'show[n]'-'that the pleader is entitled to relief.' " (Quoting Rule 8(a)(2)). The Court suggests that district judges start with reviewing pleadings for legal conclusions and then apply the plausibility standard to what remains.
A number of suggestive thoughts crossed my mind as I read this language. First, this gives a whole bunch of even greater discretion to district judges to bounce complaints they do not like or want to go to trial on. Next, what standard would a reviewing Circuit Court apply to such plausibility findings? Would it be something akin to "clearly erroneous" or whatever? Further, the Court seems to have rewritten or deconstructed Conley v. Gibson, supra, which was somewhat more positive in impact: unless there was no possible way the plaintiff could achieve relief, the complaint ought not to be dismissed. While generally speaking I have found district judges to be far sharper and more realistic (i.e., manifesting more "common sense") in their decision-making than Court of Appeals judges or Supreme Court Justices, if I were a relator's counsel a dark cloud of uncertainty would certainly be engulfing me at this point.
As mentioned above, there are only a few FCA-related cases so far which have applied the Iqbal standards. Many more will be forthcoming, as I expect virtually every motion to dismiss filed in a qui tam case to make the plausibility argument. The court's holding in United States ex rel. Wood v. Applied Research Associates, Inc., 2009 WL 2030240 (2d. Cir. July 13, 2009), a reverse FCA case, is extremely interesting in its handling of the Iqbal standards. This decision makes the key linkage for qui tam cases: plausibility and Rule 9(b). As I read the decision, it is evident that the court felt Iqbal justified it in applying Rule 9(b) in a very strict fashion. That is to say, it was no longer sufficient to satisfy 9(b) by the traditional "who, when, where, etc." tests, but there had to be sufficient facts plead in sufficient detail to establish plausibility of the claim as well.
By contrast, in United States ex rel. Lusby v. Rolls-Royce Corp., 2009 WL 1855179 (7th Cir. June 30, 2009), Judge Easterbrook (along with Judges Posner and Wood) cited Iqbal but hardly made a fuss over it. The panel seemed far more concerned with the usual standards of whether the complaint pled particulars of the fraud and thereby avoided unsubstantiated allegations, more in accordance with the usual 9(b) approach. As long as the allegations were not vague and clued in the defendant as to the alleged fraud, that was sufficient. Id. at *5.
Several non-FCA opinions are also interesting given the formative stage we are entering into in applying the Iqbal standards. In Fannie Mae v. U.S. Property Solutions, L.L.C., 2009 WL 1968330 (S.D. Tex. July 6, 2009), defendant had filed a fraud counterclaim against plaintiff Fannie Mae. While the gist of the case involved how properly to plead "fraudulent intent," the district court concentrated on the first prong of Iqbal (pleading legally-conclusory statements) as the basis for denying Fanny Mae's motion to dismiss the counterclaim. Again, a linkage to Rule 9(b) was evident in the court's analysis. Id. at *5. In Owens v. District of Columbia, 2009 WL 1916280 (D.D.C. July 6, 2009), a pro se employment rights case, the district court focused on a fragment from the Iqbal decision: there must be pled 'factual matter' that permits the court to infer 'more than the mere possibility of misconduct.' " Id. at *4; Iqbal at 1950. However, the district court in Ante v. Office Depot business Services, 2009 WL 1689604 (N.D. Cal. June 15, 2009), reminds us of a most important consideration: Iqbal "does not impose a 'probability requirement' "... Id. at *6.
Conclusions
So, where does all this leave us?: "probability" is not "plausibility" and Conley is either turned on its head or deconstructed entirely. Short of recommending we all become logical positivists and well versed in Wittgenstein's theories of language, what certainly early conclusions can be drawn. First, Rule 9(b) will become even more of a hurdle for relators than it is now, especially if enough facts must be pled to establish plausibility. One interesting suggestion has come from Gregory P. Joseph (JosephNYC.com; last read on 7/23/09) that Iqbal will encourage district judges to freeze or limit discovery until pending motions to dismiss are decided. See his blog article: Post-Iqbal, Limited Discovery at Best is Appropriate Pending Decision on 12(b)(6)Motion in Complex Cases. In addition, the Supreme Court's decision seems to add another argument to those seeking to dismiss qui tam complaints: courts must be the gatekeepers to prevent unnecessary and expensive discovery against defendants. And since relators are not even the government, but sometimes benighted individuals, the courts should be inclined to dismiss even borderline cases to spare this waste of resources.
All of which means your guess is as good as mine--but it should be interesting to see how courts apply the plausible standard. Each court will likely give its own unique twist to the Supreme Court's language and much litigation on this point will be the result.
Wednesday, June 24, 2009
REBIRTH OF THE CID?
While much attention has been focused on the new amendments to the False Claims Act as a result of FERA, most of this discussion has concentrated on the "sexy" changes implemented by the amendments--e.g., overruling Allison Engine and Totten and expanding the definitions of "claim" and "overpayment." Less dramatic are the modifications to 31 U.S.C. 3733, which contains the FCA's provision for Civil Investigative Demands ("CID"). Yet, from the strategic perspective--the focus of this blog--these mechanical modifications may prove as significant as the more exciting amendments.
Background of FCA CID's
While I was serving in the Civil Fraud Section at Main Justice, the 1986 amendment process was underway. The Civil Division emphasized to Senator Grassley and others involved in considering the proposed amendments that effective FCA enforcement required that the Civil Division have a device similar to the highly effective CID's that were available to the Antitrust Division. Emphatic promises were made that should FCA CID's be authorized, they would be heavily used by DOJ attorneys in their fraud investigations. Based on that representation, and other considerations, Congress included what became section 3733 in the 1986 amendments.
I thought this was a wise development. I had worked for two years in the Antitrust Division and utilized CID's in several investigations. The full panoply of investigative provisions were included in the FCA version of the CID's. On my webpage [fcaexpert.com], under the articles section, is an extensive article I wrote on what CID's are and how they operate. In short, DOJ fraud investigators were entitled to serve document requests, interrogatories, requests for admission, and notices of depositions in connection with an on-going investigation prior to DOJ either filing its own FCA action or intervening in a qui tam action.
While I was at DOJ, CID's were fairly extensively utilized. I always found them exceedingly useful devices to expedite and focus an ongoing fraud investigation. The major problem we faced using CID's was that it was a major pain to get the Attorney General to authorize them, since he or she (Ms. Reno in my tenure) had the sole ability to authorize them. Preparing a package for signature by the AG is always a major undertaking, since it must survive the review of many levels of supervision. Also, section 3733 has time schedules built in, which are very hard to calculate if you don't know how long it will take for AG to sign off. Sometimes CID's were authorized in a week or two; other times a month or more could elapse.
When I left DOJ in 1995, CID's were still frequently employed by my former colleagues. However, during 13 years as a private defense counsel, I only saw two CID's served in my cases. In a 2007 case I worked on, I noticed that the CID served was numbered [as all CID's must be] with a very low number, 5 or 6 as I recall, even though it had been issued toward the end of the year. The trial attorney running the case informed me that hardly anyone was using CID's at Justice for a number of reasons, the AG delay problem being prominent among them.
It is apparent that the 2009 amendments to section 3733 are designed to reinvigorate use of CID's and to enhance their impact.
First Change: AG or AG's Designee Can Authorize
Subsection (a)(1) allows the AG to designate a DOJ official to authorize the issuance of CID's. It is not evident from the new language who that individual might be--the Associate AG or the AAG in charge of the Civil Division (meaning the current deputy AAG who supervised the fraud section for something like 20 years) seem the most likely candidates. The result of this change is that it will be easier and faster to get CID's authorized. The amendment also clarifies something I don't think needed to be clarified--DOJ can issue CID's in a qui tam case before making its election to intervene or not intervene.
Second Change: Fruits of CID's Can Be Shared with Relators
Subsection (a)(1) makes a major change in allowing DOJ to share CID information "with any qui tam relator if the Attorney General or designee determine[s] it is necessary as part of any false claims act investigation." In my experience, to a certain extent, this kind of sharing was done informally at DOJ (such as during relator interviews) in any regard. This provision makes it clear that this practice is blessed and extensive sharing of CID material is being encouraged. To emphaze this point, the definition section found in 3733 (l)(8) offers one definition of "official use" as being "interviews of any qui tam relator or other witness."
Third Change: CID Information Can be Shared with other Agencies
Congress demonstrated its desire in subsection (i)(2)(C) for wider dissemination of CID material [remember this is civil, we are not dealing with 6(e) grand jury material here] by making it explicit that DOJ can share CID information with other agencies. This was always a problem area when I was at DOJ, because the client agency rightly felt its attorneys should have access to all pertinent information in a case before making a formal recommendation to either initiate an FCA action or enter a qui tam. While there always has been some informal sharing, this amendment removes that source of potential friction. The expanded definition of "official use" also points toward Congress encouraging enhanced sharing of CID information outside DOJ itself.
Left unresolved is a major issue: can CID information be turned over to the Criminal Division? The purpose of CID's is to facilitate civil investigations; moreover, very broad discovery-like devices (including depositions) are among the arsenal of available investigative devices. It was also a difficult situation when the Criminal Division got wind of a civil investigation in which it had an interest and requested CID material. The Civil Division was forever proposing that the AG issue regulations to govern this situation. I don't think it ever happened. In any regard, subsection (i)(2)(B) authorizes the CID custodian to issue copies of material to "other officer or employee of the Department of Justice." This is also an issue addressed in the definitional section where "official use" includes communications "in furtherance of a Department of Justice investigation or prosecution of a case..." Could this include criminal cases? I guess we will have to wait and see.
D. Expanded Definition of "official use"
In addition to the points already discussed relative to this expanded definition, it would seem that Congress intended under some situations for CID information to be communicated to state and local government agencies, or their contractors. Various other categories of "official use" contained in subsection (l)(8) apparently expand substantially the freedom and discretion of DOJ in how it utilizes CID information. Given the extreme proprietary sensitivity of some CID info, we are probably looking at some substantial litigation to define the exact parameters of this language.
Conclusion
So are we about to enter the "age of the CID" or will things continue much as they have been?That remains to be seen. What is clear beyond dispute is that from the strategic FCA perspective, counsel need to study seriously the new and improved section 3733 because suddenly it is more likely they will encounter CID's in their own cases.
Background of FCA CID's
While I was serving in the Civil Fraud Section at Main Justice, the 1986 amendment process was underway. The Civil Division emphasized to Senator Grassley and others involved in considering the proposed amendments that effective FCA enforcement required that the Civil Division have a device similar to the highly effective CID's that were available to the Antitrust Division. Emphatic promises were made that should FCA CID's be authorized, they would be heavily used by DOJ attorneys in their fraud investigations. Based on that representation, and other considerations, Congress included what became section 3733 in the 1986 amendments.
I thought this was a wise development. I had worked for two years in the Antitrust Division and utilized CID's in several investigations. The full panoply of investigative provisions were included in the FCA version of the CID's. On my webpage [fcaexpert.com], under the articles section, is an extensive article I wrote on what CID's are and how they operate. In short, DOJ fraud investigators were entitled to serve document requests, interrogatories, requests for admission, and notices of depositions in connection with an on-going investigation prior to DOJ either filing its own FCA action or intervening in a qui tam action.
While I was at DOJ, CID's were fairly extensively utilized. I always found them exceedingly useful devices to expedite and focus an ongoing fraud investigation. The major problem we faced using CID's was that it was a major pain to get the Attorney General to authorize them, since he or she (Ms. Reno in my tenure) had the sole ability to authorize them. Preparing a package for signature by the AG is always a major undertaking, since it must survive the review of many levels of supervision. Also, section 3733 has time schedules built in, which are very hard to calculate if you don't know how long it will take for AG to sign off. Sometimes CID's were authorized in a week or two; other times a month or more could elapse.
When I left DOJ in 1995, CID's were still frequently employed by my former colleagues. However, during 13 years as a private defense counsel, I only saw two CID's served in my cases. In a 2007 case I worked on, I noticed that the CID served was numbered [as all CID's must be] with a very low number, 5 or 6 as I recall, even though it had been issued toward the end of the year. The trial attorney running the case informed me that hardly anyone was using CID's at Justice for a number of reasons, the AG delay problem being prominent among them.
It is apparent that the 2009 amendments to section 3733 are designed to reinvigorate use of CID's and to enhance their impact.
First Change: AG or AG's Designee Can Authorize
Subsection (a)(1) allows the AG to designate a DOJ official to authorize the issuance of CID's. It is not evident from the new language who that individual might be--the Associate AG or the AAG in charge of the Civil Division (meaning the current deputy AAG who supervised the fraud section for something like 20 years) seem the most likely candidates. The result of this change is that it will be easier and faster to get CID's authorized. The amendment also clarifies something I don't think needed to be clarified--DOJ can issue CID's in a qui tam case before making its election to intervene or not intervene.
Second Change: Fruits of CID's Can Be Shared with Relators
Subsection (a)(1) makes a major change in allowing DOJ to share CID information "with any qui tam relator if the Attorney General or designee determine[s] it is necessary as part of any false claims act investigation." In my experience, to a certain extent, this kind of sharing was done informally at DOJ (such as during relator interviews) in any regard. This provision makes it clear that this practice is blessed and extensive sharing of CID material is being encouraged. To emphaze this point, the definition section found in 3733 (l)(8) offers one definition of "official use" as being "interviews of any qui tam relator or other witness."
Third Change: CID Information Can be Shared with other Agencies
Congress demonstrated its desire in subsection (i)(2)(C) for wider dissemination of CID material [remember this is civil, we are not dealing with 6(e) grand jury material here] by making it explicit that DOJ can share CID information with other agencies. This was always a problem area when I was at DOJ, because the client agency rightly felt its attorneys should have access to all pertinent information in a case before making a formal recommendation to either initiate an FCA action or enter a qui tam. While there always has been some informal sharing, this amendment removes that source of potential friction. The expanded definition of "official use" also points toward Congress encouraging enhanced sharing of CID information outside DOJ itself.
Left unresolved is a major issue: can CID information be turned over to the Criminal Division? The purpose of CID's is to facilitate civil investigations; moreover, very broad discovery-like devices (including depositions) are among the arsenal of available investigative devices. It was also a difficult situation when the Criminal Division got wind of a civil investigation in which it had an interest and requested CID material. The Civil Division was forever proposing that the AG issue regulations to govern this situation. I don't think it ever happened. In any regard, subsection (i)(2)(B) authorizes the CID custodian to issue copies of material to "other officer or employee of the Department of Justice." This is also an issue addressed in the definitional section where "official use" includes communications "in furtherance of a Department of Justice investigation or prosecution of a case..." Could this include criminal cases? I guess we will have to wait and see.
D. Expanded Definition of "official use"
In addition to the points already discussed relative to this expanded definition, it would seem that Congress intended under some situations for CID information to be communicated to state and local government agencies, or their contractors. Various other categories of "official use" contained in subsection (l)(8) apparently expand substantially the freedom and discretion of DOJ in how it utilizes CID information. Given the extreme proprietary sensitivity of some CID info, we are probably looking at some substantial litigation to define the exact parameters of this language.
Conclusion
So are we about to enter the "age of the CID" or will things continue much as they have been?That remains to be seen. What is clear beyond dispute is that from the strategic FCA perspective, counsel need to study seriously the new and improved section 3733 because suddenly it is more likely they will encounter CID's in their own cases.
Friday, March 13, 2009
The New UB-04 Form Enhances Potential FCA Liability
Beginning in March, 2007, CMS began a program to replace its UB-92 form. The UB-92 was the form employed, both in paper and electronic formats, for billing the Medicare system by institutional providers such as hospitals, home health agencies, nursing homes, etc. In terms of DOJ/relator False Claims Act ("FCA") prosecutions based on UB-92 claims, there was a major problem. There was no restrictive certification language contained on the UB-92 form which to any extent corresponded to the stringent certification included in hospital cost reports. For example, there was no Medicare certification attesting that the UB-92 was prepared "in accordance with applicable instructions," including the Anti-kickback Act and Stark Law. In fact, the Medicare certification (paragraph 7 ), on the reverse side of the form, dealt exclusively with the release of patient information and facilitating payment from other sources. Consequently, FCA defendants could argue with some justification that even if the UB-92 claim had been prepared in contravention of these two laws, merely submitting it would not violate the express certification contained on the form itself. Moreover, unless the information on the form were alleged to be false or inaccurate in any way, the UB-92 arguably was not a violation of the FCA because it was not a false claim.
This oversight by CMS has apparently been addressed in the new UB-04 successor to the UB-92 form. On the reverse side of the form, the following new language appears:
Thus far, I am aware of no cases involving the new UB-04 certification language. Nonetheless, those who represent providers are well advised I should think to bring this new language and its potential adverse FCA consequences to the attention of their clients.
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This oversight by CMS has apparently been addressed in the new UB-04 successor to the UB-92 form. On the reverse side of the form, the following new language appears:
Submission of claim constitutes certification that the billingWhile the language is not as stringent as it could have been, it nonetheless raises some important issues for providers who submit the form. For one thing, its use of "knowingly or recklessly" is clearly language borrowed from the FCA. The certification also includes the requirement for "complete" information. Also, what are the "material facts" that the provider is certifying it did not "disregard, or misrepresent or conceal" when it submitted the form?
information as shown on the face hereof is true, accurate
and complete. That the submitter did not knowingly or
recklessly misrepresent or conceal material facts.
Thus far, I am aware of no cases involving the new UB-04 certification language. Nonetheless, those who represent providers are well advised I should think to bring this new language and its potential adverse FCA consequences to the attention of their clients.
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Friday, March 6, 2009
THE 10% SOLUTION: REDUCING RELATOR RECOVERIES
The relators' bar is well acquainted with facing motions to dismiss predicated on the complaint being based on publicly disclosed information, and the relator failing to qualify as an original source. See 31 U.S.C. section 3730(e)(4)(A) & (B). Such motions can be filed on behalf of the government or the defendant, or both. If successful, this tactic will foreclose the relator from having any jurisdictional standing and benefiting from any subsequent government recovery. Should the government decline intervention, then the case is over.
But what if the relator successfully defends against such a motion (or a comparable motion under Rule 56), the government has intervened, and the prosecution is successful does that mean the relator is home free and entitled to a 15% to 25% share of the recovery? A frequently overlooked (and seldom invoked) provision of the False Claims Act ("FCA"), section 3730(d)(1), represents yet another substantial hurdle a relator must successfully scale or face substantial reduction in its potential share of any recovery.
The neglected element of section 3730(d)(1)
FCA practitioners are, of course, quite familiar with this section of the Act, since it lays out the percentages of recoveries to which relators are entitled in a successful action where the government intervenes, including costs and expenses. The remainder of this section, however, is generally far less familiar because it is so seldom invoked. It reads:
Another important distinction relates to the district court's authority when applying this section. Under the public disclosure and original source provisions, a relator either has based its complaint upon publicly-disclosed information or has not, and is either an original source or not. That is, it is a zero sum game. By contrast, under section (d)(1), the court is directed to take into account "the significance of the information and the role of person bringing the action in advancing the case to litigation." Hence, the 10% sliding scale component of the provision. Given the vague terminology the district court must construe and apply, coupled with additional discretion resulting from applying the 10% sliding scale, makes it evident how expansive the district court's authority is when applying section 3730(d)(1).
It is important to recognize that even if a relator successfully runs the section 3730(e)(4)(A) & (B) gauntlet, and survives a motion to dismiss, that does not foreclose the district court from invoking the 10% limitation to severely reduce the relator's share of any recovery. While it is assumed that Congress meant to bestow upon the Department of Justice the ability to invoke this provision, there is nothing in the FCA, its legislative history, or the limited interpretative case authority that forecloses defendants from initiating motions to reduce the relator's recovery predicated on this section as well.
Conceivably, even should defendants be unsuccessful in seeking to secure dismissal or summary judgment, and even if defendants are found liable under the Act, section 3730(d)(1) affords them a device for punishing the relator by reducing the relator's share of any recovery.
Legislative History
There are two particularly important Court of Appeals decisions which discuss the pertinent legislative history underlying this part of section (d)(1). Both United States ex rel. Barajas v. Northrop Corp., 5 F.3d 407, 410 (9th Cir. 1993), cert. denied, 511 U.S. 1033 (1994), and United States ex rel. Merena v. Smithkline Beecham Corp., 205 F.3d 97, 106 (3d Cir. 2000), quote the same language from the legislative history. Senator Grassley, sponsor of the 1986 amendments to the FCA, declared that this provision would
Case Authority
The 10% provision has very infrequently been invoked by the Department of Justice. During my 11 years in the Civil Fraud Section, I never even encountered the issue. Similarly, instances were defendants unleashed the 10% limitation are even more sparse. As a result, there is very limited (and not always consistent) case authority to assist counsel in gaining an understanding of the specifics of how section 3730(d)(1) operates.
For example, in United States v. CAC-Ramsay, Inc., 744 F. Supp. 1158, 1161 (S.D. Fla. 1990), aff'd, 963 F.2d 384 (11th Cir. 1992), the district court based its invocation of the provision on two considerations: (1) "the suit was based primarily on disclosures, albeit not public, of specific information other than information provided by the relators on their own", and (2) the relators "had only a minor role in the prosecution of the suit after it was originally filed." The lesson here apparently is that applicability of the provision is heavily fact-dependent. It is also important to note that the Ramsey court differed from Senator Grassley in holding that the information upon which the action primarily is based need not come from a "public" source.
However, one district court has held that prior disclosures that occurred during discovery which were not filed with the court and thereby made public could not trigger the 10% provision. United States ex rel. Prawer & Co. v. Fleet Bank of Maine, 63 F. Supp. 2d 59, 60-61 (D. Maine, 1998). See also, United States v. Northrop Corp., 59 F.3d 953, 964 n. (9th Cir. 1995), cert. denied, 578 U.S. 1018 (1996) (based primarily "on [previously publicly] disclosed[ed] information").
The Tenth Circuit added further clarification in United States ex rel. Precision Company v. Koch Industries, 971 F.2d 548, 553 n.3 (10th Cir. 1992). Section 3730(d)(1) is not a jurisdictional provision. In addition, "its application is limited to those cases in which the government proceeds." If the government declines to intervene, the provision is not applicable.
A couple of points are interesting regarding the district court's decision in United States v. Stern, 818 F. Supp. 1521 (M.D. Fla. 1993), opinion vacated in part on reconsideration, 932 F. Supp. 277 (M.D. Fla. 1993). First, the court described the kind of information that could invoke the section as being factual information that was already owned by, and had been disclosed by, the Government. Id. at 1522. See also, United States ex rel. Stillwell v. Hughes Helicopters, Inc., 714 F. Supp. 1084, 1098 (C.D. Cal. 1989) (provision triggered if "action is based primarily on governmental disclosures of information"). This unique language perhaps was relied upon because relator was a federal employee. Secondly, the provision had no applicability and could not constrain a relator if it has filed its qui tam complaint before the government filed its FCA action, even if the relator derived its information from a criminal indictment. Id.
As mentioned above, the Third Circuit offered its interpretation in 2000 in United States ex rel. Merena v. Smithkline Beecham Corp., supra at 106, which perhaps has become the leading case on the provision. "The lesser range (up to 10% of the proceeds) is provided for the (presumably unusual) cases in which an 'original source' relator asserts a claim that is 'primarily based' on information that has been publicly disclosed and that the relator did not provide." This can result in a district court having to review the relator's allegations on a claim by claim basis. The court reviewed pertinent legislative history (as discussed above) to buttress its conclusion. Id. at 106.
On remand, the district court grappled with how to apply the "based primarily" standard. The test became whether the government likely would have proceeded even if the relator had not come forward with "information and assistance." That is, the government had all of the "essential and necessary information" from the prior public disclosures, and had available the tools to obtain all the details (i.e., subpoenas and witness interviews). United States ex rel. Merena v. Smithkline Beechham Corp., 114 F.Supp. 2d 352, 367-8 (E.D. Pa. 2000).
The district court then faced the challenge of how to apply the sliding 10% scale. Ultimately it concluded that while the government could have brought the case without the information provided by the relator, that assistance both increased the government=s recovery and facilitated its realization earlier than if the relator had not been involved. Hence, the maximum 10% share was justified in this instance, but generally would not be. The extent of judicial discretion infused in section 3730(d)(1) again becomes starkly evident.
Further helpful guidance is offered in United States ex rel. Eitel v. Reagan, 35 F. Supp.2d 1151, 1158-59 (D. Arizona 1998), aff'd, 242 F.3d 381 (9th Cir. 2000). The district court placed primary reliance upon Federal Recovery Services v. United States, 72 F.3d 447, 452. There the Fifth Circuit held that the provision is meant to apply in a case "where the information has already been disclosed and the person qualifies as an 'original source' but where the essential elements of the case were provided to the government or news media by someone other than the qui tam plaintiff " (emphasis added). Moreover, the district court found that the provision applies only when the relator has been determined to be an original source under section 3730(e)(4)(B). 35 F. Supp. 2d at 1158. In addition to the essential elements test, the district court pointed to the statutory term "primarily" as being important, without defining its parameters. Id. at 1159.
The Seventh Circuit's twist on the statutory language is somewhat interesting in United States ex rel. Chandler v. Cook County Illinois, supra, 277 F.3d at 976. "If the basis for the suit was information that was already available, a district court may limit a relator's recovery to 10 percent of the award...or bar the suit entirely unless the Attorney General prosecutes the case..." (citing to section 3730(d)(4)(A)) (emphasis supplied). Notice that the court is construing the statutory language extremely broadly: any information that is already available from whatever source can trigger the 10% limitation. However, the court's assertion that the suit is barred under section 3730(d)(4)(A) is certainly incorrect because (1) there is no such section of the FCA, and (2) if the court is referencing ' 3730(e)(4)(A), the public disclosure bar has no applicability to section 3730(d)(1)'s 10% provision.
Concluding Discussion
Congress evidently designed the 10% provision as the solution to a fundamental problem. There would be situations in which relators who could qualify as original sources, and thereby avoid being dismissed, nonetheless had to some extent relied upon public information and/or information of which it was not the originator. Thereby, such a relator would probably be contributing nothing to the government's enforcement actions and receiving a free ride to a share of any recovery. Yet, on the other hand, there might be other ways in which such a relator might render valuable assistance to the government which merited some award.
Since no statutory provision could cover every possible factual situation, the burden was shifted to the district court to determine if the complaint was based "primarily" upon such public information, whether there were other contributions the relator made that would promote "advancing the case to litigation," and where under the 1% to 10% continuum an award should be made. And I should think it would be very difficult on appeal to successfully contest the exercise of this broad discretion vested in the district court in resolving any of these issues.
It is also a distinct possibility that some in Congress wanted to arm DOJ with an appropriate weapon to "persuade" reluctant relators to voluntarily accept a share of the proceeds smaller than they had anticipated. For example, DOJ could suggest to a relator that it accept an award in the 11% to 14% range (i.e., below the statutory 15% minimum) or face a motion predicated upon the 1% to 10% provision. Even if DOJ were prepared to recommend an award somewhere in the statutory 15% to 25% range, but less than the relator demanded, it could utilize the 10% provision as a threat to persuade recalcitrant relator to become more "reasonable."
It is interesting to note that none of the cases cited in this article involved defendants filing motions to limit relators recoveries in cases where the relators and/or government had prevailed. However, as mentioned above, there is nothing foreclosing unsuccessful defendants from filing motions seeking to invoke the 10% limitation, just as they often do to contest the award relators and the government have agreed upon after judgment has been rendered or a case settled. It is also possible, I guess, that defendants negotiating with relators in an intervened case could use the 10% threat as a device to encourage relators not to push for larger settlements. But I have not encountered such a case or heard of this situation.
Relators are far more likely to encounter the 10% limitation in their negotiations with the government over relators' share. That is, the government may argue that if a relator does not accept the proposed share of the recovery, the government will then file a motion under section 3730(d)(1) to scale down the recovery percentage to a 10% maximum, or much less. Unless the negotiations short-circuit and the government files such a motion, we have no way of knowing how extensively this threat is used to soften up relators and their counsel. I am aware of only one such purported situation of this type.
The few existing cases interpreting the 10% sanction afford food for thought in several regards. First, each case is factually intensive. No two of the published decisions involved cases that were identical on their facts. Second, the vague and undefined guidelines the court must apply in reaching its decision afford it a tremendous range of discretion which would seem very difficult to attack on appeal. Third, assuming the court invokes the 10% rule, the very nature of the sliding scale means that it has additional discretion as to where on the 1%-10% continuum it will determine the appropriate award should be paid.
The scarcity of reported cases or even rumors involving the 10% provision suggests that for relators it is somewhat of a paper tiger. But it remains a viable menace for relators nonetheless, and the wise relator counsel will always be sensitive to that possibility as strategy is planned and the qui tam complaint is drafted.
[ With due apologies to Nicholas Meyer and his The 7 Percent Solution]
Website Links of Interest:
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About Ronald H. Clark
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But what if the relator successfully defends against such a motion (or a comparable motion under Rule 56), the government has intervened, and the prosecution is successful does that mean the relator is home free and entitled to a 15% to 25% share of the recovery? A frequently overlooked (and seldom invoked) provision of the False Claims Act ("FCA"), section 3730(d)(1), represents yet another substantial hurdle a relator must successfully scale or face substantial reduction in its potential share of any recovery.
The neglected element of section 3730(d)(1)
FCA practitioners are, of course, quite familiar with this section of the Act, since it lays out the percentages of recoveries to which relators are entitled in a successful action where the government intervenes, including costs and expenses. The remainder of this section, however, is generally far less familiar because it is so seldom invoked. It reads:
Where the action is one which the court finds to be based primarily on disclosures of specific information (other than information provided by the person bringing the action) relating to allegations or transactions in a criminal, civil, or administrative hearing, in a congressional, administrative, or Government [Accountability] Office report, hearing, audit, or investigation, or from the news media, the court may award such sums as it considers appropriate, but in no cases more than 10 percent of the proceeds, taking into account the significance of the information and the role of the person bringing the action in advancing the case to litigation. [Emphasis supplied].While on the surface this language appears to replicate the text of section 3730(e)(4), there are important distinctions. For example, the public disclosure jurisdictional analysis in section (e)(4) focuses on the public disclosure of allegations or transactions, while the section (d)(1) language looks to the public disclosure of "specific information" (other than information provided by the person bringing the action) "relating to allegations or transactions." Moreover, section (d)(1) contains the significant qualifier of "primarily" which is absent from the 'section (e)(4) language. So the analysis a court would employ under section (d)(1) centers on interpreting and applying the undefined terms "specific information," " relating to," and "primarily."
Another important distinction relates to the district court's authority when applying this section. Under the public disclosure and original source provisions, a relator either has based its complaint upon publicly-disclosed information or has not, and is either an original source or not. That is, it is a zero sum game. By contrast, under section (d)(1), the court is directed to take into account "the significance of the information and the role of person bringing the action in advancing the case to litigation." Hence, the 10% sliding scale component of the provision. Given the vague terminology the district court must construe and apply, coupled with additional discretion resulting from applying the 10% sliding scale, makes it evident how expansive the district court's authority is when applying section 3730(d)(1).
It is important to recognize that even if a relator successfully runs the section 3730(e)(4)(A) & (B) gauntlet, and survives a motion to dismiss, that does not foreclose the district court from invoking the 10% limitation to severely reduce the relator's share of any recovery. While it is assumed that Congress meant to bestow upon the Department of Justice the ability to invoke this provision, there is nothing in the FCA, its legislative history, or the limited interpretative case authority that forecloses defendants from initiating motions to reduce the relator's recovery predicated on this section as well.
Conceivably, even should defendants be unsuccessful in seeking to secure dismissal or summary judgment, and even if defendants are found liable under the Act, section 3730(d)(1) affords them a device for punishing the relator by reducing the relator's share of any recovery.
Legislative History
There are two particularly important Court of Appeals decisions which discuss the pertinent legislative history underlying this part of section (d)(1). Both United States ex rel. Barajas v. Northrop Corp., 5 F.3d 407, 410 (9th Cir. 1993), cert. denied, 511 U.S. 1033 (1994), and United States ex rel. Merena v. Smithkline Beecham Corp., 205 F.3d 97, 106 (3d Cir. 2000), quote the same language from the legislative history. Senator Grassley, sponsor of the 1986 amendments to the FCA, declared that this provision would
limit the possible portion of the judgment recoverable by a qui tam plaintiff to 10 percent or less when the action is based primarily on public information. This limitation will affect those persons who have brought a qui tam action based almost entirely on information of which they did not have independent knowledge but had derived from a public source. 132 Cong.Rec.20536 (Aug. 11, 1986) (emphasis added).Subsequently, Senator Grassley added further context:
When the qui tam plaintiff brings an action based on public information, meaning he is an original source within the definition under the act, but the action is based primarily on public information not originally provided by the qui tam plaintiff, he is limited to a recovery of not more than 10 percent. In other words a 10-percent cap is placed on those original sources who bring cases based on information already publicly disclosed where only an insignificant amount of that information stemmed from that original source. 132 Cong. Rec. 28580 (1986). [Italics in original]Representative Berman, the House sponsor, addressed the proposed amendment in the following terms:
A person is an original source if he had some of the information related to the claim which he made available to the government . . . in advance of the false claims being publicly disclosed . . . Where . . . the person qualifies as an original source, but where the essential elements of the case were provided to the government or news media by someone other than the qui tam plaintiff . . . the court may award up to 10% of the total recovery to the qui tam plaintiff. 132 Cong.Rec. 29322 (Oct. 7, 1986).See also, United States ex rel. Chandler v. Cook County, Illinois, 277 F.3d 969, 976 (7th Cir. 2002); United States ex rel. Stinson, Lyons, Gerlin & Bustamante v. Prudential Ins. Co., 944 F.2d 1149, 1174 (3d Cir. 1991) (dissenting opinion of Sirica, J.).
Case Authority
The 10% provision has very infrequently been invoked by the Department of Justice. During my 11 years in the Civil Fraud Section, I never even encountered the issue. Similarly, instances were defendants unleashed the 10% limitation are even more sparse. As a result, there is very limited (and not always consistent) case authority to assist counsel in gaining an understanding of the specifics of how section 3730(d)(1) operates.
For example, in United States v. CAC-Ramsay, Inc., 744 F. Supp. 1158, 1161 (S.D. Fla. 1990), aff'd, 963 F.2d 384 (11th Cir. 1992), the district court based its invocation of the provision on two considerations: (1) "the suit was based primarily on disclosures, albeit not public, of specific information other than information provided by the relators on their own", and (2) the relators "had only a minor role in the prosecution of the suit after it was originally filed." The lesson here apparently is that applicability of the provision is heavily fact-dependent. It is also important to note that the Ramsey court differed from Senator Grassley in holding that the information upon which the action primarily is based need not come from a "public" source.
However, one district court has held that prior disclosures that occurred during discovery which were not filed with the court and thereby made public could not trigger the 10% provision. United States ex rel. Prawer & Co. v. Fleet Bank of Maine, 63 F. Supp. 2d 59, 60-61 (D. Maine, 1998). See also, United States v. Northrop Corp., 59 F.3d 953, 964 n. (9th Cir. 1995), cert. denied, 578 U.S. 1018 (1996) (based primarily "on [previously publicly] disclosed[ed] information").
The Tenth Circuit added further clarification in United States ex rel. Precision Company v. Koch Industries, 971 F.2d 548, 553 n.3 (10th Cir. 1992). Section 3730(d)(1) is not a jurisdictional provision. In addition, "its application is limited to those cases in which the government proceeds." If the government declines to intervene, the provision is not applicable.
A couple of points are interesting regarding the district court's decision in United States v. Stern, 818 F. Supp. 1521 (M.D. Fla. 1993), opinion vacated in part on reconsideration, 932 F. Supp. 277 (M.D. Fla. 1993). First, the court described the kind of information that could invoke the section as being factual information that was already owned by, and had been disclosed by, the Government. Id. at 1522. See also, United States ex rel. Stillwell v. Hughes Helicopters, Inc., 714 F. Supp. 1084, 1098 (C.D. Cal. 1989) (provision triggered if "action is based primarily on governmental disclosures of information"). This unique language perhaps was relied upon because relator was a federal employee. Secondly, the provision had no applicability and could not constrain a relator if it has filed its qui tam complaint before the government filed its FCA action, even if the relator derived its information from a criminal indictment. Id.
As mentioned above, the Third Circuit offered its interpretation in 2000 in United States ex rel. Merena v. Smithkline Beecham Corp., supra at 106, which perhaps has become the leading case on the provision. "The lesser range (up to 10% of the proceeds) is provided for the (presumably unusual) cases in which an 'original source' relator asserts a claim that is 'primarily based' on information that has been publicly disclosed and that the relator did not provide." This can result in a district court having to review the relator's allegations on a claim by claim basis. The court reviewed pertinent legislative history (as discussed above) to buttress its conclusion. Id. at 106.
On remand, the district court grappled with how to apply the "based primarily" standard. The test became whether the government likely would have proceeded even if the relator had not come forward with "information and assistance." That is, the government had all of the "essential and necessary information" from the prior public disclosures, and had available the tools to obtain all the details (i.e., subpoenas and witness interviews). United States ex rel. Merena v. Smithkline Beechham Corp., 114 F.Supp. 2d 352, 367-8 (E.D. Pa. 2000).
The district court then faced the challenge of how to apply the sliding 10% scale. Ultimately it concluded that while the government could have brought the case without the information provided by the relator, that assistance both increased the government=s recovery and facilitated its realization earlier than if the relator had not been involved. Hence, the maximum 10% share was justified in this instance, but generally would not be. The extent of judicial discretion infused in section 3730(d)(1) again becomes starkly evident.
Further helpful guidance is offered in United States ex rel. Eitel v. Reagan, 35 F. Supp.2d 1151, 1158-59 (D. Arizona 1998), aff'd, 242 F.3d 381 (9th Cir. 2000). The district court placed primary reliance upon Federal Recovery Services v. United States, 72 F.3d 447, 452. There the Fifth Circuit held that the provision is meant to apply in a case "where the information has already been disclosed and the person qualifies as an 'original source' but where the essential elements of the case were provided to the government or news media by someone other than the qui tam plaintiff " (emphasis added). Moreover, the district court found that the provision applies only when the relator has been determined to be an original source under section 3730(e)(4)(B). 35 F. Supp. 2d at 1158. In addition to the essential elements test, the district court pointed to the statutory term "primarily" as being important, without defining its parameters. Id. at 1159.
The Seventh Circuit's twist on the statutory language is somewhat interesting in United States ex rel. Chandler v. Cook County Illinois, supra, 277 F.3d at 976. "If the basis for the suit was information that was already available, a district court may limit a relator's recovery to 10 percent of the award...or bar the suit entirely unless the Attorney General prosecutes the case..." (citing to section 3730(d)(4)(A)) (emphasis supplied). Notice that the court is construing the statutory language extremely broadly: any information that is already available from whatever source can trigger the 10% limitation. However, the court's assertion that the suit is barred under section 3730(d)(4)(A) is certainly incorrect because (1) there is no such section of the FCA, and (2) if the court is referencing ' 3730(e)(4)(A), the public disclosure bar has no applicability to section 3730(d)(1)'s 10% provision.
Concluding Discussion
Congress evidently designed the 10% provision as the solution to a fundamental problem. There would be situations in which relators who could qualify as original sources, and thereby avoid being dismissed, nonetheless had to some extent relied upon public information and/or information of which it was not the originator. Thereby, such a relator would probably be contributing nothing to the government's enforcement actions and receiving a free ride to a share of any recovery. Yet, on the other hand, there might be other ways in which such a relator might render valuable assistance to the government which merited some award.
Since no statutory provision could cover every possible factual situation, the burden was shifted to the district court to determine if the complaint was based "primarily" upon such public information, whether there were other contributions the relator made that would promote "advancing the case to litigation," and where under the 1% to 10% continuum an award should be made. And I should think it would be very difficult on appeal to successfully contest the exercise of this broad discretion vested in the district court in resolving any of these issues.
It is also a distinct possibility that some in Congress wanted to arm DOJ with an appropriate weapon to "persuade" reluctant relators to voluntarily accept a share of the proceeds smaller than they had anticipated. For example, DOJ could suggest to a relator that it accept an award in the 11% to 14% range (i.e., below the statutory 15% minimum) or face a motion predicated upon the 1% to 10% provision. Even if DOJ were prepared to recommend an award somewhere in the statutory 15% to 25% range, but less than the relator demanded, it could utilize the 10% provision as a threat to persuade recalcitrant relator to become more "reasonable."
It is interesting to note that none of the cases cited in this article involved defendants filing motions to limit relators recoveries in cases where the relators and/or government had prevailed. However, as mentioned above, there is nothing foreclosing unsuccessful defendants from filing motions seeking to invoke the 10% limitation, just as they often do to contest the award relators and the government have agreed upon after judgment has been rendered or a case settled. It is also possible, I guess, that defendants negotiating with relators in an intervened case could use the 10% threat as a device to encourage relators not to push for larger settlements. But I have not encountered such a case or heard of this situation.
Relators are far more likely to encounter the 10% limitation in their negotiations with the government over relators' share. That is, the government may argue that if a relator does not accept the proposed share of the recovery, the government will then file a motion under section 3730(d)(1) to scale down the recovery percentage to a 10% maximum, or much less. Unless the negotiations short-circuit and the government files such a motion, we have no way of knowing how extensively this threat is used to soften up relators and their counsel. I am aware of only one such purported situation of this type.
The few existing cases interpreting the 10% sanction afford food for thought in several regards. First, each case is factually intensive. No two of the published decisions involved cases that were identical on their facts. Second, the vague and undefined guidelines the court must apply in reaching its decision afford it a tremendous range of discretion which would seem very difficult to attack on appeal. Third, assuming the court invokes the 10% rule, the very nature of the sliding scale means that it has additional discretion as to where on the 1%-10% continuum it will determine the appropriate award should be paid.
The scarcity of reported cases or even rumors involving the 10% provision suggests that for relators it is somewhat of a paper tiger. But it remains a viable menace for relators nonetheless, and the wise relator counsel will always be sensitive to that possibility as strategy is planned and the qui tam complaint is drafted.
[ With due apologies to Nicholas Meyer and his The 7 Percent Solution]
Website Links of Interest:
False Claims Act (FCA) Expert
Qui Tam Expert
FCA and Qui Tam Consultant
About Ronald H. Clark
More FCA and Qui Tam Whistleblower Articles
Friday, February 6, 2009
NEW NATIONAL KYPHOPLASTY ENFORCEMENT INITIATIVE
In the aftermath of its 2008 $75 million qui tam settlement with Medronic, Inc., which had acquired Kyphon, Inc., the Department of Justice is now beginning investigations and negotiations with individual hospitals seeking further recoveries under the False Claims Act. At issue is a procedure called "kyphoplasty," which involves a minimally invasive procedure inserting a balloon-like device filled with cement into the spine of a patient to repair spinal weakness and damage. The government believes that some hospitals may have been encouraged by Kyphon improperly to admit patients for in-patient hospital stays, rather than to designate them as outpatients, in order to maximizer Medicare, Medicaid and other federal healthcare plan reimbursements. My colleague Alana Wexler and I were involved in successfully negotiating the first of these new cases on behalf of a large midwestern hospital system.
I anticipate that Kyphon will take its place among other recent national enforcement initiatives, such as "LabScam" and pneumonia upcoding. If you are a hospital, it is only a matter of time until your kyphon-related requests for reimbursement are scrutinized by DOJ. Phillips & Cohen, on behalf of two relators, filed an extensive complaint against hundreds of hospitals in late May, 2008. I have reviewed a redacted copy of this complaint.
The purpose of this brief note is to offer some helpful suggestions to avoid FCA litigation, and how to deal with DOJ should your institution be targeted.
The methodology of the investigation is quite straightforwarded and easy for DOJ to perform. A computer check is run on billings for Kyphon-related services under the appropriate procedure code. If more than a scattering of such claims include requests for inpatient service reimbursement, rather than exclusively outpatient procedures, then the hospital is targeted for further investigation. This is accomplished by a joint team of HHS-OIG agents and U.S. Attorney investigators, under the supervision of the U.S. Attorney's Office, Northern District of New York, in Buffalo which is coordinating the national initiative. The supervising AUSA is highly experienced and direct, knows his stuff, and can be forceful and fair at the same time in my experience. These folks know what they are doing. In addition, further assistance is contributed by P&C as counsel for the relators, although they played no evident role in our negotiations.
The first indication of being under investigation is either an oral request for records, a written letter requesting documents, or even a subpoena. If your institution has not received any such contact, the following actions should be considered based upon my experience:
I anticipate that Kyphon will take its place among other recent national enforcement initiatives, such as "LabScam" and pneumonia upcoding. If you are a hospital, it is only a matter of time until your kyphon-related requests for reimbursement are scrutinized by DOJ. Phillips & Cohen, on behalf of two relators, filed an extensive complaint against hundreds of hospitals in late May, 2008. I have reviewed a redacted copy of this complaint.
The purpose of this brief note is to offer some helpful suggestions to avoid FCA litigation, and how to deal with DOJ should your institution be targeted.
The methodology of the investigation is quite straightforwarded and easy for DOJ to perform. A computer check is run on billings for Kyphon-related services under the appropriate procedure code. If more than a scattering of such claims include requests for inpatient service reimbursement, rather than exclusively outpatient procedures, then the hospital is targeted for further investigation. This is accomplished by a joint team of HHS-OIG agents and U.S. Attorney investigators, under the supervision of the U.S. Attorney's Office, Northern District of New York, in Buffalo which is coordinating the national initiative. The supervising AUSA is highly experienced and direct, knows his stuff, and can be forceful and fair at the same time in my experience. These folks know what they are doing. In addition, further assistance is contributed by P&C as counsel for the relators, although they played no evident role in our negotiations.
The first indication of being under investigation is either an oral request for records, a written letter requesting documents, or even a subpoena. If your institution has not received any such contact, the following actions should be considered based upon my experience:
a. Run an audit of all Kyphoplasty billings to determine which, if any, include inpatient services.
b. Review each such inpatient billing to see if it satisfies InterQual criteria for inpatient admission. What written procedures does the hospital have for admitting kyphonplasty patients. Review for any fiscal intermediary guidance issued regarding Kyphon.
c. Make sure your audit will pass muster should DOJ review it, since the audit will serve as the basis for determining single damages. Employ a conservative approach, i.e., in doubtful or borderline cases still consider the claim as invalid just to be sure no inappropriate claims have been missed. You should plan on turning the audit over to DOJ, as well as making the folks who conducted it available to them. Claiming privilege as to the audit will only demonstrate that you do not really wish to "cooperate," and this can be deadly with the supervising AUSA. More on this below.
d. Determine if any hospital employee has had contact with Kyphon sales or other personnel and the contents of any communications between hospital employees and Kyphon. It is extremely important to secure and review all internal hospital communications regarding kyphoplasty. DOJ will want to review these documents. Moreover, determine the working relationships between hospital employees and any outside radiological groups that perform kyphoplasty procedures at the hospital. Particularly important in this regard is determining who makes the decision to admit a patient as an inpatient--the outside group, the hospital staff, or both.
e. If your hospital has not been contacted by the government, then make a standard overpayment refund to your fiscal intermediary. This should be mandated by your compliance plan in any regard. However, if you have been contacted, then do not make a repayment to the FI unless it is approved by DOJ. The supervising AUSA will not look favorably upon such action.
f. A complete outside review should be undertaken of the hospital's compliance plan to ascertain how the mischarging occurred, to develop alternatives to avoid a reoccurrence, and to manifest a dedication to having the best possible compliance program. A long list of issues needs to be considered in any such review, such as the relationship between outside physician groups and the hospital in making inpatient admission decisions. In my case, our client had a superior plan, and we as outside counsel drafted a report with substantial suggestions for further improvement, which recommendations were implemented totally and immediately by the Board. This dedication to meaningful compliance helped convince DOJ that our client should not be held to the normal measure of damages in these cases (triple single damages). We were also able to convince the IG that our plan was sufficiently effective so that no CIA or other form of administrative torture was imosed. But you have to earn the government's trust on this to reap this benefit, and establishing a cooperative attitude is almost the most important element in doing so.
g. A point that cannot be emphasized too much is that DOJ expects complete "cooperation" if you wish to mitigate possible FCA damages. Most directly, the supervising AUSA will ask you to waive privilege as to pertinent documents (such as the audit), other records, and key individuals whom DOJ will want to interview. This is the only point at which we experienced a bit of rough going. In this connection, it is important to review recent DOJ pronouncements on forcing criminal defendants to waive privilege to earn cooperation credit. While DOJ's most recent position stresses the content of facts, not the source of the facts, the supervising AUSA will argue that DOJ's change in policy relates only to criminal cases, not civil FCA investigations. This is another reason it is critical to be "upfront" and credible with the government, so you can work through this challenging area constructively.
The basic point I wish to emphasize is that cooperation with DOJ, and establishing credibililty with the lead AUSA, are the most important objectives you should seek to develop during negotiations. We were treated extremely fairly because we satisfied these criteria. So, it is important to keep these points in mind throughout your negotiations.
Website Links of Interest:
Kyphoplasty Expert Witness
FCA Expert Witness
Qui Tam Expert Witness
FCA Consultant
Qui Tam Consultant
About Ronald H. Clark
More FCA and Qui Tam Whistleblower Articles
Website Links of Interest:
Kyphoplasty Expert Witness
FCA Expert Witness
Qui Tam Expert Witness
FCA Consultant
Qui Tam Consultant
About Ronald H. Clark
More FCA and Qui Tam Whistleblower Articles
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