Whistleblower Blawg

Once again, the stubborn judicial insistence on the magical “claim” to satisfy the requirements of Rule 9(b) has felled another detailed complaint.  In this instance, despite a detailed exposé of a fraud by one of the participants, the relator’s inability to produce a claim led to dismissal under Rule 9(b).  The Sixth Circuit then remanded for further consideration under its ruling in

 Relator SNAPP, Inc. (“SNAPP”) brought a qui tam action under the False Claims Act alleging that Defendant Ford Motor Company (”Ford”) fraudulently induced the federal government to contract with Ford by inflating, in official reports to the government, the extent of Ford’s dealings with small and minority-owned businesses.  If true, SNAPP’s allegations show that it was an insider to Ford’s fraud.  The scheme called for Ford to subcontract with large, majority-owned businesses but then launder its payments to that large, majority-owned business through SNAPP, allegedly a small, minority owned business.  Under this scheme, SNAPP received payments only for the purpose of passing them through, while Ford reported these transactions to the government as a subcontract with a small, minority-owned business.

Moreover, SNAPP contends that it did not actually qualify as a small, minority-owned business during the operative timeframe.  The suit alleged that from 1991 until 1999, although SNAPP was nominally owned and managed by a person of color, SNAPP maintains that this nominal control was a sham.  According to SNAPP, it was controlled entirely by Ford during this eight-year period. Ford nominated the majority of Relator’s board members, its organization charts included Relator and its employees, and Ford had full control over its dealings with Relator. Moreover, SNAPP alleges that from 1995 until 1999, Relator had too many employees to qualify as a small business.

The Southern District of Ohio dismissed SNAPP’s complaint for failure to comply with Fed. R. Civ. P. 9(b), and the Sixth Circuit affirmed in the instant opinion.  The Sixth Circuit remanded, however, to enable the district court to consider the Sixth’s decision in Bledsoe II before denying Relator’s motion to file an amended complaint.

In reiterating the pleading standard of Rule 9(b) with respect to FCA actions, the Sixth Circuit repeated its maxim from Bledsoe II that a relator must provide sufficient details regarding the time, place and content of alleged false statements, claim for payment from the federal government, and the manner in which the false statements induced the government to make a claimed payment to allow defendant to adequately prepare a responsive pleading.  Pleading with particularity as to the other elements of the cause of action is not required.  Although it found sufficient particularity as to the time, place and content of alleged false statements and as to the inducement to the government, SNAPP’s claims failed because it was unable to provide a “representative” claim for payment made by Ford. 

The Sixth Circuit did vacate and remand denial of SNAPP’s motion to file an amended complaint that apparently included “numerous claims for payment Ford submitted to the federal government,” which the district court had denied, ruling amendment would be futile because Relator “has simply been unable to frame its allegations within the confines of the FCA.”  The Court instructed that in reconsidering Relator’s motion in light of Bledsoe II, the “governing principle” guiding the district court’s consideration should be “whether vacating its order dismissing Relator’s complaint, and allowing the amended complaint, is required in order to prevent an injustice; and where an injustice will otherwise result, the trial judge has the duty as well as the power to order a new trial.” (citing Davis by Davis v. Jellico Community Hospital, Inc., 912 F.2d 129, 133 (1990)).

Breaking with the trend of Appellate Courts that just say no to pro se relators, the Tenth Circuit ruled on the merits of a pro se qui tam appeal.  In Brown v. Sherrod, 2008 U.S. Lexis 17438 (10th Cir. July 7, 2008), the unanimous Court rejected the pro se plaintiff’s appeal that the lower court did not have the power to dismiss his frivolous claims without the consent of the Attorney General of the United States.  The Court found the language of 31 U.S.C. sec. 3730(d) only applies to a voluntary dismissal. 

The 10th Circuit was faced with a clear cut question recently–whether general liability policies trigger a duty to defend FCA claims.  In Zurich American Ins. Co. v. O’Hara Regional Center for Rehabilitation, 529 F.3d 916, 918 (10th Cir. 2008), the Court unequivocally held “that the applicable insurance policies do not cover these types of claims.” 

While the government purusued an FCA claim in federal court, three insurance companies filed declaratory judgment suits concerning the above question.  The district court granted summary judgment that the professional services portion of the insurance contracts do not cover FCA claims.  O’hara claimed that it negligently failed to provide professionally adequate nursing or medical services or, alternately, tht the billing practices were professional services.  The Court distinguished the inadequate staffing issue from the misleading of the government in billing documents that it was providing adequate staffing.  As to the alternate claim, the Court found “[a]lthough processing Medicare and Medicaid claims may be difficult and time consuming, the activity does not characterize a ‘professional service.’”

On June 9, 2008, the Supreme Court Ruled in the case of Allison Engine Co., Inc. v. U.S. ex rel. Sanders, 76 U.S.L.W. 4387, 2008 U.S. Lexis 4704 (June 9, 2008).  The Court was completely correct on the real issue at hand–“The inclusion of an express presentment requirement in subsection (a)(1), combined with the absence of anything similar in subsection (a)(2), suggests that Congress did not intend to include a presentment requirement in subsection (a)(2).”

Footnote 1 concerns the Court’s insistence in protecting private entities in light of its ruling that no presentment to the government is required under (a)(2), which goes so far afield that it is irreconcilable with the clear language in section 3729(c).  Congress was clear in subsection (c) that it intended a much broader reading, but the Supreme Court has effectively read (c) out of the statute. 

Footnote 2 similarly runs roughshod over subsection (b) where Congress expressly stated that no specific intent to defraud is required.  The Supreme Court has pulled out of the statute the language “to get a claim paid” and read that as requiring specific intent.  Thus, both attempts to reconcile the ruling with the plain language of the FCA fall woefully short.

In addition, the Supreme Court has grafted onto the statute requirements that Congress specifically tried to clarify were not intended to be there when it amended the FCA in 1986.  The concepts of specific intent, materiality and limits on direct payments from the government were part of the target of the amendments attempt at cleaning up overly restrictive pre-1986 court decisions.  In the legislative history of the 1986 amendments, Congress told the Courts it expected the FCA to be interpreted very broadly as directed in the case of U.S. v. Neifert-White Co., 390 U.S. 228, 232 (1968), but in Allison Engine, Congress got the anti-Neifert-White.  Hopefully, Congress will correct the more damaging and narrowing comments of the Court in the upcoming “FCA Corrections Act of 2008″. 

In U.S. ex rel. McCandliss, 2008 U.S. App. Lexis 13165, Civil Appeal No. 07-3567 (7th Cir. June 18, 2008), the Seventh Circuit properly recognized that the qui tam relator’s motivation in bringing the lawsuit has no bearing on whether or not the defendant violated the False Claims Act.  The defendant claimed that he had previously sued the relator and said the relator brought the action for “revenge.”  The Court found ample evidence that the defendant had indeed violated the law and held that the relator’s “motivation in pursuing this case is not relevant.”

On Thursday, June 19, 2008, the House Judiciary Committee’s two Subcommittees, Commercial and Administrative Law and Courts, the Internet, and Intellectual Property, held a joint hearing on H.R. 4854, the “False Claims Act Correction Act”.  The questioning was cut short by a House vote, but the subcommittees seemed very favorable to recommending the amendment.  Indeed, the Chairman, who had sponsored the 1986 Amendments to the FCA, told the U.S. Chamber of Commerce representative that it seemed ironic that he strongly supported the 1986 version now, because his predecessor in 1986 had the same doomsday predictions about that amendment as this current representative presented in his testimony about the current amendment. 

Senate Bill 2041, The False Claims Act Corrections Act of 2007, was reported out of committee on a unanimous voice vote today. The corrections in the Bill were necessitated by a series of bad judicial opinions that took the law in a direction the Congress never intended.  The Act clarifies that the statute of limitations is 10 years.  It clarifies that Congress intends the False Claims Act to apply to all federal funds.  It preserves for the government the right to dismiss lawsuits that are based on public allegations.  It also enhances protections for whistleblowers.  Given the bi-partisan support of the Bill in committee, one would expect little opposition on the Senate floor. 

Recently, the Senate Judiciary Committee held a hearing on the proposal to amend the False Claims Act.  The exigencies of other commitments left Senator Grassley to chair a large portion of the hearing and to ask the bulk of the questions. 

The U.S. Chamber of Commerce sent a representative to make outrageous claims about the lack of need for amendments as well as the impact the amendments would have on businesses. 

The Department of Justice sent Michael Hertz to represent the position that while DOJ supported the proposed changes for conspiracy, overpayments, waiver, clarifying the statute of limitations, relation back, and changes in the CID authority, it was opposed to allowing government employees to be whistleblowers. 

An actual relator, Tina Gonter, testified before the committee.  Her testimony seemed to undermine most of the U.S. Chamber of Commerce’s positions with actual experience in a lawsuit.  Judge John Clark also testified in support of the amendments and countered most of the proposed opposition arguments. 

There is no crystal ball concerning what will happen from these hearings.  However, it appeared from the comments of the Senators that they were unified on both sides of the isle to resolve problems that courts have created for what they saw as the intent of the 1986 amendments and the best use of the False Claims Act to recover taxpayer monies. 

Yesterday, in U.S. v. Rogan, 2008 U.S. App. Lexis 3508 (7th Cir. Feb. 20, 2008), Chief Judge Easterbrook of the Seventh Circuit wrote a unanimous opinion addressing materiality and three damage issues that FCA defendants have been pushing all over the country.  Coming from a paragon of the University of Chicago with its world renowned economic analysis of the law, the materiality and damage analysis is very persuasive and poignant. 

The case involves an FCA action by the U.S. against the manager (and financial beneficiary) of a company involved in illegal kickbacks for referring Medicare and Medicaid patients.  Rogan wanted to expand the materiality aspect of the FCA to require live testimony from a government employee “that the government was sure to enforce the statute.”  The Court rejected the expansion because it undermined the point of the statute, which was to protect against gullible, careless, overworked, harried, or inattentive government employees. 

The Court in error next suggested that reliance is an element of an FCA case, but made it indistinguishable from the materiality requirement. 

Defendants are wont to argue that while they do not qualify for payment, because services were rendered for which payment would have been made under other circumstances, the government is not damaged in the value of the services.  This issue should have been foreclosed by Peterson v. Weinberger, 508 F.2d 45, 52-53 (5th Cir.), cert. denied, 423 U.S. 830 (1975), but FCA defendants continue to argue some variation of this.  The unanimous panel completely rejected this argument as Medicare and Medicaid are not payments for services, but rather subsidies for patients.  Moreover, when the conditions of payment are not satisfied, the entire amount of money received must be paid back. 

The Court also allowed for statistical analysis–rejecting the argument that every element be proven for every claim.  The Court properly saw this as a “formula for paralysis.” 

 Finally, the Court passes on the issue of excessive fines, but provides some indication of where it will go on the Amerigroup appeal.  The opinion starts properly with the suggestion that the excessive fines clause might well not apply to civil actions under the FCA.  The opinion also properly focuses on the conduct that is penalized.  The third promising part of the analysis is that it indicates that there is a deference to Congress’s assessed penalties (as opposed to ad hoc jury assessments).  Indeed, the Court proposes, in the frame of economic analysis, that because this type of fraud is so hard to detect, the penalty might very well be too low.  However, the Court does seem to get confused by mentioning the Supreme Court’s analysis of proportionality of punitive damages under the Fifth Amendment, since the excessive fines comparative is to the category of bad acts assessed by Congress and not to the individual damages proven at trial (as in a punitive damages case). 

Today, an unpublished opinion by the Eleventh Circuit was picked up and electronically circulated by LexisNexis.  In the case, Mitchell v. Beverly Enterprises, Inc., Civil Action N0. 07-12055, 2007 U.S. App. Lexis 21794 (11th Cir. Sept. 7, 2007), there is a very short per curiam affirmance of a lower court’s dismissal on Rule 9(b). 

Citing to its own breathtakingly bizarre precedents introducing the substantive Rule 9(b) to the FCA context, Clausen and Corsello, the Eleventh Circuit summarily affirms the lower court’s decision.  Even though the complaint alleges that the Relator observed and participated in the billing process, even though the complaint alleges billing procedures that take the information and pass it thorugh to bills to Medicare without alteration, and even though in Clausen where this entire mess began the Court said that this type of indicia of reliability of the claim that bills were submitted would be enough (and specifically mentioned billing policies), this case was summarily dismissed. 

The disingenuous nature of the substantive Rule 9(b) cases as applied to the various complaints is found in the final paragraph of the opinion.  “[W]e agree with the district court that Mitchell did not assert that Beverly actually submitted false clalims to Medicare with sufficient particularity and the required reliability to meet the standard under Rule 9(b) for complaints under the False Claims Act.”  (emphasis added).  In other words, because the plaintiff failed to present proof of the “assertion” in the complaint, it wasn’t “specific” enough.  For fifty years, plaintiffs were expressly protected from having to prove their case at the pleading stage.  Now, without proof of the most elusive allegation in the complaint, they are summarily discharged.