Articles Posted in Court Decisions

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Stethoscope-2-300x199A midwest healthcare provider agreed to resolve False Claims Act allegations brought by two whistleblowers for $18 million dollars.

The plaintiffs in the qui tam case were former employees of the company. Evercare, now known as Optum Palliative and Hospice Care, is a Minnesota-based provider of hospice care in Arizona, Colorado, and other states across the United States.

The False Claims Act (“FCA”) allows the government to recover damages and penalties of three times those damages. The fraudulent government contractor is also hit with an $11,000 penalty per false claim.  Last November, those penalties per claim will raise to nearly $22,000.

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A long awaited Supreme Court decision that held major implications for False Claims Act litigants was handed

New-York-City2down this week. On Tuesday, the United States Supreme Court upheld a jury verdict that found State Farm Insurance Company (“State Farm”) defrauded a federal flood insurance program to avoid paying a homeowner’s insurance claim in the wake of Hurricane Katrina.

The False Claims Act (“FCA”) is a law Congress adopted to expose rampant fraud among contractors supplying the Union Army during the American Civil War. Frauds included businesses that sold guns that did not shoot and boots that fell apart after a day’s use. The statute encourages private parties, (“whistleblowers”) or (“relators”), with knowledge of fraud to file suit and collect a share of the government’s recovery.

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Hedge-Fund-Office-Building-150x150The Second Circuit Court of Appeals recently limited the enforceability of employment separation agreements that seek to ban would-be whistleblowers from filing claims against their former employers. In U.S. ex rel. Ladas v. Exelis, Inc, et al., the Court held that broad lawsuit release provisions in employment separation agreements, which are increasingly common in the corporate sphere, cut against public policy by discouraging the filing of qui tam suits to uncover fraud against the government.

False Claims Act (“FCA”) Whistleblower Michael Ladas was the Director of Quality at Power Solutions. In 2005, Power Solutions entered into a contract with the U.S. Government to provide power supply devices. During this time, as Director of Quality, Ladas was responsible for ensuring production compliance with government contracts, product testing, and documenting and reporting manufacturing defects in Power Solutions’ products.

During Ladas’ employment as Director of Quality, Power Solutions entered into a subcontract with Innovative Mold Solutions (“IMS”), where IMS manufactured casing components for Power Solutions’ products. In November 2007, without alerting Power Solutions or the government, IMS made substantial changes in the manufacturing of its power supply case components, using a significantly less expensive adhesive material and considerably changing the process it used to apply that material. An engineering professor employed by Power Solutions alerted Ladas that a change in application method would require significant additional testing to ensure the casing’s reliability and durability; but neither IMS nor Power Solutions put the casing through additional testing, and the changes were not submitted to the government for approval.

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The Fifth CiNew Orleans (Post-Katrina)rcuit reversed the decision of the district court, which had ruled that further discovery was prohibited by Rule 9(b) of the False Claims Act (FCA). The holding will allow whistleblower’s Cori and Kerrri Rigsby to continue searching for fraud committed by State Farm Fire & Casualty Co. against the government. In the initial claim, a jury had found State Farm Fire guilty of violating the FCA when it defrauded the National Flood Insurance Program (NFIP) after the destruction created by Hurricane Katrina. The Court emphasized that future discovery decisions should be decided by examining the unique facts of each case along with an attempt to strike a balance between the whistleblower’s interest in finding additional fraud claims and the defendant’s interest in limiting the costs of the discovery process. Continue reading

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On Tuesday, the Supreme Court decideSupreme-Court-300x198d unanimously on two issues: first, that the Wartime Suspension of Limitations Act (WSLA) applies only to criminal charges and not to civil claims; second, that the first-to-file bar does not apply to new claims once a previous claim has been dismissed. The suit brought forward by whistleblower Benjamin Carter against Kellogg Brown & Root Services, Inc. (KBR) alleged that KBR had fraudulently billed the Government for work they did not perform during the Iraq War. The Court’s holding will in some circumstances reduce the amount of time whistleblowers have to bring a claim under the False Claims Act, but will also allow whistleblowers to bring new claims that contain similarities to prior dismissed suits. Continue reading

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Loan-Application-199x300Moving Water Industries Corporation (“MWI”) has asked the D.C. Circuit to reverse a finding that it violated the False Claims Act in connection with its securing of $74.3 million in loans to fund Nigeria’s purchase of its pumping equipment. The violations were a result of the certifications made by the company to the U.S. Export-Import Bank that stated that MWI had only paid “regular commissions” in connection with the pump sales. In reality, however, MWI paid commissions exceeding 30% to its Nigerian sales agent. The company is now claiming that the trial court erred in finding that the Bank had provided fair notice of the government’s interpretation of “regular commissions.” On a cross appeal, the government is arguing that the trial court erred in finding that the borrowers repayment of the loans in an amount exceeding $22.5 million entirely discharged MWI’s liability for any damages. Continue reading

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Supreme Court ColumnsOn June 12, in United States ex rel. Duxbury v. Ortho Biotech Products, the federal appeals court for the First Circuit held that the federal trial court properly limited discovery on a whistleblower’s False Claims Act allegations to only those allegations for which the relator could be deemed an “original source.” To be considered an original source under the pre-2010 version of the statute, the relator must have had “direct and independent knowledge” as to those allegations.  Although the public disclosure bar and original source exception were significantly amended in 2010 with the Affordable Care Act, the June Duxbury decision is still of import in many False Claims Act cases.

The suit was originally brought in 2003 by whistleblower Mark Duxbury against his employer, Ortho Biotech Products LP, alleging that they had offered “kickbacks” to doctors in order to generate prescriptions of the company’s anemia drug Procrit that included, inter alia, free products, rebates, educational grants, and payments to participate in studies or drug trials. Duxbury’s complaint alleged that his employer had engaged in “a common nationwide scheme” to induce Medicare providers to submit fraudulent claims for Procrit between 1992 and 1998. Despite this, the federal trial court limited discovery to approximately seven months between late 1997 and early 1998. Allegations of conduct prior to 1997 were barred by the FCA’s statute of limitations and those made after early 1998 were barred by Duxbury’s unrelated termination that consequently discontinued his direct and independent knowledge. Also applying this direct and independent knowledge standard, the federal trial court further limited the scope of discovery to the claims attributable to western sales territories; the locations that encompassed Duxbury’s sales area during his was employment with Ortho Biotech. In upholding the federal trial court’s discovery limitation, the federal appeals court concluded that Duxbury could not undertake discovery akin to a “fishing expedition”.

The False Claims Act is a federal statute dating back to 1863 that allows whistleblowers (also known as relators) to sue on behalf of the government in response to a false claim for payment. In 1986, Congress amended the Act and redesigned the public disclosure bar and original source exception in an attempt to encourage whistleblowers to come forward and limit claims to those most likely to be meritorious. Subsequently, in 2010, the original source exception was expanded to include a party that had disclosed the information to the government before the public disclosure was made, or to a party that had knowledge independent of the disclosure that “materially adds” to the disclosure and is provided to the government before the party files suit.

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Court ReportersIn United States ex rel. Nathan v. Takeda Pharmaceuticals, an opinion handed down by the United States Court of Appeals for the  Fourth Circuit on January 11th, 2013, the Court upheld a restrictive view of the Rule 9(b) pleading standard as applied to claims brought under the False Claims Act. The Court held that a qui tam relator must allege details pertaining to specific false claims submitted to the government in order to survive a motion to dismiss. In so doing, the Court rejected the more flexible approach to application of the 9(b) pleading standard adopted by the Fifth Circuit in United States ex rel. Grubbs v. Kanneganti (2009) and (implicitly) by the Eleventh Circuit in U.S. ex rel. Walker v. R&F Properties of Lake County, Inc., furthering a circuit split that will not be resolved unless and until the Supreme Court has occasion to decide the question in future litigation.

The False Claims Act, 31 U.S.C. § 3729 et seq., is a federal statute that prohibits individuals and companies from presenting (or causing to be presented) false claims for payment to the United States government. Enacted in 1863 to deter fraud by private contractors against the Union Army, the law has evolved into a capacious vehicle through which the government protects the Treasury and combats fraud. Successive amendments to the statute, including passage of the Fraud Enforcement and Recovery Act in 2009, the Dodd-Frank Wall Street Reform  Act in 2010, and the Patient Protection and Affordable Care Act (“PPACA”) in 2010, have enhanced the tools at the government’s disposal and expanded the ambit of conduct actionable under the Act. In furtherance of the statute’s remedial purpose, the law contains qui tam provisions which allow private whistleblowers, referred to as relators, to file complaints under seal. While a qui tam complaint is under seal, the allegations are disclosed to the government, which then investigates the claim and makes a determination as to whether or not the United States will exercise its right to intervene in the litigation.

As is the case with all federal statutes (especially those involving suits between private parties), the task of interpreting its provisions and fashioning procedural rules governing litigation under the False Claims Act is incumbent upon the federal courts. Of particular interest to relators filing claims under the False Claims Act is the pleading standard governing the sufficiency of a qui tam complaint. Although most types of legal claims in federal court are subject to the relatively liberal pleading standard set forth in Rule 8(a) of the Federal Rules of Civil Procedure, requiring a “short plain statement” describing the claim for which relief is sought, Rule 9(b) requires that claims of fraud be pleaded with “particularity.” Specifically, Rule 9(b) says that a party alleging “fraud or mistake must state with particularity the circumstances constituting fraud or mistake.” Consequently, the federal appeals courts have had little difficulty holding that the heightened pleading requirement of Rule 9(b) applies to qui tam complaints and government prosecutions under 31 U.S.C. § 3729 (a) (1-3). Because the Supreme Court has limited the application of Rule 9(b) to those causes of action enumerated in the rule itself, the heightened pleading standard does not apply to other claims under the False Claims Act (as the Ninth Circuit held, for example, in Mendiondo v. Centinela Hospital Medical Center, 521 F.3d 1097 (2008)).

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FDA approvedA recent opinion handed down by a panel of the United States Court of Appeals for the Second Circuit in U.S. v. Caronia has raised serious questions about the constitutionality of criminal prosecutions for illegal promotion of drugs under the Federal Food, Drug, and Cosmetic Act (“FDCA”), a statute which many proponents of consumer protection regard as indispensable for the effective regulation of drug safety in the United States. Alfred Caronia, a Specialty Sales Consultant hired by Orphan Medical, Inc. (a drug manufacturer since acquired by Jazz Pharmaceutical) in March of 2005 to promote the drug Xyrem, was convicted on two counts of misbranding and conspiracy to misbrand under the FDCA in 2009 after a jury trial in federal district court in Long Island, NY. Caronia appealed his conviction to the Second Circuit, which has jurisdiction over the federal district courts in New York State, Connecticut, and Vermont, and the panel vacated his conviction on the grounds that criminal convictions predicated upon the “off-label” promotion of drugs (that is, promotion of drugs for indications not approved by the FDA) constitute speaker- and content-based restrictions of speech in violation of the First Amendment. The panel’s decision was 2-1, with a vigorous dissent from Circuit Judge Debra Livingston.

The text of FDCA §331(a) prohibits the “misbranding” of drugs; a drug is defined as “misbranded” if, among others, the manufacturer fails to provide adequate instructions for the intended use of the drug under §352(f). Furthermore, regulations promulgated by the FDA make clear that the government may demonstrate a drug’s intended use through evidence of statements in promotion of the drug for uses for which it is neither labeled nor advertised. Thus, when pharmaceutical representatives promote the use of a drug for indications unapproved by the FDA, the conduct is probative of misbranding in violation of the FDCA. While the federal government investigates misbranding offenses for the purposes of criminal prosecution, the practice of off-label promotion also gives rise to false claims under the federal False Claims Act. Off-label promotion was first recognized by a court as actionable fraud under the False Claims Act in 2003, when U.S. District Judge Patti Saris denied summary judgment in a False Claims Act suit alleging off-label promotion by Warner-Lambert and Pfizer. Since the novel theory was validated in 2003 (culminating in a historic $430 million settlement in 2004), off-label promotion has led to billions of dollars in recoveries for both the government and private whistleblowers filing suit under the qui tam (whistleblower) provisions of the False Claims Act. Whistleblowers (known as “relators”) who file suit under the False Claims Act may recover between 15% and 30% of any final judgment or settlement as a reward for coming forward.

Xyrem was approved by the FDA in 2002  for narcolepsy patients who experience cataplexy, a condition associated with weak or paralyzed muscles. In 2005, the FDA approved Xyrem to treat narcolepsy patients with excessive daytime sleepiness (“EDS”), a neurological disorder caused by the brain’s inability to regulate sleep-wake cycles. Xyrem’s active ingredient is gamma-hydroxybutryate (“GHB”), commonly referred to as the “date rape drug” due to its prevalence in the commission of sexual assaults, and consequently the FDA limited the drug’s approval to the two indications and required the manufacturer to place a “black box” warning on the label. A black box warning is the most serious type of warning that the FDA can mandate; among others, Xyrem’s black box warning disclaimed the drug’s efficacy in patients under 16 years of age as well as the elderly. Careful FDA regulation of potentially harmful drugs such as Xyrem is intended to ensure that consumers are not exposed to unreasonable danger from use.

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Loan ApplicationIn a decision released on August 6, 2012 in the case of United States of America v. BNP Paribas SA; BNP Paribas AMERICA; BNP Paribas Houston Agency; and Jovenal Miranda Cruz, the United States District Court for the Southern District of Texas, Houston Division allowed the government’s lawsuit alleging banking fraud under the False Claims Act (“FCA”) to move forward, denying the defendants’ motions to dismiss. The defendants, various divisions of the bank BNP Paribas (“BNPP”),  are alleged to have engaged in a scheme to defraud the Commodity Credit Corporation (“CCC”). The CCC is a federally chartered corporation within the United States Department of Agriculture (“USDA”) that administers a Supplier Credit Guarantee Program (“SCGP”), which extends credit guarantees to eligible commodity exporters.  Under the program, exporters assign to a financial institution both an importer’s promissory note and the exporter’s right to payment, and the CCC guarantees payment to the financial institution. The government’s complaint alleges that BNP, largely through the initiative of defendant Cruz, who was serving as VP and Manager of Trade Finance for BNP in Houston, entered into a series of Master Purchase and Sale Agreements (“MPSAs”) with several United States exporters pursuant to which BNPP agreed to provide financing to the Exporters in exchange for receipt of payment obligations from a series of corresponding Mexican importers and SCGP guarantees for those payment obligations. Because the exporters were owned and/or controlled by Mexican national Pablo Villareal Cantu (“Villareal”), who also owns the importers with which the exporters enter into commerce, the Villareal exporters are ineglible for participation in the SCGP program. The SCGP does not guarantee payments to exporters that are directly or indirectly owned or controlled by the foreign importer or by a person or entity that owns or controls the importer. According to the United States’ complaint, the Villareal exporters and importers submitted false documents to the CCC, as a result of which they received SCGP guarantees. Subsequently, the guarantees and importers’ payment obligations were assigned to BNPP. The arrangement provided that BNPP would extend a line of credit to the exporters up to the amount of the importer payment obligations, minus a fee. After certain importers failed to make over $78 million in payments owed to BNPP, the banks filed claims with the CCC to recover their losses. The fraudulent CCC claims are the gravamen of the government’s complaint, constituting the false claims that gave rise to liability under the FCA.

The BNPP defendants, including Cruz, filed motions to dismiss in the case, both for failure to state claims for which relief can be granted and for failure to plead fraud with particularity pursuant to Rule 9(b) of the Federal Rules of Civil Procedure. The defendants claimed that, taken on their face, the government’s pleadings affirmatively demonstrated that the FCA’s six year statute of limitations barred the claims. Moreover, the defendants argued that the three year equitable tolling period provided for in the statute did not apply. The court rejected these arguments, and additionally found that a federal law originally dating back to the World War I period, the Wartime Suspension of Limitations Act (“WSLA”), 18 U.S.C. § 3287, applied to civil claims under the FCA and thus the statute of limitations was suspended at any rate. The WSLA was amended in 2008 to apply not only during times of war, but also “‘[w]hen… Congress has enacted a specific authorization for the use of the Armed Forces, as described in section 5(b) of the War Powers Resolution (50 U.S.C. 1544(b)).'” The court’s finding on the applicability of the WSLA to civil FCA claims may be of great import to whistleblowers.

At the heart of the case, however, was the defendants’ contention that technically “true” claims submitted to the government pursuant to fraudulently-induced contracts could not constitute false claims as a matter of law. The court roundly rejected this argument, underscoring that fraudulent inducement to contract does indeed result in FCA liability. Since the exporters and importers in the BNPP case knowingly submitted false claims in order to qualify for the CCC guarantees in the first place, any claims registered pursuant to the guarantees are tainted by fraud and give rise to FCA liability.