Articles Posted in Court Decisions

Lady JusticeIn a decision handed down on July 26, 2012 in WEC Carolina Energy Solutions, LLC v. Miller, the United States Court of Appeals for the Fourth Circuit ruled that the Computer Fraud and Abuse Act (“CFAA”), a federal law which primarily consists of criminal penalties directed at computer hackers, does not apply to employees who capture electronic information from computers to which their employers allowed them access in the course of their employment. The ruling is an important victory for all whistleblowers who seek to gather evidence of fraud or other illegal conduct on the part of their employers. While the CFAA is primarily a criminal statute, it allows the victims of computer hacking to privately seek injunctive and monetary relief.

The facts of the Miller case involve allegations of unfair competition rather than whistleblowing. Nonetheless, the decision will have  very important implications for whistleblowers gathering data to document fraud. In Miller, an employee of WEC Carolina Energy Solutions, Mike Miller, resigned his post and accepted an offer from a competitor; allegedly, Miller shared WEC proprietary information at the behest of the competitor firm. WEC sued for, inter alia, violating the CFAA. The relevant statutory language states that a CFAA violation occurs when information is taken from a computer “without authorization.” In 2007, the Chicago-based Seventh Circuit held that an employee who erased information on a company laptop prior to returning it breached a duty of loyalty to the employer, terminating the relationship upon which the “authorization” of use of the computer was based. An en banc panel of the Ninth Circuit, however, held just this year that “without authorization” should be interpreted narrowly in a manner consistent with the plain meaning of the statute. According to the Ninth Circuit’s reading, “without authorization” means that the employee did not have permission to use the computer from which the information was taken. With its ruling in Miller, the Fourth Circuit joins the Ninth in adopting the narrower reading of the “without authorization” language of the CFAA.

Whistleblowers in the Ninth and Fourth Circuits  are thus able to utilize information obtained from their former employers’ computers so long as they had authorization, without fear of liability under the CFAA. Because fraudulent conduct is highly difficult for investigative authorities to detect, the government often relies on information from whistleblowers in prosecuting fraud claims. Under the qui tam provisions of the False Claims Act (“FCA”), a federal whistleblower statute, private whistleblowers (known as relators) may sue on behalf of the government for fraudWhen a relator files an FCA complaint, the government reviews the allegations and may elect to intervene in the litigation. Whether or not the government intervenes, relators may bring their claims privately. If successful, relators stand to recover between 15% and 30% of any final judgment or settlement. Individuals and contractors face FCA liability when they knowingly or recklessly submit false claims for payment to the government or fail to return overpayments from the government. Passage of the Fraud Enforcement and Recovery Act (FERA) in 2009 and the Dodd-Frank Bill and the Patient Protection and Affordable Care Act (PPACA) in 2010 have resulted in major changes to the FCA. Taken together, the recent changes to the law have increased the number of actionable claims under the FCA and strengthened the law’s protections against employer retaliation.


Supreme Court PillarsIn an opinion released on July 12th in  United States ex rel. Osheroff v. Tenet Healthcare Corporation, the United States Federal Court for the Southern District of Florida rejected an argument that facts and information disclosed online constitute a “public disclosure” for the purposes of the False Claims Act (“FCA”).

The False Claims Act is a federal whistleblower statute that allows private whistleblowers (known as “relators”) to sue on behalf of the government for false claims submitted to the government in connection with payment. In many cases, a claim is false because submission of the claim impliedly certifies compliance with other federal laws; therefore, a claim submitted by an individual or corporation that is not in compliance with other federal laws can be a false claim resulting in FCA liability. In the Osheroff case, a relator alleged that Tenet Healthcare Corporation and related companies leased offices to referring physicians at below-market rates in violation of the federal Anti-Kickback Statute (AKS) and the Stark Law. Thus, Medicare and Medicaid claims submitted by Tenet for services rendered to patients referred by said physicians would be false claims in violation of the FCA.

Tenet argued in its motion to dismiss that because the relator’s complaint was based upon online real estate information initially disclosed by the news media, the claim was barred by the statute’s public disclosure bar. The court was unpersuaded by this argument, reaffirming that the plain language of the public disclosure bar does not preclude the claim. The relevant language of the statute precludes “an action based upon the public disclosure of allegations or transactions…” Thus, public disclosure of mere information does not bar a complaint under the FCA. As the court observes: “Relator’s action is based upon an alleged fraud that was first discerned through Relator’s synthesis and analysis of otherwise apparently innocuous, garden-variety real estate/financial information…”

Court ReportersOn June 22nd, the United States Court of Appeals for the Sixth Circuit affirmed the decision of a federal district court to deny motions to direct a verdict or, alternatively, order a new trial. The trial court awarded damages for a retaliation claim filed under the False Claims Act (“FCA”).

In November of 2004, Mark Thompson, a former CEO at Monroe County Medical Center (MCMC), a health care facility managed by Quorum Health Resources, LLC, filed a lawsuit in which he alleged that Quorum had defrauded the federal government’s Medicare program by unnecessarily driving up costs by improperly selecting hospital vendors and group purchasing organizations (GPOs). According to Thompson, about a month after learning of the FCA complaint, Quorum terminated Thompson’s employment. Thompson then amended his initial complaint to allege retaliation. Quorum’s stated reason for firing Thompson was failure to comply with the company’s code of conduct by reporting the concerns of fraud when they initially arose. Thompson argued, meanwhile, that Quorum’s stated reason for the termination was mere pretext for an improper retaliation on the basis of protected conduct, namely, filing a claim under the FCA. After a jury verdict in Thompson’s favor on the count of retaliation, the court awarded damages of nearly $1 million. Quorum made a motion for a judgment as a matter of law  and, alternatively, for a new trial. Both motions were denied.

On appeal, Quorum argued that the district court erred by admitting testimony about the allegations of fraud contained in Thompson’s initial complaint but disallowing testimony that the government failed to intervene. The Sixth Circuit held, in an unpublished opinion, that the testimony concerning the fraud was relevant because Thompson needed to show that Quorum was committing such fraud and failed to conduct a sufficiently thorough investigation. Such evidence was relevant to rebut Quorum’s assertion that Thompson failed to comply with the company’s code of conduct. The Cincinnati-based federal appeals court thus affirmed the district court’s denial of the motions.

Law LibraryIncreased attention in recent years on fraud and abuse in the arenas of lending and finance has led to a burgeoning wave of litigation and recoveries under the federal False Claims Act (“FCA”). In its recent opinion handed down on June 18th, 2012, United States ex rel. Oberg v. Kentucky Higher Educ. Student Loan Corp., the United States Court of Appeals for the Fourth Circuit joined the Ninth, Fifth, and Tenth Circuits in an opinion that may have important implications for whistleblowers seeking to file claims under the Act.

Although the False Claims Act contains two procedural hurdles, a first-to-file bar and a public disclosure bar, a host of amendments to the FCA have served to increase whistleblowers’ access to the courts and to facilitate the successful prosecution of more cases. Under the qui tam provisions of the FCA, private whistleblowers (known as relators) may sue on behalf of the government for fraud. The Fourth Circuit opinion in Oberg, however, addressed an even more fundamental question: what constitutes a “person” subject to suit for the purposes of the FCA? States are immune from liability under the statute, but courts have been asked to decide the question of whether or not certain government-owned corporations are subject to sufficient government control to be considered entities immune from suit. In the Oberg case, the qui tam suit was brought by Dr. Jon H. Oberg, a former researcher with the U.S. Department of Education who alleged that several student lenders submitted fraudulent claims to the federal government, resulting in $1 billion in excess subsidies.  The defendants, who according to the Fourth Circuit opinion are “corporate entities created by their respective states to improve the availability of higher educational opportunities by financing, making, and/or guaranteeing student loans,” claimed immunity from suit as “state agencies.” Oberg, on the other hand, argued that any corporation, state-affiliated or not, is a “person” subject to suit under the FCA.

The Fourth Circuit reversed the finding of a federal district court in favor of the defendants, holding that the lower court must engage in an “arm of the state” analysis under the Eleventh Amendment (which has been interpreted to grant sovereign immunity to the states).  Such an analysis would consider several factors, including whether any judgment against the entity would be paid by the state, the degree of autonomy exercised by the entity, whether the entity is involved with state concerns as opposed to non-state or local concerns, and how the entity is treated under state law. After Oberg, the Fourth Circuit joins a growing consensus among circuit courts that entities with only highly attenuated links to state or federal government may not raise the shield of immunity as a defense to liability under the FCA.

200352787-001Yesterday, the United States Supreme Court voted to uphold the Patient Protection and Affordable Care Act (“PPACA”), the landmark health reform law enacted in 2010. The justices’ ruling in National Federation of Independent Business v Sebelius leaves intact nearly all of the provisions of the law (with the exception of an expansion of the Medicaid program), including a series of amendments to the False Claims Act (“FCA”) that entailed both procedural and substantive changes to the statute. In the wake of the Supreme Court decision, a review of the 2010 amendments to the FCA put into effect under the PPACA will help relators to understand the direct import of the landmark health care case to the likelihood of pressing ahead with a qui tam action under the FCA.

The FCA is a federal whistleblower statute that was passed in 1863 to mitigate the adverse impact of war profiteering on the federal treasury. The Act’s qui tam provisions allow whistleblowers (known as relators) to sue on behalf of the government for alleged fraud perpetrated against the government. At the heart of a successful qui tam action under the FCA is the submission of a “false claim” to the federal government, which typically involves false representations made in connection with payment from a government program or payment for performance under a contract with the government. In 1986, the Act underwent significant changes that widely expanded the number of actionable claims and lowered the barriers for relators to receive monetary awards for their participation in qui tam lawsuits. The statute allows the government to intervene in an action filed by a whistleblower, but even if the government does not intervene relators may proceed privately with their claims. Successful relators may recover between 15% and 30% of any settlement or final judgment.

In 2009, Congress passed the Fraud Enforcement and Recovery Act (“FERA”), a bill written to counteract the decisions of many federal courts to interpret the FCA in a narrow fashion that limited the types of fraud that gave rise to a qui tam suit. FERA was passed at the height of the financial crisis in 2008 in order to address the sorts of financial, securities, and mortgage-lending fraud that contributed to the panic. In 2010, the PPACA made several important changes to the FCA:

Pill Bottle MoneyThe U.S. Supreme Court has agreed to hear a challenge to the Ninth Circuit’s recent ruling in a securities fraud class action lawsuit against Amgen Inc., the world’s largest biotechnology company. In the shareholder action, investors in Amgen have alleged that the company misrepresented safety concerns surrounding two of its products, the anemia drugs Aranesp and Epogen, in order to bolster its stock price. According to the investors’ lawsuit, the alleged misrepresentations took place over a period of three years. The Ninth Circuit Court of Appeals sided with the investors, who seek to be certified as a class of plaintiffs in order to aggregate their claims for damages suffered as a result of a precipitous decline in Amgen’s stock price. In the Ninth Circuit appeal, Amgen argued  the investors must demonstrate that the alleged misrepresentations caused the change in share price; the judges disagreed, finding that, if the other requirements for class certification are met, evidence regarding share price need not be presented until trial.

Circuit courts have issued conflicting decisions on this particular issue. The Second Circuit, based in New York, has held that investors must show that the fraud is causally linked to the change in stock price before a judge may certify a class; the Philadelphia-based Third Circuit found that such evidence was not necessary for class certification (although an affirmative showing that the alleged wrongdoing had no effect on trading, according to the Third Circuit’s ruling, would be sufficient to defeat class certification). The controversy comes on the heels of a Supreme Court decision, issued last year, in which the Court ruled that a group of investors could sue Halliburton Co. as a class without first showing that they lost money due to the alleged fraud. Investors in the Amgen case were led by Connecticut’s public employee pension plans.

Individuals may take action to combat fraudulent and abusive practices outside of the context of shareholder class action lawsuits. The False Claims Act, a federal qui tam whistleblower statute, allows private whistleblowers (also called relators) to sue on behalf of the government for false claims made in connection with receipt of government payments or avoidance of liability to the government. The government may elect to intervene in a whistleblower’s claim, but does not always do so, and whistleblowers may proceed with their claims irrespective of government intervention. The False Claims Act also provides employees protections from retaliation by their employers for taking efforts to stop violations of the Act. While the law initially required that a false claim be made directly to the government, a 2009 amendment to the statute has expanded the Act’s coverage to include false claims made to third parties, such as grantees or other beneficiaries of federal money. Relators may recover between 15% and 30% of any settlement or final judgment.

First Amendment challenges to the FDA’s off-label promotion ban are hardly novel, however case law in this area remains relatively unsettled. Drug makers initially rejoiced with the ruling in Washington Legal Foundation, however the case was later vacated.  Case law now appears to be more settled in the wake of Caronia.

First amendment contests are usually brought as either defenses to off-label prosecutions (as in Caronia) or by advocacy groups and drug companies seeking injunctive relief (Washington Legal Foundation). Continue reading ›

The Ninth Circuit became the latest in a handful of other Circuits to endorse the “implied certification theory” of the False Claims Act in a decision handed down on August 9th.  Liability under the FCA is most clear when a defendant falsely obtains money from the government by “expressly” certifying compliance with federal regulations.  However, the question of whether a defendant can be liable for “impliedly” certifying compliance with federal law – such as by simply submitting a claim for reimbursement from Medicare – is much more debatable. Continue reading ›

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