Ninth Circuit Narrows the Public Disclosure Bar for Whistleblowers

BU009443In a far ranging decision, the Ninth Circuit held that whistleblowers need only meet two requirements to be considered an “original source” under the False Claims Act (FCA). First, the whistleblower must inform the government of the alleged fraud voluntarily. Second, the whistleblower must have “direct and independent knowledge” of the alleged fraud. The courts restatement of the original source requirement means that whistleblowers who have participated in the public disclosure of fraud are not automatically barred from bringing a FCA suit. This decision reversed the district court’s earlier ruling in United States ex rel. Hartpence v. Kinetic Concepts, Inc., which had dismissed the plaintiffs claim under the public disclosure bar. In a less surprising ruling, the Ninth Circuit also held that the district court erred when finding that the plaintiff would have also been dismissed under the first to file bar.

In describing the fraud scheme, the whistleblowers alleged that their employer had defrauded the government by sending false reimbursements claims to Medicare. Defendants in the case were Kinetic Concepts, Inc. and KCI USA, Inc., referred to collectively as KCI. KCI created medical devices that increased a patient’s ability to heal from wounds. These devices are covered under the Medicare program and considered “durable medical equipment”. When a manufacturer submits a claim for reimbursement for their devices, an initial determination is made by Medicare which determines if the cost of the device will be reimbursed.

The plaintiffs allege that KCI committed fraud by submitting reimbursement requests with false billing codes for their devices. The billing codes used by KCI were selected because they met Medicare’s standards for durable medical equipment, but these billing codes were improper when compared to the actual use of the KCI devices. The reimbursement payments were improper for a number of reasons such as: the device being ineffective, use of the device not being reasonable, missing documentation, falsely stating the device was assisting the patient, and using the device on wounds that were too small to warrant such use.

The whistleblower, Steven Hartpence, learned of the allegedly fraudulent conduct during his employment with KCI as the Director of Medicare Cash and Collections. Hartpence then filed a FCA lawsuit against KCI, alleging that KCI used false billing codes with Medicare so that payments would be reviewed automatically, instead of using the correct billing codes which would have triggered the individual review of each claim. The defendants moved to dismiss the case, claiming the plaintiff failed the original source requirement. This claim was possible because during the trial court phase, the underlying facts of the claim were made available to the public through a federal audit report. The plaintiffs thus failed the original source requirement because they took no part in this initial public disclosure of the alleged fraud. Prior precedent in the Ninth Circuit stated that the original source requirement was not met when a FCA suit is based on the same information already disclosed to the public. Following this precedent, the trial court dismissed the claim. The district court held further that even if Hartpence had been able to pass the original source bar, he would have failed the first to file bar.

The Ninth Circuit reviewed the district court’s interpretation of the FCA de novo, reversing the dismissal of the district court on appeal, holding that the original source exception does not require the whistleblowers to have had a “hand in the public disclosure”. The court found no support for this “hand in” rule when examining the statutory language of the FCA. In doing so the Ninth reversed its own precedent set in Wang v. FMC Corporation, and resurrected two prior FCA cases. The court also reversed the first to file decision, finding the underlying facts of each whistleblowers claim to be sufficiently different.

The effects of this case will be limited to pre 2010 claims, as the statutes examined by the court were prior to the 2010 amendments to the FCA. Going forward, pre 2010 claims will face a much narrower public disclosure bar, allowing more whistleblowers to bring claims forward. This decision dramatically increases the availability of original sources that qualify under the original source requirement.

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