The Supreme Court issued a number of headline-grabbing decisions this term on topics like religious accommodation, LGBTQ protections, and consideration of race in college admissions. These decisions are wide-reaching and impact individuals, employers, and higher education institutions. Though not nearly as wide-reaching, the Supreme Court also issued two important decisions this year dealing with the False Claims Act (FCA) that could have dramatic impact nonetheless for those ensnared in an FCA action.
First, the highest court settled a multi-circuit split on whether and when the United States can seek dismissal over the relator’s objection. In United States ex rel. Polansky v. Executive Health Resources, the Court agreed with the Third Circuit that the United States may seek dismissal of an FCA case over the relator’s objection, so long as it has intervened, whether during the seal period or later on, and so long as the motion to dismiss complies with Federal Rule of Civil Procedure 41(a). The relator must also receive notice and opportunity to be heard, although that doesn’t appear to mean much because the Court made it clear the Government’s views in an FCA case are entitled to substantial deference. The Court explained that if the Government offers a reasonable argument for why the burdens of continued litigation outweigh the benefits, the court should grant the motion, even if the relator presents a credible assessment to the contrary. In other words, so long as the Government intervenes, checks the Rule 41(a) boxes, and the relator gets notice and an opportunity to be heard then a tie as the benefits and burdens goes to the Government. Whether and how often the Government will flex this muscle remains to be seen, but Polansky settles the questions on when and how the Government can seek dismissal over the relator’s objection.
Second, as previously described here, in its combined decision in United States ex rel. Schutte v. SuperValu, Inc. and United States et al. ex rel. Proctor v. Safeway, Inc., the Court held that the scienter element in an FCA case turns on a defendant’s contemporaneous subjective belief about whether its claims were inaccurate, when the affected agency has not issued authoritative guidance as to the law’s proper interpretation. This is a sea change, and not in a good way for FCA defendants. Up to this point, the Seventh Circuit and other courts have held that scienter is not established when a defendant’s actions under an ambiguous regulation were consistent with an objectively reasonable standard, regardless of what the defendant itself may have believed at the time. In practical terms, SuperValue means an FCA defendant may have to produce evidence of their subjective intent or belief about whether their claims and possibly certifications of compliance were accurate, and this could limit the opportunities for dismissing a complaint at the pleading stage.
A handful of FCA circuit court decisions issued in 2023 are noteworthy as well.
In U.S. ex rel. Piacentile v. U.S. Oncology, Inc., the Second Circuit affirmed dismissal of a FCA suit on jurisdictional grounds, applying the pre-2010 version of the public disclosure bar. The decision in and of itself is not widely impactful considering fewer cases these days will involve pre-2010 conduct, but it serves as a good reminder that the 2010 amendment to the public disclosure bar does not apply retroactively. Thus, in cases involving pre-2010 conduct, relators must still have firsthand knowledge to qualify as an original source. This point is driven home in Piacentile, where relators alleged that a pharmaceutical company paid illegal kickbacks to oncologists to encourage their use of the company’s drugs over competitors. The district court found three prior lawsuits predated the relators’ lawsuit and disclosed the same scheme. The Second Circuit affirmed, agreeing there was no requirement that the exact defendant have been named in those prior suits for the public disclosure bar (a jurisdictional bar under the pre-2010 version of the FCA) to apply. The Second Circuit also agreed the relators did not meet the exception to the bar because they were not original sources; rather, their knowledge of the alleged scheme was second-hand, not direct and independent. Importantly, in 2010, Congress relaxed the original source exception such that, going forward, relators who even materially add to the publicly disclosed allegations can qualify, even if they did not directly obtain the information. The case is a solid reminder that ensuring the right version of the FCA’s public disclosure/original source standard is being applied might make the difference between dismissal or not.
The Fifth Circuit reaffirmed its application of the McDonnell Douglas burden shifting framework when it affirmed summary judgment for the defense in an FCA retaliation action. In United States ex rel. Toledo v. HCA Holdings, et al., the relator filed retaliation claims under the FCA against her former employer and its corporate affiliate. Under the Fifth Circuit’s burden shifting framework, the employee must first establish a prima facie case of retaliation by showing: (1) she engaged in protected activity; (2) the employer knew about the protected activity; and (3) she suffered retaliation because of the protected activity. The relator claimed to have engaged in numerous instances of protected conduct when she complained to various employees about what she characterized as fraud in her lawsuit. The court assumed she did engage in some protected conduct, but the undisputed evidence showed the relevant decisionmakers were unaware of such conduct, and such conduct did not contribute to her termination. Importantly, although the court assumed the relator engaged in some protected activity, the court found that in many of her communications she, at most, characterized discrepancies in therapy documentation as mistakes or possible computer glitches, not fraud. Therefore, the court noted, such communications were insufficient to alert anyone to allegedly protected conduct, particularly given her job responsibilities included assuring accurate documentation of therapy minutes.
Another noteworthy FCA decision is out of the Sixth Circuit. The Sixth Circuit applied tight reigns in deciding an FCA case based on an alleged violation of the Anti-Kickback Statute (AKS). In United States ex rel. Martin v. Hathaway, the only eye center in a small town convinced the only local hospital not to hire an ophthalmologist because doing so would negatively impact patient referrals going both ways. The employment negotiations ended, and the ophthalmologist sued. She claimed the real reason the hospital did not hire her was the threatened loss of referrals and that the eye center and hospital were engaged in an illegal fraudulent scheme under the AKS in violation of the FCA.
The Sixth Circuit agreed with the district court’s dismissal and finding that the amended complaint had two legal flaws. First, the court agreed that “remuneration” under the AKS covers just payment and other transfers of value, not any act that may be valuable to another. The court reasoned the decision not to hire the ophthalmologist did not entail a payment or transfer of value to the eye center owner. The decision may have benefited him, but the hospital never offered him anything at all. The hospital simply left things where they were. The Sixth Circuit further agreed the amended complained faced another problem: neither the hospital nor the eye care center’s owner submitted claims for Medicare or Medicaid reimbursement for items or services “resulting from” the AKS violation. As such, the complaint failed to plausibly allege but-for causation. In so holding, the court aligned itself with the Eight Circuit rather than the Third Circuit’s more relaxed causation approach. Circuit splits often make their way to the United States Supreme Court so this is an area to watch.
Finally, in U.S. ex rel. Gharibian v. Valley Campus Pharmacy, Inc., the Ninth Circuit affirmed dismissal of an FCA case for failure to state a claim, reiterating the importance of Escobar and the requirement of materiality. The relator sued several pharmacies claiming they instructed their employees to misrepresent who they worked for when seeking medication prior authorizations and by falsifying patient records to procure prior authorization. The Ninth Circuit agreed with the dismissal because, for all but two allegations, the amended complaint merely pled on information and belief that the defendants made false statements to government payors (as opposed to private insurers), and the allegations did not include allegations of materiality. Relying on Escobar,the Ninth Circuit agreed that the pleading failed to plausibly plead materiality. It failed to allege that payors would have refused to pay had they known the prior authorizations were from a pharmacy rather than a provider. Indeed, the relator had no authority showing the provider had to be the one to contact the payor, and the court noted that Medicare regulations appear to contemplate that individuals other than physicians or their representatives would be the ones obtaining prior authorizations on behalf of patients.
Edited with the assistance of Winston Bribach, a summer associate in the Husch Blackwell LLP Austin office.