FCA Now

Last week, the U.S. District Court for the District of New Jersey dismissed a qui tam action against Defendants Pioneer Education, LLC, Pioneer Education Manager, Inc., Jolie Health & Beauty Academy, and Joseph Visconti (collectively, “the Academy”) alleging violations of the False Claims Act (“FCA”), 31 U.S.C. § 3729-33. United States ex rel. Lampkin v. Pioneer Educ., LLC, No. 16-cv-1817, 2020 U.S. Dist. LEXIS 136022 (D.N.J. July 31, 2020). In doing so, the Court reiterated that the “rigorous” and “demanding” materiality principle post-Escobar that requires specific allegations of deception which, had the government been made aware of the misrepresentations, influenced the payment of allocated funds. See Universal Health Servs. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016). According to Relator’s Amended Complaint, there were several instances of improper administration practices occurring at the Academy, which specializes in cosmetology education and training. Relator alleged, for example, misrepresentations or “half-truths” about student attendance violations, various code of conduct infractions, and lack of satisfactory academic performance. Relator also alleged that the Academy’s failure to disclose this information established an FCA claim because the Academy was required, as an express condition of payment, to ensure adequate and efficient administration of the funds it received from the Department of Education. These misrepresentations, Relator contended, had “a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property”—triggering a FCA violation. 31 U.S.C. § 3729(b)(4). The Court disagreed. Reiterating that the FCA is “not meant to be a vehicle for punishing garden-variety breach of contract or regulatory violations,” the Court concluded the Amended Complaint failed to demonstrate how, if at all, the Academy’s purported misrepresentations were material. In particular, the Court noted that the Relator’s Complaint was completely devoid of any, much less sufficient, allegations from which a fact finder could infer that the Department of Education would have ceased payment of Title IV funds as a result of the Academy’s conduct. Nor was it enough, the Court said, that the Relator’s complaint broadly alleged that the Academy’s conduct caused the Department of Education to pay claims under Title IV that it would not have paid but for the Academy’s fraud. Instead, the Court explained, the materiality standard demands specific allegations demonstrating the alleged misrepresentations had a tendency to influence the Department of Education’s disbursement of funds. Broad, conclusory declarations without substantive details demonstrating materiality will not do. This decision once again serves as a reminder that a conclusory declaration of materiality will not suffice for purposes of stating a FCA claim. Instead, Courts will look for particular factual allegations demonstrating that a purported misrepresentation did, or was likely to, affect the recipient’s actual behavior. Moreover, the potential increase in FCA actions as a result of the billions of dollars disbursed by the government in COVID-19 relief (and often based on certifications or representations from an individual or business that they are entitled to such relief), means that courts will likely continue to regularly confront questions of materiality in the future to determine whether any alleged misrepresentations actually affected the government’s payment decisions.

Following the passage of the Affordable Care Act (“ACA”), which placed new limits on physician-owned hospitals, St. Luke’s Health System (“System”) took action to change one of its hospital’s ownership structures through a buy-out of the physicians’ partnership interests pursuant to the Texas Securities Act (“TSA”). The TSA allows rescission for the original price paid for a security, plus interest, in exchange for a release of potential liability under TSA. Three of the physician-owners, who resisted the System’s attempt to rescind their ownership interests, sued the System and other defendants in connection with the buy-out alleging state-law violations and violations of the Anti-Kickback Statute (“AKS”), 42 U.S.C. § 1320a-7b(b), the Stark Law, 42 U.S.C. § 1395nn, and by extension, the False Claims Act (“FCA”), 31 U.S.C. § 3729-3733. The district court dismissed the federal claims with prejudice. U.S. ex rel. Patel v. Catholic Health Initiatives, 312 F. Supp. 3d 584 (S.D. Tex. 2018). Relying heavily on the district court’s lengthy and thorough decision, the United States Court of Appeals for the Fifth Circuit affirmed in a nonprecedential decision. U.S. ex rel. Patel v. Catholic Health Initiatives, 2019 U.S. App. LEXIS 34741 (5th Cir. Nov. 20, 2019) (per curiam). The physician Relators first alleged that the process by which the physician-owners were bought out under the TSA resulted in payments to the physician-owners substantially above market value of their stakes in the hospital. According to the Relators, these high prices were set with the intent by the System of maintaining referral relationships with those physicians, in violation of the AKS and Stark Law. The Relators’ second alleged scheme concerned the System’s false representations to federal and state health care programs about the true ownership of the hospital. The Relators alleged that despite their retained ownership in the hospital after the partial buyout process, the System began representing to the government that the partnership was defunct and that a different entity owned the hospital. According to the Relators, this rendered the System’s representations factually false, leading to violations of both the FCA and the Texas Medicaid Fraud Prevention Act. Ultimately, the district court reasoned that while the Relators “might well have had legitimate grievances” and that the complaint had “an abundance of detail,” the claims “[did] not add up to liability under the [FCA]” because “the [FCA] ‘is not an all-purpose antifraud statue or a vehicle for punishing garden-variety breaches of contract or regulatory violations.’” U.S. ex rel. Patel, 312 F. Supp. 3d at 589 (quoting Univ. Health Servs., Inc. v. U.S. ex rel. Escobar, 136 S. Ct. 1989 2003 (2016)). “More is needed to establish that false or fraudulent claims have been made on the government.” Id. The Fifth Circuit affirmed, rejecting the Relators’ AKS and Stark Law claims because the System “had a reasonable basis to utilize the TSA approach” to try to comply with the ACA, “and nothing ties the allegedly high payment for physician shares to any inducement or referrals.” U.S. ex rel. Patel, 2019 U.S. App. LEXIS 34741, at *5. In affirming the dismissal of the FCA claims, and rather than relying on the district court’s analysis of whether the ownership representations were factually or legally false, the Fifth Circuit “conclude[d] that the alleged falsity, under the circumstances of this case, was not material.” Id. at *8. Because “[n]othing in Relators’ filings suggests that that the government would stop the flow of funds to this hospital if it knew the truth of its ownership,” and because “the System has continued to submit claims and receive reimbursement, even after a court determined that the entity designated as owner of the [h]ospital was not really the owner,” the Fifth Circuit found the alleged falsity immaterial. Id. at *9-10. “This suggests that the government does not care who the 'rightful' owner of the hospital is, and Relators have not alleged facts to the contrary.” Id. at *10. The case is another example of Escobar in action, and a reminder that FCA claims, even if very detailed with allegations of breaches of contract and regulatory violations, are unlikely to survive a motion to dismiss unless the materiality of the false claims can be established.

In recent weeks, the United States Department of Justice (“DOJ”) issued two memoranda that might change the calculus of False Claims Act (“FCA”) cases.  The memoranda at a minimum provide organizations with new—or at least invigorated—defenses to qui tam actions and civil enforcement matters. First, on January 10, Michael Granston, Director of DOJ’s Civil Frauds section, issued a memorandum encouraging DOJ trial attorneys to consider dismissing unmeritorious qui tam cases (even over the objection of the relator).  The DOJ’s authority to dismiss FCA cases has long been built directly into the governing statute, 31 U.S.C. § 3730(c)(2)(A), which provides that: The Government may dismiss the action notwithstanding the objections of the person initiating the action if the person has been notified by the Government of the filing of the motion and the court has provided the person with an opportunity for a hearing on the motion. In practice, DOJ trial attorneys rarely use this power, preferring to allow qui tam cases they declined to intervene in to continue being prosecuted by the relator.  The Granston Memo encourages a shift in practice by suggesting that DOJ attorneys should dismiss qui tam cases that lack substantial merit.  Meritless qui tam cases drain limited government resources and may “generate adverse decisions that may affect the government’s ability to enforce the FCA.”  To aid in determining whether a DOJ attorney should seek dismissal of a declined qui tam action, the Granston Memo sets forth seven factors, including curbing parasitic qui tams and preserving government resources. Second, on January 25, the Associate Attorney General (“AAG”) issued a memorandum prohibiting reliance on government agency “guidance documents” as a basis for liability in DOJ affirmative civil enforcement matters—including FCA cases.  Such “guidance documents” include all non-statutory or regulatory documents that purport to advise the public of legal rights or obligations, as are commonly issued by agencies like the US Environmental Protection Agency and the Department of Health and Human Services.  The memo advises DOJ litigators that because “[g]uidance documents cannot create binding requirements that do not already exist by statute or regulation . . . [DOJ] litigators may not use noncompliance with guidance documents as a basis for proving violations of applicable law.”  The AAG's memo acknowledges that sub-regulatory guidance serves a valuable function, and does not likely presage a government-wide change in agency’s use of such documents.  But FCA matters—qui tam or otherwise—that are built on such sub-regulatory guidance are on shakier ground. These memoranda create interesting implications for FCA cases.  First, the AAG’s memo narrows potential FCA liability by excluding a wide range of agency documents from being the basis of FCA violations.  The AAG’s memo also raises interesting questions about what agency materials might be evidence of “materiality,” particularly after the Supreme Court’s recent Escobar decision.  Second, although the authority of the DOJ to dismiss qui tam actions has not changed, the government may be newly receptive to arguments for the dismissal of plainly deficient qui tam cases.  The memo thus presents an opportunity for legal counsel to affirmatively seek dismissal of a weak FCA case—a move that could potentially save the accused violator the time and expense of otherwise defending against the case. The two memoranda are available here and here.