FCA Now

Walmart successfully ended eight years of protracted litigation under the False Claims Act (“FCA”) on June 4, 2021, when the Sixth Circuit affirmed dismissal of Medicare and Medicaid fraud allegations against the major retailer.  The case was first filed in February 2013.  See United States ex rel. Sheoran v. Wal-Mart Stores E., No. 13-10568, 2019 U.S. Dist. LEXIS 140710, at *2 (E.D. Mich. Aug. 20, 2019). The case was originally filed by Ashwani Sheoran, a former Walmart pharmacist.  See United States v. Wal-Mart Stores E., LP, No. 20-2128, 2021 U.S. App. LEXIS 16763, at *2 (6th Cir. June 4, 2021).  The basis for Sheoran’s allegations stemmed from observing a Michigan physician (and co-defendant) writing what Sheoran believed were improper prescriptions for high doses of opioid pain medications.  Id. at *3.  Sheoran alleged that filling those prescriptions violated the FCA and the Michigan Medicaid False Claims Act due to their purportedly excessive doses.  Id.  The case was finally unsealed in September 2018 after the United States government and the state of Michigan declined to intervene.  In August 2019, Walmart’s motions to dismiss were granted.  Wal-Mart, 2019 U.S. Dist. LEXIS 140710 at *14.  Sheoran moved for reconsideration, which was denied.  United States v. Wal-Mart Stores E., LP, No. 13-10568, 2020 U.S. Dist. LEXIS 177251, at *9 (E.D. Mich. Sep. 28, 2020).  Sheoran then appealed. On appeal, Sheoran argued that the district court granted the motions to dismiss in error; that it was error for the lower court to exclude his Medicaid False Claims Act claims in its summary of claims; and that the court abused its discretion by waiving oral argument on the motions.  Wal-Mart, 2021 U.S. App. LEXIS 16763 at *4. To establish a claim under the FCA, Sheoran was required to allege that “(i) the defendant presented a claim of payment to the government, (ii) the claim was false or fraudulent, (iii) the defendant knew it was false or fraudulent, and (iv) the false claim was material to the government’s payment.”  Id. at *5.  Because FCA claims necessarily involve allegations of fraud, a plaintiff must also meet the particularity requirements under Federal Rule of Civil Procedure 9(b) by alleging the “time, place, and content of the alleged misrepresentation . . . [;] the fraudulent scheme; the fraudulent intent of the defendants; and the injury resulting from the fraud.” Id. at *4–5 (internal quotations and citations omitted). Focusing on particularity, the Sixth Circuit determined that Sheoran failed to sufficiently plead each of the four elements of an FCA violation. First, the Court held Sheoran failed to allege that a claim for payment was presented to the government.  Id. at *5.  To support the claim, Sheoran submitted a document that listed all opioid payments with a $1-2 copay.  Id. at *6.  Based on the low copay value, Sheoran argued that the government must have provided reimbursement through Medicaid or Medicare.  Id.  The Court rejected that assumption, noting that many other reasons could explain a low copay.  Id. The Court concluded that alleging presentment effectively requires more than “mere speculation.”  Id. Second, the Court held Sheoran was unable to effectively plead that any of the alleged claims were “false or fraudulent.”  Id.  See 31 U.S.C. § 3729(a)(1)(A), (B).  Although Sheoran had alleged the prescriptions were written for “high doses” of opioid pain medications that “would kill the person” if taken as prescribed, Sheoran provided no information about the patient’s medical history or needs to help the Court evaluate whether the doses were too high.  Id. *7.  Accordingly, the Court could not accept that falsity was supported. Third, the Court held the pleadings failed to allege that Walmart “knowingly” presented false claims to the government.  Id.  In order to establish knowledge, a defendant must “know[] of, or ‘act[] in deliberate ignorance’ or ‘reckless disregard’ of, the fact that he is involved in conduct that violates a legal obligation to the United States.”  Id. (internal quotations and citations omitted).  The Court determined that Sheoran’s mere assumption that payment was submitted to the government was insufficient, and that the pleadings lacked allegations indicating that Walmart even suspected the claims were illegal, false, or fraudulent.  Id. Finally, the Court concluded that materiality was also insufficiently alleged.  To meet this “demanding” standard, the alleged misrepresentation must have been “material” to the government’s decision to reimburse the claim.  Id. at *8.  The Court reasoned that if all of the claims had indeed been submitted to the government, the government had the same knowledge about the allegedly “high doses” and yet still paid those claims.  Id.  This evidence of payment was considered to be “very strong evidence that the requirements were not material.”  Id. (citing Universal Health Servs., Inc. v. United States, 136 S. Ct. 1989, 2001 (2016)). The Sixth Circuit summarily dismissed Sheoran’s remaining arguments.  In regards to the denial of oral argument, the Court reasoned that “this was a straightforward FCA case that was properly decided on the briefs.”  Id. at *12.  Unfortunately for Walmart and its co-defendants, this “straightforward” case required eight years of protracted litigation and expense that finally concluded due to the FCA’s exacting pleading standard.

On April 30, 2021, a Northern District of Texas judge denied a motion to dismiss an FCA qui tam action alleging “a fraudulent scheme to obtain Government subcontracting opportunities reserved for eligible small businesses under the Small Business Act.” United States ex rel. Haight v. RRSA (Commer. Div), LLC, 3:16-CV-1975-S, 2021 U.S. Dist. LEXIS 82894, at *1-4 (N.D. Tex. Apr. 30, 2021). In the complaint, the relator alleged that one or more of the defendants received several lucrative government construction subcontracts by falsely claiming small business eligibility. Id. at *4. According to the relator, Defendant RRSA Residential, a large, national roofing company, and its related entities “devised a scheme to obtain subcontracting opportunities that are reserved for small businesses under the Small Business Act.” United States ex rel Haight v. RRSA (Commer. Div.), 3:16-CV-1975-S, 2020 U.S. Dist. LEXIS 195267, at *4-5 (N.D. Tex. Oct. 20, 2020) (hereinafter “Haight I”). Certain government contracts are reserved, or set aside, for business that qualify as “small” under the SBA size standards set forth in 13 CFR 121. The relator alleged that RRSA Defendants falsely certified that an affiliated entity, RRSA Commercial, was an eligible small business, and calculated that it would have an advantage over legitimate small businesses due to the “combined resources, materials, industry connections, and ‘bondability’ that most legitimate small businesses do not have.” Id. at *6. After certifying that RRSA Commercial was an eligible small business on the System for Award Management (“SAM”) database, RRSA Commercial received “dozens” of small business subcontracts. Id. at *7. The relator also alleged that prime contractor defendants were aware that RRSA Commercial was in reality a large business and variously participated in and enabled the scheme. Id. at *7-8. Accordingly, the relator alleged that these false representations caused false claims for payment to be submitted to the government under an implied false certification theory. United States ex rel. Haight v. RRSA (Commer. Div), LLC, 3:16-CV-1975-S, 2021 U.S. Dist. LEXIS 82894, at *4 (hereinafter “Haight II”). Defendants moved to dismiss, arguing that the relator failed to satisfy the pleading standards of Federal Rule of Civil Procedure Rules 8(a), 12(b)(6), and 9(b). Haight I, 2020 U.S. Dist. LEXIS 195267, at *11. The court granted the motion in part and denied the motion in part, granting the relator an opportunity to replead dismissed claims. Id. at *24. Plaintiff filed an amended complaint in 2020. Dkt. 104. Defendants again moved to dismiss, this time arguing the relator lacked standing under Federal Rule of Civil Procedure 12(b)(1) because she had allegedly signed a settlement agreement that contained a broad release provision of “any and all claims” prior to the filing of the present qui tam action. Haight II, 2021 U.S. Dist. LEXIS 82894, at *5-6 (internal quotation omitted). The court rejected Defendants’ standing argument and denied the motion to dismiss. In discussing Defendants’ standing argument, the court first noted the plain language of the FCA provides that “a qui tam relator may not unilaterally enter into an enforceable settlement agreement or release after filing an FCA action.” Id. at *11. Although the Fifth Circuit has not directly considered enforceability of pre-filing releases, the court noted that several circuits apply the balancing test articulated by the Ninth Circuit in United States ex rel. Green v. Northrop Corp., 59 F.3d 953, 956 (9th Cir. 1995) when assessing enforceability. Id. at *11-17. Under the balancing test, courts must determine “whether the interest in enforcing the release was outweighed in the circumstances by a public policy harmed by enforcing the release.” Id. at *12 (citing Green, 59 F.3d at 958, 962). Applying the balancing test to the facts alleged, the court found dispositive the factor that the government did not know of the alleged fraud at the time of the alleged signing of the release. Because qui tam suits serve a valuable role in notifying the government of instances of fraud and a contrary holding would incentivize defendants to settle cases of fraud pre-filing without ever informing the government, the court refused to enforce the release as “contrary to well-established public policy.” See id. at *13, 17. The court noted the case’s similarity to Green, where the Ninth Circuit likewise “concluded that enforcement of the prefiling release would ‘impair a substantial public interest’ because the release ‘would threaten to nullify’ the ‘central purpose of the qui tam provisions of the FCA’—to incentivize insiders privy to fraud on the Government to ‘blow the whistle on crime.’” Id. at *12-13 (quoting Green, 59 F.3d at 963). The case serves as a reminder of the underlying policy justifications for the qui tam provision of the FCA, and, moreover, as a cautionary tale of the skepticism that courts will apply to pre-filing releases.

On March 19, 2021, a Southern District of New York judge denied a motion to dismiss a False Claims Act (“FCA”) suit alleging that Omnicare—a subsidiary of CVS Health Corp.—“dispensed drugs based on invalid prescriptions to potentially tens of thousands of individuals living at more than 3,000 residential facilities.” See United States ex rel. Bassan v. Omnicare, Inc., No. 1:15-cv-4179 (CM), 2021 U.S. Dist. LEXIS 52323 *3 (S.D.N.Y. Mar. 19, 2021).  The long-pending suit, which was originally brought by qui tam relator Uri Bassan in 2015, alleges that Omnicare consistently issued prescriptions to individuals in long-term care facilities that were not supported by valid prescriptions between 2010 and 2018. The Court explained that the defendants’ motion “present[ed] what can only be described as a novel reason why the Government’s pleading is insufficiently particular.”  Id. at *27.  The “novel” argument was that the regulation upon which the Government relied to demonstrate that filling invalid prescriptions was illegal took effect on January 1, 2013, rendering the prior alleged conduct of dispensing prescription drugs without a prescription legal.  The Court denied the motion on three bases. First, the Court explained that the Government’s pre-2013 claims arose under three different government insurance programs and the regulation at the core of the defendants’ argument only concerned one.  As a result, the Court determined that the allegations related to the two other programs precluded dismissal of the pre-2013 claims. Second, the court reasoned that because the Government was able to show in detail that Omnicare’s Medicare reimbursements after January 1, 2013 were also the product of alleged false claims, the claim could not be dismissed in full. Third, the Court, relying on several regulations and guidance materials, “reject[ed] Omnicare's suggestion that it was perfectly legal to dispense drugs paid for by Medicare without a valid prescription prior to 2013.” Id. at *28-29.  To do so, the Court first cited to Centers for Medicare and Medicaid Services regulatory guidance pre-dating 2013 which provided that "we have consistently maintained that drugs cannot be eligible for [Medicare] coverage unless they are dispensed upon prescriptions that are valid under applicable State law."  Id. at 28-29 (citing 76 Fed. Reg. 63,018, 63,059 (Oct. 11, 2011).  The Court also relied on other federal statutory schemes such as the Federal Food Drug and Cosmetic Act, which described a prescription drug as one that can only be dispensed upon a valid prescription.  See 21 U.S.C. § 353(b)(1). This case is a reminder that the litigation of alleged false claims spanning several years can often be impacted by the different statutory schemes and regulations that are in effect, or not in effect, over the course of the alleged false claims.