As discussed previously in this blog, efforts to curb fraud, waste and abuse are generally “bi-partisan.” Given the significant monetary recoveries the Government enjoys through enforcement of the federal False Claims Act (“FCA”), we have predicted that efforts in this arena will continue under a Trump administration. However, this is dependent, in part, on the priorities of the new administration and the resources it devotes in this arena. To this end, the testimony of Attorney General nominee Sessions during his confirmation hearing on January 10th may have given us some insight into how he views the FCA.

Notably, as part of his opening testimony, Attorney General nominee Sessions said:

“Further, this government must improve its ability to protect the United States Treasury from waste, fraud, and abuse. This is a federal responsibility. We cannot afford to lose a single dollar to corruption and you can be sure that if I am confirmed, I will make it a high priority of the Department to root out and prosecute fraud in federal programs and to recover any monies lost due to fraud or false claims.”

During questioning by Senate Judiciary Committee Chairman Charles Grassley (R. IA.), Sessions elaborated on his intent to focus on the FCA. When asked whether he would “pledge to vigorously enforce the False Claims Act and devote adequate resources to investigating and prosecuting False Claims Act cases,” Sessions testified:

“In the qui tam provisions and the part of that, I’m aware of those. I think they are valid and an effective method of rooting out fraud and abuse. I even filed one myself one time as a private lawyer…. It has saved this country lots of money and probably has caused companies to be more cautious because they can have a whistleblower that would blow the whistle on them if they try to do something that’s improper. So, I think it’s been a very healthy thing…”

In addition, after commenting that, in his opinion, some qui tam cases remain under seal for an “awfully long time,” Sessions testified that, if confirmed, he would provide Congress with “regular timely updates on the status of…. False Claims Act cases including statistics as to how many are under seal and the average length of seal time.”

Sessions’ testimony seems to have offered something to those on “both sides” of the FCA. His statements suggest that he recognizes the value of the FCA and its qui tam provisions; indeed, we learned that he even brought a qui tam case when he was in private practice. However, his testimony also reflects concern about unreasonably long seal periods, which are a significant problem for defendants in FCA cases. Extended seal periods plainly provide a unilateral litigation advantage to the Government and qui tam Relators by allowing extensive time to investigate while providing defendants no corresponding opportunity. Instead, extended seal periods often force defendants to be relegated to face aged claims once they are finally able to defend themselves. (Most FCA actions are filed under whistleblower, or qui tam, provisions. According to the Department of Justice, whistleblowers filed 702 qui tam suits in fiscal year 2016—an average of 13.5 new cases every week.) Only time will tell if a Justice Department under Attorney General Sessions will press to expedite consideration of FCA cases and improve the “playing field” in the process.

The federal government continues to secure significant recoveries through settlements and court awards related to its enforcement of the False Claims Act (FCA), particularly resulting from actions brought by qui tam relators. In fiscal year (FY) 2016, the federal government reported that it recovered $2.5 billion from the health care industry. Of that $2.5 billion, $1.2 billion was recovered from the drug and medical device industry.  Another $360 million was recovered from hospitals and outpatient clinics.

Government Intervention Drives Recoveries

The FY 2016 FCA statistics reflect that more than 97% of the recoveries from qui tam cases resulted from matters in which the government elected to intervene and pursue directly. Government intervention remains a real danger to health care entities.

However, more than 80% of new FCA matters were filed by qui tam relators; relator share awards reached almost $520 million in FY 2016. The financial incentives to pursue these matters are significant and well recognized; last year, the number of new qui tam FCA cases was the second highest since 1987.

Enforcement Climate Became Worse for Individuals in FY 2016—and Will Likely Continue

The government’s focus on individual liability, as reflected in the “Yates Memo,” is expected to continue. This focus on individual accountability has recently resulted in substantial FCA recoveries from physicians, a former hospital CEO, a nursing home CFO, and even the Chair of a board of directors.[1]  On the administrative side, such focus has resulted in the 20-year exclusion of a physician specializing in urogynecology whom the government alleged billed for services not performed or not medically necessary. Indeed, this focus continues: just last week, the government filed a FCA complaint against a mental health and substance abuse clinic and its owner in his individual capacity.

Regulatory Changes in 2016 Created More Financial Exposure

The monetary exposure faced by health care industry participants under the FCA is increasing. In June, the Department of Justice released an interim final rule increasing the minimum per-claim penalty under Section 3729(a)(1) of the FCA from $5,500 to $10,781 and increasing the maximum per-claim penalty from $11,000 to $21,563.

The Government’s Use of Technology

The use of technology has markedly enhanced the government’s recovery efforts. Federal and state governments, along with some commercial insurers, are investing in the use of predictive analytics that can analyze large volumes of health care data to identify fraud, waste, and abuse. Notably, the government reportedly enjoyed an $11.60 return for each dollar it spent on its investment in these technologies in 2015.  The use of such technology is expected to continue under the new administration.

The Risk of Enforcement Is Real

The FY 2016 FCA statistics reflect the government’s belief that devoting time and resources to FCA cases makes “good business sense.” This realization is very unlikely to change. Health care entities—as well as individuals—must be alert to potential violations and have strong compliance functions to deal with compliance-related matters in a way that prevents claims and litigation.

Enforcement in a Trump Administration and Opportunities to Reshape the Landscape

Enthusiasm for efforts to curb fraud, waste, and abuse is bipartisan. As a result, government enforcement is likely to stay on its present course with the incoming administration, in good part due to the high return on investment in government fraud investigations and no public policy outcry to reduce such enforcement efforts.

While the growth of the federal government’s investment in enforcement efforts might slow due to both the anticipated federal worker hiring freeze and President-elect Trump’s pledge to reduce regulations, health care entities should not ignore the real risk that they face in this area.

A new administration, however, may bring opportunities to reshape part of the enforcement landscape. President-elect Trump promised to repeal and replace the Affordable Care Act (“ACA”). Included within the ACA were several provisions that made it easier for qui tam relators to bring FCA cases.[2] While it is likely that such provisions—which plainly benefit the government—would be pressed for exemption from any repeal, this does present the potential for legislative changes beneficial to potential FCA defendants. Additionally, given the real likelihood of multiple U.S. Supreme Court appointments, along with the need to fill the more than 100 current federal district court vacancies, more legal challenges to efforts to expand the reach of the FCA can be anticipated.

____

[1] See Press Release, Department of Justice, North American Health Care Inc. to Pay $28.5 Million to Settle Claims for Medically Unnecessary Rehabilitation Therapy Services (Sept. 19, 2016), https://www.justice.gov/opa/pr/north-american-health-care-inc-pay-285-million-settle-claims-medically-unnecessary; Press Release, Department of Justice, Former Chief Executive of South Carolina Hospital Pays $1 Million and Agrees to Exclusion to Settle Claims Related to Illegal Payments to Referring Physicians (Sept. 27, 2016), https://www.justice.gov/opa/pr/former-chief-executive-south-carolina-hospital-pays-1-million-and-agrees-exclusion-settle.

[2] The ACA impacted the FCA by narrowing the Public Disclosure Bar (31 U.S.C. § 3730(e)(4)(A)), expanding the scope of the “original source” exception for the Public Disclosure Bar (31 U.S.C. § 3730(e)(4)(B)), relaxing intent requirement for violations of the Anti-Kickback Statute (42 U.S.C. § 1320a-7b(h)), and providing that claims resulting from Anti-Kickback Statute violations would also be considered false claims (42 U.S.C. § 1320a-7b(g)).

As many pundits speculate regarding the future of the Yates Memo[1] in a Trump administration, on Wednesday, November 30, 2016, Department of Justice (“DOJ”) Deputy Attorney General, Sally Q. Yates, provided her first comments since the election.  The namesake of the well-known, “Yates Memo,” Yates spoke at the 33rd Annual International Conference on Foreign Corrupt Practices Act in Washington, D.C. and provided her perspective on the future of DOJ’s current focus on individual misconduct.

Yates, who has served at the DOJ for over twenty-seven years, stated that while the DOJ has endured many transitions in leadership during her tenure, the ideology of the DOJ with respect to general deterrence as well as enforcement of corporate misconduct has remained unchanged. Thus, Yates predicted that the incoming administration under President-elect Donald Trump will maintain the DOJ’s current commitment to pursing potential individuals while combating alleged cases of corporate fraud and wrongdoing, proclaiming:

In 51 days, a new team will be running the department, and it will be up to them to decide whether they want to continue the policies that we’ve implemented in recent years. But I’m optimistic. Holding individuals accountable for corporate wrongdoing isn’t ideological; it’s good law enforcement.[2]

Given the length of time that white collar investigations typically take, Yates noted there are a significant number of corporate investigations that began after the issuance of the Yates Memo in September 2015 that will not resolve until well after the new administration takes control. Yates also stated that she expects that the cases already in the pipeline will continue being pursued, and as a result, she anticipates that “higher percentage of those cases [will be] accompanied by criminal or civil actions against the responsible individuals.”[3]

In recent years, the Department of Justice has accelerated its emphasis on the investigation and prosecution of healthcare-related cases.[4]  In the civil realm, since release of the Yates Memo in September 2015, there has been a significant increase in False Claims Act[5] settlements containing cooperation provisions.[6] In the criminal side of the house, since the release of the Yates Memo, DOJ has brought high-profile indictments alleging violations of federal law including conspiracy to commit health care fraud, violations of the anti-kickback statute, money laundering, and aggravated identity theft, and involving a variety of health care-related services such as home health care, psychotherapy, physical and occupational therapy, durable medical equipment, and compounding prescription drugs schemes.  Most recently, on December 1, 2016, an indictment was unsealed in the Northern District of Texas charging 21 people, including the founders and investors of the physician-owned Forest Park Medical Center (“FPMC”) in Dallas, other executives at the hospital, and physicians, surgeons, and others affiliated with the hospital,[7]  with allegedly participating in a $200 million bribery and kick-back scheme focused on inducing surgeons to use the FPMC facilities.

Even before the Yates memorandum explicitly set forth guidance regarding parallel investigations, over the past few years DOJ already was increasing coordination between civil and criminal attorneys running parallel health care-related investigations with the goal of establishing collaboration at the very inception of an investigation. One U.S. Attorney’s Office, the District of New Jersey, even has co-located criminal and civil assistants dedicated to investigating health care fraud, who are supervised by the same AUSA to facilitate civil and criminal investigations, increase coordination and “maximize appropriate deterrence.”[8]

Notably, in June 2016, DOJ and the Department of Health and Human Services (HHS) announced a nationwide sweep of health care fraud civil and criminal cases.  Billed as the largest health care-related take-down in history, and led by DOJ’s Medicare Fraud Strike Force[9] in 36 federal districts, the takedown resulted in criminal and civil charges being filed against 301 individuals, including 61 doctors, nurses, and other licensed medical professionals, for their alleged participation in health care fraud schemes involving approximately $900 million in false billings.[10] [11]

Based on Yates’s comments on November 30, 2016, it can be anticipated that there will be a continued effort by the DOJ to combat corporate misconduct by focusing on individual accountability for alleged wrongdoers. Therefore, health care companies will need to remain diligent in maintaining sufficient compliance and corporate policies, including providing adequate training for executives and employees on the Yates Memorandum, as well as conducting thorough internal investigations, and to identify potential instances of corporate misconduct.[12] Since a centerpiece of the Yates Memo is the disclosure of individual wrongdoing in order to receive credit for cooperating with an investigation, health care-related companies must develop ways to identify individuals involved in potential fraudulent schemes, and the extent of each individual’s potential involvement in wrongdoing, to ensure they receive credit for cooperation. As Yates’s concluded on November 30th, “In the days ahead, this institution – and those who lead it – will continue the hard work of rooting out corruption here and abroad. And we will remain determined to protecting and strengthening our values of justice, fairness, and the rule of law. That has always been, and will always be, at the core of the DOJ.”[13] Thus, there is no indication of a DOJ slow-down any time soon, and based on recent high-profile DOJ enforcement efforts, the health care industry will not be excluded from DOJ’s focus on individual accountability any time soon either.

____

[1] Sally Quillian Yates, Deputy Attorney Gen., DOJ, “Individual Accountability for Corporate Wrongdoing,” (“Yates Memo”), (Sept. 9, 2015) The Yates Memo, released by the DOJ in September 2015, sets forth six specific steps for DOJ attorneys to focus on while assessing potential corporate wrongdoing:  (1) in order to quality for any cooperation credit, corporations must provide to the Department all relevant facts relating to the individuals responsible for the misconduct; (2) criminal and civil corporate investigations should focus on individuals from the inception of the investigation; (3) criminal and civil attorneys handling corporate investigations should be in routine communication with one another; (4) absent extraordinary circumstances or approved departmental policy, the Department will not release culpable individuals from civil or criminal liability when resolving a matter with a corporation; (5) DOJ attorneys should not resolve matters with a corporation without a clear plan to resolve related individual cases, and should memorialize any declinations as to individuals in such cases; and (6) civil attorneys should consistently focus on individuals as well as the company and evaluate whether to bring suit against an individual based on considerations beyond that individual’s ability to pay.

[2] Sally Quillian Yates, Deputy Attorney Gen., DOJ, Remarks at the 33rd Annual Int’l Conference on Foreign Corrupt Practices Act (Nov. 30, 2016).

[3] Id.

[4] DOJ, Facts and Statistics¸ (June 9, 2015), https://www.justice.gov/criminal-fraud/facts-statistics.

[5] The False Claims Act, 21 U.S.C. § 3729(2)(B).

[6] Eric Toper, “DOJ Increasingly Demanding Corporate Cooperation in FCA Settlements After Yates Memo,” Bloomberg BNA, (May 25, 2016), https://www.bna.com/doj-increasingly-demanding-n57982072932/.

[7] Shelby Livingston, “Execs, Physicians at Doc-Owned Luxury Hospital Chain Indicted in Alleged Kickback Scheme,” Modern Healthcare (Dec. 6, 2016), http://www.modernhealthcare.com/article/20161206/NEWS/161209950/execs-physicians-at-doc-owned-luxury-hospital-chain-indicted-in. See https://www.justice.gov/usao-ndtx/pr/executives-surgeons-physicians-and-others-affiliated-forest-park-medical-center-fpmc (press release and indictment).

[8] Gabriel Imperator, Combating Healthcare Fraud in New Jersey: An Interview with Paul J. Fishman, Compliance Today 16-22 (Oct. 2015).

[9] DOJ, June 2016 Takedown, (June 22, 2016), https://www.justice.gov/criminal-fraud/health-care-fraud-unit/june-2016-takedown (The Medicare Fraud Strike Force are part of the Health Care Fraud Prevention & Enforcement Action Team (“HEAT”), a joint initiative announced in May 2009 between the DOJ and HHS to focus their efforts to prevent and deter fraud and enforce current anti-fraud laws around the country. Since its inception in March 2007 it has charged over 2,900 defendants who have falsely billed the Medicare program over $8.9 billion).

[10] Id.

[11] Id.

[12] For more information please view: EBG’s Individual Accountability in Health Care Fraud Enforcement: Thought Leaders in Health Law.

[13] Yates, supra note 2.

In fiscal year 2015, the U.S. Department of Justice (“DOJ”) recovered more than $3.5 billion from False Claims Act (“FCA”) cases. A staggering $1.9 billion of that amount was recovered from health care providers who were alleged to have provided unnecessary care, paid kickbacks or overcharged federal health care programs.  While this amount may seem high, the drastic increases in FCA penalties expected this summer have the potential to skyrocket FCA recoveries in coming years. DOJ has not yet released the increased penalty amounts that would apply to FCA cases involving companies in the health care and life sciences industries, but penalty increases released this month by another agency, the U.S. Railroad Retirement Board (“Railroad Board),[1] seem to be a good indication of what providers can expect.

On May 2, 2016, the Railroad Board released an interim final rule, which will take effect on August 1, 2016, that nearly doubles the penalty amounts for false claims submitted to the Railroad Board. The mandatory minimum penalty will increase to $10,781 per claim and the maximum penalty to $21,563 per claim.  The current civil monetary penalty amounts under the FCA (which apply across all federal agencies) range from $5,500 per claim (minimum) to $11,000 per claim (maximum).

 

False Claims Act Penalties: Breaking Down the Numbers
Date and Legislation Minimum Penalty Maximum Penalty Additional Facts

1986

Federal False Claims Act

31 U.S.C. § 3729

$5,000 $10,000 N/A
1996

Inflation Adjustment Act

 

$5,500 $11,000 This adjustment was no more than 10% of the previous penalty amount due to the cap imposed by the Debt Collection Improvement Act of 1996.
2015

Federal Civil Penalties Inflation Adjustment Act Improvements Act  (Bipartisan Budget Act of 2015, Section 701)

$10,781 $21,563 The minimum and maximum penalty amounts are derived by multiplying:

(a) the 1986 penalty amounts; with

(b) the Consumer Price Index for all Urban Consumers (CPI-U) percentage increase between 1986 and 2015 (which is 215.628%).

 

Federal agencies that handle FCA cases are required (under the Bipartisan Budget Act of 2015 (the “Act”)) to publish rules updating their FCA penalty amounts by July 1, 2016, with the new amounts becoming effective on August 1, 2016.  And the penalty increases may not stop there. Under the Act, federal agencies may make annual adjustments to penalty amounts on January 15 of each year.  The allowable increase is based on the percent increase between the Consumer Price Index for all Urban Consumers (“CPI-U”) from the previous year and the CPI-U from two years before.[2]  In other words, if the Railroad Board were to increase the minimum and maximum penalties in 2017, the adjustment would be calculated by multiplying the 2016 penalty amounts ($10,781 (minimum), $21,563 (maximum)) with the percent change between the CPI-U for October 2016 and October 2015.

It is important to remember that this interim final rule is specific to the Railroad Board, and therefore does not apply broadly to health care FCA cases. Still, it strongly suggests that other agencies, including DOJ, are headed in the same direction.  Health care providers and life sciences entities should be thinking about the implications of the impending penalty increases.  For example, higher penalty amounts could make it harder for defendants to reach favorable settlement agreements as relators and the government will have a stronger argument for starting negotiations at much higher numbers.  Also, note that the increased penalties do not affect the government’s ability to seek treble damages in FCA cases.  At the end of the day, though, we suspect that the government will avoid being too aggressive in pushing for extremely high penalty amounts as these could potentially incite challenges under the excessive fines bar of the Eighth Amendment of the U.S. Constitution.

If you are interested in commenting on this interim final rule, note that the Railroad Board has a condensed comment period.  Comments must be submitted on or before July 1, 2016.  Since future penalty adjustment increases do not require prior public notice or comment, this may be one of the few opportunities for health care stakeholders to weigh in.

 

[1] The Railroad Board is an independent executive agency that administers retirement, survivor, unemployment, or sickness benefit programs for railroad workers and their families.  As part of the retirement program, the Railroad Board has administrative responsibilities under the Social Security Act to provide railroad workers benefit payments and Medicare coverage.

[2] Agencies can, through rulemaking, choose to increase penalties by a lesser amount than the new formula dictates, but only if the Secretary of the agency finds, and the Director of the U.S. Office of Management and Budget concurs, that increasing the penalty by the required amount will have a negative economic impact or that the social costs outweigh the benefits.

Earlier this month, Customed, Inc. initiated the largest medical device recall ever recorded in FDA history.  The recall was of sterile convenience surgical packs and was due to packaging flaws.  These flaws could result in loss of sterility and lead to infection.  There have also been a number of voluntary recalls on the drug side related to sterility.  FDA has also issued warning letters to pharmaceutical companies for poor aseptic practices, among other Good Manufacturing Practices (cGMP) related issues.  These headlines should remind the medical device and pharmaceutical industry of the importance of sterility and the renewed focus the government has with respect to these issues.

How does a company decide what aspects of sterility to focus on to ensure their processes are aligned with FDA’s current thinking?

  • Constantly Review Recent Warning Letters:  This can give you a road map as to what FDA is looking into when conducting an inspection.  Determine the issues other companies faced and ensure your systems address these issues.
  • Be Aware of Recent Recalls:  Ensure that your company understands the reasoning behind the recalls and if similarities exist between your processes/products and the company that is initiating the recall, assess whether changes need to be made within your organization.
  • Be aware of the most recent FDA Guidance Documents
  • Be aware of the most up-to-date ISO standards

It is important to note that violations of sterility may not only expose companies to potential liability under the FD&C Act, but also has the potential to lead to allegations that violations of the FD&C Act caused false claims to be submitted in violation of the False Claims Act (FCA).  Historically, manufacturer’s exposure under the FCA was based on allegations of off-label promotion or alleged anti-kickback violations.  However, in 2010 that changed when GMP violations served as one of the basis of liability in the GlaxoSmithKline $600 million settlement.  This month, a complaint was filed against Gilead Sciences, Inc. alleging the company’s failure to comply with the FD&C Act resulted in FCA violations.  Specifically, the complaint alleges that the company caused the submission of false claims by selling products that lacked potency and were contaminated with filth, metal and microbes.  At the same time, a recent court case has called into question the extent to which GMP violations can cause a claim to be false or fraudulent.

Given these actions, pharmaceutical and medical device manufacturers should pay close attention to the possibility of not only being subject to heightened FDA enforcement, but also possibly having to defend themselves against allegations under the FCA.

By Daniel C. Fundakowski

                   I.            Background

On June 6, 2014, in Foglia v. Renal Ventures Management, LLC the Third Circuit revived a dismissed False Claims Act (“FCA”) lawsuit, holding that the New Jersey District Court applied Federal Rule of Civil Procedure 9(b) too rigorously when granting Renal’s 12(b)(6) motion to dismiss.  Under Rule 9(b), an FCA whistleblower must allege “with particularity the circumstances constituting fraud or mistake.”

Foglia was hired in 2007 as a registered nurse for Renal Ventures Management, a dialysis provider, and was terminated in 2008.  Foglia alleged in his second amended complaint that Renal violated the FCA by falsely certifying to Medicare that it was in compliance with state regulations regarding quality of care, falsely submitting claims for reimbursement for the vitamin D drug Zemplar, and by reusing the remainder of single-use Zemplar vials while charging Medicare for the full content of the vial.  Foglia’s allegations derived from Renal’s inventory logs.  Based on the number of patients seen throughout a given month, Foglia alleged that Renal would have needed 50 vials of Zemplar per day (assuming Renal was not reusing vials).  Because Renal was only using 29 to 35 vials per day, Foglia alleged that Renal was reusing vials and overcharging Medicare because the vials are reimbursed for the full content of the vial, regardless of how much is used.

The district court held that Foglia’s complaint failed to satisfy Rule 9(b)’s “particularity” requirement because it failed to provide a “representative sample” or “identify representative examples of specific false claims made to the Government.”  The United States did not intervene in the litigation.

                II.            Circuit Split on Applying Rule 9(b) in FCA Context

Circuit Courts of Appeal are split on the proper application of Rule 9(b)’s “particularity” requirement in the FCA context.  In a unanimous decision, the Third Circuit panel aligned itself with the First, Fifth, and Ninth Circuits, which endorse a more lenient approach to how precisely whistleblowers must plead FCA claims.  In these circuits, it is generally sufficient to allege “particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted.”  On the other hand, the Fourth, Sixth, Eighth, and Eleventh Circuits are known for a stricter application of Rule 9(b), often requiring whistleblower complaints to include “representative samples of the alleged fraudulent conduct, specifying the time, place, and content of the acts and the identity of the actors.”

Acknowledging this as a “close case,” the Third Circuit articulated several reasons for ultimately adopting a more “nuanced” and lenient standard for evaluating the sufficiency of FCA complaints.  First, the court found a stringent approach to be textually inconsistent with the FCA—asserting that “it is hard to reconcile the text of the FCA, which does not require that the exact content of the false claims in question be shown, with the ‘representative samples’ standard favored by the Fourth, Sixth, Eighth, and Eleventh Circuit.”  Second, the court cited the recent amicus curiae brief filed by Solicitor General Donald Verrilli, Jr. in connection with the writ of certiorari in U.S. ex rel. Nathan v. Takeda PharmaceuticalsSee 707 F.3d 451 (4th Cir. 2013), cert. denied, 81 U.S.L.W. 3650 (Mar. 31, 2014) (No. 12-1349).  In that case, the Solicitor General asserted that the “heightened or ‘rigid’ pleading standard required by the Fourth, Sixth, Eighth, and Eleventh Circuits is ‘unsupported by Rule 9(b)'” and “undermines the FCA’s effectiveness as a tool to combat fraud against the United States.”

             III.            Impact of the Foglia Decision

It is unclear what impact this opinion will have on other courts and lawmakers, especially because it appears subtly at odds with several key tenets that are trending in other circuits.  For example, Foglia downplays the rigorous Rule 9(b) pleading standard by stating that “the purpose of Rule 9(b) is to ‘provide[] defendants with fair notice of the plaintiffs’ claims'” and holding that Foglia’s complaint met the Rule 9(b) standard because it “suffice[d] to give Renal notice of the charges against it, as is required by Rule 9(b).” (emphasis added).  While notice is indeed one objective of Rule 9(b), perhaps the more prominent objective is discouraging frivolous and speculative lawsuits—not simply apprising the defendant of the plaintiff’s claims.

Further, the panel’s reversal of the district court’s decision revived allegations that included violations of conditions of participation.  Conditions of participation are quality of care standards directed towards an entity’s continued ability to participate in federal health care programs, rather than prerequisites to government reimbursement.  On the other hand, conditions of payment are requirements that must be satisfied before the government will reimburse a claim.  Unlike a condition of participation, noncompliance with a condition of payment may properly support an FCA suit under the theory that the government should not have paid a claim that failed to comply with one or more prerequisites to payment.

Here, Foglia’s allegation about the practice of reusing Zemplar vials was permissible if certain HHS conditions were followed to ensure patient safety.  Foglia alleged that these conditions were conditions of payment, notwithstanding how they related to quality of care—a hallmark of conditions of participation.  The district court held that even if Foglia met the Rule 9(b) requirements, his complaint “provided no authority under an express or implied false certification theory that the claims submitted . . . violated a rule or statute establishing compliance as a condition of payment.”  On appeal, the Third Circuit held that, though it was “highly doubtful” that the HHS safety conditions were conditions of payment, “we must accept as true the allegations in the complaint” and “that Renal did not, in fact, comply with the required recommendations by HHS for the safe re-use of Zemplar vials.”

Consistent with judicial reluctance to expand the FCA into an all-purpose statute that polices all forms of regulatory noncompliance, courts are increasingly holding that legally false claims must allege conduct that would violate a condition of payment, not merely a condition of participation.  The Third Circuit balking at dismissing Foglia’s condition of participation claim may undermine the persuasiveness of this opinion on other courts where Rule 9(b) particularity may be an issue of first impression.

             IV.            Conclusion

This opinion is a victory for whistleblowers pleading FCA violations in the Third Circuit.  Though the Third Circuit clearly aligns itself with the First, Fifth, and Ninth Circuits endorsing a more relaxed interpretation of Rule 9(b), the subtle yet contentious findings in the opinion make it unclear whether it will have a durable impact.

The June 6, 2014 opinion was vacated and amended on June 10, 2014 to correct a typographical error in articulating the circuit split.  The amended opinion is available by clicking here.