Judicial Decisions
United States ex rel. Mackillop v. Grand Canyon Education, Inc., et al., 2022 WL 4084444 (D. Mass.)
Industry: Higher Education
Topics: Materiality, Scienter
In Mackillop, the relator, a university counselor, brought suit against Grand Canyon Education, Inc., an educational service company that provides support services to colleges and universities, and Grand Canyon University (collectively Grand Canyon), alleging that Grand Canyon violated the FCA by applying for and receiving federal grants and financial aid while failing to disclose its violations of the “Incentive Compensation Ban” (Compensation Ban) – a statute and set of Department of Education regulations that prohibit schools from compensating counselors and recruiters on the basis of how many students they enroll.
After the close of discovery, Grand Canyon moved for summary judgment on three grounds: (1) there was no evidence of any violation of the Compensation Ban; (2) there was no triable evidence that representations regarding Grand Canyon’s compliance with the Compensation Ban were material; and (3) there was no triable evidence that Grand Canyon’s misrepresentations were made with knowledge of their falsity.
The court denied Grand Canyon’s summary judgment motion. Regarding Grand Canyon’s argument that there was no evidence of a Compensation Ban violation because its compensation plans were based on tenure, the court found a dispute of material fact as to whether there were such violations given evidence that Grand Canyon’s compensation plans were based on both tenure and sales volume.
Grand Canyon also argued that any such misrepresentation was not material, because the government knew of its alleged violations, including by virtue of the filing of the instant case, and took no action in response. The Court rejected this argument for three reasons. First, the relator’s complaint was merely a set of allegations, and courts should not rely on the government’s response to mere allegations in assessing materiality. Second, the government disputed that it had actual knowledge of Grand Canyon’s alleged violations. Although Grand Canyon asserted that it submitted the compensation plans at issue to the Department of Education, there was a factual dispute as to whether such submissions occurred given the Department of Education’s denials of ever having received them. Third, the court held that even if the government had knowledge, there was evidence that there were legitimate reasons why the government might not withdraw funding even after learning of the non-compliance, such that the government’s knowledge of the wrongdoing was not by itself dispositive on the issue of materiality.
Lastly, Grand Canyon urged the Court to apply the Safeco standard in analyzing scienter and argued that the undisputed facts demonstrated that Grand Canyon intended for the school to comply with the Compensation Ban, as shown by (1) Grand Canyon’s dedication of significant resources towards designing policies for compliance, and (2) that Grand Canyon did not knowingly or recklessly violate the Compensation Ban.
The Safeco standard provides a framework to analyze scienter for legally false claims. Under the standard, a defendant who acted under an incorrect interpretation of the relevant underlying statute or regulation did not act with reckless disregard if, regardless of the defendant’s subjective intent, “(1) the interpretation was objectively reasonable and (2) no authoritative guidance existed that might have warned defendant away from its interpretation.” [1] The court recognized that while some courts have applied the Safeco standard to evaluate scienter, others applied a similar, but distinguishable “gross-negligence” – plus standard, defining recklessness as a “state of mind in which one ‘knows or has reason to know of facts that would lead a reasonable person’ to ascertain that harm is likely.”[2] While recognizing this split, the Court nonetheless did not decide the issue of what standard should apply because it determined that there was a disputed factual issue under either standard, given evidence of Grand Canyon’s ignoring explicit instructions by its attorneys not to engage in the conduct alleged to have violated the Compensation Ban.
Accordingly, the court denied Grand Canyon’s motion for summary judgment in its entirety.
Takeaways: As this decision notes, the circuit split on the applicability of Safeco to the FCA’s “knowledge” element is not a binary one, with the Fourth Circuit having staked out its own position on Safeco in United States ex rel. Sheldon v. Allergan Sales, LLC, 24 F.4th 340, 347–48 (4th Cir. 2022).
This decision also highlights the limitations of arguing the government’s knowledge of the falsity of the claim as a defense against materiality. The court viewed materiality as a disputed issue where even if the government knew of the false claims, there were legitimate reasons for the government not to seek recoupment of the allegedly false claims.
United States ex rel. Hartpence v. Kinetic Concepts, Inc., 44 4th 838 (9th Cir. 2022)
Industry: Healthcare
Topic: Medicare Part B, Materiality
Recently, the Ninth Circuit reversed a district court’s grant of summary judgment in favor of a manufacturer of a medical device, holding that the district court had erred in finding that the relator had failed to establish triable issues of fact as to the materiality and scienter elements of the FCA.
Defendant Kinetic Concepts, Inc. (KCI) is the manufacturer of a device that heals wounds by a method called Vacuum Assisted Closure Therapy, or “VAC Therapy.”[3] Payment for such
VAC Therapy treatments may be covered by Medicare for patients enrolled in Medicare Part B. “Items and services” otherwise covered by Medicare Part B are generally eligible only where they are “reasonable and necessary for the diagnoses or treatment of illness or injury or to improve the functioning of a malformed body member.” 42 USC. § 1395y(a)(1)(A). For durable medical equipment such as those devices that facilitate VAC Therapy, Centers for Medicare & Medicaid Services (CMS) contracts with Durable Medical Equipment Medicare Administrative Contractors (DME MACs) and delegates the initial determination that treatments are “reasonable and necessary” to these DME MACs.[4]
DME MACs are authorized to issue Local Coverage Determinations (LCDs) addressing whether a particular item or service is covered by Medicare. As relevant here, all four DME MACs adopted LCDs clarifying when use of a “negative pressure wound therapy” pump (like KCI’s device) would be covered by Medicare Part B.[5] These LCDs provided that coverage for the device would end when “[a]ny measurable degree of wound healing has failed to occur over the prior month.”[6] These LCDs also provided that, to expedite claim processing, a supplier could demonstrate that a given claim met all relevant conditions for coverage by adding to the claim a specified two-letter modifier – ZX or KX.[7]
Over the next couple of years following the issuance of the LCDs, KCI engaged with the DME MACs seeking clarification regarding whether Medicare coverage extended to “stalled cycles” – a month in which VAC Therapy was used but there was no wound improvement.[8] During this time, one of the DME MACs also issued a bulletin providing that if there was a “stalled cycle,” “there will be no further coverage” of the VAC Therapy.[9]
While engaging with the DME MACs, KCI resumed billing for “stalled cycle” claims, and in 2008 KCI’s former senior vice president of business systems filed a qui tam action alleging that KCI was doing so in violation of the FCA. The government declined to intervene.[10]
The district court granted KCI’s motion of summary judgment finding that the relator had failed to establish an issue of triable fact related to the scienter and materiality elements of the FCA. Specifically, the district court concluded that KCI’s use of the ZX and KX modifier was not material to the government’s decision to pay, because claims with the modifier were, in the district court’s view, not necessarily “automatically paid.” Rather, audit evidence showed that payment of claims with these modifiers could be denied after an audit.[11] The district court also concluded that because the use of the KX and ZX modifier on stalled-cycle claims was not material, evidence that KCI knew that it was wrongly using the KX modifier was insufficient to establish scienter.[12]
The Ninth Circuit rejected both of these conclusions. First, the Ninth Circuit held that “[t]he fact that the KX modifier was not accepted at face value in case-specific auditing does not mean that compliance with the LCD criteria [on stalled cycles] (which is what use of the modifier is supposed to signify) was not material to most payment decisions.”[13] Rather, the Ninth Circuit explained that the record evidence of stalled-cycle claims, which included administrative rulings, post-payment and pre-payment audits, and a 2007 OIG report, showed the rejection of “stalled-cycle claims,” meaning the record showed that KCI’s allegedly false use of the KX modifier to obtain automatic payment “avoided a scrutiny that it sometimes lost.”[14] As a result, failure to comply with the LCD criteria could have been material to the government’s payment decision.[15] Citing the Supreme Court’s decision in Escobar, the Ninth Circuit, however, noted that “compliance with the specific LCD criterion that there be no stalled cycle would not be material if, upon case-specific review, the government routinely paid stalled cycle claims.”[16]
Second, as to scienter, the Ninth Circuit questioned the district court’s proposition that “liability requires not only knowledge that a representation was false but also knowledge that the representation was material,” but did not decide whether the assumption was correct.[17] Instead, the Ninth Circuit reasoned that even if the district court was correct, there was a triable issue regarding KCI’s knowledge of the materiality of its misuse of the KX modifier. Specifically, the Ninth Circuit pointed to evidence from email communications that KCI was “plainly aware that using the KX modifier avoided a costly review and appeals process that it would sometimes win and sometimes lose.”[18] The Ninth Circuit also held that the district court’s reasoning as to scienter rested “on a clear failure to view the evidence in the light most favorable to the relator.”[19]
Takeaway: Although the standard for materiality is a rigorous one, the Ninth Circuit’s decision serves as a not so subtle reminder that, on summary judgment, evidence must still be viewed in the light most favorable to relators.
United States ex rel. Sibley v. University of Chicago Medical Center, 44 F.4th 646 (7th Cir. 2022)
Industry: Healthcare
Topics: Reverse False Claims, Rule 9(b), Retaliation
The Seventh Circuit affirmed in part and reversed in part a district court’s decision in an FCA action brought by three Relators against their former employers, Medical Business Office Corp. (MBO) and Trustmark Recovery Services (Trustmark), and one of MBO’s clients, the University of Chicago Medical Center (UCMC). The Relators alleged that UCMC knowingly avoided an obligation to repay the government after it effectively learned that it had been reimbursed for noncompliant debts and that MBO and Trustmark, which deliver medical-billing and debt-collection services to healthcare providers, caused the submission of false claims to the government by violating regulatory requirements. Each Relator also brought a retaliation claim against MBO and Trustmark under the FCA.
Under Medicare regulations, the federal government reimburses Medicare providers when a Medicare patient fails to make required deductible or coinsurance payments, and a provider may seek reimbursement from CMS for those “bad debts.”[20] There are four requirements for a debt to be reimbursable, one of which is that the provider must be able to establish that reasonable collection efforts were made.[21]
The relators’ allegations against UCMC arose from a contract under which MBO provided billing and collection services for UCMC, including collecting debts that Medicare beneficiaries owed to UCMC, which later reported many of those debts to CMS as Medicare bad debts. Although UCMC authorized MBO to assign nine employees to the Medicare/Medicaid project, in late 2017, UCMC learned that only one person from MBO was pursuing collection efforts for Medicare beneficiary debt and that it was impossible that MBO had complied with Medicare regulations concerning reasonable collection efforts for Medicare bad debts that UCMC had reported in its 2017 cost report submitted to CMS, which sought reimbursement from the government and certified compliance with applicable regulations. Despite this knowledge, UCMC did not amend its 2017 cost report.
Similarly, relators alleged that MBO and Trustmark, on behalf of Trustmark’s client, Community Hospital, wrote off patient deductibles as Medicare bad debts in violation of the Medicare regulations, resulting in the submittal of a cost report to the government that reported reimbursable Medicare bad debts for which reasonable collection efforts had not been made.
The FCA includes a provision forbidding reverse false claims and establishing liability for any person who knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the government.[22] With respect to the reverse false claims allegations against UCMC, the Seventh Circuit concluded that the relators failed to meet the heightened pleading standards of FRCP 9(b) and allege with sufficient precision that UCMC had an established duty to repay the government once it discovered that MBO had wrongfully caused UCMC to report Medicare bad debts on its cost reports despite a lack of compliance with the regulatory requirements. The relators also failed to allege specific examples of patient debts. In addition, the relators failed to meet the FCA’s scienter requirement and could not show that UCMC acted knowingly in avoiding an obligation to repay the government. Accordingly, the Seventh Circuit affirmed the district court’s decision dismissing the reverse false claim against UCMC.
With regard to the direct false claims against MBO and Trustmark, the Seventh Circuit concluded that the relators failed to state a cause of action under the FCA against MBO because they did not include specific representative examples of patient debts that were included in UCMC’s cost reports as reimbursable Medicare bad debts. With regard to Trustmark, however, the relators provided three specific examples of debts owed to Community Hospital by Medicare beneficiary patients, which were assigned to Trustmark for collection and were written off as Medicare bad debts without being subject to reasonable collection efforts in violation of the Medicare regulations. Based on these facts, the complaint plausibly alleged that the regulatory requirements for reasonable collection efforts, as well as Trustmark’s certification of compliance, were material to the government’s decision to reimburse the Medicare bad debts claimed by Community Hospital. Therefore, the Seventh Circuit affirmed the district court’s dismissal of the direct false claim against MBO, but reversed the district court’s dismissal of the direct false claim against Trustmark.
Finally, the relators alleged retaliation against MBO and Trustmark under the FCA. As relevant here, the FCA provides that an employee is entitled to relief if she is discharged or in any other manner discriminated against in the terms and conditions of employment because of lawful acts done in furtherance of an action under the FCA.[23] The Seventh Circuit held that it was joining other circuits in holding that a retaliation claim under the FCA need not be pleaded with particularity under Rule 9(b) because it does not allege fraud. After considering each of the relator’s claims in turn, the circuit court affirmed the district court’s dismissal of one relator’s retaliation claim and reversed the dismissal of the other two relators’ FCA claims.
Takeaway: Not all circuit courts apply the more rigorous pleading standard under Rule 9(b) to complaints in FCA cases with courts adopting different approaches to the level of specificity required in connection with the details of the claims submitted to the government. There are currently three pending petitions for writ of certiorari before the Supreme Court requesting that the Court resolve the circuit split.
Noteworthy FCA Settlements
Bayer Settles Anti-Kickback Act Allegations originally filed in 2005 for $40 Million
Industry: Healthcare
Topics: Anti-Kickback Statute
Ending a 17-year saga of litigation, the Department of Justice reached a settlement with pharmaceutical firm Bayer Corporation and related entities, which agreed to pay $40 million to resolve allegations that it had violated the FCA by paying kickbacks to hospitals and physicians to induce them to utilize two drugs, Trasylol and Avelox, marketed these drugs for off-label uses that were not reasonable and necessary, and downplayed the safety risks of Trasylol, resulting in the submission of false claims to the Medicare and Medicaid programs and violating the laws of 20 states and the District of Columbia.[24]
The Anti-Kickback Statute prohibits any person or entity from making payment to induce or reward any person for referring, recommending, or arranging for federally funded medical services or items that are paid for by a federal health care program, such as Medicare, Medicaid, or TRICARE.[25] Claims submitted to these programs in violation of the Anti-Kickback statute give rise to liability under the FCA.
The settlement also resolves allegations relating to Bayer’s statin drug, Baycol, involving Bayer’s conduct in downplaying Baycol’s risks of causing a life-threatening condition caused by muscle breakdown and muscle death, which were known to Bayer, and that Bayer misrepresented Baycol’s efficacy and fraudulently induced the Defense Logistics Agency to renew certain contracts relating to Baycol. Trasylol and Baycol were both withdrawn later from the market for safety reasons.
The settlement resolves two lawsuits brought by a former marketing employee of Bayer, under the qui tam or whistleblower provisions of the FCA. The relator pursued litigation for nearly two decades.[26] As part of the settlement, Bayer did not admit liability.[27]
Takeaway: Bayer’s settlement after protracted litigation by a whistleblower underscores the critical role that whistleblowers play in FCA cases, particularly for combatting fraud in federal healthcare programs, as well as the risk of protracted litigation when relators “go it alone” after the government declines to intervene.
Instec Inc. Settlement
Industry: Government Contracting
Topics: Buy American Act
Last week, the Department of Justice announced that it had entered into a $625,000 settlement with scientific research company Instec Inc. (Instec) and Instec’s owner and president to resolve allegations, originally raised in a qui tam lawsuit, that Instec violated the FCA by falsely certifying compliance with the Buy American Act (BAA) under several government contracts.
The BAA creates a preference for the acquisition of domestic end products in certain government procurements. Generally, to be considered a domestic end product under the BAA, an item must be (1) manufactured in the United States, and (2) at least 55% of the cost of the components must be of US origin.[28]
Specifically, DOJ alleged that Instec falsely asserted that goods it sold to the Department of Energy, the Army, the Navy, the National Nuclear Security Administration, and NASA pursuant to contracts containing domestic-preference requirements were of domestic origin, when these goods were actually manufactured in China. The settlement did not reflect an admission of liability.
Takeaway: The Instec settlement is the latest evidence that the government continues to pursue violations of the Buy American Act through the mechanism of the FCA.
[1] See United States ex rel. Sheldon v. Allergan Sales, LLC, 24 F.4th 340, 350 (4th Cir. 2022), reh’g en banc granted, No. 20-2330, 2022 WL 1467710 (4th Cir. May 10, 2022); United States v. United Healthcare Ins. Co., 848 F.3d 1161, 1178 (9th Cir. 2016)
[2] United States ex rel. Mackillop v. Grand Canyon Education, Inc., No. 18-11192-WGY, 2022 WL 4084444 at *25 (D. Mass. Sept. 6, 2022).
[3] United States ex rel. Hartpence v. Kinetic Concepts, Inc., 44 4th 838, 840 (9th Cir. 2022)
[4] Id. at 840-41.
[5] Id. at 841.
[6] Id.
[7] Id.
[8] Id. at 842.
[9] Id.
[10] Id. at 845.
[11] Id.
[12] Id. at 851.
[13] Id. at 847.
[14] Id. at 848.
[15] Id.
[16] Id. at 847 (emphasis added).
[17] Id. at 851 (emphasis in the original).
[18] Id. at 851.
[19] Id.
[20] 42 C.F.R. § 413.89(b), (e).
[21] 42 C.F.R. § 413.89(e).
[22] 31 U.S.C. § 3729(a)(1)(G).
[23] 31 U.S.C. § 3730(h).
[24] https://www.justice.gov/opa/pr/bayer-pay-40-million-resolve-alleged-use-kickbacks-and-false-statements-relating-three-drugs.
[25] 42 U.S.C. § 1320a-7b(b).
[26] United States ex rel. Simpson v. Bayer Corp., Civ. No. 05-cv-3895 (D.N.J.) and United States ex rel. Simpson v. Bayer Corp., Civ. No. 08-5758 (D. Minn.).
[27] https://www.justice.gov/opa/press-release/file/1530771/download.
[28] At the time of Instec’s alleged violations, the cost of components requirement was 50%.