nursing home liability article reprint taf apr03qr

T a x p a y e r s

A g a i n s t

F r a u d

TAF ED U C AT I O N FU N DVol. 30April 2003

False Claims Act and Qui Tam Quarterly Review

INSIDE... FALSE CLAIMS ACT AND QUI TAM DECISIONS

FCA Liability of Government EntitiesCook County v. U.S. ex rel. Chandler (U.S. Mar. 10, 2003) . .p. 1

U.S. v. Hickman County (6th Cir. Feb. 18, 2003) . . . . . . .p. 3

U.S. ex rel. Dunleavy v. County of Delaware (U.S. Mar. 24, 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .p. 4

FCA Liability/MaterialityU.S. ex rel. Costner v. U.S. (8th Cir. Jan. 28, 2003) . . . . . .p. 5

U.S. ex rel. Bidani v. Lewis (N.D. Ill. Mar. 4, 2003) . . . . .p. 7

FCA Liability/False CertificationU.S. ex rel. Diop v. Wayne County Community College District (E.D. Mich. Jan. 31, 2003) . . . . . . . . . . . . . . . . . .p. 8

U.S. ex rel. Perales v. St. Margaret’s Hospital (C.D. Ill.Feb. 7, 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .p. 10

U.S. ex rel. Barrett v. Columbia/HCA Healthcare Corp.(D.D.C. Feb. 13, 2003) . . . . . . . . . . . . . . . . . . . . . . . . . .p. 12

U.S. ex rel. Local 342 Plumbers & Steamfitters v. Caputo Co. (9th Cir. Mar. 5, 2003) . . . . . . . . . . . . . . .p. 14

FCA Liability of Medicare Carriers and FiscalIntermediariesU.S. ex rel. Sarasola v. Aetna Life Insurance Co. (11th Cir.Jan. 28, 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .p. 16

U.S. ex rel. Watson v. Connecticut General Life Insurance Co. (E.D. Pa. Feb. 11, 2003) . . . . . . . . . . . . . . . .p. 17

Government Employee RelatorsU.S. ex rel. Holmes v. Consumer Insurance Group (10th Cir.Feb. 10, 2003) (en banc) . . . . . . . . . . . . . . . . . . . . . . . . .p. 20

Section 3730(b)(2) Disclosure StatementU.S. ex rel. Bagley v. TRW Inc. (C.D. Cal. Feb. 5, 2003) . . . .p. 23

Section 3730(b)(5) First-to-File BarU.S. ex rel. Ortega v. Columbia Healthcare, Inc. (D.D.C.Jan. 15, 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .p. 26

U.S. ex rel. Hampton v. Columbia/HCA Healthcare Corp.(D.C. Cir. Feb. 7, 2003) . . . . . . . . . . . . . . . . . . . . . . . . . .p. 28

Section 3730(c)(2)(A) Dismissal by the GovernmentSwift v. United States (D.C. Cir. Feb. 11, 2003) . . . . . . . .p. 30

Section 3730(d) Relator’s ShareU.S. ex rel. Johnson-Pochardt v. Rapid City Regional Hospital (D.S.D. Feb. 26, 2003) . . . . . . . . . . . . . . . . . . . .p. 32

Section 3730(e) Public Disclosure Bar and OriginalSource ExceptionU.S. ex rel. Brennan v. Devereux Foundation (E.D. Pa.Jan. 14, 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .p. 34

U.S. ex rel. Coppock v. Northrop Grumman Corp.(N.D. Tex. Mar. 5, 2003) . . . . . . . . . . . . . . . . . . . . . . . . .p. 36

U.S. ex rel. Feingold v. AdminaStar Federal, Inc. (7th Cir.Mar. 27, 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .p. 38

Section 3730(h) Retaliation ClaimsU.S. ex rel. Siewick v. Jamieson Science & Engineering,Inc. (D.C. Cir. Mar. 28, 2003) . . . . . . . . . . . . . . . . . . . .p. 40

Section 3731(b) Statute of LimitationsU.S. ex rel. Purcell v. MWI Corp. (D.D.C. Mar. 25, 2003) . . .p. 41

Rule 9(b)U.S. ex rel. Cericola v. Ben Franklin Bank (N.D. Ill.Jan. 27, 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .p. 43

Peterson v. Comm Gen Hosp (N.D. Ill. Feb. 7, 2003) . . . .p. 44

U.S. ex rel. McCready v. Columbia/HCA Healthcare Corp.(D.D.C. Mar. 7, 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . .p. 45

Attorneys’ Fees, Costs, and ExpensesU.S. ex rel. Costner v. U.S. (8th Cir. Jan. 28, 2003) . . . . .p. 47

LITIGATION DEVELOPMENTS

Nursing Home Liability for Failure of Care Under the False Claims Act

Kristine BlackwoodHoward F. Daniels

Assistant U.S. AttorneysLos Angeles, California

INTERVENTIONS AND SUITS FILED/ UNSEALED

JUDGMENTS AND SETTLEMENTS

SPOTLIGHT

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The False Claims Act and Qui Tam Quarterly Review is published by the Taxpayers Against FraudEducation Fund. This publication provides an overview of major False Claims Act and qui tam devel-opments including case decisions, DOJ interventions, and settlements.

The TAF Education Fund is a nonprofit charitable organization dedicated to combating fraudagainst the Federal Government through the promotion and use of the qui tam provisions of the FalseClaims Act (FCA). The TAF Education Fund serves to inform and educate the general public, thelegal community, and other interested groups about the FCA and its qui tam provisions.

The TAF Education Fund is based in Washington, D.C., where it maintains a comprehensive FCAlibrary for public use and a staff of lawyers and other professionals who are available to assist anyoneinterested in the False Claims Act and qui tam.

Taxpayers Against Fraud Education Fund1220 19th Street, NW Suite 501 Washington, DC 20036Phone (202) 296-4826 Fax (202) 296-4838Internet: http://www.taf.org

Copyright © 2003 TAF Education Fund. All Rights Reserved.

TAF Education Fund

Board of DirectorsPeter Budetti, ChairmanFred AndersonJoseph GersteinGregory LawlerJohn PhillipsLinda SundroGregory WetstoneRobert Wolfe

Professional StaffJames Moorman, President and CEOAmy Wilken, Associate DirectorBret Boyce, Staff Attorney,

Quarterly Review EditorDaniel Shores, Development DirectorCarmen Ruffin, Office AdministratorLinda Powell, Administrative Assistant

1TAF Quarterly Review Vol. 30 • April 2003

FCA Liability of GovernmentEntities

Cook County v. U.S. ex rel. Chandler,123 S. Ct. 1239 (Mar. 10, 2003)

The Supreme Court ruled that local govern-ments are subject to liability in qui tamactions under the FCA. The Court held thatmunicipal corporations have been “persons”subject to suit under the FCA ever since it wasfirst enacted in 1863, and that the 1986amendments did not repeal municipal liabili-ty. The court also clarified that the trebledamages provision in the current version ofthe FCA has a compensatory function as wellas a punitive one, and is certainly not to beequated with classic punitive damages.

Dr. Janet Chandler brought this qui tam actionin 1997 against the Hektoen Institute for MedicalResearch (Hektoen), Cook County, and CookCounty Hospital (CCH). CCH had obtained agrant from the National Institute of Drug Abuseto study the treatment of drug-dependent preg-nant women. The grant was later transferred toHektoen, which is a CCH affiliate. The terms ofthe grant required the grantee to comply withfederal regulations for research on human sub-jects. Chandler’s lawsuit alleged that the defen-dants forged data pertaining to nonexistent“ghost” research subjects and submitted falseprogress reports to the Government. She alsoalleged that they failed to comply with the regu-lations governing research on human subjects,failed to obtain informed consent or thoroughmedical histories from participants, and failed tokeep accurate records or provide proper care.Finally, she alleged that CCH unlawfully retaliat-ed against her by firing her for speaking outabout these abuses.

Cook County moved to dismiss, arguing that it

is not a “person” subject to liability under theAct. The district court initially denied thecounty’s motion, ruling that the term “person”in the Act’s liability provision includes munici-palities. Furthermore, the court ruled that theAct’s treble damages provision is not punitive,so the traditional immunity of municipalitiesfrom punitive damages was not implicated. SeeUnited States ex rel. Chandler v. HektoenInstitute for Medical Research, 35 F. Supp. 2d1078 (N.D. Ill. 1999), 16 TAF QR 3 (Apr. 1999).Subsequently, in Vermont Agency of NaturalResources v. United States ex rel. Stevens, 529U.S. 765 (2000), 19 TAF QR 1 (July 2000), theSupreme Court ruled, per Justice Scalia, thatstates are not “persons” for purposes of FCAqui tam suits, and stated that the Act’s trebledamages provision is “essentially punitive innature.” In light of Stevens, Cook Countymoved for reconsideration of the districtcourt’s decision.

On reconsideration, the district court foundnothing in Stevens to alter its conclusion thatthe county is a “person” for purposes of FCAliability. See United States ex rel. Chandler v.Hektoen Institute for Medical Research, 118 F.Supp. 2d 902 (N.D. Ill. 2000), 21 TAF QR 2(Jan. 2001). However, in view of Stevens, thecourt abandoned the position that FCA dam-ages are not punitive. Holding that the countywas immune from the imposition of punitivedamages, the court dismissed the case againstit. On appeal, the Seventh Circuit reversed andremanded, ordering the district court to rein-state Cook County as a defendant. See UnitedStates ex rel. Chandler v. Cook County, 277 F.3d969 (7th Cir. 2002), 26 TAF QR 1 (Apr. 2002).The court of appeals ruled that municipalitieshave been “persons” subject to FCA liabilitysince the Act was first adopted in 1863, andthat nothing in the 1986 amendments exempt-ed municipalities from liability. The Supreme

FALSE CLAIMS ACT AND QUI TAM DECISIONS

Court granted certiorari. See 536 U.S. 956(2002), 27 TAF QR 1 (July 2002).

Municipalities are “Persons” Subject toFCA Liability

The Supreme Court affirmed the judgment ofthe Seventh Circuit. Writing for a unanimousCourt, Justice Souter observed that as early as1826, the Court, quoting Coke’s Institutes,expressly recognized the presumption that thestatutory term “person”“extends as well to per-sons politic and incorporate, as to natural per-sons whatsoever.” United States v. Amedy, 24U.S. (11 Wheat.) 392, 412 (1826). The defen-dant Cook County conceded that private cor-porations were considered to be persons sub-ject to suit when the FCA was passed in 1863,but argued that municipal corporations werenot so considered until six years later, when theCourt in Cowles v. Mercer County, 74 U.S. (7Wall.) 118 (1869), specifically held that munic-ipal corporations are persons subject to suit.However, the court noted that both case lawand legal commentary in the nineteenth centu-ry reflected the widespread understanding thatmunicipal corporations, like private corpora-tions, are included in the term “person.”Indeed, municipalities were the archetypal cor-porations of the eighteenth century, and it wasnot until the nineteenth century that privatecorporations became widespread. In light ofthis long history going back at least to Coke’s1628 treatise, the Cowles court was able to con-clude automatically and without discussionthat municipal corporations should be treatedlike natural persons for virtually all purposes ofconstitutional and statutory analysis.

The Court also rejected the defendant’s argu-ments that municipal liability was inconsistentwith the criminal penalties and the historicalcontext of the 1863 Act. Although the Act’scriminal penalty of imprisonment clearly couldnot apply to municipalities, it has never been

considered anomalous to require municipalitiesto comply with the substantive standards of fed-eral statutes imposing both civil and criminalsanctions upon “persons.” That municipalitiesmay not be susceptible to every statutory penal-ty is no reason to exempt them from remediesthat sensibly apply. Moreover, although it is truethat local governments were not recipients ofmassive amounts of federal funding in 1863,Congress drafted the FCA expansively in orderto reach all types of fraud that might result infinancial loss to the Government. Thus, neitherthe Act’s text nor its history supports the exclu-sion of municipalities from liability.

Treble Damages Serve Remedial Purposes

The court also rejected the defendant’s attemptto rely on the Stevens Court’s statement thatthe current FCA treble damages are “essential-ly punitive in nature” to argue that even if the1863 Act provided for municipal liability, the1986 amendments eliminated such liability.Clarifying its statement in Stevens, the Courtobserved that “treble damages have a compen-satory side, serving remedial purposes in addi-tion to punitive objectives.” Although “the tip-ping point between pay-back and punishmentdefies general formulation,” several features ofthe FCA suggest a remedial function.

First of all, some liability beyond the amount ofthe fraud is unquestionably necessary to com-pensate the Government completely for ancil-lary costs, such as the costs of detection andinvestigation, as well as the delays and inconve-niences occasioned by fraudulent claims.Moreover, the qui tam feature, which diverts asmuch as thirty percent of the recovery to a pri-vate relator, is the “most obvious indication thatthe treble damages ceiling has a remedial placeunder this statute.” Once the relator’s share issubtracted, the Government’s recovery is rough-ly double damages, which the Court recognizedas remedial in United States v. Bornstein, 423


U.S. 303, 315 & n.11 (1976). Moreover, the FCAhas no separate provision for prejudgmentinterest, which is usually thought essential tocompensation. Finally, the Act does notexpressly provide for consequential damages,which are typically available in actions for fraudat common law. In fact, the Court observed, theAct’s legislative history suggests that Congressadopted the treble damages provision as a sub-stitute for consequential damages.

Thus, the Court concluded, the FCA’s trebledamages provision “certainly does not equatewith classic punitive damages.” Classic puni-tive damages leave the jury with open-endeddiscretion, raising concerns that municipaldefendants, because of their taxing power, maybe unfairly targeted by unduly generous juries,resulting in the imposition of liability onblameless or unknowing taxpayers. These con-cerns are much less acute under the FCA. If thejury finds liability in an FCA case, it is instruct-ed to return a verdict for actual damages: thecourt then determines any multiplier, and setsany separate penalty. Moreover, the FCAimposes liability only on local taxpayers whohave already enjoyed the indirect benefit of thefraud, to the extent that the ill-gotten federalmoney has already been passed along in theform of lower taxes or expanded services. Thecourts, by exercising their discretion, and theGovernment, by deploying its power to inter-vene and dismiss or settle, can determinewhether the local taxpayer should make up foran undeserved benefit, or the federal taxpayershould be permanently out of pocket. Thus,the presumption against “punitive” damageshas only limited vigor in this context.

1986 Amendments Did Not Repeal 1863Definition of “Person” by Implication

Working against the weakened presumptionregarding “punitive” damages was a different pre-sumption, this one at full strength: the cardinal

rule that repeals by implication are disfavored. Asthe Court observed: “Inferring repeal from leg-islative silence is hazardous at best, and errorseems overwhelmingly likely in the notion thatthe 1986 amendments wordlessly redefined ‘per-son’ to exclude municipalities.” In fact, in light ofthe objectives of the 1986 amendments, theCourt concluded, it is impossible to believe thatCongress intended silently to repeal municipalliability. The purpose of the amendments was tostrengthen the FCA: thus Congress abolished thegovernment knowledge defense, increased themeasure of recovery, and enhanced the incentivesfor relators to bring suit. There is also evidence inthe legislative history that Congress affirmativelyendorsed municipal liability. Thus, the Courtruled, “[i]t is simply not plausible that Congressintended to repeal municipal liability sub silentioby the very Act it passed to strengthen theGovernment’s hand in fighting false claims.”Because the term “person” in the FCA includedlocal governments in 1863, and nothing in the1986 amendments redefined the term, the Courtaffirmed the judgment of the Seventh Circuit.

U.S. v. Hickman County, 2003 U.S. App.LEXIS 5397 (6th Cir. Feb. 18, 2003)

The Sixth Circuit reversed a district courtdecision holding that the Government maynot bring an FCA action against a county. Thecourt of appeals remanded the case to the dis-trict court for further proceedings consistentwith the recent decision of the Supreme Courtthat local governments are “persons” subjectto liability under the FCA.

The Government brought this FCA actionagainst Hickman County, Tennessee, allegingthat the county fraudulently sought federal dis-aster funds to replace several bridges purport-edly damaged as the result of a flood. After theGovernment filed suit, the Supreme Courtruled in Vermont Agency of Natural Resources v.


United States ex rel. Stevens, 529 U.S. 765, 787-88 (2000), that states are not “persons” subjectto qui tam suits under the FCA. AlthoughHickman County is not a state, and theGovernment’s suit against it is not a qui tamaction, the district court ruled in an unpub-lished decision that under Stevens the countywas not a person subject to qui tam liability anddismissed the suit. The Government appealed.

County Is Subject to FCA Liability

The Sixth Circuit, in an unpublished per curi-am decision, reversed. The court observed thatwhile the Government’s appeal was pending,the Supreme Court decided another casedirectly on point. In Cook County v. UnitedStates ex rel. Chandler, 2003 U.S. LEXIS 1957(March 10, 2003), the Supreme Court ruledthat local governments are “persons” subject toliability under the FCA, and that the Act’s trebledamages remedy does not preclude recoveryagainst a county. See above at page —-.Accordingly, the Sixth Circuit reversed the dis-trict court’s decision dismissing the case againstHickman County, and remanded to the districtcourt for further proceedings consistent withthe Supreme Court’s decision in Chandler.

U.S. ex rel. Dunleavy v. County ofDelaware, 155 L. Ed. 2d 308 (Mar. 24, 2003)

The Supreme Court vacated a Third Circuitjudgment ruling that local governments arenot amenable to suit under the False ClaimsAct. The Supreme Court remanded the casefor further proceedings consistent with itsrecent decision that local governments are“persons” subject to liability under the FCA.

Anthony Dunleavy, a former consultant toDelaware County, brought this qui tam suit in1994, alleging that the county improperly used

HUD program funds for general county purpos-es. In 2000, in light of the Supreme Court’s deci-sion in Vermont Agency of Natural Resources v.United States ex rel. Stevens, 529 U.S. 765, 787-88(2000), that states are not “persons” subject to quitam suits under the FCA, the district court con-cluded that local governments are immune fromqui tam suits as well, because FCA damages are“essentially punitive.” See 2000 WL 1522854(E.D. Pa. Oct. 12, 2000), 21 TAF QR 3 (Jan. 2001).

Dunleavy appealed, but the Third Circuitaffirmed the judgment of the district court. See279 F.3d 219 (3d Cir. 2002), 26 TAF QR 4 (Apr.2002). Noting that the term “person” is notdefined in the FCA, the court of appeals con-cluded that “this lack of clarity in the text of theAct is insufficient indicia [sic] of congressionalintent to abrogate local governmental immuni-ty under the FCA.” Dunleavy petitioned for awrit of certiorari in the Supreme Court.

The Third Circuit’s decision ignored a decisionissued a week before in the Seventh Circuit,United States ex rel. Chandler v. Cook County, 277F.3d 969 (7th Cir. 2002), 26 TAF QR 1 (Apr.2002). In Chandler, the Seventh Circuit held thatthe FCA authorizes qui tam suits against localgovernments, and pointed out that decisions inother courts to the contrary were inconsistentwith established doctrinal distinctions betweenstates, which are sovereigns, and municipalities,which are not. The Supreme Court granted cer-tiorari in Chandler, and on March 10, 2003affirmed the judgment of the Seventh Circuit.See above at page —-. The Supreme Court ruledthat local governments have never enjoyedimmunity under the FCA, and observed that theAct’s treble damages certainly cannot be equatedwith classic punitive damages.

Third Circuit Judgment Vacated

In a summary disposition on March 24, 2003,the Supreme Court granted Dunleavy’s peti-


tion for certiorari and vacated the judgment ofthe Third Circuit. Without discussion, theSupreme Court remanded the case to the courtof appeals for further consideration in light ofthe recent decision in Chandler.

FCA Liability/Materiality

U.S. ex rel. Costner v. U.S., 317 F.3d 883(8th Cir. Jan. 28, 2003)

The Eighth Circuit affirmed a district court’sgrant of summary judgment in favor of thedefendants in a qui tam action based on alle-gations that the defendants submitted falseclaims for the treatment and disposal of haz-ardous waste. Without deciding the precisecontours of a materiality requirement underthe FCA, the court of appeals ruled that thedistrict court properly granted summaryjudgment on most of the relators’ claims forfailure to show that the alleged misstatementswere even relevant to the Government’s deci-sion to pay. The Eighth Circuit also ruled thatthe district court properly held that theGovernment’s knowledge and approval of theparticulars of several of the claims at issuenegated the scienter required for liability.Furthermore, the district court did not err indismissing the remaining claims for failure toplead fraud with particularity as required byFederal Rule of Civil Procedure 9(b).

The plaintiffs in this qui tam action, a group ofindividuals and public interest groups, filedsuit in 1995 alleging that the defendant corpo-rations conspired to submit false claims forpayment under a government contract for thetreatment and disposal of hazardous waste atthe Vertac Chemical Plant site in Jacksonville,Arkansas. The Vertac site was home to variouschemical, herbicide, and pesticide productionfacilities from 1948 to 1987, when Vertac aban-

doned it, leaving approximately 28,000 corrod-ing and leaking drums of toxic waste on thepremises. The EPA subsequently contractedwith the defendants to clean up the site. Intheir qui tam action, the relators alleged thatthe defendants concealed operational prob-lems and numerous regulatory violations fromthe EPA, rendering their requests for paymentfalse under the FCA.

The Government declined to intervene, andsubsequently appeared as a movant in theaction on the side of the defendants. Afterextended discovery, the district court grantedsummary judgment to the defendants on allclaims except those alleging tampering withmonitoring devices. The court then dismissedcertain of the tampering claims, finding thatthey had been pleaded with insufficient partic-ularity. After trial on the two remaining tam-pering claims, the district court entered judg-ment in favor of the defendants on all claims.The relators appealed, arguing that the districtcourt erred (1) in holding that they had failedto produce evidence of materiality on mostclaims; (2) in finding that the defendants’ dis-closure of their operational difficulties to theEPA negated the scienter required for liability;and (3) in dismissing most of the tamperingclaims for failure to plead with particularity.

Relator Failed to Show AllegedOmissions Were Relevant toGovernment’s Decision to Pay

The Eighth Circuit affirmed the judgment ofthe district court. The district court had reject-ed most of the plaintiffs’ claims for failure toshow materiality, noting that the EPA wasinformed of the operational problems from atleast three sources and nevertheless continuedto approve monthly payments. The EighthCircuit observed that the existence of andappropriate standard for materiality in FCAcases is a matter of some disagreement among


the courts. Although the Eighth Circuit hasnot directly resolved this question, it has statedthat the Act provides recovery for material mis-representations, and has suggested that out-come materiality is the proper standard, rulingthat only actions by the claimant that have thepurpose and effect of causing the Governmentto pay money that it is not obligated to pay areactionable claims under the FCA.

However, the court did not need to decide theprecise contours of the materiality require-ment in this case, because it held that the plain-tiffs had failed to produce evidence raising agenuine issue of material fact as to whether theallegedly withheld information was even rele-vant to the EPA’s payment decision. Only withrespect to the allegations of tampering withmonitoring devices did the plaintiffs produceevidence that the EPA’s decision would proba-bly have been affected had it known of thealleged omission. Therefore, the district courtdid not err in granting summary judgment onall but the monitor tampering claims.

Government Knowledge and Approval ofOmissions Negated Scienter Required forLiability

The court of appeals also ruled that the defen-dants’ openness with the EPA about their prob-lems and their close working relationship insolving those problems negated the requiredscienter regarding those issues. The courtquoted with approval the holding of its sistercircuits on this point: “If the governmentknows and approves of the particulars of aclaim for payment before that claim is present-ed, the presenter cannot be said to have know-ingly presented a fraudulent or false claim.”United States ex rel. Becker v. WestinghouseSavannah River Co., 305 F.3d 284, 289 (4th Cir.2002), 28 TAF QR 9 (Oct. 2002) (quotingUnited States ex rel. Durcholz v. FKW, Inc., 189F.3d 542, 543 (7th Cir. 1999)). Although the

defendants’ performance under the contractwas not perfect, the record showed that theGovernment was aware of ongoing problemsas they occurred, worked with the defendantsto correct them, and got what it paid for.Therefore, the district court properly grantedsummary judgment on these claims.

Relators Failed to State RemainingClaims With Particularity

The only claims that survived the districtcourt’s rulings on materiality and scienter werethe allegations of intentional tampering withthe kiln draft monitor, a measuring device onthe waste incinerator. The plaintiffs alleged thatthe tampering occurred on two specified as wellas several other unspecified occasions, but didnot indicate who allegedly carried out the tam-pering, or how it was carried out. Withoutinformation as to who allegedly carried out thetampering and how and when it occurred, thecourt ruled, the defendants would be largelyunable to respond with witnesses and docu-ments to defend against these charges.Therefore, the district court did not err in dis-missing the claims of tampering on unspecifiedoccasions, and proceeding to trial only on theclaims of tampering on the two specified occa-sions. Accordingly, the Eighth Circuit affirmedthe judgment of the district court.

The Eighth Circuit issued two additional deci-sions in this action on the same date. Thecourt of appeals affirmed the district court’saward of costs to the defendants pursuant toFed. R. Civ. P. 54(b). See 317 F.3d 889, summa-rized under “Attorneys’ Fees, Costs, andExpenses” below at page 47. The court alsoaffirmed the district court’s denial of the plain-tiffs’ motion for a default judgment against oneof the defendants, MRK Incineration, Inc.,which had failed to defend against the suit. See2003 U.S. App. LEXIS 1314, summarized in“Litigation Developments” below at page 50.


U.S. ex rel. Bidani v. Lewis, 2003 U.S.Dist. LEXIS 3291 (N.D. Ill. Mar. 4, 2003)

An Illinois district court denied the defen-dants’ motion for summary judgment in a quitam action based on allegations that thedefendants submitted kickback-tainted claimsto Medicare. The court ruled that because theAnti-Kickback Act is a critical provision of theMedicare Statute, compliance with it is mater-ial to the Government’s payment of claims forreimbursement.

Dr. Anil Bidani brought this qui tam actionagainst Edmund Lewis and two companies con-trolled by Lewis, American Medical SupplyCorporation (AMS) and Circle MedicalManagement Corporation. The procedural his-tory of this case is extensive and has been the sub-ject of numerous prior rulings by the districtcourt. See 2001 WL 1609377 (Dec. 14, 2001), 25TAF QR 20 (Jan. 2001); 2001 WL 747524 (June29, 2001); 2001 WL 32868 (Jan. 1, 2001), 22 TAFQR 10 (April 2001); 1999 WL 163503 (March 12,1999); 1998 WL 1820753 (Dec. 29, 1998). Onecount of the complaint remains, in which Bidanialleges that the defendants billed Medicare fordialysis supplies without reporting that theyreceived discounts which were in fact illegal kick-backs under the provisions of the Anti-KickbackAct. The defendants moved for summary judg-ment on this remaining count, arguing thatBidani had failed to offer evidence that thealleged kickback violations were material to theGovernment’s handling of their Medicare claims.

Court Embraces Outcome MaterialityStandard

The court denied the defendants’ motion. Thecourt observed that an implied false certifica-tion claim such as Bidani’s is viable only if com-pliance with the statute or regulation in ques-tion is required in order to receive funds fromthe Government. The court agreed with the

defendants that Bidani needed to show that thealleged violation of the Anti-Kickback Act wasmaterial to the Government’s treatment of thedefendants’ Medicare claims. However, thecourt noted a split of authority as to whetherthe FCA requires a showing of outcome mate-riality (that the misrepresentation affected theGovernment’s decision to remit funds) or claimmateriality (that the misrepresentation wasmaterial to the defendant’s claim of right). Thecourt observed that the Seventh Circuit hasleaned toward an outcome materiality stan-dard, stating that an omission must be “materi-al to the government’s buying decision.” Luckeyv. Baxter Healthcare Corp., 183 F.3d 730, 732(7th Cir. 1999). Thus, the court adopted themore stringent outcome materiality standard.

Violation of Anti-Kickback Act IsMaterial to Payment Decision

Because the defendants’ alleged violation of theAnti-Kickback Act was not disclosed to theGovernment, the question whether the misrep-resentation affected the Government’s decisionto remit funds was a hypothetical one. In sucha case, courts must inquire whether compliancewith the Anti-Kickback Act was so important orcentral to the Medicare reimbursement processthat failure to disclose noncompliance resultedin wrongful payments. The defendants pointedto the commentary on the 1992 amendments tothe Medicare program setting reimbursementcaps for the supplies at issue in this case. Thecomments recognized that the Governmentoften does not have access to suppliers’ costsand that the real costs are often lower than theset caps. In the defendants’ view, these com-ments showed that failure to disclose their dis-counts was not material since the governmentpayment amount would have been the sameregardless of the actual cost of the supplies.

The court ruled that the defendants’ argumentsmisread Bidani’s allegations. Bidani alleged


not merely that the defendants failed to reportdiscounts that lowered their actual supplycosts, but that they submitted claims for sup-plies for which they received illegal kickbacks.

The Government had entered a statement ofinterest arguing that because the Anti-Kickback Act is a critical provision of theMedicare Statute, compliance with it is mater-ial to the Government’s payment decision.The court agreed. The Anti-Kickback Actcriminalizes the submission of kickback-taint-ed claims to Medicare, and bars those convict-ed of violations from participating in the pro-gram. Thus, compliance with the Anti-Kickback Act is central to Medicare, and reim-bursing a kickback-tainted claim would putthe Government in the position of fundingillegal kickbacks after the fact. Accordingly,the court ruled that the alleged kickback viola-tions were material to the Government’s pay-ment decision, and denied the defendants’motion for summary judgment.

FCA Liability/False Certification

U.S. ex rel. Ortega v. ColumbiaHealthcare, Inc., 240 F. Supp. 2d 8(D.D.C. Jan. 15, 2003)

See “Section 3730(b)(5) First-to-File Bar”below at page 26.

U.S. ex rel. Watson v. ConnecticutGeneral Life Insurance Co., 2003 U.S.Dist. LEXIS 2054 (E.D. Pa. Feb. 11,2003)

See “FCA Liability of Medicare Carriers andFiscal Intermediaries” below at page 17.

U.S. ex rel. Bidani v. Lewis, 2003 U.S.Dist. LEXIS 3291 (N.D. Ill. Mar. 4, 2003)

See “FCA Liability/Materiality” above at page8.

U.S. ex rel. Diop v. Wayne CountyCommunity College District, 242 F.Supp. 2d 497 (E.D. Mich. Jan. 31, 2003)

A Michigan district court granted the defen-dant’s motion for summary judgment in acase purporting to state, inter alia, a qui tamclaim for “academic fraud” as well as a claimfor retaliation in violation of the FCA’swhistleblower protection provision. Thecourt ruled that the plaintiff had failed toestablish a claim for false certification, andrejected the retaliation claim on the groundsof Eleventh Amendment immunity, or in thealternative, on the grounds that the plaintiffdid not act in furtherance of an FCA claim.

Seydou Diop is an African male employed as apart-time chemistry instructor by the WayneCounty Community College District (WCCCD),which operated five campuses in the Detroit area.In 2000, WCCCD posted a job notice for a full-time chemistry faculty position, which was sentto all part-time instructors, including Diop. Diopand various others applied for the position; allapplicants, including Diop, who met the mini-mum requirements for the job (a master’s degreeand relevant teaching experience) were invitedfor an interview. However, Diop did not makehimself available for an interview. Another part-time chemistry instructor, a white female, washired for the position.

Three months later Diop filed suit againstWCCCD and various college officials, alleginggender, race, and national origin discrimina-tion in violation of Michigan state law and the


Fourteenth Amendment, as well as substantiveand procedural due process violations. He alsoasserted a qui tam claim, alleging that thedefendants received federal funds by falselycertifying compliance with applicable statutoryand regulatory provisions and accreditationstandards. He alleged that he suffered retalia-tion in violation of the FCA’s whistleblowerprotection provisions for complaining of thedefendants’ “academic fraud.” At the close ofdiscovery the defendants moved for summaryjudgment on all claims.

Plaintiff Misconstrued Nature and Extentof Defendant’s Certification to theGovernment

The court granted the motion and dismissedthe case in its entirety with prejudice. Diop’stheory of qui tam liability was that the accredi-tation information in WCCCD’s application forparticipation in the Federal Student FinancialAid program was false because the chemistrylaboratories were ill-equipped. However, thecourt observed, although 20 U.S.C. § 1099brequires accrediting agencies to apply certaineducational standards in accrediting education-al institutions, it imposes no duties on the insti-tutions themselves. WCCCD truthfully certi-fied that it was accredited, but did not certifyadherence to any particular standards, muchless the particular standards regarding equip-ment of its chemistry laboratories that Diopsought to engraft onto its certification.Accordingly, the court granted summary judg-ment to the defendant on Diop’s qui tam claim.

Defendants Enjoyed Sovereign ImmunityFrom Liability on Retaliation Claim

The court also ruled that the defendants enjoyedimmunity under the Eleventh Amendmentfrom liability on Diop’s retaliation claim. Thecourt observed that while state colleges and uni-versities almost always enjoy Eleventh

Amendment immunity, community and techni-cal colleges tend to present a more difficultquestion, because they are most often hybrids ofstate entities, which enjoy such immunity, andlocal entities, which do not. In such cases courtsmust examine the degree of local autonomy,and most importantly, the funding of the par-ticular entity in question. The court found thatWCCCD was created and governed by state law,and that it received a little more than a third ofits revenues from the state in recent years. Whilethe Sixth Circuit has not directly addressed thequestion of immunity of community colleges,the court found persuasive an Eighth Circuitopinion holding that a community college thatreceived about 75% of its funding from the stateenjoyed Eleventh Amendment immunity.Although WCCCD received a smaller percent-age of its funding from the state, the court notedthat any damage award would necessarily“invade the state treasury, at least in part.”Therefore, given the totality of the circum-stances, the court held that WCCCD enjoyedEleventh Amendment immunity.

Plaintiff Had Not Acted in Furtherance ofan FCA Claim

As an alternative basis for its ruling, the courtheld that even if WCCCD did not enjoy immu-nity, Diop had failed to raise a legally cogniz-able FCA retaliation claim. Diop had pro-duced no evidence that his complaints aboutthe inadequacies of the chemistry laboratorieswere made in furtherance of an FCA action.Even accepting his post-deposition affidavit,where he stated that he complained that thecondition of the laboratories constituted “aca-demic fraud,” Diop had failed to show that hehad engaged in activity protected under thewhistleblower provisions of the FCA. BecauseDiop’s FCA qui tam and retaliation claims, aswell as his other claims, did not raise a genuineissue of material fact, the court granted thedefendants’ motion for summary judgment.


U.S. ex rel. Perales v. St. Margaret’sHospital, 243 F. Supp. 2d 843 (C.D. Ill.Feb. 7, 2003)

An Illinois district court denied the relator’smotion for partial summary judgment andgranted the defendant’s motions for summaryjudgment in a qui tam action based on allega-tions of violations of the Stark and Anti-Kickback Statutes. The court ruled that the con-tracts and arrangements identified by the rela-tor did not violate those statutes, and thus couldnot serve as the basis for an FCA violation.

Constantino Perales, a physician, had a contrac-tual relationship with St. Margaret’s Hospital inSpring Valley, Illinois from 1989 through early1992. In 1994 a dispute arose between Peralesand the hospital over payment he allegedly owedit, resulting in state court litigation. In 1998,Perales brought a qui tam action against the hos-pital in federal court, alleging that the hospitalviolated the Stark and Anti-Kickback Statutesboth in its relationship with Perales and by pur-chasing the practices of several other physiciansat prices that exceeded the fair market value ofthe practices and included kickbacks for futurereferrals. After discovery, Perales moved for par-tial summary judgment on his contention thatthe hospital paid remuneration for referrals. Thehospital filed multiple motions for summaryjudgment, on the grounds that Perales had failedto raise a genuine issue of material fact as to theexistence of violations of the Stark and Anti-Kickback Statutes, and that the statute of limita-tions barred claims arising out of Perales’ ownrelationship with the hospital.

Relator Failed to Establish That HospitalPaid More Than Fair Market Value forPhysician Practices

The court denied Perales’ motion and grantedthe defendant’s motions. Central to Perales’claim regarding the practice purchases was his

allegation that the hospital paid more than fairmarket value. Perales sought partial summaryjudgment on this allegation, while the hospitalsought partial summary judgment to the con-trary. While Perales sought to rely on variousdepositions to support his motion, the courtfound that they did not in fact support his con-tention that the hospital paid more than fairmarket value. Perales failed to demonstrate whatthe fair market value for the practices in questionwas, much less that the amounts paid includedany improper inducements. Accordingly, thecourt denied his motion for partial summaryjudgment, and granted the defendant’s corre-sponding motion on the issue of practice pur-chases for more than fair market value. Thecourt similarly granted the defendant’s motionfor summary judgment on Perales’ unsupportedassertion that it made improper payments fornon-compete agreements and goodwill.

Relator’s Own Relationship to HospitalCould Not Give Rise to FCA Claim

Perales alleged that his own contract with thehospital required him to make certain referralsonly to the hospital and therefore violated theStark and Anti-Kickback Statutes. However,Perales also alleged that he did not abide by thiscontractual restriction and never made an ille-gal referral to the defendant hospital. The courtobserved that for FCA liability to attach, theplaintiff must show not just that an inducementto make improper referrals was offered, but alsothat at least one timely claim for payment taint-ed by the improper referral relationship wassubmitted to the Government. Perales’ taintedcontract with the hospital expired in early 1992,but he did not file his qui tam suit until six yearsand nine months afterward, in late 1998. Thecourt could find no authority indicating thatthe taint continues once the improper referral-inducing contract is no longer in effect, and thevast majority of the services Perales referred toin his complaint were provided and apparently


billed well outside the statute of limitations.Perales also claimed that he although he neverspecified that patients should be referred to St.Margaret’s, a nurse in his office routinely direct-ed all patients to the hospital, resulting in thefiling of false claims. The court rejected thistheory, which would impose liability withoutany culpable conduct, as absurd. BecausePerales failed to raise a genuine issue of materi-al fact on his allegations of FCA violations aris-ing out of his own relationship with the hospi-tal, the court granted summary judgment to thedefendant on these claims.

Loans and Compensation Paid toPhysicians Were Not Contingent on Valueor Volume of Referrals

The court also rejected Perales’ contention thatloans that the defendant made to physicianswhose practices it purchased were illegal remu-nerations for referrals. The court noted thatthe hospital charged an appropriate amount ofinterest and the physicians repaid the loans infull. Furthermore, the hospital’s contracts withthese physicians were bona fide employmentagreements, and did not require unlawfulreferrals. The contracts required the physi-cians to maintain staff privileges at the hospi-tal, but this requirement was not illegal as itwas not contingent on the value or volume ofreferrals. Therefore, the court granted summa-ry judgment to the defendants on the relator’scontention that the loans were illegal remuner-ations for referrals. Similarly, an independentcontractor agreement between the hospital anda physician the hospital had recruited was notcontingent on the value or volume of referrals,and thus did not give rise to liability.

Lease Charges For Space and EquipmentWere Commercially Reasonable

The court found that, contrary to Perales’ asser-tions, leases for space and equipment between

the hospital and various physicians were com-mercially reasonable and not contingent on thevalue or volume of referrals. Perales had failedto make any attempt to demonstrate that therates charged exceeded fair market value.Accordingly, the court granted summary judg-ment to the defendants on these claims.

Relator Failed to Show Scienter

The defendants also argued, and the courtagreed, that even if the relator could show thata violation of the Anti-Kickback or StarkStatute occurred, he had produced no supportfor his assertion that false claims were madewith actual knowledge or in willful ignoranceor reckless disregard of their truth or falsity, asthe FCA requires. The record showed thatSMH obtained independent market valuationsbefore setting compensation and rental rates,received and considered relevant publicationson compliance, established a corporate com-pliance committee, and routinely consultedcounsel in drafting contracts and agreements.Moreover, the record did not support a findingof reckless disregard: rather, the court found,“the theories presented by Perales and there-fore the process by which any conceivable vio-lation could be demonstrated, are so convolut-ed and attenuated that it has taken the Courtsubstantial amounts of time even to discernwhat Perales is talking about, let alone the legalmerits of the allegations.” Ultimately, however,the court determined that the allegations werewithout merit, and hence ruled that the defen-dant could not have “knowingly” violated theFCA as that term is defined in the Act.

Court Criticizes Implied CertificationTheory

In conclusion, the court observed that theFCA, which was originally applied to suchpatently fraudulent activities as billing for ser-vices not provided, has recently been expanded


by plaintiffs seeking to reach indirect violationssuch as the implied false certification claims atissue in this case. There is a lack of consensuson the implied false certification theory, andthe Seventh Circuit has not yet addressed it.The court had no need to grapple with thisquestion, as it disposed of the case on othergrounds. However, the court suggested thatthe proceedings in this case could be consid-ered “vivid examples” in support of the rejec-tion of the implied certification theory. Thecourt chastised Perales for expanding expo-nentially on the few facts of which he had per-sonal knowledge to pursue untenable theoriesdespite repeated warnings, resulting in manyyears of litigation, substantial expense, andconsiderable waste of judicial resources.

U.S. ex rel. Barrett v. Columbia/HCAHealthcare Corp., 2003 U.S. Dist. LEXIS25884 (D.D.C. Feb. 13, 2003)

A District of Columbia district court grantedin part the defendant’s motion to dismiss a quitam action alleging that the defendant submit-ted kickback-tainted claims to Medicare. Thecourt rejected the defendant’s arguments thatkickbacks cannot give rise to an FCA claimand that the implied certification theory is notviable. However, the court granted withoutprejudice the defendant’s motion to dismissthe FCA claims for failure to plead fraud withparticularity. The court denied the defen-dant’s motion to dismiss the plaintiff ’s claimunder § 3730(h) for unlawful retaliation.

Scott Barrett and Marie Goodwin worked forGramercy Surgery Center, Ltd., a subsidiary ofColumbia/HCA Healthcare Corporation inHouston. They filed a qui tam action againstGramercy, HCA, and various other entities,alleging that the defendants violated the FCAby submitting kickback-tainted claims to feder-al health care programs, by waiving mandatory

copayments, by coding uncovered claims ascovered procedures, and by concealing over-payments from Medicare by fraudulentaccounting practices. In addition, they raisedclaims under § 3730(h) for unlawful retaliation.They also asserted a claim under Texas law forintentional infliction of emotional distress, andpurported to assert federal common-law claimsfor unjust enrichment and conspiracy to per-form illegal acts, as well as a federal statutoryclaim for violation of the Anti-Kickback Act.The Government declined to intervene, and thecase was transferred to the District of Columbiaas part of a multi-district litigation.

HCA moved to dismiss, arguing that kickbackscannot give rise to an FCA cause of action, andthat the relators’ implied false certification the-ory of liability was not viable. They alsoargued that the relators had failed to pleadfraud with particularity as required by Fed. R.Civ. P. 9(b). They urged that the whistleblowerretaliation claims should be dismissed becausethe underlying qui tam claim was not viable.They also argued that the non-FCA claimsshould be dismissed. The relators opposed themotion, and the Government also filed a state-ment of interest arguing that kickbacks cangive rise to an FCA claim, and that the impliedfalse certification theory is viable. See 28 TAFQR 49 (Oct. 2002).

Kickbacks May Give Rise to FCA Liability

The court rejected HCA’s argument that kick-backs cannot give rise to an FCA cause ofaction. The court observed that HCA’s argu-ment ran contrary to existing precedent.Courts have found that violations of the Anti-Kickback and Stark Acts affect theGovernment’s decision to pay. For a moreextensive discussion of this issue, the courtreferred the parties to its prior opinion inUnited States ex rel. Pogue v. Diabetes TreatmentCenters of America, Inc., 2002 U.S. Dist LEXIS


24425 (D.D.C. Dec. 18, 2002), 29 TAF QR 5(Jan. 2003).

Implied Certification Theory is Viable

The court also rejected HCA’s argument thatthe implied false certification theory is notviable in the D.C. Circuit. HCA relied heavilyon United States ex rel. Siewick v. JamiesonScience and Engineering, Inc., 214 F.3d 1372(D.C. Cir. 2000), 19 TAF QR 5 (July 2000).However, the Siewick court merely held that therelator’s implied certification claim in that casefailed because the relator had not proved thatcompliance with the statute at issue there (theso-called “revolving door statute”) was a condi-tion of the contract. Thus, the D.C. Circuit inno way rejected the implied certification theoryin Siewick, and in fact expressed willingness toendorse the theory two years later in UnitedStates v. TDC Management Corp., 288 F.3d 421,426 (D.C. Cir. 2002), 27 TAF QR 21 (July 2002).

Qui Tam Claims Failed to Satisfy Rule 9(b)

Nevertheless, the court dismissed the relators’qui tam claims for failure to plead fraud withparticularity as required by Fed. R. Civ. P. 9(b).With regard to the claims alleging waiver ofcopayments, the court found that the relatorshad not shown that such violations affected theGovernment’s decision to pay, and had notlinked those allegations to specific claims forpayment by the Government. The upcoding,miscoding, and kickback allegations were alsoinsufficiently linked with the submission ofclaims to Medicare. The allegations thatGramercy retained overpayments did not referto a false record or statement, as requiredunder § 3729(a)(7).

HCA argued that the complaint should be dis-missed with prejudice, but the court observedthat that would be contrary to the principlesand policies of Fed. R. Civ. P. 15, which states

that leave to amend “shall be freely given whenjustice so requires.” HCA argued that the rela-tors’ failure to submit an adequate complaintin three years constituted undue delay, but thecourt observed that discovery had been stayedpending decision on HCA’s motion to dismiss,and thus HCA had suffered no harm or preju-dice. Because the relators’ complaint in thiscase was inartfully drafted but not obviouslymeritless, the court dismissed it without preju-dice, and directed the relators to seek leave tofile an amended complaint expeditiously.

Retaliation Claim May Be Viable Even IfQui Tam Claim Is Not

The court ruled that HCA was wrong to arguethat the retaliatory discharge claim failed becausethe qui tam claim was deficient. Congress intend-ed to protect employees engaged in collectinginformation even before they have put all thepieces together. Thus the employee need not havedeveloped a winning qui tam claim to fall underthe protection of the retaliation provision; all thatis required is that an employee be investigatingfalse or fraudulent claims.

In this case, the plaintiffs alleged that theyspoke to supervisors and management regard-ing the waiver of copayments, discounting,kickbacks, and the retention of overpayments.This satisfied the first two requirements for anaction under § 3730(h), namely, that theemployees were engaged in protected activityand that their employer was on notice of theactivity. Furthermore, the plaintiffs alsoalleged the third required element, that theemployer discharged them because of theiractivity in furtherance of their qui tam action.Accordingly, the court ruled that they had ade-quately stated a claim for retaliation anddenied HCA’s motion to dismiss that claim.

The court also denied HCA’s motion to dismissthe plaintiffs’ claim for intentional infliction of


emotional distress. However, the court grant-ed its motion to dismiss their federal non-FCAclaims, which they lacked standing to assert.

U.S. ex rel. Local 342 Plumbers &Steamfitters v. Caputo Co., 321 F.3d 926(9th Cir. Mar. 5, 2003)

The Ninth Circuit affirmed grants of summa-ry judgment to the defendants in two separatequi tam actions by different locals of aplumbers’ union based on allegations that thedefendants failed to pay wages at the prevail-ing rate as required by the Davis-Bacon Act.The court ruled that the plaintiffs could notshow that the defendants had failed to pay theprevailing wage, because no prevailing wagehad been established.

In 1993 and 1994 federal wastewater treatmentplant expansion contracts were awarded to theDan Caputo Company and the C.W. RoenCompany, respectively. The projects were gov-erned by the Davis-Bacon Act, 40 U.S.C.§ 276a, and applicable regulations, whichrequire contractors to pay prevailing wage ratesand to submit weekly certifications of compli-ance with this requirement to the Government.

In 1992 the Plumbers’ Union and the Laborers’Union had signed a “jurisdictional agreement”resolving the classification of piping work onNorthern California water treatment plantprojects. The 1992 Agreement provided thatPlumber-Steamfitter-Pipefitter prevailingwages were to be paid to all employees whoperformed piping work. In 1994, Frank Conte,the Department of Labor Wage and HourDivision District Director in San Francisco,wrote a letter to the Plumbers’ Union’s counselstating that the 1992 Agreement established theprevailing practice in Northern California forclassification of work done on water treatmentplants. In 1996 Conte sent a second letter to

the union’s counsel confirming that the rele-vant job classifications were as set out in the1992 Agreement. However, in 1997 JohnFraser, the acting administrator of the Wageand Hour Division, notified the union’s coun-sel that the Department of Labor had reexam-ined its position and concluded that it couldnot enforce the 1992 Agreement because therewere indications that the agreement had notbeen followed in practice.

Meanwhile, in 1995, Local 342 of the Plumbers’Union filed a qui tam action against Caputo,alleging that it had violated the FCA by falselycertifying in its Davis-Bacon compliance state-ments that its employees performing pipingwork had performed work falling with in aLaborer or Millwright wage classificationrather than a Plumber-Steamfitter-Pipefitterclassification. The parties filed cross motionsfor summary judgment.

The court granted the defendant’s motion forsummary judgment. See United States ex rel.Plumbers & Steamfitters Local Union No. 342 v.Dan Caputo Co., 2001 U.S. Dist. LEXIS 13762(N.D. Cal. 2001), 24 TAF QR 36 (Oct. 2001).It ruled that the Conte letters were not bindingclassification determinations because theywere not issued in accordance with the regula-tory scheme adopted by the Department ofLabor to resolve disputed classification issues.Therefore, the relators had presented no evi-dence that the defendant’s Bacon-Davis certifi-cations were false. Moreover, the 1999 letterissued by the Department of Labor constituteda valid final ruling, from which the relators didnot appeal. This final ruling determined thatthe defendant did not misclassify the employ-ees performing piping work on the project.Because the Department issued this ruling inthe exercise of its primary jurisdiction on anissue within its regulatory authority, it wasappropriate for the court to defer to it.Therefore, both because the relators had failed


to present evidence supporting an essential ele-ment of their claim and because that claim wasprecluded by the Department’s ruling, thedefendant was entitled to summary judgment.

Similarly, in 1996, Local 38 of the Plumbers’Union filed a qui tam action under seal againstRoen. The Government declined to intervene.In 1997 the district court entered summaryjudgment for the defendant, but the NinthCircuit reversed, holding that the FCA doesextend to false claims regarding the payment ofprevailing wages, and remanded for furtherproceedings to ascertain (among other things)the manner in which the Department of Labormay determine prevailing wage rates and jobclassifications and the effect of theDepartment’s repudiation of earlier wage-ratedeterminations on the falsity of previouslysubmitted certifications. See 183 F.3d 1088(9th Cir. 1999). In 2001 the union filed arenewed motion for summary adjudication ofthe defendant’s liability, and the defendantfiled a cross motion for summary judgment.

The court granted summary judgment to thedefendants. See United States ex rel. Plumbers& Steamfitters Local Union No. 38 v. C.W. RoenConstruction Co., 2002 U.S. Dist. LEXIS 730, 26TAF QR 31 (Apr. 2002). The court ruled thatthere was a genuine issue of material factwhether Conte as District Director had theauthority to issue a prevailing wage determina-tion. This ruling foreclosed the possibility ofsummary adjudication in the union’s favor.

The court then examined whether Conte’s let-ters could have constituted a binding determi-nation of prevailing wage rates (assuming hehad the proper authority). The parties dis-agreed over the requirements governingDepartment of Labor determinations of pre-vailing wage rates and job classifications. Thedefendants argued that the applicable proce-dure is set out in 29 C.F.R. § 5.11, while the

union argued that the applicable procedure isset out in § 5.13. The court noted that the factsof this case were almost identical to those in theCaputo case. Like the Caputo court, the court inthis case ruled that because § 5.11 by its ownterms “sets forth the procedure for resolution ofdisputes of fact of law concerning payment ofprevailing wage rates, overtime pay, or properclassification,” that section, and not § 5.13, setsforth the administrative procedure by whichwage classification determinations must bemade. Because the union did not dispute thatthe Conte letters were not issued in accordancewith the § 5.11 procedures, those letters did notconstitute binding agency determinations.

The union appealed both judgments. TheNinth Circuit consolidated the appeals, andaffirmed the judgments of both district courts.

Plaintiffs Failed to Establish Claims WereFalse

The Ninth Circuit ruled that that the defen-dants failed to seek a determination of prevail-ing wage rates in accordance with the § 5.11procedures. The 1992 agreement did notestablish a prevailing wage, as the agreementwas not followed. Nor was a prevailing wageestablished by a collective bargaining agree-ment, by an actual survey, or by the Conte let-ters. Therefore, the union did not show thatthe defendants failed to pay the prevailingwage, and thus they could not show that thedefendant’s certifications of compliance withthe Davis-Bacon Act were false. Accordingly,the district courts properly granted summaryjudgment in each case.


FCA Liability of MedicareCarriers and FiscalIntermediaries

U.S. ex rel. Sarasola v. Aetna LifeInsurance Co., 319 F.3d 1292 (11th Cir.Jan. 28, 2003)

The Eleventh Circuit ruled that Medicare fis-cal intermediaries enjoy immunity from quitam liability for a provider’s false claims forpayment that the intermediary failed to auditproperly. The court stated that if a fiscal inter-mediary fails to audit a provider’s claims, itmay be held liable only for its own claim to theGovernment for auditing services, but not forthe provider’s claims that it improperlyapproved.

The relators in this action, Mario Cardoso andValentine Sarasola, worked for St. Johns HomeHealth Agency, Inc., a Florida corporation, inthe early 1990s. During this period, Aetna LifeInsurance Company served as the Medicare fis-cal intermediary for the state of Florida.During 1992 and 1993, a dispute arose betweenAetna and St. Johns over Medicare reimburse-ments. Aetna claimed that St. Johns had beenoverpaid nearly $2.8 million in the two preced-ing fiscal years, and expressed skepticism aboutAetna’s claims for home health visits and tran-scription charges. In 1993 St. Johns sued Aetnaand HHS, seeking injunctive and declaratoryrelief. Later that year St. Johns filed for bank-ruptcy protection under Chapter 11 and soughta court order prohibiting CMS and Aetna fromwithholding reimbursement payments. Thecourt denied the motion in 1994, and subse-quently approved the sale of St. Johns’ assetsand its liquidation under Chapter 7.

While St. Johns’ chapter 11 case was still pend-ing, Cardoso and Sarasola reported to the FBIthat under the direction of its CEO Arnold

Friedman, St. Johns was defrauding theGovernment by seeking reimbursement fromAetna for home health care services it had notprovided. Fifteen months later, in June 1995,Cardoso and Sarasola brought a qui tam actionagainst St. Johns, Friedman, and Aetna. Theyalleged that St. Johns, at Friedman’s direction,had presented claims for services to fictitious,deceased, or otherwise ineligible persons, forservices that were not medically justified, andfor services that were never provided. Theircomplaint also alleged that Aetna aided andabetted this conduct by submitting claims itknew or should have known were false. TheGovernment filed an unopposed motion to staythe qui tam action while it conducted a crimi-nal investigation. In 1998 a grand jury returnedan indictment against twenty-six defendants.Sixteen pleaded guilty and the Governmentproceeded to trial against the rest in 1999.

The Government declined to intervene in thequi tam action against Aetna, and in 2000 thecourt dismissed the action, instructing the rela-tors to file a new complaint if they wished toproceed. The relators filed a new complaint,which was almost verbatim the same complaintthat they had filed in 1995. Aetna moved to dis-miss, contending that it was immune from lia-bility under United States ex rel. Body v. BlueCross & Blue Shield of Alabama, Inc., 156 F.3d1098 (11th Cir. 1998), 15 TAF QR 8 (Oct. 1998).The Body court had ruled that 42 U.S.C.§ 1395h(i)(3) immunizes fiscal intermediariesfrom FCA liability for payment of fraudulentclaims. Conceding that the holding in Bodyapplied squarely to their claim as it was cur-rently stated in their complaint, the relatorssought leave to amend, which the court grant-ed. The relators then filed an amended com-plaint, which repeated the same factual allega-tions as their earlier complaint, but sought topremise liability not on Aetna’s certificationand disbursement of St. Johns’ claims, butrather on Aetna’s failure to audit in accordancewith its obligations to CMS.


Aetna again moved to dismiss. The districtcourt denied Aetna’s motion, ruling that Aetnawas not immune under § 1395h(i)(3) from therelators’ reformulated claim. Aetna appealed.

Fiscal Intermediaries Are Immune FromLiability for Payment of Fraudulent Claims

The Eleventh Circuit held that Body foreclosedthe relators’ claim. To allow the relators to seekrecovery of treble damages based on the value ofthe funds St. Johns fraudulently received fromMedicare, the court ruled, would render Bodyand § 1395h(i)(3) “virtual nullities.” In thecourt’s view, the relators sought recovery for thevery conduct deemed immune in Body simply byrecasting their theory of liability from “‘aidingand abetting’ to some sort of contractual res ipsaloquitur,”under which the intermediary would bepresumed to have failed to perform audits prop-erly merely because fraudulent claims were paid.

In Body that the court had held that theabsolute immunity of fiscal intermediaries wasa recognition of their unique administrativefunction in the operation of the Medicare sys-tem and Congress’ unwillingness to impose lia-bility for the vast amounts of federal moneythey disburse. In the case at bar the court heldthat the relators could not circumvent thisimmunity simply by alleging a failure to audit.

However, the court reiterated the observationit made in Body that the statutory immunity isnot so broad as to foreclose all claims againstfiscal intermediaries. If a fiscal intermediaryhas in fact failed to fulfill its contractual oblig-ation to audit a provider’s records, than itmight be liable in a qui tam action for submit-ting a claim for auditing services never ren-dered. However, because the court’s jurisdic-tion in this interlocutory appeal was strictlylimited under the collateral order doctrine, ithad no occasion to rule on the legal or factualfeasibility of such a claim.

U.S. ex rel. Watson v. ConnecticutGeneral Life Insurance Co., 2003 U.S.Dist. LEXIS 2054 (E.D. Pa. Feb. 11,2003)

A Pennsylvania district court granted summa-ry judgment to the defendant in a qui tamaction against a Medicare carrier. The courtruled that the relator had failed to raise a gen-uine issue for trial on his allegations that thecarrier manipulated its software to ignoreduplicate claims and engaged in other improp-er conduct that could give rise to FCA liability,and had not even attempted to demonstratethat the defendant acted with the required sci-enter. The court also granted summary judg-ment to the defendant on his FCA retaliationclaim, ruling that as an independent contractorrather than an employee of the defendant, theplaintiff lacked standing to bring such a claim.

Michael Watson contracted in 1994 with theConnecticut General Life Insurance Company(CGLIC), a Medicare carrier that processesdurable equipment claims for the western partof the United States, to serve as an independenthearing officer in the Medicare appealsprocess. Under the contracts, Watson was anindependent contractor who was compensatedon a case-by-case basis, received no employeebenefits, set his own schedule, and providedthe bulk of his own supplies. CGLIC terminat-ed Watson’s contracts pursuant to their termsin 1998. Later that year, Watson filed a qui tamaction against CGLIC, alleging that it engagedin a multitude of deceptive practices thatcaused its claims processing costs to rise andthereby increased the reimbursements itreceived from HCFA. Watson also stated aclaim for retaliatory discharge in violation of§ 3730(h) as well as various state law claims. In2000 the Government declined to intervene,and in April 2002 CGLIC moved for summaryjudgment.


Relator Failed to Provide EvidenceSupporting Qui Tam Claim

The district court granted summary judgmentto the defendant on all counts. Watson allegednumerous forms of improper conduct as thebasis for his qui tam claim. He averred thatCGLIC encouraged Medicare suppliers toresubmit rather than seek review of theirdenied or incomplete claims to increase itsreimbursement; that it manipulated its com-puter software to allow duplicate claimsthrough its system; that it fraudulently certifiedcompliance with the Medicare CarriersManual; that it manipulated its CarrierPerformance Evaluations in order to boost itscompensation, avoid penalties, and securerenewal of its contracts; and that it failed toimpose late fees on delinquent providers.None of these allegations survived summaryjudgment.

Policy of Encouraging ResubmissionsDid Not Cause Presentation of FalseClaims

The court found that CGLIC’s policy ofencouraging resubmissions did not cause thepresentation of false claims. For the most part,this policy had the effect of reducing theamount of money the Government owed toCGLIC. While on at least one occasion the pol-icy resulted in an increase of the amount offunds budgeted to CGLIC for interim pay-ments, CGLIC would retain those funds only ifits actual claims processing costs rose, and thusthis incident did not give rise to an FCA claim.The court also ruled that there was no evidencethat the policy of encouraging resubmissionswas wrongful, and noted that there was evi-dence that the Government was well aware ofthe policy. Finally, there was no evidence thatCGLIC acted with the scienter required forFCA liability. In fact, CGLIC presented evi-dence that it considered resubmission to be the

more efficient and cost-effective method ofdealing with denied or incomplete claims.

Allegation that Defendant ManipulatedSoftware to Ignore Duplicate Claims WasUnsupported by Evidence

The court found that Watson had failed to pre-sent sufficient evidence to support his claim thatCGLIC knowingly manipulated its software tocause duplicate claims to be paid. The courtfound that Watson’s evidence in fact demon-strated that CGLIC properly managed its com-puter system, educated its employees as to howto process claims correctly, and consulted withthe Government and took action when problemsdid arise. Even assuming that Watson could pre-sent sufficient evidence to support his claim thatCGLIC manipulated its software, Watson failedto demonstrate that CGLIC did so knowing thatit would cause a false or fraudulent claim to bepresented to the Government. There was no evi-dence that CGLIC’s occasional failure to catchduplicate claims was caused by anything morethan negligence or mistake. Because the courtfound that Watson presented insufficient evi-dence to support these allegations, the court hadno need to address CGLIC’s alternative argu-ment that it could not be held liable under theFCA for duplicate payments because it enjoyedstatutory immunity as a Medicare carrier underthe approach of United States ex rel. Body v. BlueCross & Blue Shield of Alabama, 156 F.3d 1098(11th Cir. 1998), 15 TAF QR 8 (Oct. 1998).

Alleged False Certifications ofRegulatory Compliance Did NotInfluence Government’s Decision to Pay

The court ruled that Watson’s allegations thatCGLIC falsely certified compliance with HCFAregulations and the Medicare Carriers Manual(MCM) could not give rise to FCA liability,because Watson had provided no evidence thatsuch alleged false certifications influenced the


Government’s payment decision. Followingthe holding in Mikes v. Straus, 274 F.3d 687, 697(2d Cir. 2001), 25 TAF QR 6 (Jan. 2002), thecourt ruled that false certification of compli-ance cannot give rise to FCA liability when thealleged noncompliance would not have influ-enced the Government’s decision to pay.CGLIC’s government funding was based on itsworkload, not on its compliance with MCM orHCFA directives, and although a provision inits government contract authorized a reduc-tion in funding when the services provided didnot correspond to contract requirements,Watson provided no evidence that noncompli-ance with MCM or HCFA directives wouldhave resulted in the imposition of this contrac-tual penalty. Moreover, CGLIC provided evi-dence that such penalties were never imposedon carriers like CGLIC that operated undercost-reimbursement contracts. Accordingly,the court ruled that Watson had failed to pro-vide evidence supporting a prima facie FCAfalse certification claim.

Relator Did Not Support Qui Tam ClaimBased on Allegations That DefendantManipulated Contractor PerformanceEvaluations

The court ruled that Watson failed to carry hisburden of providing evidence to support hisFCA claim based on allegations that CGLICengaged in deceptive practices to obtain afavorable Contractor Performance Evaluation(CPE). According to Watson, these allegedpractices enabled CGLIC (1) to obtain renewalof its HCFA contracts, (2) to receive incentivepayments under the contracts, and (3) to avoidpenalties for noncompliance. However, thecourt found no evidence that CGLIC’s CPEwould have been deficient had it not engagedin the alleged manipulation, or that the CPEplayed a decisive role in HCFA’s decision torenew the contracts. Moreover, even assumingthat the CPE did play a decisive role in the con-

tract renewal decision, the court ruled that thelink between the renewal and any false orfraudulent claim was too attenuated to give riseto FCA liability. Similarly, the court ruled thatCGLIC’s right to incentive payments was unre-lated to its CPE. Finally, the court ruled thatWatson’s claim that the alleged manipulationenabled CGLIC to avoid penalties failed for thesame reason as his contract renewal claim:there was no evidence that the CPE would havebeen deficient absent the alleged manipulation,or that the alleged manipulation caused theGovernment to pay sums that it otherwisewould have withheld as penalties.

Evidence Insufficient to Support ClaimBased on Failure to Impose Late Fees

The court found that Watson did not identifyevidence sufficient to establish that CGLICknowingly failed to assess late fees. Medicarecarriers are obligated by statute to assess apenalty of ten percent on claims filed by sup-pliers more than twelve months from the dateof service. To support his claim, Watson reliedsolely on the expert report of Stephen Brooks.However, Brooks’ report was completelyundermined by his deposition testimony thatthe late fee could have been waived for goodcause or administrative error. Moreover,Watson provided no evidence that CGLICacted knowingly, recklessly, or with deliberateignorance in failing to assess the fees.Accordingly, the court granted summary judg-ment on this claim as well.

Retaliatory Discharge Claim FailedBecause Plaintiff Was Not Employee ofDefendant

The court granted summary judgment onWatson’s FCA retaliation claim, becauseWatson was an independent contractor ratherthan an employee of CGLIC, and thereforelacked standing to bring a retaliation claim.


The court observed that the plain language of §3730(h) limits retaliation claims to employees,and since the FCA does not define the term“employee,” its meaning is prescribed by thecommon law agency doctrine. Watson was askilled hearing officer who required no trainingwhen he contracted with CGLIC, providedmost of his own materials and tools, was paidon a case-by-case basis rather than a set salary,and exercised complete control over the timeand location of his work. The contract betweenWatson and CGLIC expressly stated thatWatson was “an independent contractor andnot an employee” of CGLIC. All these factorspointed in favor of a finding that Watson wasan independent contractor. The court conced-ed that the four year duration of Watson’s con-tract with CGLIC and the fact that they bothwere in the same business tended to point in theopposite direction, but concluded that thesetwo factors were hardly sufficient to allow arational jury to conclude that they outweighedthe other factors. Accordingly, the court ruledthat Watson was an independent contractorand as such lacked standing to bring an FCAretaliation claim against CGLIC.

The court also ruled that Watson had failed toprovide evidence supporting his state lawclaims. Accordingly, it granted CGLIC’smotion for summary judgment in its entirety.For a summary of an earlier decision in thiscase on an evidentiary dispute, see “LitigationDevelopments” below at page 51.

Government Employee Relators

U.S. ex rel. Holmes v. ConsumerInsurance Group, 318 F.3d 1199 (10thCir. Feb. 10, 2003) (en banc)

The Tenth Circuit, sitting en banc, vacated apanel decision holding that a government

employee investigating fraud allegations pur-suant to her official duties may not bring a quitam suit based on those allegations. The courtrejected the rationales of both the appellatepanel, which had held that such an employee isnot a “person” for purposes of the FCA’s quitam provisions, and the district court, whichhad held that the Government’s ongoinginvestigation precluded the employee’s suit.The en banc majority ruled that the term “per-son” in the qui tam provisions unambiguouslyencompasses all natural persons. Accordingly,the court reversed the judgment of the districtcourt and remanded for further proceedings.

In 1995 Mary Holmes, who is postmaster inPoncha Springs, Colorado, confirmed the eligi-bility of Consumer Insurance Group (CIG) forthe per pound bulk postal mailing rate. Afterfurther investigation, however, Holmes deter-mined that CIG was not eligible for the perpound rate because the pieces in its mailing didnot satisfy minimum weight requirements.Two years later Holmes discovered that CIGwas nevertheless receiving the per pound rateand reported the matter first orally to her supe-rior and then several months later in a letter tothe Office of the Inspector General. The PostalInspection Service initiated an investigationand turned the case over to the U.S. Attorney.The Government interviewed one current andtwo former CIG employees, revealing its suspi-cions to them, although it later became clearthat the interviewees were already aware of thefraud. In 1998 the Postal Service commendedHolmes’ efforts with a letter of appreciationand a $500 award.

In 1999 Holmes filed a qui tam action againstCIG. The Government moved to dismissHolmes from the action for lack of subjectmatter jurisdiction, arguing that its revelationsof the allegations to the CIG employees consti-tuted public disclosure, and that Holmes wasnot an original source. The district court


granted the motion, not on the public disclo-sure grounds advanced by the Government,but rather on the ground that theGovernment’s ongoing investigation precludedHolmes’ suit. Holmes appealed.

A divided panel of the Tenth Circuit affirmedthe dismissal of Holmes, but not on thegrounds advanced either by the Governmentor the district court. See 279 F.3d 1245 (10thCir. 2002), 26 TAF QR 9 (April 2002). Rather,the panel majority ruled that a governmentemployee who is part an ongoing governmentinvestigation of fraud is not a “person” whomay bring a qui tam action based on that fraudunder § 3730(b)(1). Judge Briscoe dissented,urging that the term “person” clearly encom-passes all human beings, including governmentemployees. Holmes appealed the panel’s deci-sion to the en banc court of appeals.

Ongoing Government Investigation DoesNot Bar Qui Tam Action

Upon rehearing en banc, the Tenth Circuitvacated the panel’s opinion and reversed thejudgment of the district court. Judge Briscoe,who had dissented from the earlier panel deci-sion, now wrote for the majority of the en banccourt. The en banc court of appeals rejectedthe district court’s holding that an ongoinggovernment investigation bars subject matterjurisdiction over a qui tam action. Under thedistrict court’s analysis, a prospective relatorwould have to report her information to theGovernment and then immediately file suit inan attempt to act before the Government insti-tuted an investigation into her allegations.Such an analysis runs contrary to congression-al intent, because it could prevent persons withlegitimate inside knowledge from pursuing aqui tam action. The court of appeals conclud-ed that the district court erred in failing toapply the normal public disclosure analysis.

Disclosure to Persons With PriorKnowledge of Wrongdoing Is Not “PublicDisclosure”

The court of appeals also rejected theGovernment’s arguments that the public dis-closure bar applied, calling them “perplexing,and at times disingenuous.” In United States exrel. Ramseyer v. Century Healthcare Corp., 90F.3d 1514, 1521 (10th Cir. 1996), 7 TAF QR 1(Oct. 1996), the Tenth Circuit had held that“public disclosure occurs only when the allega-tions or fraudulent transactions are affirmative-ly provided to others not previously informedthereof.” Applying this principle to the case athand, the court concluded that a public disclo-sure did not occur when government investiga-tors questioned the current and formeremployees of CIG. Because all three of thoseemployees participated in the alleged fraudu-lent scheme and had thus been “previouslyinformed thereof,” no public disclosure tookplace during the government investigation.

Term “Person” in Qui Tam ProvisionUnambiguously Encompasses AllIndividual Human Beings

Finally, the en banc majority rejected the panelmajority’s conclusion that a governmentemployee investigating fraud allegations pur-suant to her official duties is not a “person”who may maintain a qui tam action under §3730(b)(1) based on those allegations. Thecourt noted that the Dictionary Act defines theword “person” to include “individuals,” and anumber of authoritative dictionaries define“person” as a “human being.” Therefore, thecourt held, there can be no doubt that the word“person” unambiguously encompasses allhuman beings.

The court rejected the notion that § 3730(b)’stitle, “Actions by private persons” might limitwho may qualify as a relator under the section.


The court noted that the title of a staturoryprovision cannot limit the plain meaning ofthe text, but may only be used to shed light onan ambiguous word or phrase. The court ruledthat the word “person” is not ambiguous, butstated that even if it were, consideration of thetitle could only lead to one of two conclu-sions—either that all government employeesare persons, or that all government employeesare not persons. However, the latter conclusionwould render superfluous the specific exclu-sion of certain suits by members of the armedforces in § 3730(e)(1).

The court also rejected the argument that afederal employee who discovers fraud in thecourse of her employment and is required toreport it is not a “person” under § 3730(b)because that section draws a distinctionbetween the Government and the individualqui tam plaintiff. The court reasoned thatalthough Holmes may have been acting “as theGovernment” (that is, in her official capacity)when she obtained the information thatformed the basis of her qui tam complaint, shewas acting as a “person” (that is, in her indi-vidual capacity) in filing and pursuing her quitam complaint. The court noted that inUnited States ex rel. Marcus v. Hess, 317 U.S.537, 546 (1943), the Supreme Court observedthat the Senate sponsor of the FCA in 1863stated that “even a district attorney, whowould presumably gain all his knowledge of afraud from his official position, might sue asthe informer.” The court opined that theMarcus v. Hess Court’s view that a governmentofficial may file suit based upon informationobtained in the course of his or her officialduties remains valid.

The court noted the policy arguments that theGovernment offered against allowing federalemployees to maintain qui tam actions basedupon information obtained in the course oftheir employment. Government employees are

prohibited from using their office for privategain, and permitting qui tam suits by federalemployees who are already obligated to dis-close fraud may create perverse incentives.Although the court conceded that these argu-ments “have some appeal” and “may be sound,”the court held that it lacked the power to inter-pret the FCA in a way that would eliminatethese difficulties. In the majority’s view, this isCongress’ prerogative, not the courts’.

Dissent Argues Government EmployeeInvestigating Fraud Allegations Pursuantto Duties May Not Bring Qui Tam ActionBased on Those Allegations

Three judges dissented, arguing that the FCA’sgrant of jurisdiction over qui tam actionsplainly assumes a distinction between theGovernment and the relator, which was notpresent in this case. The dissent observed thatfederal courts are of limited jurisdiction, andany doubts must be resolved against jurisdic-tion. The grant of jurisdiction in § 3730(b)(1)provides that a person acting as relator maybring an action “for the person and for theUnited States Government.” This language,the dissent insisted, assumes a distinctionbetween the Government and the relator, andsuch a distinction is absent where, as in thiscase, the relator is a government employeewhose job duties include uncovering andreporting the particular type of fraud that isthe basis for the qui tam action and the relatoris participating in an ongoing investigation ofthat very same fraud.

The dissent criticized the majority for inter-preting the word “person” in isolation. It urgedinstead that the word must be interpreted in itsstatutory context. Because the statute extendsjurisdiction only to persons in a position tobring suit on behalf of themselves and theGovernment, if there is no distinction betweenthe person and the Government, then, in the


dissent’s view, § 3730(b)(1) does not conferjurisdiction on the person.

The dissent noted that the Supreme Court hastaught that statutory titles should be used toresolve ambiguity arising from a discrepancybetween the title and the text. The title of theprovision granting federal jurisdiction over quitam actions refers to actions by “private per-sons,” while the text of the provision refers onlyto “persons,” creating ambiguity. The dissentconcluded that the text’s reference to “persons”should be understood to refer to the “privatepersons” referred to in the title, and not per-sons acting as the Government with regard tothe fraud at issue.

The dissent also argued that consideration ofthe purposes of the FCA, as well as policy con-siderations embodied in federal conflict ofinterest statutes, bolstered its conclusion thatjurisdiction was lacking in this case. Congresssought to encourage exposure of fraud whilepreventing parasitic suits. In the dissent’s view,Holmes’ suit was parasitic because she alreadyhad a duty as a government employee to reportthe alleged fraud, and the Government, byHolmes’ own admission, was already engagedin active pursuit of the allegations. Moreover,federal regulations prohibit governmentemployees from using nonpublic governmentinformation to further any private interest orto use their office for private gain. In the dis-sent’s view, the majority’s construction maxi-mizes the inherent tension between the FCAand the conflict of interest rules. The dissentdid not assert that federal employees may neveract as qui tam relators, but it argued that theymay not do so when they are acting as theGovernment with regard to the particular evi-dence of fraud that grounds their qui tam suits.

Section 3729(b) KnowledgeRequirement


See “FCA Liability/Materiality” above at page 5.

U.S. ex rel. Watson v. ConnecticutGeneral Life Insurance Co., 2003 U.S.Dist. LEXIS 2054 (E.D. Pa. Feb. 11, 2003)

See “FCA Liability of Medicare Carriers andFiscal Intermediaries” above at page 17.

Section 3730(b)(2) DisclosureStatement

U.S. ex rel. Bagley v. TRW Inc., 212F.R.D. 554 (C.D. Cal. Feb. 5, 2003)

A California district court granted in part anddenied in part the defendant’s motion to com-pel the Government and relator to produceseveral disclosure statements prepared by therelator pursuant to a qui tam suit. The courtruled that the statutory disclosure statementought to include legal analysis rather than amere recitation of facts, and both the factualnarrative and legal analysis ought to be pro-tected as opinion work product. Accordingly,the disclosure statements were protected fromdiscovery, with the exception of a statementthat was used by the relator to refresh his rec-ollection before testifying at his deposition,and any portions of statements alreadyrevealed to the defendant, for which workproduct protection had been waived.


Richard Bagley, the former director of financialcontrol at TRW’s Space & Technology Groupin Redondo Beach, California, brought this quitam action in 1994, alleging that TRW engagedin various cost mischarging schemes. In 1998,the Government intervened in two of Bagley’sclaims, and added new claims of its own. See13 TAF QR 26 (Apr. 1998).

The case moved into discovery, and the defen-dant sought to obtain several disclosure state-ments prepared by Bagley and his counsel andserved on the Government pursuant to§ 3730(b)(2). The relator asserted that thesestatements were protected under the workproduct doctrine, and the defendants moved tocompel production.

Disclosure Statement Should IncludeLegal Theories As Well As Facts

The court granted the motion in part anddenied it in part. The court observed that theFCA does not specify in detail the nature andextent of the relator’s disclosure obligationunder § 3730(b)(2), and few reported decisionshave addressed this issue. While some decisionshave suggested that a disclosure statementshould contain only facts, others have recog-nized that the statement may contain addition-al information, such as legal analysis, theories,and opinion. This inconsistency in reporteddecisions is paralleled in the practices of rela-tors’ counsel, who invest different levels ofeffort in preparing disclosure statements. Ofthe two views, however, the court found thatthe one favoring inclusion of analysis is moreconsonant with the purpose of § 3730(b)(2). Indrafting the 1986 amendments to the FCA,Congress sought to encourage a working part-nership between the Government and relators’counsel, and this purpose is promoted if thedisclosure statement provides a complete analy-sis of the factual and legal issues in the case.

However, the court noted, a relator preparing adisclosure statement today is in a bind. On theone hand, the relator should make the state-ment as complete as possible in order to per-suade the Government to intervene and dis-suade it from moving to dismiss. On the otherhand, it is not in the relator’s interest to providea full and candid discussion of the strengthsand weaknesses of the case in the disclosurestatement if there is a risk that the statementmay be turned over to the defendant. The courtobserved: “Forcing the relator to navigateunerringly at his or her peril the narrow passagebetween the Scylla of too little disclosure andthe Charybdis of too much disclosure may beunfair and probably makes little sense.” Thus,the statutory purpose of the disclosure require-ment would be best served by a bright line ruleprecluding discovery of all portions of disclo-sure statements or drafts thereof. However, nosuch bright line rule currently exists: the Actdoes not explicitly prohibit discovery of disclo-sure statements, and reported decisions haveuniformly concluded that the attorney-clientprivilege does not protect them.

Work Product Doctrine ProtectsDisclosure Statements

Nevertheless, the Government and the relatorcontended that the attorney work product doc-trine protected the disclosure statements fromdiscovery. The defendant countered that thestatements were not work product, and thateven if they were, the defendant had demon-strated “substantial need” justifying discoveryof the information contained therein underFed. R. Civ. P. 26(b)(3).

The court observed that most opinionsaddressing the issue have concluded that disclo-sure statements prepared pursuant to § 3730(b)(2) are work product because they areprepared in anticipation of litigation. Althoughthe statements are also prepared to satisfy thestatutory disclosure requirement that is a pre-


requisite to suit, that purpose and the litigationpurpose are inseparably intertwined.

The court ruled that the relator did not waivework product protection by providing the dis-closure statements to the Government. Waivermay occur when a party discloses work productin a manner that increases the likelihood that acurrent or potential opponent in the litigationmight gain access to it. However, although theGovernment is not a co-party at the time the dis-closure statement is filed, and may subsequentlytake actions adverse to the relator, the courtruled that it would be antithetical to the lan-guage and purposes of the FCA to characterizethe Government as an adversary or potentialadversary of the relator at the time that the dis-closure occurs. The FCA seeks to ally relatorswith the Government to uncover and remedyfraud, and there was no evidence in the recordthat the Government commonly reveals disclo-sure statements to the defendants in qui tamactions. Accordingly, a number of courts haveheld that the “common interest” or “joint prose-cution” doctrine applies to prevent the relator’sdisclosure of work product (including the writ-ten disclosure statement) to the Governmentfrom operating as a waiver.

However, the defendant stated that theGovernment or the relator had already providedit with redacted versions of the disclosure state-ment regarding three of their claims. To theextent that the plaintiffs had already producedany disclosure statements to the defendant, thecourt ruled, they had waived work product pro-tection as to the portions already revealed.

Both Factual Narrative and LegalAnalysis Are Opinion Work Product

The court examined whether the disclosurestatements at issue were ordinary work prod-uct, which enjoys only qualified protectionfrom discovery, or opinion work product,which enjoys nearly absolute protection. The

disclosure statements consisted of three parts:(1) a narrative of specific facts and evidencesupporting the relator’s claim; (2) an analysisof the facts and evidence in light of the relevantlegal standards; and (3) a set of supportingexhibits. The third component was not atissue, because all the documents attached assupporting exhibits had already been producedin discovery. The second component plainlyconstituted opinion work product because itconsisted of the mental impressions, conclu-sions, opinions, or legal theories of the relatorand his counsel.

The analysis of the first component (the factu-al narrative) was more challenging. At a mini-mum, the narrative was ordinary work prod-uct, but arguably it deserved the nearlyabsolute protection enjoyed by opinion workproduct. Where the selection, organization,and characterization of facts in a given materi-al reveal the theories, opinions, or mentalimpressions of a party or the party’s represen-tative, that material qualifies as opinion workproduct. Accordingly, the court ruled that thesubjective and analytical process of culling,organizing, and summarizing the factual infor-mation presented in the disclosure statementdeserved the heightened protection accordedto opinion work product. The statutoryrequirement that the relator disclose “substan-tially all material evidence and information”does not call for an indiscriminate catalogue ofthe entire universe of known facts, but ratherrequires the relator and his counsel to engagein a process of selecting or winnowing fromthe totality of information only those facts andevidence that are material to the relator’sclaims. Thus, the factual narrative necessarilyreveals the mental impressions, conclusions,opinions, or legal theories of the relator and hiscounsel, and accordingly qualifies as opinionwork product. Such an approach also furthersthe purposes of the FCA by encouraging rela-tors to make their statements as complete aspossible, and spares the parties and the court


the expense and burden of litigating the dis-coverability of disclosure statements.

Thus, the court ruled that the disclosure state-ments were opinion work product, and deniedthe defendant’s motion to compel production,with two exceptions. First, as noted above,work product protection had been waived as toany portions of the disclosure statementsalready revealed to the defendants. Second, therelator used one of the disclosure statements torefresh his recollection before testifying at hisdeposition. Under Fed. R. Evid. 612, courtshave the discretion to require production ofwritten material used to refresh the memory ofa witness while or before testifying, where theinterests of justice so require, for example forpurposes of cross-examination. Accordingly,the relator’s use of the document to refresh hisrecollection prior to testifying amounted to alimited waiver of work product protection, andthe court granted the defendant’s motion tocompel production of that document.

Section 3730(b)(5) First-to-File Bar


A District of Columbia district court dis-missed a qui tam action alleging that thedefendant health care corporation violated theFCA by paying kickbacks to physicians forreferrals and fraudulently procuring certifica-tion from the Joint Commission onAccreditation of Healthcare Organizations(JCAHO). The court dismissed the kickbackclaims pursuant to the first-to-file bar, rulingthat a later-filed qui tam complaint is barredunless (1) it alleges a different type of wrong-doing, based on different material facts thanthose alleged in the earlier suit and (2) it gives

rise to a separate and distinct recovery by theGovernment. The court also dismissed theJCAHO certification claim, on the ground thatJCAHO certification is not a prerequisite toparticipation in Medicare.

Sara Ortega filed this qui tam action in theWestern District of Texas in 1995, alleging thatColumbia Medical Center West, an El Pasohospital owned by HCA, fraudulently pro-cured certification from the Joint Commissionon Accreditation of Healthcare Organizations(JCAHO), and that this fraud excluded it fromparticipation in Medicare, rendering its claimsfor Medicare reimbursement false. In late1997, Ortega amended her complaint, addingallegations that the defendant provided illegalkickbacks for referrals and upcoded treatmentsto inflate the compensation it received fromMedicare. In 1998, the Government inter-vened in the kickback and upcoding claims,but not the JCAHO certification claim. Theupcoding allegations were subsequently settledand Ortega received a relator’s share.

The Government later filed a suggestion of dis-missal of the kickback claims based on thefirst-to-file bar, on the grounds that other rela-tors had filed claims, predating Ortega’s, thatalleged the same scheme. HCA moved to dis-miss, asserting in addition to the first-to-filebar that the complaint did not plead fraud withparticularity, and that JCAHO accreditation isnot a prerequisite to participation in Medicare,and therefore the fraudulent procurement ofJCAHO certification would not have affectedthe Government’s decision to pay.

Court Adopts “Material Facts” RatherThan “Identical Facts” Test

The court dismissed the kickback claims pur-suant to the first-to-file bar, and the certifica-tion claims for failure to plead with particular-ity and failure to state a claim. Turning first to


the kickback claims, the court observed that § 3730(b)(5) establishes an exception-freefirst-to-file bar. Litigants have advanced differ-ent interpretations of the provision’s proscrip-tion of a “related action based on the factsunderlying the pending action.” Relators haveargued that the test should be whether the latercomplaint relies on facts identical to those inthe first complaint, while defendants havefavored a “material facts” test.

The court ruled that the “material facts” test,rather than the “identical facts” test, is consis-tent with the language and policy of the FCA.The court noted that § 3730(b)(5) refers to“related” actions and “underlying” facts, lan-guage inconsistent with a rigid identical factstest. Moreover, the court observed, “permit-ting infinitely fine distinctions among com-plaints has the practical effect of dividing thebounty among more and more relators, there-by reducing the incentive to come forwardwith information on wrongdoing.” For thisreason, courts have rejected the identical factstest in favor of the material facts approach.

Later-Filed Claim Barred Unless ItAlleges Different Type of WrongdoingBased on Different Material Facts andGives Rise to Separate GovernmentRecovery

The court observed that while no single for-mulation of the material facts test has won uni-versal approval, there is widespread agreementon the test’s basic elements. Rather thanadopting wholesale the formulation of others,the court combined them to obtain a test thatin its view best effectuated the purpose of thefirst-to-file bar. The court adopted the follow-ing formulation: “A later-filed qui tam com-plaint is barred unless (1) it alleges a differenttype of wrongdoing, based on different mater-ial facts than those alleged in the earlier suit;and (2) it gives rise to a separate and distinct

recovery by the government.”

Under this approach, if the later-filed com-plaint alleges the same type of wrongdoing asthe first, and the first alleges a broad schemeencompassing the time and location of the latercomplaint, then the later complaint is barredeven if it could theoretically lead to a separaterecovery. The court reasoned that once theGovernment learns of the essential facts of thefraudulent scheme, it is able to discover relatedfrauds without outside assistance. The courtobserved that Rule 9(b) limits the preclusiveeffect of the first-filed complaint to claims thatcan be pleaded with particularity, obviating thedanger of unsupported placeholder complaintsfiled for the sole purpose of preemption.

In applying this test, courts need only examinethe relevant complaints, and no backgroundevidence is necessary. Therefore, the courtdenied Ortega’s request for an evidentiary hear-ing. Two other qui tam actions based on simi-lar facts to Ortega’s were currently before thecourt. James Thompson filed his original com-plaint in 1995, alleging that HCA providedkickbacks to physicians to induce referrals “inthe Corpus Christi division of the SouthernDistrict of Texas as well as elsewhere.” Gary LeeKing filed his complaint in 1996, alleging thatHCA and El Paso Healthcare Systems, Ltd.(EPHS) provided kickbacks to physicians.EPHS owned both Columbia Medical CenterEast, where King worked, and ColumbiaMedical Center West, where Ortega worked,although King’s complaint did not specificallymention the latter facility. Ortega did not fileher amended complaint containing the kick-back allegations until 1997. Because these ear-lier-filed complaints alleged the same type ofwrongdoing, based on the same material facts,as Ortega’s later complaint, Ortega’s later-filedkickback allegations were barred under § 3730(b)(5). The fact that the two earlier com-plaints did not specifically mention Columbia


Medical Center West did not save Ortega’s kick-back claim, because a mere variation in geo-graphic location is not a different material fact,and in any case King’s specific inclusion ofEPHS, which owns Columbia Medical CenterWest, preempted Ortega’s claim.

JCAHO Certification Is Not Required forParticipation in Medicare

HCA argued that Ortega’s remaining claim,that HCA fraudulently obtained JCAHO certi-fication, was not pleaded with sufficient partic-ularity to satisfy Rule 9(b), and that JCAHOcertification is not a prerequisite for participa-tion in Medicare. Turning first to the Rule 9(b)argument, the court ruled that Ortega’sdescription of the fraudulent scheme was suffi-ciently specific, but that Ortega had failed toconnect the scheme to claims for payment.Ortega had listed the names of the committeeswhose minutes were allegedly falsified, thenames of those involved in the falsification,and described the individual instances of falsi-fication. Presumably, her theory was that allclaims submitted to Medicare while the hospi-tal held a fraudulently obtained JCAHO certi-fication were tainted and therefore false underthe FCA, but her complaint did not explicitlymake this allegation. Ordinarily she wouldhave been granted leave to amend to cure thisflaw, but because the court went on to holdthat her JCAHO certification theory was insuf-ficient to state an FCA claim, amendmentwould have been futile.

Although JCAHO accreditation automaticallyconfers eligibility to participate in Medicare,the court ruled, it is not a prerequisite. Rather,applicable regulations authorize a number ofentities to determine compliance and eligibili-ty to participate in Medicare, including privatenational accreditation programs, states,JCAHO, and the American OsteopathicAssociation. The Government will pay a claim

submitted by a provider that is not JCAHO-accredited, and the CMS state operations man-ual provides that when a provider loses itsJCAHO certification, it is not automaticallydisqualified, but rather may be recertified bythe state agency. Because JCAHO certificationis not a prerequisite to receiving payment, fail-ure to obtain certification does not give rise toFCA liability.

The court also denied Ortega’s motion to filevarious responses under seal, and vacated theseal on all remaining proceedings in the case.Because Ortega’s kickback allegations werebarred by the first-to-file rule, and her JCAHOallegations did not state a claim under theFCA, the court dismissed her entire complaintwith prejudice.

U.S. ex rel. Hampton v. Columbia/HCAHealthcare Corp., 318 F.3d 214 (D.C.Cir. Feb. 7, 2003)

The D.C. Circuit affirmed the dismissal of a quitam action based on the first-to-file bar. Inapplying the bar, the court adopted the “mater-ial facts” test, rejecting the rival “identical facts”test. The court ruled that the fact that the later-filed complaint named different defendantsand specified different geographical locationsthan the earlier-filed complaint did not save thelater-filed complaint from dismissal.

Mary Hampton filed this qui tam action in theMiddle District of Georgia in February 1999,alleging that the defendants, Columbia/HCAHealthcare Corporation, Clinical ArtsComprehensive Services, Inc. (an HCA sub-sidiary), and several Clinical Arts employees,improperly billed Medicare for home healthservices. In August 1997, Randall Boston hadfiled an earlier qui tam action in the NorthernDistrict of Texas based on similar allegations.In December 1999, the Judicial Panel on


Multidistrict Litigation transferred Hampton’scase and twenty-nine others from various dis-tricts to the District of Columbia for coordi-nated pretrial proceedings.

In December 2000, the Government and HCAreached a partial settlement agreement cover-ing thirteen of these cases, includingHampton’s. See 21 TAF QR 16 (Jan. 2001).Under the agreement, HCA agreed to pay morethan $731 million and the Government agreedto dismiss numerous claims against HCA,including claims about the billing practices ofmore than 600 HCA subsidiaries, among themClinical Arts. Pursuant to the settlement agree-ment, in February 2001 the Government inter-vened in Hampton’s case with respect to theimproper billing claims against HCA andClinical Arts, but declined to intervene withrespect to the claims against the individualemployees. One month later the Governmentmoved to dismiss Hampton’s complaint underthe first-to-file rule, arguing that it was barredby Boston’s earlier-filed action. The districtcourt granted the motion and dismissedHampton’s complaint. Hampton appealed.

Court Adopts “Material Facts” Test

The D.C. Circuit asserted jurisdiction over theappeal and affirmed. The court observed thata split in authority exists as to whether consol-idated cases retain their separate identity orbecome one for purposes of appellate jurisdic-tion. Some circuits treat consolidated cases asseparate actions that may be appealed withoutcertification under Fed. R. Civ. P. 54(b); otherstreat consolidated cases as a single action; stillothers focus on the reasons for the consolida-tion to determine whether the cases are one orseparate. The D.C. Circuit has inclined towardthe last view, and since Hampton’s case and thetwenty-nine others were consolidated only forpurposes of pretrial proceedings, the courtruled that the order dismissing Hampton’s case

was a final judgment appealable without certi-fication under Rule 54(b).

Turning to the merits of the appeal, the courtadopted the “material facts” test as the properstandard for applying the FCA’s first-to-filebar, and rejected the rival “identical facts” test.Under this approach, the language of§ 3730(b)(5) barring a “related action based onthe facts underlying the pending action” isinterpreted to bar actions alleging the samematerial elements of fraud as the earlier suit,even if the allegations incorporate somewhatdifferent details. The court ruled that thisinterpretation best serves the purposes of the1986 amendments, which sought to encouragewhistleblowing while at the same time to dis-courage opportunistic behavior.

Later Action Was Related to and Based onSame Underlying Facts as Earlier Action

Hampton did not dispute that the materialfacts test was the proper standard but arguedthat her action was not barred under that stan-dard. She pointed out that while Boston suedonly HCA, she sued not only HCA but alsoClinical Arts and several Clinical Arts employ-ees. Moreover, although Boston’s complaintspecifically alleged fraud at HCA home healthcare subsidiaries in six states, it did not men-tion Georgia, where Clinical Arts is located.The court ruled that these were not differencesin the material elements of the fraud. Bostonalleged a corporate-wide problem, in whichHCA committed fraud in providing health careservices through numerous subsidiaries.Although Boston gave specific details relatingto only six states, he described these as “exam-ples” and “samplings” of a widespread patternof fraud at 550 home health locations in 37states. The fraud allegations in the two com-plaints were very much along the same lines.

Hampton also raised an issue about the differ-


ence in the time periods covered by the twocomplaints. She argued that her complaintincluded allegations of fraud by Clinical Artsbeginning in 1994, and that HCA did notacquire Clinical Arts until 1996. The courtindicated that if Hampton was right about thetiming of the acquisition, she might have avalid argument that her claims of fraud com-mitted by Clinical Arts before it was acquiredby HCA were not precluded by the first-to-filebar. However, the court declined to addressthis argument, because Hampton did not raiseit in the district court, and there was no evi-dence in the record as to when the acquisitionoccurred. Ruling that Hampton’s action wasrelated to and based on the same underlyingfacts as Boston’s, the court of appeals affirmedthe judgment of the district court.

Section 3730(c)(2)(A) Dismissalby the Government

Swift v. United States, 318 F.3d 250(D.C. Cir. Feb. 11, 2003)

The D.C. Circuit affirmed the district court’sdismissal of a qui tam action on the motion ofthe Government pursuant to § 3730(c)(2)(A).The court concluded that that provision setsno substantive limits on the Government’spower to dismiss a qui tam action, but merelyprovides the relator a formal opportunity toconvince the Government not to end the case.

Susan Swift, a former Department of Justiceemployee, brought this qui tam action inJanuary 1999 against one current and two for-mer employees of DOJ’s Office of LegalCounsel. Swift alleged that the employees (oneof whom was subsequently dropped from thecase) violated the FCA by submitting false timesheets and leave slips, defrauding theGovernment of $6169.20. Without purporting

to intervene, the Government moved to dismissthe complaint, arguing that the amount ofmoney involved did not justify the expense oflitigation even if the allegations could be proved.Swift sought a hearing and discovery about theGovernment’s dismissal policy, and moved tounseal the record. The district court granted ahearing, but denied Swift’s request for discoveryand unsealing. After the hearing the court dis-missed the complaint, holding that the dismissalwas rationally related to a valid governmentalpurpose. Swift appealed pro se, arguing that theGovernment cannot dismiss without first inter-vening, and that the dismissal was improper.

Government Need Not Intervene to SeekDismissal

The D.C. Circuit affirmed the judgment of thedistrict court. Section 3730(c)(2)(A) provides:“The Government may dismiss [a qui tam]action notwithstanding the objections of the[relator] if the [relator] has been notified by theGovernment of the filing of the motion and thecourt has provided the [relator] with an oppor-tunity for a hearing on the motion.” While thisprovision does not require the Government tointervene to seek dismissal, Swift argued thatintervention is required under § 3730(b), whichrequires the Government to intervene if it wish-es to “proceed with the action,” and under § 3730(c)(1), which provides that once theGovernment intervenes, the relator may con-tinue as a party subject to the limitations setforth in the dismissal provision, § 3730(c)(2).

The court ruled that Swift’s interpretation wasunwarranted. While § 3730(b) requires theGovernment to intervene if it wishes to “pro-ceed with the action,” ending the case is notproceeding with the action, so intervention isnot required to dismiss. Moreover, althoughthe relator’s right to continue as a party afterintervention is limited by the right of theGovernment to dismiss, it does not follow that


the Government must intervene in order todismiss. In any case, the court ruled, the ques-tion whether the Government must intervenein order to seek dismissal is largely academic,because, as Swift conceded at oral argument,the court could construe the motion to dismissas including a motion to intervene, which thedistrict court granted by ordering dismissal.

Government’s Decision to Dismiss isPresumptively Unreviewable

Swift also argued that the Government improp-erly applied the standard set forth in UnitedStates ex rel. Sequoia Orange Co. v. Baird-NeecePacking Corp., 151 F.3d 1139 (9th Cir. 1998), 14TAF QR 9 (July 1998). The Sequoia Orangecourt ruled that the Government’s dismissalpower under § 3730(c)(2)(A) is very broad: theGovernment may dismiss a qui tam case regard-less of its merits over the relator’s objections if(1) the Government shows that the dismissal isrationally related to a valid purpose, and (2) therelator fails to show that the decision to dismisswas fraudulent, illegal, or arbitrary and capri-cious. The Ninth Circuit reasoned that thisstandard imposes no greater restriction on theGovernment’s power to dismiss than is alreadyimposed by the Constitution, which prohibitsarbitrary or irrational prosecutorial decisions.

Nevertheless, the D.C. Circuit hesitated to adoptthis test, suggesting that the Government’spower to dismiss is even broader than indicatedby the Sequoia Orange court. The D.C. Circuitcould not see how § 3730(c)(2)(A) could givethe Judiciary oversight over the Executive’s deci-sion to dismiss, and noted that the provision’slanguage—“the Government [i.e. the Executive]may dismiss”—suggested the absence of judicialconstraint. The court added that decisions notto prosecute, which is what the Government’sdecision to dismiss amounted to, are presump-tively unreviewable.

In the D.C. Circuit’s view, the Sequoia Orangecourt’s interpretation of the constitutional limitson the Government’s decision not to prosecutewas incorrect. The D.C. Circuit held that theGovernment’s decision whether to bring anaction on behalf of the United States is generallycommitted to the absolute discretion of theExecutive, because the Constitution entrusts tothe Executive the duty to “take Care that the Lawsbe faithfully executed.” U.S. CONST., art. II, § 3.The court found that nothing in § 3730(c)(2)(A) purports to deprive the Executiveof its historical prerogative to decide which casesshould go forward in the name of the UnitedStates, and concluded that the function of a hear-ing when the relator requests one is simply to givethe relator a formal opportunity to convince theGovernment not to end the case.

The court also ruled that even if Sequoia Orangeset the proper standard, the Government easilysatisfied it. The Government asserted that thedollar recovery would not justify the expense ofresources necessary to monitor the case, complywith discovery requests, and so forth, and thatthe case would divert scarce resources frommore significant cases. The goal of minimizingexpenses is a legitimate governmental objective,and dismissal of the suit furthered that objec-tive. Moreover, Swift’s assertion that theGovernment’s decision was arbitrary and capri-cious, illegal, or fraudulent was pretextual andunsupported.

The court ruled that the Government was notrequired to investigate the validity of Swift’scharges, because its decision to dismiss wasunrelated to the merits of the case. Moreover,she was not entitled to discovery, because herallegations of improper conduct lacked evi-dentiary support, and a substantial thresholdshowing is required for discovery of informa-tion related to prosecutorial decisions. Thedistrict court did not err in denying Swift’smotion to unseal, which came at the eleventh


hour and would have further delayed the hear-ing, which Swift had already twice postponed.Accordingly, the court of appeals affirmed thejudgment of the district court.

Section 3730(d) Relator’s Share

U.S. ex rel. Johnson-Pochardt v. RapidCity Regional Hospital, 2003 U.S. Dist.LEXIS 5344 (D.S.D. Feb. 26, 2003)

A South Dakota district court awarded the rela-tor $1.566 million or 24% of the total recoveryin a Medicare fraud case that was settled latelast year for $6.525 million. In light of the rela-tor’s energetic persistence, her attorneys’ cru-cial contributions, and her personal hardships,the court determined that she was entitled to arobust share of the settlement proceeds.

Karen Johnson-Pochardt worked in the 1990s asthe administrator at the Rapid City RegionalHospital (RCRH) Cancer Care Institute (CCI). Inthe early 1990’s, Dr. Larry Ebbert and OncologyAssociates (OA) entered into a lease arrangementwith RCRH, under which Ebbert paid RCRH$19,000 per year to rent 400 square feet of space,while RCRH paid him a medical director fee of$20,000 per year and allowed him to use hospitalresources such as staff, equipment, and supplies.

In 1997, after becoming director of CCI,Johnson-Pochardt spoke to Ebbert’s practiceconsultant about the possible illegality of thelease arrangement. Ebbert thereupon wrote aletter to Johnson-Pochardt’s supervisor askingthat Johnson-Pochardt’s responsibilities beconfined to public education and marketing.When the supervisor refused, Johnson-Pochardt and the supervisor sustained person-al insults from Ebbert and his wife.

Johnson-Pochardt then queried hospital man-agers whether RCRH was complying with the

Stark and Anti-Kickback Statutes, because it didnot appear that OA was paying RCRH fair mar-ket value for the space and services. Johnson-Pochardt undertook an analysis of the arrange-ment and concluded that OA was paying$19,000 annually for space and services actuallyworth $136,441. In 1998 and 1999 Johnson-Pochardt sought legal advice, and in 2000 shepresented RCRH’s CEO with a spreadsheet indi-cating that RCRH had subsidized OA by overone million dollars. RCRH still took no action.

Having determined that internal complaintswere futile, Johnson-Pochardt filed a qui tamaction against RCRH, Ebbert, and OA. Thecomplaint was served on the Government inMarch 2001. The Government sought andobtained ten extensions of time between June2001 and December 2002 to decide whether tointervene. In December 2002, the partiesreached a written settlement, and theGovernment intervened. RCRH agreed to pay$6 million, and OA agreed to pay $525,000. See29 TAF QR 54 (Jan. 2003). Meanwhile, Johnson-Pochardt reached a severance agreement withRCRH and resigned from her position.

Johnson-Pochardt moved for a relator’s shareaward of 25 percent of the proceeds of the set-tlement. The Government opposed hermotion and moved the court to grant her ashare of 16 percent.

Relator’s Share Varies According toRelator’s Contribution

The court awarded Johnson-Pochardt a shareof 24 percent. Quoting from statements madeby Representative Berman, House sponsor ofthe 1986 amendments to the FCA, the courtobserved it had discretion to award between 15and 25 percent of the total recovery to the rela-tor in cases in which the Government inter-venes, and that the greater the relator’s assis-tance to the Government in investigating and


prosecuting the case, the greater the relator’sshare should be. In evaluating the relator’scontribution and determining her share, thecourt relied heavily on the analysis in UnitedStates ex rel. Alderson v. Quorum Health Group,Inc., 171 F. Supp. 2d 1323 (M.D. Fla. 2001), 25TAF QR 11 (Jan. 2002).

Senate Factors

The court first considered the factors to betaken into account in determining the percent-age of the relator’s share based on the discus-sion in the Senate debates over the 1986amendments. These factors are the significanceof the information provided by the relator, therelator’s contribution to the final outcome, andwhether the Government previously knew ofthe information. The court found that all threeof these factors indicated that a robust relator’sshare was appropriate in this case.

Because of her position as director of CCI,Johnson-Pochardt was able to contribute sig-nificant information to the Government. Shesupplied the Government with many impor-tant documents and spent a great deal of timeanalyzing the subsidies OA received and meet-ing with Government officials to help developthe case. Her assistance was critical in persuad-ing the Government to intervene and instru-mental to the success of the settlement negotia-tions. Moreover, there was no evidence that theGovernment would have learned of the viola-tions had Johnson-Pochardt not come forward.

Department of Justice Guidelines

The court also considered the internal guide-lines established by the Department of Justicefor calculating the relator’s share. (For the fulltext of these guidelines, see 11 TAF QR 17 (Oct.1997)). The court observed that these guide-lines are merely non-binding internal stan-dards, and quoted with approval the criticism

of the Alderson court that the guidelines areself-contradictory, and that their incoherentand “indiscriminate enumeration of fairlyobvious factors” is not terribly helpful for pur-poses of adjudication. Nevertheless, the courtstated that some of the guidelines embodycommon sense considerations that can be ofuse in determining the relator’s share.

The Government argued that factors 1 and 2 inthe Guidelines, which indicate that the relatorshould report the fraud promptly and notify asuperior or the Government, militated againstan increased relator’s share, because Johnson-Pochardt took four years to report the matterto the Government. The court disagreed.Johnson-Pochardt was not a lawyer and need-ed time to determine whether the defendantswere violating federal law. It took her less thana year to bring the matter to the attention ofRCRH personnel, and she followed the naturalchain of command in hopes that RCRH wouldcorrect the matter without resort to a lawsuit.When her efforts proved unsuccessful, andwhile she was still employed at RCRH, shereported the violations to the Government,thus putting herself at risk of retaliation andtermination. These actions supported anincreased award.

Johnson-Pochardt also satisfied factors 3, 6, 7,8, 9, 10, and 11 in the DOJ Guidelines, all ofwhich supported an increased relator’s share.Her actions caused the fraud to stop, she pro-vided extensive, first-hand details, theGovernment had no prior knowledge of thefraud, she provided substantial assistance tothe Government, and was candid, honest, andhelpful. Her attorneys played a significant rolein the case. The Government argued that shewas uncooperative because she opposed theGovernment’s requests for long extensions oftime to decide whether to intervene. The courtrejected this argument, noting that theGovernment has sixty days by statute to make


its intervention decision, and Johnson-Pochardt’s actions in opposing ten extensionsover two years did not demonstrate resistanceto the Government’s investigation. The courtobserved that Johnson-Pochardt ran the risk ofdiscovery and possible retaliation while the suitremained under seal, and that her attorneyswere concerned that the defendants mightdestroy important documents before theyreceived notice of the suit.

Johnson-Pochardt also suffered substantialharm as a result of her qui tam action, whichsupported an increased award under factor 14in the DOJ Guidelines. She and her husbandsold their business to ensure some financial sta-bility, and her work environment and relation-ships with co-workers deteriorated drastically.She became withdrawn, her marriage cameunder severe strain, and she lost hair and suf-fered other physical ailments. Ultimately, shelost a well-paying job in a field that she loved,together with insurance and retirement bene-fits, and positions on numerous boards andorganizations. Her chances of finding a similarposition in South Dakota were greatly reduced.

Like the Alderson court, the court in this caserejected the DOJ’s factor 13 in its list of factorssuggesting an increase in relator’s share, and itsfactor 11 in its list of factors suggesting adecrease. These two factors in the Guidelinessuggest that the relator’s share should beincreased if the recovery is relatively small anddecreased if it is relatively large. The courtruled that Congress did not establish a slidingscale to graduate the percentages inversely asthe size of recovery increases, and rejected theGovernment’s argument that the size of thetotal recovery is a relevant factor in determin-ing the relator’s share.

However, the court observed that one of theDOJ Guidelines did support a reduced share inthis case: the case was settled rather than going

to trial. This factor suggested that the relatorshould not receive the maximum share of 25percent. Nevertheless, the settlement negotia-tions themselves were quite arduous, and all ofthe Senate factors as well as most of the factorsin the DOJ Guidelines supported a robustaward. Accordingly, the court awardedJohnson-Pochardt a share of 24 percent, onepercent short of the maximum.

In an earlier decision in this case, the courtdenied the Government’s motion to keep itsrequests for extensions sealed. See “LitigationDevelopments” below at page 49.

Section 3730(e) Public DisclosureBar and Original SourceException

U.S. ex rel. Holmes v. ConsumerInsurance Group, 318 F.3d 1199 (10thCir. Feb. 10, 2003) (en banc)

See “Government Employee Relators” above atpage 20.

U.S. ex rel. Brennan v. DevereuxFoundation, 2003 U.S. Dist. LEXIS 709(E.D. Pa. Jan. 14, 2003)

U.S. ex rel. Brennan v. DevereuxFoundation, 2003 U.S. Dist. LEXIS 2783(E.D. Pa. Feb. 25, 2003)

A Pennsylvania district court denied a defen-dant’s motion to dismiss a qui tam actionbased on the public disclosure bar and Fed. R.Civ. P. 9(b). The court ruled that there hadbeen no public disclosure in any of the statu-torily enumerated contexts, and that the rela-tor had pleaded his claim with adequate par-ticularity. The court criticized the approach of


the Seventh Circuit, under which disclosure toa responsible public official is sufficient toraise the public disclosure bar.

Kevin Brennan, a former employee of theDevereux Foundation, brought this qui tamsuit against his former employer as well asDevereux Properties, Inc., alleging that thedefendants submitted false claims for paymentfor rehabilitation services to Medicaid andMedicare. The Government declined to inter-vene. The defendants moved to dismiss forlack of jurisdiction pursuant to the public dis-closure bar, lack of standing to assert commonlaw claims, and failure to plead with particular-ity as required by Fed. R. Civ. P. 9(b).

No Public Disclosure Occurred in AnyStatutorily Enumerated Context

On January 14, 2003, the court denied thedefendants’ motion to dismiss Brennan’s quitam FCA claim, but granted their motion todismiss his common law claims, whichBrennan conceded he lacked standing to assert.In support of their public disclosure argument,the defendants argued that the Foundationpublicly disclosed the transactions underlyingBrennan’s claim by voluntary disclosures to theintermediary payors responsible for processingtheir Medicare claims. The defendants reliedexclusively on United States ex rel. Mathews v.Bank of Farmington, 166 F.3d 853, 861 (7th Cir.1999), 16 TAF QR 5 (April 1999), which heldthat “public disclosure within the meaning of§ 3730(e)(4)(A) [occurs] when the disclosureis made to one who has managerial responsi-bility for the very claims being made.”

The court ruled that the defendants’ argumentwas without merit. It noted that the ThirdCircuit has not endorsed the Seventh Circuit’sinterpretation, but instead strictly adheres tothe statutory language, which refers to “thepublic disclosure of allegations or transactions

in a criminal, civil, or administrative hearing,in a congressional, civil, or GovernmentAccounting Office [sic] report, hearing, audit,or investigation, or from the news media.” TheThird Circuit has insisted that in order to fallwithin this language, the disclosure “mustoccur in one of the specified contexts.” UnitedStates ex rel. Mistick PBT v. Housing Authorityof the City of Pittsburgh, 186 F.3d 376, 383 (3dCir. 1999). Therefore, the court ruled, underthe Third Circuit’s interpretation, the defen-dants’ notification to the intermediary payorsdid not constitute public disclosure.

Rule 9(b) Was Satisfied

The court rejected the defendants’ argumentthat the relator had failed to plead his claim withparticularity as required by Rule 9(b). Thecourt ruled that the relator had provided suffi-cient facts to put the defendants on notice of theclaims against them. In fact, the court observed,the defendants proved this point by addressingsome of the specific allegations of fraud in sup-port of their motion to dismiss. Accordingly,the court denied the defendants’ motion to dis-miss the relator’s qui tam FCA claims.

Motion to Reconsider Denied

On February 25, 2003, the court denied amotion by the defendants to reconsider itsJanuary 14 ruling. In its opinion denying itsmotion to reconsider, the court stated that thedefendants had presented two contradictoryarguments to support their claim thatBrennan’s suit was based upon publicly dis-closed transactions. The defendants arguedthat the transactions in question were (1) vol-untarily disclosed to a public official with man-agerial responsibility and (2) disclosed duringan administrative investigation or audit.

The court again rejected the first argument,which was based on the Seventh Circuit’s opin-


ion in Mathews. The court reiterated that theThird Circuit had rejected the approach of theMathews court.

The court also rejected the second argument,which in its view was based on a factually inac-curate premise. Upon reviewing the documentssubmitted by the defendants, the court conclud-ed that the defendants were right the first time,when they characterized the disclosure as volun-tary. The court found no evidence to suggest afederal government audit or investigation priorto the filing of Brennan’s qui tam action.Accordingly, the court ruled, the jurisdictionalbar of § 3730(e)(4) was never triggered.

Seventh Circuit Approach Criticized

Even if the disclosure source were properlyclassified as an administrative audit or investi-gation, the court ruled, the defendants stillfailed to meet the requirement that the disclo-sure be public. In discussing this requirement,the court offered a detailed critique of theSeventh Circuit’s approach in Mathews. Thecourt observed that the Third Circuit has con-sistently held that disclosures are not publicunless they are directly in the public’s view orwithin the public access. Thus, in the court’sview, the Seventh Circuit’s approach, whichconsiders disclosure to a responsible govern-ment official public even if the public has noaccess to the disclosure, is directly contradicto-ry to the Third Circuit’s approach.

Moreover, in the court held, the Seventh Circuit’sapproach directly contradicts the intent ofCongress in drafting the public disclosure provi-sion. In enacting this provision, Congresssought to abolish the pre-1986 governmentknowledge bar. Instead of barring private claimsbased on any information known to theGovernment, Congress sought to prevent claimsbased on information obtained from govern-ment inquiries or media accounts rather than

personal knowledge. However, the disclosure atissue in Mathews, like those in the case at bar,were made to the Government privately, ratherthan being made to the public or even availableto the public. In the district court’s view, such ascenario is not what Congress intended to guardagainst, and application of the public disclosurebar in such a context is unnecessary and undulyburdensome. Furthermore, in the districtcourt’s view, the Seventh Circuit in Mathewsappeared to confuse the disclosure statementrequirements of § 3730(b)(2) with the publicdisclosure bar of § 3730(e)(4)(A).

The court also criticized the Mathews court’sapproach from a public policy perspective. Ifdisclosure to a responsible government officialis sufficient to trigger the public disclosure bar,the court ruled, relators will be discouragedfrom coming forward with important infor-mation before filing suit on their own, a resultcontrary to Congress’ intent in enacting the1986 amendments.

Finally, the court questioned whether the defen-dants would prevail even if Mathews establishedthe proper standard. The Mathews courtrequired the disclosure to be made to a “compe-tent public official . . . who has managerialresponsibility for the very claims being made.” Inthe case at bar, the defendants made the disclo-sure not to a public official, but to privateMedicaid payors hired by governmental agencies.Thus, there was no evidence that those notifiedhad managerial responsibility for the claim.

U.S. ex rel. Coppock v. NorthropGrumman Corp., 2003 U.S. Dist. LEXIS3329 (N.D. Tex. Mar. 5, 2003)

A Texas district court denied the defendant’smotion to dismiss qui tam claims based on thepublic disclosure bar. Instead, the courtdirected the parties to brief the issue whether


the defendant was an original source, andindicated that it would allow discovery on theissue whether public disclosure had occurredonly if it first determined that the defendantwas not an original source.

Stephen Coppock, a former engineer atNorthrop Grumman Corporation’s NavalWeapons Industrial Reserve Plant in Dallas, agovernment-owned industrial production andwaste treatment facility, brought a qui tam actionagainst Northrop, alleging that it falsely certifiedcompliance with contractual and legal dutieswhile contaminating a government-owned pro-duction site as well as the local water supply.Northrop moved to dismiss pursuant to thepublic disclosure bar and Rule 9(b), as well as forfailure to state a claim. In August 2002 the courtgranted that motion in part. The court ruledthat it lacked jurisdiction pursuant to the publicdisclosure bar because Coppock’s complaintfailed to allege that his claims were not based onpublic disclosures, and alleged that he was theoriginal source only with respect to claims basedon a toxic waste spill in July 1997. The court alsodismissed the latter claims for failure to pleadfraud with particularity, failure to plead that thealleged false certifications were a prerequisite ofpayment or forbearance, and failure to pleadmateriality. However, the court grantedCoppock leave to replead the spill component ofhis claim. See 2002 U.S. Dist. LEXIS 14510 (N.D.Tex. Aug. 1, 2002), 28 TAF QR 15 (Oct. 2002).

In September 2002 Coppock filed a secondamended complaint, which not only repleadedthe spill component of his claim (Count III),but also reasserted the claims that the court haddismissed pursuant to the public disclosure bar(Counts I, II, IV, and V). In the new complaintCoppock alleged that he was the original sourcewith respect to all counts, and also alleged thatthe information in Counts I, II, IV, and V wasnot publicly disclosed. Northrop moved tostrike Counts I, II, IV, and V, arguing that they

reasserted dismissed claims that Coppock didnot obtain leave to assert, and moved to dismissthe amended complaint under the public disclo-sure bar, Rule 9(b), and Rule 12(b)(6).

Motion to Strike Denied

The court denied Northrop’s motion to strikeand deferred ruling on its motion to dismiss.The court stated that when it directed Coppock“to replead in order to comply with Rule 9(b)with respect to the spill component of hisclaim” and “to file an amended complaint thatcures the deficiencies identified,” it meant thedeficiencies “that related to the July 31, 1997spill, but it also intended to include the otherdeficiencies found.” Accordingly, the courtruled that Coppock would be allowed to seekto cure all deficiencies, jurisdictional or other-wise, and denied the motion to strike.

Factual Challenge to Jurisdiction CouldBe Resolved Without Discovery

Turning next to Northrop’s motion to dismisspursuant to the public disclosure bar, the courtobserved that Northrop, relying on affidavits,deposition testimony, and other documents,contended that each of Coppock’s FCA claimswere based on publicly disclosed information,and that Coppock was not an original source.Because Northrop presented evidence this timeto support its jurisdictional challenge, the courtheld that this challenge, unlike the previousone, was factual rather than facial. Accordingly,Coppock was required to defeat the challengeby a preponderance of the evidence.

In the context of a factual challenge, the courtobserved, it would normally make sense togrant a stay to allow Coppock to conduct dis-covery to establish jurisdiction. However, thecourt ruled, it was possible that Coppock couldwithstand a factual attack on the court’s sub-ject matter jurisdiction by demonstrating that


he was an original source, which he couldprove without discovery by means of informa-tion in his exclusive custody and control.Therefore, the court discerned no reason togrant a stay to allow additional discovery.

Original Source Issue To Be ResolvedBefore Public Disclosure Issue

Instead, the court ordered briefing without dis-covery on the original source issue. If the courtthen determined that Coppock was not an origi-nal source of any of the counts in the secondamended complaint, it stated that it would at thatpoint allow discovery to determine whether apublic disclosure had occurred. The court recog-nized that this “regimen” could potentially causeadditional delay for discovery on the issue ofpublic disclosure, but considered that preferableto allowing discovery that would not be needed ifthe jurisdictional question could be resolvedbased on the original source inquiry alone.

U.S. ex rel. Feingold v. AdminaStarFederal, Inc., 2003 U.S. App. LEXIS 5833(7th Cir. Mar. 27, 2003)

The Seventh Circuit affirmed the dismissal ofa qui tam action pursuant to the public disclo-sure bar. The court ruled that the action wasbased upon publicly disclosed allegations ortransactions and that the relator was not anoriginal source of the information.

Richard Feingold brought this qui tam actionin 1998 against Associated InsuranceCompanies, Inc. (AIC), AdminaStar, Inc., andAdminaStar Federal, Inc., which had contractswith HCFA to approve claims submitted byhealth care equipment providers for reim-bursement under Medicare. During the rele-vant time period, Medicare did not providereimbursement for adult diapers, and Feingoldsuspected that the three companies he eventu-

ally named as defendants had recklesslyapproved claims for diapers that were dis-guised as claims for other, reimbursable items.Feingold believed he found confirmation of hissuspicions in the following documents: (1)HCFA and HHS Fraud Alerts issued in 1994;(2) a July 1998 newspaper article reporting thecriminal indictments of two individuals forbilling Medicare for diapers; (3) the indict-ments of those two individuals; (4) HCFA sta-tistical reports created in 1998 showing thenumber of improper claims approved by AIC,AdminaStar, and AdminaStar Federal; and (5)papers from prior qui tam litigation thatFeingold had brought against other entities.

The Government declined to intervene andthe defendants moved for summary judgment.The district court ruled that Feingold’s actionwas based upon public disclosures in the fivecategories of documents, and that Feingoldwas not the original source of the information.Accordingly, the district court concluded thatit lacked jurisdiction and granted the defen-dants’ motion for summary judgment.Feingold appealed.

Suit Was Based Upon Publicly DisclosedAllegations or Transactions

The Seventh Circuit affirmed the districtcourt’s entry of summary judgment, but clari-fied that the suit failed under the public disclo-sure bar as a matter of substantive law ratherthan for lack of jurisdiction. Although the textof the public disclosure bar uses the term “juris-diction,” and courts often refer to it as a “juris-dictional bar,” the Seventh Circuit observed thatthe Supreme Court has held that the FCA’s pub-lic disclosure provision is actually substantiverather than jurisdictional. See Hughes AircraftCo. v. United States, 520 U.S. 939, 950-51(1997). The Seventh Circuit pointed this outmerely as a technical clarification; it did notmaterially affect the court’s analysis.


The court explained that the underlying poli-cy behind the public disclosure bar is thatwhen a public disclosure has brought a falseclaim to the attention of the relevant authori-ty, that authority is already in a position tovindicate society’s interests, and a qui tamaction would serve no purpose. Under theSeventh Circuit’s approach, a public disclosureoccurs when the critical elements exposing thetransaction as fraudulent are placed in thepublic domain. Turning to the dictionary, thecourt observed that “public” meant “accessibleto or shared by all members of the communi-ty,” while “to disclose” meant “to make knownor public.” The court also found that its defi-nition of public disclosure was consistent withthe context of the FCA and with Congress’intention to encourage those with insideinformation to come forward, and to discour-age parasitic suits.

Accordingly, the court examined the five cate-gories of documents on which Feingold reliedin order to determine whether they placed thecritical elements of his fraud allegations in thepublic domain. Feingold conceded that thedocuments in the first three categories, thenewspaper article, the criminal indictments,and the fraud alerts, were publicly disclosed.

The fourth category, the HCFA reports, wereadministrative reports issued by the responsi-ble government agency, and were thereforeplaced in the public domain. Feingold soughtto avoid the conclusion that they were publiclydisclosed by arguing that a DOJ attorney wasunaware of any public disclosure. The courtdismissed this argument as irrelevant. Theadministrative report in itself constitutedpublic disclosure; it was of no momentwhether a particular attorney was aware of theinformation.

The fifth and final category consisted of papersfrom Feingold’s previous FCA litigation.

Feingold conceded that documents filed in thatlitigation were publicly disclosed, but statedthat suppliers’ claims containing patient med-ical information were not filed in those previ-ous lawsuits and therefore were not publiclydisclosed. However, Feingold did not providethe court of appeals with any informationabout those papers, and did not cite to any partof the record from which the court couldexamine them. Thus the court was unable toevaluate whether they were even relevant to thecase. Accordingly, the court held that all of theinformation on which Feingold’s suit wasbased was publicly disclosed.

Relator Was Not Original Source

Feingold pointed to no evidence that wouldallow a factfinder to conclude that he had inde-pendent knowledge of the allegations or trans-actions upon which his suit was based. Instead,he merely offered the conclusory assertion that“through his own investigation, [Feingold]gathered the information necessary in order tomake the allegations against” the defendants.Thus the district court did not err in conclud-ing that Feingold was not an original source.Therefore, the court of appeals affirmed thedistrict court’s grant of summary judgment.

Section 3730(h) RetaliationClaims

U.S. ex rel. Diop v. Wayne CountyCommunity College District, 242 F.Supp. 2d 497 (E.D. Mich. Jan. 31, 2003)


See “FCA Liability/False Certification” aboveat page 8.


U.S. ex rel. Watson v. ConnecticutGeneral Life Insurance Co., 2003 U.S.Dist. LEXIS 2054 (E.D. Pa. Feb. 11, 2003)

See “FCA Liability of Medicare Carriers andFiscal Intermediaries” above at page 17.

U.S. ex rel. Siewick v. Jamieson Science& Engineering, Inc., 2003 U.S. App.LEXIS 5924 (D.C. Cir. Mar. 28, 2003)

The D.C. Circuit affirmed a grant of summaryjudgment in favor of an individual supervisorwho was named as an additional defendant ina § 3730(h) action against a corporate employ-er. The court ruled that as a matter of law thesupervisor was not the plaintiff ’s employerand could not be held liable for retaliation.

Dr. Joseph Siewick brought this § 3730(h)action against his former employer JamiesonScience and Engineering, Inc., as well as hisimmediate supervisor Dr. John Jamieson, whowas the company’s chairman, president, andmajority shareholder, alleging that the defen-dants wrongfully fired him for blowing thewhistle on improprieties in the company’sbilling for government contracts. AfterJamieson’s death his estate was substituted as adefendant. The estate moved for summaryjudgment, arguing that Jamieson was notSiewick’s “employer” for purposes of§ 3730(h).

In July 2001 the district court denied thatmotion, but on reconsideration in light ofintervening D.C. Circuit precedent the courtgranted the motion in February 2002. See 191F. Supp. 2d 17 (D.D.C. 2002), 26 TAF QR 23(Apr. 2002). The district court noted thatunder United States ex rel. Yesudian v. HowardUniversity, 270 F.3d 969 (D.C. Cir. 2001), 25TAF QR 13 (Jan. 2002), the question whetheran individual defendant is an “employer” for

purposes of § 3730(h) is legal rather than fac-tual, and the word “employer” as used in theretaliation provision “does not normally applyto a supervisor in his individual capacity.” Thecourt held that Jamieson’s estate could not beheld liable for the acts of the corporationabsent circumstances warranting piercing thecorporate veil. Siewick appealed.

Existence of Employment Relationship isQuestion of Law

The D.C. Circuit affirmed. Siewick argued thatwhether Jamieson was Siewick’s employer wasa factual issue precluding a grant of summaryjudgment, but the court of appeals reiteratedthat the existence of an employment relation-ship is a question of law, not fact. BecauseCongress did not define the term “employer” inthe FCA, the court presumed that Congressintended the term to have its ordinary com-mon law meaning. Siewick argued that theSenate Report on the 1986 amendments, whichstates that “the definition[] of . . . ‘employer’should be all-inclusive,” supported a differentmeaning. However, as far as the court coulddetermine, the Report signified only that theterm was meant to cover both public and pri-vate employers.

Corporation is Sole Employer of ItsEmployees

The court ruled that “[t]he corporation only isthe employer of the corporation’s employees.”Thus neither Jamieson’s ownership nor hiscontrol of the corporation made him Siewick’s“employer” within the common law meaningof that term. A footnote in Siewick’s briefasserted that the corporate veil should bepierced because the corporation allegedlyengaged in fraud. But his complaint did noteven allege that the corporate form was a shamin this case. The district court in this case cor-rectly insisted on the importance of the differ-


ence between being a fraud and conductingone. Because there was no basis for piercingthe corporate veil in this case, the court ofappeals ruled, the district court did not err ingranting summary judgment.

Section 3731(b) Statute ofLimitations

U.S. ex rel. Purcell v. MWI Corp., 2003U.S. Dist. LEXIS 4410 (D.D.C. Mar. 25,2003)

A District of Columbia district court denied amotion to dismiss the Government’s com-plaint in intervention in a qui tam action aseither time-barred or precluded by principlesof equity. The court ruled that theGovernment’s complaint was timely under therelation-back doctrine, and that there wereinsufficient facts in the record to determinewhen the FCA’s three-year tolling provisionwas triggered.

Robert Purcell filed this qui tam action onAugust 28, 1998 against his former employerMWI Corporation, a manufacturer of indus-trial pumps. In the early 1990s MWI arrangedto sell irrigation pumps to seven Nigerianstates, and in 1992 the U.S. Export-ImportBank made eight loans totaling $74.3 millionto Nigeria to finance the sales. As a conditionof approving and disbursing the payments, theGovernment required MWI to certify that ithad not paid any commissions or other pay-ments in connection with the pump sales. J.David Eller, the former president of MWI,signed most of these certifications. Purcellalleged that the certifications were false,because the company had paid $28 million incommissions to their Nigerian sales represen-tative to obtain the sales contracts.

Purcell’s suit sparked a criminal investigation,and the Government obtained multiple exten-sions to determine whether to intervene in thequi tam action. Finally, in January 2002 theGovernment elected to intervene, and in April2002 it filed its own complaint in the action.See 27 TAF QR 46 (July 2002). In addition tojoining Purcell’s FCA claims against MWI, theGovernment added an FCA claim against Eller,as well as equitable claims for unjust enrich-ment and payment by mistake.

The defendants moved to dismiss theGovernment’s complaint. They argued that allof the Government’s claims were time-barred,and that its equitable claims were barredbecause the FCA furnished a complete andadequate remedy at law. Eller also argued thatthe Government could not add him as a defen-dant, because the statute of limitations hadexpired and the relation-back doctrine doesnot apply to new defendants absent a mistakeof identification.

Relation Back Doctrine Applied toGovernment’s FCA and Equitable Claims

The court denied the defendants’ motion, rul-ing that the Government’s complaint was time-ly under Fed. R. Civ. P. 15(c). That rule pro-vides that a plaintiff may amend its complaintto add a claim or defense that “arose out of theconduct, transaction, or occurrence” set forthin the original pleading. In determiningwhether an amendment relates back to theoriginal complaint, courts inquire whether thecomplaint gave the defendant notice of thenew claim. The defendants argued that theGovernment’s complaint represented a newaction that paralleled rather than amended therelator’s complaint, and noted that theGovernment’s complaint was broader than therelator’s complaint in that it added Eller as adefendant and included non-FCA claims, butalso narrower in that it did not repeat the rela-


tor’s allegations that MWI created deceptiveequipment descriptions.

The court rejected the defendants’ argument. Itobserved that the United States is the real partyin interest in qui tam actions, and hence theGovernment’s complaint in intervention is anamendment of the relator’s complaint.Therefore, if the Government’s claims arose outof the conduct set forth in the relator’s com-plaint, then under Rule 15(c) the Government’scomplaint relates back to the date of the rela-tor’s complaint. In the case at bar, both theGovernment’s FCA claims and its additionalequitable claims arose out of the defendants’alleged concealment of its improper “commis-sion” payments. Hence the relation-back doc-trine applied to both the Government’s FCAclaims and its equitable claims.

Motion to Dismiss Claims Against EllerWas Premature

However, the relation-back doctrine did notapply to the Government’s claims against Eller.Rule 15(c) permits relation back for newly-added defendants only if cases of mistakenidentity. Therefore, the Government’s claimsagainst Eller were viable only if theGovernment’s complaint was filed within theapplicable statute of limitations. Because thelast alleged violation occurred in 1994 and theGovernment’s complaint was not filed until2002, the six-year limitations period of§ 3731(b)(1) had clearly expired. Therefore,the Government’s FCA claim against Eller wasviable only if it fell within the three-year tollingperiod of § 3731(b)(2), which provides that anFCA claim may not be brought “more than 3years after the date when the facts material tothe right of action are known or reasonablyshould have been known by the official of theUnited States charged with responsibility to actin the circumstance.” Similarly, the equitableclaims against Eller were limited by 28 U.S.C.

§ 2415, which provides a three-year limitationsperiod for tort claims, subject to a tolling pro-vision in § 2416(c) that excludes periods when“facts material to the right of action are notknown and reasonably could not be known” bythe responsible federal official.

Accordingly, the viability of the Government’sFCA and equitable claims against Eller turnedon when the responsible federal official knewor should have known of the material facts.The defendants contended that the applicabledate was August 27, 1998, when the relator’scomplaint was served on the Department ofJustice. The relator’s complaint stated thatEller was the president, CEO, and sole owner ofMWI and that he signed the supplier’s certifi-cates. Applying the three-year limit, the defen-dants concluded that the Government’s claimsagainst Eller, which were filed on April 4, 2002,were time-barred.

However, the Government contended that therelator’s complaint did not allege that Ellerknowingly approved the alleged commissions,and even if it had, receipt of such allegationswould not have been enough to trigger the lim-itations period. Instead, the Governmentinsisted that the date on which theGovernment learned of Eller’s alleged role wasa question of fact that could only be resolvedon a motion for summary judgment, not on amotion to dismiss. The court agreed, rulingthat there were not enough facts in the recordto permit it to determine when the responsiblefederal official should have known of the mate-rial facts underlying the allegations againstEller. Therefore, the court declined to dismissthe Government’s claims against Eller at thispoint in the proceedings.

Government May Plead AlternativeTheories of Liability

The court also rejected the defendants’ argu-


ment that it should dismiss the Government’sequitable claims because they were inconsis-tent with its FCA claims. The defendantsobserved that equitable relief is not availablewhen the plaintiff has a complete and adequateremedy at law, and asserted that the FCA’s tre-ble damages are more than adequate becausethey allow the Government both to recoup itslosses and punish the defendants. To bolstertheir argument, the defendants relied on theSupreme Court’s statement in Vermont Agencyof Natural Resources v. United States ex rel.Stevens, 529 U.S. 765, 784 (2000) that FCAdamages are “essentially punitive in nature.”

The court rejected this argument, observingthat under Fed. R. Civ. P. 8(e)(2), a plaintiffmay plead alternative theories of liability,regardless of whether such theories are consis-tent with one another, although a plaintiff maynot recover damages on the basis of mutuallyinconsistent theories. Accordingly, dismissal ofthe equitable claims was not appropriate on amotion to dismiss.

Moreover, the court observed that recently inCook County v. United States ex rel. Chandler,123 S. Ct. 1239 (2003), supra page 1, theSupreme Court clarified that FCA treble dam-ages have a compensatory side and may be nec-essary for full recovery. Accordingly, the courtdeclined to determine at this stage of the pro-ceedings whether FCA damages in this caseconstituted a complete and adequate remedy atlaw that barred equitable relief.

Rule 9(b)


See “FCA Liability/Materiality” above at page 5.


See “Section 3730(b)(5) First-to-File Bar”above at page 26.

U.S. ex rel. Brennan v. DevereuxFoundation, 2003 U.S. Dist. LEXIS 709(E.D. Pa. Jan. 14, 2003)

See “Section 3730(e) Public Disclosure Bar andOriginal Source Exception” above at page 34.


See “FCA Liability/False Certification” aboveat page 12.

U.S. ex rel. Cericola v. Ben FranklinBank, 2003 U.S. Dist. LEXIS 1044 (N.D.Ill. Jan. 27, 2003)

An Illinois district court denied a motion todismiss a qui tam complaint alleging that thedefendants submitted false claims to HUD forTitle I loan insurance. The court ruled thatthe relator had stated her allegations with suf-ficient particularity to satisfy Rule 9(b).

Karen Cericola, a senior vice president of BenFranklin Bank, brought this qui tam actionagainst the bank and its officers, alleging thatthey submitted false claims for federal mort-gage insurance payments under the HUD TitleI loan insurance program. Cericola allegedthat the officers caused the bank to purchase aportfolio of 424 low-grade mortgage loaninvestments shortly before attempting to takethe bank public in late 1990. The officers


intended to use the portfolio to inflate thebank’s reported earnings by recognizing in theyear of the initial public offering all of the rev-enue that the bank could expect to receive fromservicing the loans over their expected six-yearlife. In fact, these loans were highly risky andimproperly underwritten, and it was unreason-able to believe that they would reach theirexpected life without defaulting. By exposingthis scheme, Cericola forced the bank to call offthe IPO, and shortly thereafter the bank beganexperiencing a crippling number of defaults onthese loans.

Faced with the potential failure of the bank,Cericola alleged, the officers tried to unload theloans onto the taxpayers through a scheme offalse claims for federal mortgage insurancepayments under the HUD Title I loan insur-ance program. Both Cericola and an outsideconsultant discovered numerous instances ofimproper underwriting on the loans, andshared their findings with the bank’s officers.Nevertheless, Cericola alleged, in late 1999 thedefendants began submitting claims to HUDfor insurance on loans that it knew to be unin-surable. HUD refused to make payment on 50of the 81 submitted loans, but paid $715,694on the remaining 31 loans.

In addition to her qui tam claim, Cericolabrought a claim under the anti-retaliation pro-visions of the FCA and the Financial InstitutionReform, Recovery, and Enforcement Act of 1989(FIRREA), as well as a claim for intentionalinfliction of emotional distress. The defendantsmoved to dismiss for failure to plead fraud withparticularity as required by Fed. R. Civ. P. 9(b)and failure to plead materiality. They also filedvarious motions seeking to dismiss Cericola’sFCA and FIRREA retaliation claims, as well asher claim for intentional infliction of emotionaldistress.

Complaint Satisfied Rule 9(b)

The court denied the defendants’ motion to dis-miss. The court noted that Cericola identifiedeach of the 81 loan claims and set forth the rea-sons why each was false by identifying specificunderwriting deficiencies. Moreover, Cericolaalleged that the board of directors caused falseclaims to be submitted, and it was reasonable topresume that the submissions of the allegedlyfalse claims were the collective actions of the offi-cers of the bank. Thus, Cericola had adequatelypleaded her fraud allegations with particularity,and had informed the defendants of their role inthe alleged fraud, thus satisfying Rule 9(b).

The court also rejected the defendants’ argumentthat Cericola failed to allege materiality, notingthat she alleged that the defendants submittedclaims that they knew were ineligible for reim-bursement. The court rejected as meritless thedefendants’ argument that HUD regulations pro-vided a safe harbor for their actions. It alsorejected their argument that Cericola’s FCA retal-iation claim should be dismissed because she hadnot adequately pleaded her FCA qui tam claim.However, it granted the defendants’ motion for amore definite statement of her FIRREA retalia-tion claim. Finally, the court denied the defen-dants’ motion to dismiss Cericola’s claim forintentional infliction of emotional distress.

Peterson v. Comm Gen Hosp, 2003 U.S.Dist. LEXIS 1783 (N.D. Ill. Feb. 7, 2003)

An Illinois district court granted the defen-dants’ motion to dismiss a qui tam actionbased on allegations of self-referrals for failureto plead with particularity as required by Fed.R. Civ. P. 9(b). The relator failed to specifywhich claims were fraudulent and whichpatients had been illegally referred to thedefendants, or to provide representativeexamples of the alleged fraud.


Dr. David Peterson filed this improperly cap-tioned qui tam action against CGH MedicalCenter (incorrectly named “CommunityGeneral Hospital”), Sterling Rock Falls Clinic,and Katherine Shaw Bethea Hospital, allegingthat the defendants violated the FCA by sub-mitting Medicare claims tainted by self-refer-rals in violation of the Stark law. The defen-dants moved to dismiss pursuant to Fed. R.Civ. P. 9(b) and 12(b)(6).

Complaint Failed to Specify AllegedlyFalse Claims

The court granted the motion. For presentpurposes the court assumed that violation ofthe Stark law could render otherwise properclaims false under the FCA, because the defen-dants did not contest that issue. Rather, thedefendants argued that the relator’s allegationsdid not meet the heightened pleading standardof Rule 9(b). Although the gravamen of therelator’s complaint was that the defendantsbilled Medicare for services to patients referredto them in exchange for financial and otherremuneration, the complaint did not identify asingle Medicare patient referred to the defen-dants through any of the allegedly unlawfularrangements. The complaint also failed toidentify a single Medicare claim submitted forservices rendered pursuant to an unlawful self-referral. The court stated that it did not expectthe relator to list every single patient, claim, ordocument involved, but it did expect him toprovide at least some representative examples.

The relator argued that he was unable to providethis information because it was within the defen-dants’ exclusive control. However, the courtrejected this assertion, noting that the claims atissue were submitted to the Government.Moreover, the court ruled, even if the relator werecorrect, he should at least plead the particular cir-cumstances of the fraud on information andbelief, as well as the factual basis for his suspicions.

Accordingly, the court granted the defendants’motion to dismiss, and gave the relator twenty-one days to file an amended complaint or facedismissal with prejudice. The court alsodirected the relator to supply a proper captionfor the amended complaint, in which heshould identify the plaintiff as “United Statesex rel. Dr. David Peterson.”

U.S. ex rel. McCready v. Columbia/HCAHealthcare Corp., 2003 U.S. Dist. LEXIS3300 (D.D.C. Mar. 7, 2003)

A District of Columbia district court denied adefendant’s motion to dismiss a qui tamaction alleging that the defendant health careproviders manipulated the length of patientstays to maximize reimbursement. The courtheld that the allegations in the complaint metthe standard of pleading fraud with particu-larity. The court also rejected the movingdefendant’s argument that it could not be heldliable because it did not benefit from thealleged fraud. Finally, the court clarified thatthe Government may participate in a declinedcase by submitting a statement carefully craft-ed to protect its interests but avoid involve-ment in the factual issues.

Dr. Clint McCready brought this qui tam actionagainst Columbia North Monroe Hospital, itsowner and operator Columbia/HCAHealthcare Corporation, Milestone Healthcare(a management company), and various others,alleging that the defendants manipulated thelength of patient stays to maximize reimburse-ment. Medicare reimbursement of illnessescovered by certain diagnostic codes is made ona per diem basis, up to a maximum amountbased on the geometric mean length of stay.McCready alleged that the defendants acted tokeep patients with such diagnoses in hospitalcare at North Monroe until they reached thegeometric mean length of stay, regardless of the


medical suitability of that course of treatment.Milestone, which manages a rehabilitation cen-ter, is reimbursed on a cost basis rather than onthe basis of diagnostic codes, but the relatoralleged that Milestone participated in thescheme to retain patients at North Monroe.This case is now part of the multidistrict litiga-tion of qui tam suits against HCA and variousrelated entities.

Milestone moved to dismiss, arguing that therelator’s complaint failed to plead fraud withparticularity as required by Fed. R. Civ. P. 9(b).It also argued that it could not be held liable forNorth Monroe’s alleged fraud because it did notbenefit from that fraud. The relator respondedto Milestone’s motion, and the Government alsofiled a statement of interest, requesting that anydismissal resulting from Milestone’s motion bewithout prejudice to the Government, and con-testing Milestone’s argument that its lack ofpecuniary benefit mandated dismissal. In itsreply, Milestone challenged the Government’sright to participate in the motions practice of acase in which it had not intervened.

Complaint Satisfied Rule 9(b)

The court denied Milestone’s motion to dis-miss. The relator alleged that while he wasemployed as the medical director of theMilestone rehabilitation unit, he was instruct-ed not to allow the transfer of patients until thegeometric mean length of stay had beenreached, and named specific patients to whomthis scheme had been applied. He alleged thatas a result of these extended stays, cost reportsand reimbursement claims submitted toMedicare contained inflated costs, and that thispractice was widespread in the HCA system.The court found that the complaint identifiedthe time period of the alleged fraud, the partiesinvolved, the schemes employed, and theinflated claims that resulted. Thus, the com-plaint amply prepared the defendants to meet

the allegations contained in them and accord-ingly satisfied Rule 9(b).

Defendant Need Not Benefit From Fraudto Incur Liability

The court also rejected Milestone’s argumentthat it could not be held liable under the FCAbecause it was not reimbursed on a per diembasis and thus did not benefit from the allegedfraud. The court observed that an FCA plain-tiff need only plead the facts forming the basisfor the fraud, and is not required to plead hislegal theory. Furthermore, a corporation isliable for the fraudulent acts of its agents evenif it received no benefit from the fraud.Milestone sought to rely on a 1981 case quot-ing an older version of Moore’s Federal Practicefor the proposition that to satisfy Rule 9(b) afraud complaint must state not only the time,place, and content of the false representation,but also “what was obtained or given up as aconsequence of the fraud.” However, the courtobserved that the current version of Moore’somits the latter phrase and substitutes thephrase “the resulting injury,” thus clarifyingthat the older reference to “what was obtainedor given up” refers to the defrauded party (theGovernment) rather than the perpetrator.Because the relator had adequately alleged thatthe Government paid more than was necessaryto treat Medicare patients, he had specifiedwhat was given up by the Government, i.e., theresulting injury.

Government May File Statement ofInterest in Declined Case

The court ruled that the Government actedproperly in filing a statement that was carefullycrafted to avoid involvement in the factualissues of this declined case and designed solelyto protect its own interests. While nonpartiesgenerally may not participate in litigation, theGovernment is in a unique position in declined


qui tam cases, because it remains the real partyin interest regardless of whether it has inter-vened. In its statement of interest in this case,the Government expressly disclaimed taking aposition on the sufficiency of the relator’s com-plaint. Rather, it requested that any dismissalbe without prejudice to it, and it discussed thepurely legal aspect of Milestone’s claim thatpecuniary benefit to the defendant is requiredfor liability, thus assisting the court by enlight-ening it on a point of FCA jurisprudence.Accordingly, the Government’s participation inmotions practice in this case was not improper.

Attorneys’ Fees, Costs, andExpenses


The Eighth Circuit affirmed the districtcourt’s award of costs to the defendants in aqui tam action pursuant to Fed. R. Civ. P.54(b). The court rejected the relators’ con-tention that § 3730(d)(4) of the FCA precludesan award of costs under Rule 54(b).

The plaintiffs in this qui tam action, a group ofindividuals and public interest groups, filedsuit in 1995 alleging that the defendant corpo-rations conspired to submit false claims forpayment under a government contract for thetreatment and disposal of hazardous waste atthe Vertac Chemical Plant site in Jacksonville,Arkansas. The Government declined to inter-vene, and after extended discovery, the districtcourt granted summary judgment to thedefendants on most claims, and after trialentered judgment on the remaining claims.The Eighth Circuit affirmed.

After entry of judgment, the defendants movedfor reimbursement of costs in the amount of

$163,592. The district court ordered the plaintiffsto pay $26,408, reducing the amount in partbecause of the defendants’ failure to itemize manyof the submitted costs. The relators appealedon three grounds: (1) that § 3730(d)(4) of theFCA precluded an award of costs under Fed. R.Civ. P. 54; (2) that the relators were entitled torelief from the award of costs because of theirlimited financial resources; and (3) that thedefendants’ improper conduct precluded anaward of costs.

Section 3730(d)(4) Does Not Preclude anAward of Costs Under Rule 54(b)

The Eighth Circuit affirmed the judgment of thedistrict court. Rule 54(d)(1) provides: “Exceptwhen express provision therefor is made eitherin a statute of the United States or in these rules,costs other than attorneys’ fees shall be allowedas of course to the prevailing party unless thecourt otherwise directs.” The relators arguedthat § 3730(d)(4) of the FCA is an “express pro-vision” for costs that displaces the court’s author-ity under Rule 54 to award costs to the defen-dant. Section 3730(d)(4) provides that “thecourt may award to the defendant its reasonableattorneys’ fees and expenses if the defendantprevails in the action and the court finds thatclaim of the person bringing the action wasclearly frivolous, clearly vexatious, or broughtprimarily for the purposes of harassment.”

The court observed that the term “costs” doesnot appear in § 3730(d)(4). However, the rela-tors contended that the term “expenses” in theFCA includes costs, and thus the reference toexpenses in § 3730(d)(4) is an express provisionregarding costs. The court rejected this con-tention, observing that in contrast to § 3730(d)(4), § 3730(d)(2) provides for theaward to a prevailing qui tam plaintiff of “rea-sonable expenses . . . plus reasonable attorneys’fees and costs.” Similarly, § 3730(g) providesfor an award of costs to a prevailing defendant


when the Government intervenes by referringto 28 U.S.C. § 2412(d), which also distinguish-es among fees, expenses, and costs. The courtconcluded that the reference to fees and expens-es in one subsection, and to expenses, fees, andcosts in two other subsections evinced an intentto treat the awards differently. If the term“expenses” included costs, the court reasoned,there would have been no need for an expressreference to costs in the latter two subsections.

Award of Costs Was Not Abuse ofDiscretion

The Eighth Circuit found no abuse of discre-tion in the award of costs, observing that thedistrict court substantially reduced the amountof costs requested by the defendants. The courtof appeals noted that “the defendants [Editor’sNote—The court apparently meant to say “theplaintiffs”] have produced no evidence of theirinability to pay.” Furthermore, the court ruledthat the plaintiffs’ contention that the defen-dants engaged in improper conduct was with-out merit. Accordingly, the Eighth Circuitaffirmed the judgment of the district court.

The Eighth Circuit issued two additional deci-sions in this action on the same date. As notedabove, the court of appeals affirmed the districtcourt’s grant of summary judgment. See 317F.3d 883, summarized under “FCALiability/Materiality” above at page 5. Thecourt also affirmed the district court’s denial ofthe plaintiffs’ motion for a default judgmentagainst one of the defendants, MRKIncineration, Inc., which had failed to defendagainst the suit. See 2003 U.S. App. LEXIS1314, summarized in “LitigationDevelopments” below at page 50.



U.S. ex rel. Health Outcome Technologies v.Pennock Hospital, 2003 U.S. Dist. LEXIS 937(W.D. Mich. Jan. 21, 2003)

In January 2003, a district court denied adefendant’s motion for reconsideration of anorder maintaining certain court documentsunder seal, and ordered all but one of thedefendant’s affirmative defenses stricken. Thematter came before the court on the defen-dant’s motion for reconsideration as well asthe Government’s motion for partial judg-ment on the pleadings. The defendant’smotion for reconsideration primarily repeatedarguments that the court had previouslyrejected, and the court ruled that “[t]he factthat the Defendant has repeated those argu-ments with a full complement of adjectives toreflect its extreme displeasure is hardly a prop-er basis for reconsideration.”

The court then turned to the eight affirmativedefenses, which included: (1) statute of limita-tions; (2) due process; (3) excessive fines; (4)public disclosure; (5) laches; (6) failure toexhaust administrative remedies; (7) failure tostate a claim; (8) inapplicability of the FCA.The Government moved to strike or dismiss allbut the third for failure to state a defense as amatter of law. In response, the defendant con-ceded that its fifth and sixth defenses werelegally deficient and should be dismissed, andfailed to respond in support of its seventh andeighth defenses. Therefore, the court struckthese defenses.

The court also struck the remaining defenses,with the exception of the third. The courtobserved that the defendant had failed to pleadany factual basis for its defenses, which weretherefore subject to dismissal. Accordingly, thecourt granted the Government’s motion.

U.S. ex rel. Johnson-Pochardt v. Rapid CityRegional Hospital, 2003 U.S. Dist. LEXIS 4758(D.S.D. Jan. 21, 2003)

In January 2003, a South Dakota district courtdenied the Government’s motion to keepunder seal its requests for extensions of time ina qui tam action. Karen Johnson-Pochardt,former director of the Cancer Care Institute(CCI) at Rapid City Regional Hospital(RCRH), brought this action against RCRH,Dr. Larry Ebbert, and Oncology Associates(OA) in 2001. The complaint alleged thatRCRH entered into a prohibited financial rela-tionship with OA, through which OA receivedsubstantial medical referrals in violation offederal law. The Government filed elevenmotions between June 2001 and December2002 for extension of time to decide whether tointervene. On December 18, 2002, the partiesreached a settlement agreement, and theGovernment intervened the following day.The court unsealed the complaints, notice ofintervention, and settlement agreement, but allother documents filed before December 19,2002 remained under seal. The Governmentmoved to keep those documents under seal.

The court denied the motion. The purpose ofthe seal provision, the court observed, is toprotect the confidentiality of the Government’sinvestigation and prevent injury to the defen-dant’s reputation. Because the underlyingaction had been settled and the complaint andsettlement agreement had been made public,these interests were no longer at issue. Thedocuments that the Government sought tokeep under seal contained no specific informa-tion about the internal workings of theGovernment’s investigation. They did not dis-cuss client agencies and contractors, reveal anydetails relating to the content of documentsreceived from the defendants, or indicate the



process of the Government’s decision not tointervene. Thus, maintaining the seal on thedocuments would not promote the publicinterest, comport with the requirements of theFCA, or serve any justifiable purpose.Accordingly, the court lifted the seal from theremaining documents.

In a decision in this case issued the followingmonth, the district court granted Johnson-Pochardt a relator’s share of 24 percent or$1.566 million. See “Section 3730(d) Relator’sShare” above at page 32.

U.S. ex rel. Costner v. U.S., 2003 U.S. App.LEXIS 1314 (8th Cir. Jan. 28, 2003)

In January 2003, the Eighth Circuit affirmed adistrict court judgment in favor of a defendantthat had failed to defend against a qui tamaction. The relators, a group of individualsand public interest groups, filed suit in 1995alleging that the defendant corporations con-spired to submit false claims for paymentunder a government contract for the treatmentand disposal of hazardous waste at the VertacChemical Plant site in Jacksonville, Arkansas.The Government declined to intervene, andafter extended discovery, the district courtgranted summary judgment to the defendantson most claims, and after trial entered judg-ment on the remaining claims. The EighthCircuit affirmed.

Among the defendants in this action was MRKIncineration, Inc. MRK and MorrisonKnudsen Corp., a second defendant, hadentered into a joint venture named Vertac SiteContractors, a third defendant in the action, toincinerate toxic waste at the site. While theother defendants appeared, defended the suit,and were found not liable, MRK did not answerthe complaint or otherwise defend against the

suit. The relators moved for a default judgmentagainst MRK. However, after the other defen-dants prevailed at trial, the district courtdeclined to enter a default judgment againstMRK, relying on Frow v. De La Vega, 82 U.S.552, 554 (1872), which held that the issuance ofinconsistent verdicts between jointly liabledefendants is “incongruous and illegal.”

The relators appealed the denial of theirmotion for a default judgment. They sought todistinguish Frow on the grounds that the liabil-ity at issue there was merely joint, whereas lia-bility under the FCA is joint and several.However, in an unpublished per curiam opin-ion, the Eighth Circuit rejected that distinc-tion. The court ruled that the holding in Frowwas that logically inconsistent verdicts shouldbe avoided. Although joint liability is one cir-cumstance where such inconsistency may arise,it is not the only one. The relators’ action wasbased upon claims submitted by Vertac SiteContractors and another defendant, URSConsultants. They did not allege that MRKsubmitted any separate claims to theGovernment. Therefore, a verdict againstMRK could not be reconciled with the verdictin favor of its joint venture partner MorrisonKnudsen Corp. Accordingly, the Eighth Circuitaffirmed the judgment of the district court.

The Eighth Circuit issued two additional deci-sions in this action on the same date. As notedabove, the court of appeals affirmed the districtcourt’s grant of summary judgment. See 317F.3d 883, summarized under “FCALiability/Materiality” above at page 5. Thecourt of appeals also affirmed the districtcourt’s award of costs to the defendants pur-suant to Fed. R. Civ. P. 54(b). See 317 F.3d 889,summarized under “Attorneys’ Fees, Costs, andExpenses” above at page 47.



U.S. ex rel. Watson v. Connecticut General LifeInsurance Co., 2003 U.S. Dist. LEXIS 2003(E.D. Pa. Jan. 30, 2003)

In January 2003, a Pennsylvania district courtdenied a qui tam relator’s motion to excludethe declarations of a former governmentemployee from consideration in connectionwith a pending motion for summary judg-ment. The proposed witness, John Barton, wasthe government contracting officer for thecontract at issue in the case at bar. He retiredfrom government service in November 2001.

The relator sought to exclude Barton’s declara-tion pursuant to 18 U.S.C. § 207 and Fed. R.Evid. 701. However, the court observed that § 207 only prohibits former governmentemployees from representing or acting onbehalf of a party in a matter in which the for-mer employee participated personally and sub-stantially. In the case at bar, there was no evi-dence that Barton was acting on behalf of thedefendant: he received no compensation fromthe defendant or defense counsel, but merelyresponded to questions based on his personalknowledge of certain contracts while employedby the Government.

The court also rejected the relator’s contentionthat Barton’s declaration was impermissibleexpert testimony under Fed. R. Evid. 701.Rather, most of his declaration consisted offactual statements based on his personalknowledge and perception, and to the extenthe stated opinions, they were admissible as layopinion testimony based on knowledge heobtained by virtue of his position as the formercontracting officer for the defendant’s contractduring the years at issue. However, to theextent that any of Barton’s statements might gobeyond his personal knowledge and offerexpert opinion testimony, the court stated that

it would not rely on them in deciding thepending motions for summary judgment.Accordingly, the court denied the relator’smotion.

In a subsequent decision issued the followingmonth, the court granted summary judgmentto the defendant. See 2003 U.S. Dist. LEXIS2054 (February 11, 2003), summarized under“FCA Liability of Medicare Carriers and FiscalIntermediaries” above at page 17.

White v. Apollo Group, 241 F. Supp. 2d 710(W.D. Tex. Jan. 30, 2003)

In January 2003, a Texas district court dis-missed a pro se complaint alleging, inter alia,violations of the federal criminal False ClaimsAct. Leeland White sought a student loantotaling approximately $9,200 from the ApolloGroup, doing business as the University ofPhoenix. The University at first awarded $500,explaining that White had failed to inform it offinancial aid he had already received. After analtercation, the University cancelled White’sfinancial aid and barred him from the campus;ultimately it expelled White for harassment.White sued, alleging various violations of theHigher Education Act, “swindle by mail,” andviolation of the criminal False Claims Act. Thedefendant moved to dismiss on the groundsthat there is no private right of action for vio-lation of any of the statutes White cited.

The court agreed. With respect to White’s pur-ported FCA claim, the court noted that Whitehad failed to comply with any of the strict pro-cedural requirements of the civil FCA, includ-ing the requirements that a qui tam action bebrought in the name of the Government, andfiled in camera and under seal; that the com-plaint and a disclosure statement be served onthe Government; and that the complaint not




be served on the defendant until the court soorders. White’s other claims were also fatallydeficient. Accordingly, the court granted thedefendant’s motion to dismiss.

U.S. ex rel. Drake v. Norden Systems, Inc., 2003U.S. Dist. LEXIS 3044 (D. Conn. Feb. 19, 2003)

In February 2003, a Connecticut district courtdismissed a qui tam action with prejudice forfailure to prosecute. Walter Drake, a formerSupervisor of Facilities Accounting at NordenSystems, Inc. (NSI) filed this action in 1994against NSI and United TechnologiesCorporation (UTC). The Governmentdeclined to intervene, and in 1997 Drake twiceamended his complaint. In 1998, the defen-dants moved to dismiss the second amendedcomplaint, and the court granted the motionin part in August 2000, ordering Drake to file afinal amended complaint within sixty days ofthat ruling. However, Drake failed to do so forsixteen months: he did not file his thirdamended complaint until February 2002. Thatsame month, the defendants moved to strikethe third amended complaint and dismiss thecase for failure to prosecute.

The court granted the motion, ruling that dis-missal for failure to prosecute was appropriateunder Fed. R. Civ. P. 41(b). The court found thatthe delay in filing the third amended complaintwas lengthy and in no way attributable to thedefendants; that the plaintiff was on notice thatfurther delays would result in dismissal; that thedefendants were prejudiced both actually and asa matter of law by the long delay; and that nolesser sanction than dismissal would suffice torecompense the defendants for the prejudice suf-fered. Although the court’s calendar had notbeen adversely affected by the delay, this singlecountervailing factor did not outweigh the fac-tors militating in favor of dismissal. Accordingly,

the court dismissed the action with prejudice.

U.S. v. Reed, 2003 U.S. Dist. LEXIS 2659 (N.D.Ill. Feb. 25, 2003)

In February 2003, an Illinois district courtentered judgment sua sponte in favor of thedefendants in an FCA action. TheGovernment brought this action against Carland Patricia Reed and their children Carla andSharay, alleging that they submitted falseparental income information in order for Carlaand Sharay to receive federal need-based finan-cial aid. The Government sought recoveryunder the False Claims Act as well as under thecommon law doctrines of payment by mistakeand unjust enrichment. The defendants, actingpro se, each denied under oath that they sub-mitted false claims. The Government movedfor summary judgment.

The court denied the Government’s motionand entered judgment sua sponte in favor ofthe defendants. The court found that theGovernment had provided no admissible evi-dence that the documents the defendants sub-mitted were false. The Government providedonly an affidavit by a Special Agent with theDepartment of Education stating that based ona plea agreement and interviews with thirdparties, the defendants submitted financial aidapplications using false income information.This evidence was hearsay and inadmissible toestablish the falsity of the defendants’ state-ments. The Government presented no W-2forms or other evidence indicating that the taxreturns that the defendants submitted in con-junction with their aid applications were false.Nor did the Government attempt to depose thedefendants to obtain an admission. Thus, theGovernment had failed to establish a primafacie case. Although the defendants had notcross-moved, the court observed that the



Government, as movant, was on notice that ithad to come forward with all of its evidence,and its failure to produce evidence was fatal.Therefore, the court entered judgment in favorof the defendants.

U.S. ex rel. Goodstein v. McLaren RegionalMedical Center, No. 97-CV-72992-DT (E.D.Mich. Feb. 28, 2003)

In February 2003 a Michigan district courtdenied the motions of several defendants in aqui tam action for costs and fees pursuant to theEqual Access to Justice Act. Peter Goodsteinand Charles Grossmann brought this action in1997 against McLaren Regional Medical Center,Family Orthopedic Realty, L.L.C. (FOR), andFamily Orthopedic Associates, P.L.C. (FOA). In2000 the Government elected to intervene andfiled a complaint. The Government contendedthat McLaren paid the FOA physicians, throughFOR, remuneration in the form of a lease atabove-market rates, in exchange for referrals ofMedicare patients. The Government contend-ed that this lease agreement, as well as the pay-ment of a medical director fee, violated theStark II statute, 42 U.S.C. § 1395nn(a)(1), andthe anti-kickback statute, 42 U.S.C. § 1320a-7b.The Government later amended its complaintto substitute several individual physicians forFOA. See 2002 U.S. Dist. LEXIS 15700 (July 9,2002), 28 TAF QR 41 (Oct. 2002).

In September 2001 several defendants filed amotion, which the court granted, to bifurcatethe trial by first conducting a separate benchtrial as to whether McLaren’s lease paymentswere above fair market value. On February 14,2002, the court granted judgment to the defen-dants, ruling that the lease rate was at fair mar-ket value and did not take into account thevalue of potential patient referrals.

McLaren and FOR filed applications pursuantto the Equal Access to Justice Act, 28 U.S.C. §2412, arguing that they were entitled as pre-vailing parties to expenses and attorney feesbecause the Government’s position was notsubstantially justified. The Governmentopposed the applications, maintaining that itsposition was substantially justified, and alter-natively, that the defendants were not entitledto attorney fees exceeding the statutory limit.

The court denied the fee applications. The courtobserved that merely because it found the defen-dants’ experts more credible than theGovernment’s, it did not follow that theGovernment’s position was not substantially jus-tified. The lease rate did vary depending on theamount of director fees paid and theGovernment relied on its experts’ conclusion thatthe lease rate exceeded fair market value. TheGovernment offered testimony that the defen-dants considered referrals in choosing a location,and pointed to admissions by a McLaren repre-sentative that the lease payments were “too high”as well as alleged flaws in the appraisals of thedefendants’ experts. Accordingly, the court ruledthat the Government’s justifications for its posi-tion were reasonable.

In re Cardiac Devices Qui Tam Litigation, 2003U.S. Dist. LEXIS 3448 (J.P.M.L. Mar. 5, 2003)

In March 2003, the Judicial Panel onMultidistrict Litigation consolidated 35 qui tamactions pending in 25 judicial districts by trans-ferring them to the District of Connecticut.Kevin Cosens originally filed these actions as asingle qui tam action in the Western District ofWashington against 132 hospital defendants,accusing them of submitting false claims forpayment for unapproved cardiac devices.Many of these claims have been settled, whilethe remaining claims were transferred to the



home districts of the hospital defendants.Meanwhile, the Government intervened in allbut one of the remaining actions. The relatorand the Government moved to centralize thelitigation in the Western District ofWashington. All defendants opposed thismotion.

The panel found that the actions should beconsolidated because they involved commonquestions of fact and law, but decided to cen-tralize them in the District of Connecticut.Given the wide dispersal of parties and wit-nesses, a range of suitable transferee districtsexisted, but several factors, in the panel’s view,pointed to the District of Connecticut as themost suitable. Most of the remaining partieswere located in the eastern United States; theConnecticut district court enjoyed theresources that the complex docket was likely torequire; and that court also had an availabletransferee judge who had presided over otherlitigation involving the core regulations at issueand thus possessed expertise in the underlyingissues. Therefore, the panel ordered the actionsto be transferred to the District of Connecticutand assigned to Judge Gerard Goettel for coor-dinated or consolidated pretrial proceedings.

U.S. ex rel. Johnson v. MacNeal HealthServices Corp., 2003 U.S. Dist. LEXIS 4817(N.D. Ill. Mar. 27, 2003)

In March 2003, an Illinois district court deniedthe defendant’s motion for summary judgmentand granted in part and denied in part a motionto strike certain testimony in a qui tam action.Sandra Johnson brought this action against herformer employer Genesis Clinical Laboratory, awholly owned subsidiary of MacNeal HealthServices Corporation that performs laboratoryservices for MacNeal Memorial Hospital. Whileshe was serving as Director of Operations for

Genesis, Johnson alleges that she discovered thatGenesis was illegally bundling profiles, forcingphysicians to order laboratory tests that werenot medically necessary. Johnson stated a quitam claim based on these allegations as well as aclaim under § 3730(h) for retaliation. Thedefendant moved for summary judgment onboth claims, and moved to strike Johnson’s tes-timony regarding whether the Genesis requisi-tion form complied with standards promulgat-ed by the Office of Inspector General.

The court denied the defendant’s motion forsummary judgment. Genesis argued that itsrequisition form complied with Medicare reg-ulations, and asserted that the forms allocatedspace where physicians could write in thenames of tests and thus order individual testsrather than bundled tests. However, Johnsonclaimed that the forms were formatted in amanner that encouraged physicians to orderbundles of tests and thus include tests thatwere medically unnecessary. The court foundthat the essence of Genesis’ argument was thatthe court should believe it rather than Johnson,and ruled that there was a genuine issue ofmaterial fact as to whether the form violatedMedicare regulations, precluding summaryjudgment. Genesis also argued that Johnsondid not point to specific false claims. However,the court held that the trier of fact could drawreasonable inferences as to whether improperdiagnosis codes were being entered.

As for the retaliation claim, Johnson allegedthat she repeatedly told Genesis managementthat Genesis was not in compliance withMedicare regulations, but Genesis denied thatsuch conversations ever took place. Once again,the court found that Genesis was arguing thatthe court should believe it rather than Johnson.The court ruled that Johnson had raised a gen-uine issue of material fact as to whether Genesis



knew that she engaged in protected activity.

The court denied Genesis’ motion to strikeJohnson’s testimony about the information sheprovided to Genesis regarding federal billingrequirements and regarding the company’salleged submission of false claims. The assess-ment of the admissibility and credibility ofthese statements, the court ruled, should be leftfor trial. However, the court granted Genesis’motion to strike Johnson’s references to aninvestigation at a company where Genesis’president worked before coming to Genesis.The court ruled that these references were notrelevant and were prejudicial to Genesis.

NURSING HOME LIABILITY FOR FAILURE OF

CARE UNDER THE FALSE CLAIMS ACT

Kristine Blackwood and Howard F. Daniels*

Assistant United States Attorneys

Central District of California

I. INTRODUCTION

In recent years, the Department of Justice and various United States Attorney’s Officeshave brought cases against nursing homes under the False Claims Act, 31 U.S.C.§§ 3729-3733 (FCA), where the homes’ egregious failures to provide their residents withproper care resulted in serious harm and, in some cases, death. E.g., United States v.Chester Care, No. CV 98-139 (E.D. Pa. 1998) (resident left to scald to death in the bath-tub);1 United States v. GMS Management-Tucker, Inc., No. CV 96-1271 (E.D. Pa. 1996)(grossly inadequate nutritional and wound care provided to three nursing home resi-dents who developed several severe medical conditions including malnutrition, dehy-dration, gangrene, and multiple decubitus ulcers at the facility); United States v. City ofPhiladelphia, No. CV 98-4253 (E.D. Pa. 1998) (FCA counts brought in conjunction withCivil Rights of Institutionalized Persons Act claim for inadequate medical, psychiatric,and nursing care, and failure to ensure resident safety at a city-owned nursing home);


*Ms. Blackwood and Mr. Daniels are Assistant United States Attorneys (AUSAs) in the Civil Fraud Section of the UnitedStates Attorney’s Office for the Central District of California, the section responsible for enforcement of actions under theFalse Claims Act and other federal civil statutes. The opinions expressed in this article are solely those of the authors anddo not represent the official policy of the United States Department of Justice or the United States Attorney’s Office for theCentral District of California. This article is a revised and adapted version of earlier articles published by the BNA and theABA. Reproduced with permission from BNA’s HEALTH CARE FRAUD REPORT, Vol. 6, No. 4, pp. 158-61 (Feb. 20, 2002).Copyright 2002 by The Bureau of National Affairs, Inc. (800-372-1033) <http://www.bna.com>. A second version pub-lished by the same authors under the same title appeared in the 2003 ABA-CLE publication THE CIVIL FALSE CLAIMS ACT

AND QUI TAM ENFORCEMENT. Copyright 2003 American Bar Association. Reprinted and reproduced by permission. Allrights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any meansor downloaded or stored in an electronic database or retrieval system without the express written consent of the AmericanBar Association.

1 For a description of the Chester Care case and the U.S. Attorney’s Office for the Eastern District of Pennsylvania prose-cution of failure-of-care cases under the FCA, see David R. Hoffman, The Role of the Federal Government in EnsuringQuality of Care in Long-Term Care Facilities, 6 ANNALS HEALTH L. 147 (1997).

SPOTLIGHT

United States v. NHC Health Care Corp., 163 F. Supp. 2d 1051 (W.D. Mo. 2001) (two res-idents died from overall lack of proper care).

The largest failure-of-care case to date involved the nursing home chain, Vencor, Inc., nowcalled Kindred Healthcare, Inc. (Vencor). Vencor paid $20 million in the context of itsChapter 11 reorganization to settle significant systemic failure-of-care claims under theFCA. In re Vencor, Inc., Nos. 99-3199 through 99-3327 (Bankr. D. Del., petition filedSeptember 13, 1999). In addition to other claims, the United States alleged that Vencorfailed to provide adequate care to patients at its long-term care hospitals by staffing thesefacilities with insufficient number of nursing staff or using unqualified staff members toprovide services to beneficiaries of the Medicare and TRICARE2 programs. TheGovernment’s investigation arose out of a qui tam lawsuit under the FCA and evidence thatgrossly inadequate care at certain Vencor facilities had resulted in numerous deaths.

The FCA is the Government’s primary weapon against fraud on Medicare, Medicaid, andother taxpayer-funded programs. Providers defending failure-of-care cases sometimesargue that they represent a radical departure from the “normal” FCA fraud case and anattempt to “federalize” malpractice cases. The defense bar also has argued that the healthcare industry is unique in that the quality of services rendered turns on professionaljudgments that should not be second-guessed by federal courts in the context of FCAcases. The battle lines are generally drawn over whether billing the Medicare or Medicaidprogram for failures of care can constitute a “false” claim under the FCA.

FCA cases alleging fraudulent billing for failure of care may reflect a new focus, butthese cases apply well-established and conventional legal principles for proving falsityunder the FCA. The cases are actionable under several different theories of falsity, suchas that the billing is for nonexistent or grossly deficient goods and services (worthlessservices), or is for services that violate core statutory, regulatory, or contractual require-ments, or is based on false certifications, or, as often is the case in a failure-of-care mat-ter, all of the above.3


2 The TRICARE program formerly was known as the Civilian Health and Medical Program of the Uniformed Services(CHAMPUS).

3 For example, recent failure-of-care cases have relied on a combined regulatory violation and worthless servicesapproach. See, e.g., United States v. NHC Health Care Corp., 163 F. Supp. 2d 1051 (W.D. Mo. 2001); In re Vencor, Nos. 99-3199 through 99-3327 (Bankr. D. Del., petition filed Sept. 13, 1999); United States v. Mercy Douglass Human Servs. Corp.,No. CV 00-3471 (E.D. Pa. 2000).

A. Worthless Services Theory Of Falsity

The most typical FCA claim is for services not rendered or goods not provided by aGovernment contractor. As Congress said in adopting amendments to the FCA in 1986:“a false claim may take many forms, the most common being a claim for goods and ser-vices not provided.” S. REP. NO. 99-345, at 25, reprinted in 1986 U.S.C.C.A.N. 5266, 5274(emphasis added). See also United States v. McNinch, 356 U.S. 595, 599 (1958) (FCA pri-marily directed against exorbitant billing or billing for nonexistent or worthless goods);United States v. Krizek, 111 F.3d 934 (D.C. Cir.1997) (psychiatrist’s claims to Medicarefor treatment sessions adding up to more than 24 hours in a day were false); UnitedStates ex rel. Compton v. Midwest Specialties United, 142 F.3d 296 (6th Cir. 1998) (claimfor brake shoes false when defendant delivered shoddy, untested goods). In UnitedStates v. NHC, 115 F. Supp. 2d 1149 (W.D. Mo. 2000), the court squarely addressed theworthless services theory in the context of nursing home care. In denying the defen-dant’s motion to dismiss, the court considered it self-evident that charging for servicesnever provided or provided in such a manner as to be worthless establishes falsity underthe FCA. Id. at 1152 (“While at certain times a court is required to consider policy ques-tions, it is generally the function of the courts to interpret the law as written”).

In United States ex rel. Lee v. Smithkline Beecham, Inc., 245 F.3d 1048, 1050 (9th Cir.2001), the relator alleged that an operator of regional clinical laboratories falsified lab-oratory control test data that fell outside the acceptable standard of error. The courtheld that the relator should have an opportunity to amend his complaint to allege aworthless services claim. The Lee court also rejected the defendant’s argument that theGovernment had to show false certification or that it “relied” on a representation,express or implied, of value by the provider. Id. at 1053. The court concluded:

In an appropriate case, knowingly billing for worthless services or reck-lessly doing so with deliberate ignorance may be actionable under [theFCA], regardless of any false certification conduct . . . . Neither false cer-tification nor a showing of government reliance on false certification forpayment need be proven if the fraud claim asserts fraud in the provisionof goods and services.

Id.

Other courts have recognized that a claim may be false when an entity bills theGovernment for services that are so far beneath the standard of care as to be tanta-mount to no services. In Aranda v. Community Psychiatric Centers of Oklahoma, Inc.,945 F. Supp. 1485 (W.D. Okla. 1996), the United States alleged that children in a psy-chiatric hospital suffered physical injuries and sexual abuse because the hospital failedin its obligation to maintain a reasonably safe environment, as required by Medicaid


rules and regulations. The court rejected the defendant’s argument that the governingcare regulations were too vague to have been knowingly violated:

It may be easier for a maker of widgets to determine whether its productmeets contract specifications than for a hospital to determine whetherits services meet “professionally recognized standards for health care.” Inthe Court’s view, however, a problem of measurement should not pose abar to pursuing an FCA claim against a provider of substandard healthcare services under appropriate circumstances.

945 F. Supp. at 1488.

The question whether the Government has proved worthlessness for purposes of estab-lishing the element of falsity is a question properly decided by the jury. NHC, 163 F.Supp. 2d at 1056 n.4. In NHC, the Government was prepared to present evidence of fal-sity based on: (1) severe staffing shortages at NHC’s Joplin, Missouri facility; (2) unsan-itary conditions at the home; (3) the neglected condition of the subject residents; and(4) expert opinions that the patients’ physical conditions were caused by lack of careand that the facility was not adequately staffed to meet the needs of its residents. Id. at1057. The district court held that a reasonable jury reviewing this type of evidencecould conclude that the facility’s claims for payment were false. Id. at 1056-1057.

Even courts not squarely faced with the worthless services theory have acknowledged itsvalidity. In United States ex rel. Mikes v. Straus, 274 F.3d 687 (2d Cir. 2001), a qui tam casethat the United States declined to pursue, the relator attempted to turn a violation of guide-lines recommended by a private organization, the American Thoracic Society, into an FCAviolation. The relator alleged that defendants’ failure to calibrate a spirometry machinerendered the test results so unreliable as to render their payment claims “false” under theFCA. Id. at 693. Although the Second Circuit rejected the relator’s false certification the-ories, the court recognized, among other things, that a worthless services claim (raised atoral argument and in the Government’s amicus brief on appeal) is separately actionable:

We agree that a worthless services claim is a distinct claim under the[FCA]. It is effectively derivative of an allegation that a claim is factual-ly false because it seeks reimbursement for a service not provided.[Citation omitted]. In a worthless services claim, the performance of theservice is so deficient that for all practical purposes it is the equivalent ofno performance at all.

Id. at 703. Although the Mikes court found no FCA violation under this theory, it did so notbecause the worthless services theory was unsound. Rather, the court held that the relator,


as a matter of law, could not overcome the defendants’ evidence of a good faith belief in themedical value of the spirometry tests so as to survive summary judgment. Id. at 704.

B. False Express Certifications

It is well established that the Government can show falsity when defendants have express-ly certified compliance with a Government contract or program. See, e.g., Harrison v.Westinghouse Savannah River Co., 176 F.3d 776, 786 (4th Cir. 1999) (prime contractor forDepartment of Energy held liable for subcontractor’s false certification of lack of conflictof interest); United States ex rel. Fallon v. Accudyne Corp., 880 F. Supp. 636, 638 (W.D.Wis.1995) (false certification of compliance with environmental standards); and UnitedStates v. Incorporated Village of Island Park, 888 F. Supp. 419, 434-36, 440-41 (E.D.N.Y.1995)(false certifications of compliance with the nondiscrimination requirements of the FairHousing Act and with an affirmative action plan). Many failure-of-care cases will involveone or more falsifications of an express certification. Indeed, as of September 1, 2000, thestandardized forms that Medicare-certified Skilled Nursing Facilities (SNFs) must com-plete for each resident in order to receive payment under the new prospective payment sys-tem4 contains a very detailed certification that reads as follows:

I certify that the accompanying information accurately reflects residentassessment or tracking information for this resident and that I collected orcoordinated collection of this information on the dates specified. To thebest of my knowledge, this information was collected in accordance withapplicable Medicare and Medicaid requirements. I understand that thisinformation is used as a basis for ensuring that residents receive appropriateand quality care, and as a basis for payment from federal funds. I furtherunderstand that payment of such federal funds and continued participationin the government-funded health care programs is conditioned on the accu-racy and truthfulness of this information, and that I may be personally sub-ject to or may subject my organization to substantial criminal, civil, and/oradministrative penalties for submitting false information. I also certify thatI am authorized to submit this information by this facility on its behalf.


4 Under the new payment system, SNFs must use the MDS every time they perform a resident assessment. The MDSassigns the resident to one of 44 groups according to Version III of the Resource Utilization Group (RUG-III) system,according to the relative intensity of resource use for that resident, such as nursing hours , therapy time, or other relevantfactors such as ventilators or feeding tubes. 42 C.F.R. § 413, Subpart J. Medicare’s per diem payments to SNFs are basedon the national average cost of treating beneficiaries in each RUG-III category, adjusted for local wage costs. The ratescover an SNF’s cost of furnishing typical nursing home services to patients in the particular RUG-III category, such asroom, board, nursing services, minor medical supplies; related costs such as therapies, drugs and lab services; and capitalcosts including land, building and equipment. Medicaid-certified nursing facilities in some states (e.g., Pennsylvania) also must submit an MDS form or a similar form in order to receive reimbursement.

Minimum Data Set (MDS) – Version 2.0. The attestation makes clear that adequatecare is a condition of federal payment, that the Government relies on the accuracy ofMDS data to calculate payment for the patient, and that the MDS translates directly intoa claim for payment.

C. Core Violations

The courts also have recognized that the Government can show falsity when an entitybills the Government for services that do not comply with a contract specification, reg-ulation, or statute that goes to the core of the Government’s agreement. See, e.g., Millerv. United States 550 F.2d 17 (Ct. Cl. 1997) (contractor billed for service calls and repairsnot furnished); United States ex rel. Marcus v. Hess, 317 U.S. 537 (1943) (collusive bid-ding); United States v. Bornstein, 423 U.S. 303 (1976) (goods failed to conform to spec-ifications); United States ex rel. Roby v. Boeing Co., 79 F. Supp. 2d 877 (S.D. Ohio 1999)(helicopters with defective gears violated Government contract); United States v.Hangar One, Inc., 563 F.2d 1155 (5th Cir. 1977) (artillery shells did not conform to spec-ification); United States v. Aerodex, Inc., 469 F.2d 1003 (5th Cir. 1972) (subspecificationaircraft bearings); United States v. Mead, 426 F.2d 118 (9th Cir. 1970) (violation ofDepartment of Agriculture regulations); Faulk v. United States, 198 F.2d 169 (5th Cir.1952) (false labels in provision of substandard milk). In cases such as these, theGovernment establishes falsity simply by showing that the defendant violated contractspecifications or regulations governing contract performance.

In the Nursing Home Reform Act, as incorporated in the Omnibus Budget ReconciliationAct of 1987, 42 U.S.C. §§ 1395i-3, 1396r (OBRA 87), Congress sought to ensure that pub-licly-subsidized nursing home residents achieve and maintain the “highest practicablephysical, mental, and psychosocial well-being.” 42 U.S.C. §§ 1395i-3(b)(2), 1396r(b)(2).OBRA 87 has been translated into a set of highly specific requirements in the imple-menting regulations, found at 42 C.F.R. § 483.1-483.75, which impose specific standardson nursing homes in the areas on which the Government’s failure-of-care cases tend tofocus, such as inadequate staffing. The grossly deficient care and resulting harm, or death,to patients in these cases clearly involve “core” violations of OBRA 87 by any measure. SeeNHC, 115 F. Supp. 2d at 1154 (finding that allegations concerning pressure sores, weightloss, and unnecessary pain were “at the heart” of the provider agreement).

Basing falsity on statutory, regulatory, or contractual violations is hardly a novel theory.Indeed, the legislative history of the FCA amendments in 1986 could not be clearer:

The False Claims Act is intended to reach all fraudulent attempts tocause the Government to pay out sums of money or to deliver propertyor services. Accordingly, a false claim may take many forms, the most


common being a claim for goods or services not provided or provided inviolation of contract terms, specifications, statute or regulation. . . .

S. REP. No. 99-345 (emphasis added).

Some providers have argued that the OBRA 87 regulations are “merely” conditions ofparticipation in the Medicare or Medicaid programs and not conditions of payment.Indeed, the court accepted this theory in Mikes, 274 F. 3d at 699. But this is a classic dis-tinction without a difference. If one violates the conditions of participation and can-not be in the program at all, then it necessarily follows that one is not entitled to anypayments from the program. As the Supreme Court held in Fischer v. United States,with respect to hospital reimbursement from federal funds: “[w]hile [Medicare] pay-ments might have similarities to payments an insurer would remit to a hospital quitewithout regard to the Medicare program, the Government does not make the paymentunless the hospital complies with its intricate regulatory scheme. The payments are madenot simply to reimburse for treatment of qualifying patients but to assist the hospital inmaking available and maintaining a certain level and quality.” 529 U.S. 667, 679-680(2000) (emphasis added). Likewise, in Aranda, the court relied on the Medicaid par-ticipation requirements as the applicable standards, the violation of which gave rise toa cause of action under the FCA. The court attached no significance to the fact that theregulations pertained to participation and were not express conditions precedent topayment. 945 F. Supp. at 1488. Where violations of the participation requirementsresult in serious or fatal harm to patients, such outcomes are hardly “tangential” to theservice for which reimbursement is sought.

Nonetheless, in Mikes v. Straus, the court accepted the defendant’s argument that permit-ting an FCA case based on alleged failure to meet “medical standards” to go forward would“federalize” routine malpractice actions. 274 F.3d at 700. This argument ignores the factthat the Government must prove that the statutory, regulatory, or contractual violationswere made knowingly to establish an FCA case, whereas malpractice actions are based onmere negligence. Moreover, while a nursing home patient’s clinical care may be supervisedby a physician exercising professional judgments, that is not generally the focus of failure-of-care cases. In most such cases brought by the United States, the issue is not the failureto comply with a particular medical standard of practice, but rather systemic failuresinvolving primarily day-to-day ministerial and administrative functions such as failing toturn bed-bound patients regularly to prevent them from developing pressure sores, or fail-ing to feed or hydrate patients sufficiently to keep them alive.

D. Battle Over “Implied Certification” Theory

As discussed above, the United States has several sound and conventional theoriesunder which it may pursue failure-of-care cases, including worthless services, express


false certifications, and core regulatory violations. The Government need not, there-fore, rely on the “implied certification” theory that has attracted so much fire from thedefense bar. Nonetheless, there is support in the case law for the theory. To begin with,in most substandard goods or services cases, the contractor has not expressly certifiedthat it has complied with all of the contract terms or with the military specifications andstandards embodied in Department of Defense or other agency regulations. The courtssimply take it as a given that an invoice seeking payment for work performed is animplicit representation that there was such compliance.

In United States ex rel. Pogue v. American Healthcorp., Inc., 914 F. Supp. 1507 (M.D. Tenn.1996), appeal denied, No. 96-8518 (6th Cir. April 19, 1996), the United States allegedthat Medicare claims for payment were tainted by underlying kickback violations andthat the defendant had implicitly certified compliance with the anti-kickback laws in itsMedicare cost report. The court held that certifications need not be express but can beimplied, and found sufficient the certification that the hospital had not violated state orfederal law. Likewise, in Ab-Tech Construction, Inc. v. United States, 31 Fed. Cl. 429(1994), aff ’d, 57 F.3d 1084 (Fed. Cir. 1995) (table), the court held that a request for pay-ment constitutes a representation that the entity billing is eligible for payment. Wherethe entity was in fact not eligible, the bills are false under the FCA.

The implied certification theory is, in effect, the core violation theory restated. Casesrejecting the implied certification approach tend to involve technical regulatory require-ments that are peripheral to the agreement between the Government and the defendant,and that seem to stretch the FCA beyond its tenable limits. In such cases, the courtsavoid distinguishing between core and non-core violations based on the implied certifi-cation theory. For example, in United States ex rel. Hopper v. Anton, 91 F.3d 1261 (9thCir. 1996), the relator relied on a state requirement that a classroom teacher attend cer-tain meetings pursuant to a special education program, and claimed that this technicalviolation rose to the level of a false claim for federal special education funds by the schooldistrict. The Hopper court affirmed the trial court’s grant of summary judgment, hold-ing that, absent a false certification of compliance upon which payment is conditioned,there is no remedy under the FCA. In Hopper, however, there was no allegation that theservices were not rendered or were rendered in a manner so as to make them of lessvalue.5 Similarly, in Mikes, the relator tried to convert violations of guidelines for ensur-ing reliability of spirometry tests into false claims for medically necessary services.


5 In Lee, the Ninth Circuit was not content merely to distinguish its prior decision in Hopper, but went out of its way tonarrow Hopper to circumstances where false certifications are specifically at issue. Lee, 245 F.3d at 1053; see also United Statesex rel. Plumbers & Steamfitters Local Union No. 18 v. Roen Constr. Co., 183 F.3d 1088, 1092 (9th Cir. 1999) (noting thatHopper applies only to cases resting on a certification theory and not to “overcharging” cases).

II. COMPUTATION OF DAMAGES IN FAILURE-OF-CARE CASES

Before discussing the appropriate measure of damages in a failure-of-care case, it isimportant to note that the Government’s overriding objective in most of these cases isto obtain prospective relief. Settlements reached in several failure-of-care cases havefocused on injunctive relief that establishes baselines for the provision of care, some-times enforced by a monitor. The Government will undoubtedly continue to bring fail-ure of care cases in which the recovery of damages is a secondary consideration.

There is no reported case law on computation of damages in FCA failure-of-care cases,although there have been settlements of several matters. However, traditional measuresof FCA damages lend themselves to application in failure-of-care cases.

As is well established, the measure of damages in an FCA case depends on the specificfacts, and the Government has leeway in establishing its loss. The overarching rule incases involving goods or services (as opposed to defective pricing or other accountingcases) is that the Government’s damages are equal to the difference between the marketvalue of the goods or services it received and the market value of the goods or serviceshad they been of the quality required by the contract or applicable statutes or regula-tions. Bornstein, 423 U.S. at 316 n.13. See also United States v. Woodbury, 359 F.2d 370,379 (9th Cir. 1966) (“the measure of the government’s damages would be the amountthat it paid out by reason of the false statements over and above what it would have paidif the claims had been truthful.”); United States v. Ben Grunstein & Sons Co., 137 F. Supp.197, 205 (D.N.J. 1956); United States v. American Packing Corp., 125 F. Supp. 788, 791(D.N.J. 1954).

In failure-of-care cases, the Government is paying for services provided to a third party(the resident) and not to a government agency. However, analytically, that makes nodifference in determining the proper method of computation of damages. In those fail-ure-of-care cases in which the Government alleges and proves that the services provid-ed were worthless, the value of what was received is obviously zero, so that under thetraditional formula, the Government is entitled to recover all amounts paid to thedefendant for the care of the residents who did not receive proper care, for the timeperiod supported by the evidence at trial.

The types of evidence that could be offered to support a claim of damages in the fullamount paid to the SNF are discussed in NHC. See 163 F. Supp. 2d 1051. Such evidencecould include time cards and testimony that there was a staffing shortage, such that ajury could conclude that it was a physical impossibility for the defendant to have pro-vided all of the services necessary for the proper care of the residents. It could alsoinclude evidence of lack of care at the facility in general, without direct linkage to spe-


cific patients. Such evidence could include unsanitary conditions, improper or uncleanclothing, use of unlicenced personnel, failure to provide in-service training, safety haz-ards and the like.

A third type of evidence could consist of direct evidence of lack of care for specific res-idents. Some of this evidence would be documentary records of care, such as inade-quate care plans, incomplete progress notes, family complaints, reports of abuse, orwound care logs. Additional documentary evidence would focus on the medical con-dition of the resident, such as nursing assessments, physician histories, hospital admis-sion records or emergency care records.

This last category of evidence would dovetail with expert testimony. As the NHC courtpointed out, expert testimony can be presented to the fact-finder in the form of med-ical experts’ opinions that the physical conditions developed by a patient, or conditionsthat worsened, were the result of lack of care. See 163 F. Supp. 2d at 1056.

Defendants in failure-of-care cases contend that they incurred costs for and provided allservices to which the government was entitled. They argue that the residents received suf-ficient hours of nursing care, nutrition, therapies and assistance with daily activities. Theargument is in essence that the Government received services equal in market value towhat it paid. This contention misses the point that the Government is contending thatthe quality of services provided was so inadequate as to be worthless. It may be that theSNF incurred costs that approximate the amounts paid by the Government, so that themarket value of the care provided is close to the amount reimbursed. However, the valueof those services to the Government was nil. An analogous situation was presented inFaulk v. United States, 198 F.2d 169 (5th Cir. 1952). The defendants in that case substi-tuted reconstituted milk for the fresh milk called for by the Army’s contract. The evidenceshowed that the reconstituted milk had the same market value as the fresh milk. However,the court refused to find that there were no damages and held instead that damages wereto be measured by the amount of milk that the servicemen refused to drink.

The rule should be the same as that followed in cases involving defective products. Ifthe product is of no use to the Government because it does not satisfy the Government’spurposes, damages are the full contract amount, even if the product had some marketvalue. For example, in Aerodex, the defendants delivered engine bearings that were notmanufactured to contract specifications. The defendants offered evidence that thebearings were acceptable substitutes in the industry and had the same market value asthe bearings sought by the Government. The court rejected this argument and heldthat, because the bearings had no value to the Government, the Government it was enti-tled to the full contract amount as single damages. 469 F.2d at 1011.


A somewhat different approach to the computation of damages would be to computethe cost of the services that were required but not provided. This is a more conserva-tive methodology than treating the services as completely worthless. The Governmentwould identify certain categories of services that were not provided, or were not pro-vided in sufficient amount. For example, the evidence might establish that the SNFshould have had two additional registered nurses and six additional certified nursingassistants, as well as added physical therapy. The Government would then introduceevidence of the market value of the services that were missing and treat that figure assingle damages.

This “cost of services” method is one that the Government has frequently used in falsetesting cases. In such cases it may be that the product itself complies with the contractspecifications but the required testing was not done or was done improperly. If the gov-ernment agency that purchased the product places it into service, the Government can-not argue that it is entitled to the full contract price. However, the Government paidfor testing that was not performed and that has a value. Accordingly, it is entitled to sin-gle damages in the amount of the market value of the testing.

However, this “cost of services” approach may not be appropriate in the context of a fail-ure-of-care case. Human beings are not ball bearings. An SNF’s failure to provide oneparticular service, such as turning the patient to avoid pressure sores, can cascade intoan overall deterioration of health, resulting in serious illnesses and even the resident’sdeath. An approximate analogy presented itself in the recent case of Roby v. Boeing.Boeing sold a helicopter with a defective gear to the Army, and the malfunctioning ofthe gear caused the helicopter to crash during a flight over the Saudi Arabian desert inOperation Desert Shield. Boeing argued that the proper measure of FCA damages wasthe market value of the defective gear, not the value of the entire helicopter. However,the court held that because the gear was “flight critical,” the entire helicopter was defec-tive, so that the Government was entitled to single damages in the amount of the heli-copter’s market value. 302 F. 3d at 646. Similarly, if an SNF fails to provide one aspectof care, the Government would be entitled to claim as damages the entire cost of carefor an individual who suffered ill effects.

Finally, the Government may also seek to recover as damages the costs of additionalhealth care services that had to be provided to a patient as a result of the facility’s fail-ure of care. Thus, if a patient receives emergency care, acute hospital care or physicianservices because of the failure of care on the part of the SNF, the Government could seekto recover such reimbursements.


III. CONCLUSION.

When nursing home owners bill the Government for worthless, nonexistent, or grosslyinadequate care, their claims for payment are false. Congress designed the FCA as aweapon to rectify the squandering of public funds by government contractors unjustlyenriching themselves at public expense. Where necessary and appropriate to protectfrail, elderly, and disabled nursing home residents, the Government should and mustuse the FCA to ensure that nursing home residents receive the care that Congressintended them to receive, and for which taxpayers are paying. The Government shouldrecover the full amount of its reimbursements for a failure of care, under the theory thatthe services provided were worthless.



INTERVENTIONS AND SUITS FILED/UNSEALED

ALLEGATION: UPCODING CLAIMS

U.S. v. Tenet Healthcare Corporation, No. CV-03-206 GAF (C.D. Cal.)

In January 2003, DOJ announced that it hadfiled an FCA suit against Tenet Healthcare forsubmitting fraudulent claims to Medicare. TheGovernment alleges that Tenet and its hospitalsupcoded inpatient claims for pneumonia, sep-ticemia, and other respiratory treatments. Mostof the alleged upcoding took place during a timewhen Tenet was under a Corporate IntegrityAgreement with the Department of Health andHuman Services. One of the central issues in thecase involves allegations that Tenet, pursuant tothe integrity agreement, falsely certified that itwas in compliance with Medicare regulations.

ALLEGATION: BILLING FOR EXPERI-MENTAL DEVICES

U.S. ex rel. Cosens v. Johns Hopkins Hospital

U.S. ex rel. Cosens v. Methodist Hospitals

In January 2003, DOJ announced that it hadintervened in two cases filed by Kevin Cosensagainst Johns Hopkins Hospital and MethodistHospitals for submitting false claims toMedicare. The Government alleges that from1987 to 1995 these hospitals falsely chargedMedicare for procedures involving experimentalcardiac devices that were not reimbursable.Cosens, a former medical device salesman, ini-tially filed qui tam actions against 132 hospitals.31 other hospitals have settled for a combinedtotal of over $46 million. See 28 TAF QR 54(Oct. 2002); 29 TAF QR 55 (Jan. 2003); and thisissue’s “Judgments and Settlements” sectionbelow at page 73. Don Warren and Phil Bensonof the Warren & Benson Law Group (San Diego& Los Angeles) represent the relator.

ALLEGATION: MEDICARE FRAUD

U.S. ex rel. Stacy v. Eastridge Health Systems

In January 2003, the Government reportedlyintervened in a case against Eastridge HealthSystems, a West Virginia-based mental healthand drug treatment provider. The Governmentalleges that from July 1994 to June 1999Eastridge filed false claims under the Medicareprogram. Valerie Stacy, a former Eastridgebilling specialist, filed this qui tam suit. LaurenClingan represents the relator.

ALLEGATION: FRAUDULENT PRICING

U.S. ex rel. LaCorte v. Merck & Co., Inc., No.99-cv-3807 (E.D. La.)

In January 2003, a qui tam lawsuit wasunsealed alleging that Merck defrauded theMedicare and Medicaid programs in market-ing its heartburn drug, Pepcid. The complaintalleges that Merck sold Pepcid to hospitals andnursing homes for about 10 cents per tablet,while charging the Government as much as$1.65 per tablet. Under federal law, drug com-panies are required to give the Medicare andMedicaid programs the lowest price it offers toprivate customers. Dr. William St. JohnLaCorte filed this qui tam suit in 1999. J. MarcVezina (Gretna, Louisiana) represents the rela-tor. The Government has not yet decidedwhether to intervene in this suit.

ALLEGATION: NONCOMPLIANCE WITHANTIDISCRIMINATION LAWS

Old Baldy Council of Boy Scouts of America

In January 2003, a qui tam lawsuit was unsealedalleging that the Old Baldy Council of Boy



Scouts of America falsified information in orderto receive a $15,000 federal grant. The com-plaint alleges that by signing a grant contract tocomply with federal and state anti-discrimina-tion laws while adhering to a national policythat bars gays and atheists, the Boy Scouts ofAmerica violated the FCA. The American CivilLiberties Union filed this qui tam suit in 2002.The Government has decided to not intervenein this case.

ALLEGATION: BILLING FOR UNNECE-SARY EQUIPMENT

U.S. v. Paulin, No. 03-CV-0186-W (S.D. Cal.)

In January 2003, DOJ announced that it hadfiled an FCA suit against Renato Paulin and hiscompany, Benison Medical Supply, fordefrauding the Medicare program. TheGovernment alleges that Paulin and his com-pany submitted false documents to obtainreimbursement for the purchase of powerwheelchairs, hospital beds, and other equip-ment that were either medically unnecessary ornot actually supplied to patients.

ALLEGATION: BILLING FOR MEDICALLYUNNECESSARY BLOOD TESTS

U.S. v. Lahey Clinic Hospital, No. 03-10194(D. Mass.)

U.S. v. University of Massachusetts MedicalCenter, No. 03-10195 (D. Mass.)

In January 2003, the Government reportedlyfiled FCA suits against the Lahey Clinic and theUniversity of Massachusetts Medical Center fordefrauding Medicare. The Government allegesthat the two hospitals repeatedly misbilled forhematology indices—which were generated

from routine complete blood count tests—even though the indices were neither medical-ly necessary nor ordered by a physician.

ALLEGATION: BILLING NAVY FOR COMMERICIAL CUSTOMER COSTS

U.S. v. Newport News Shipbuilding, Inc., No.1:03-CV-142 (E.D. Va.)

In February 2003, DOJ announced that it hadfiled an FCA suit against Newport NewsShipbuilding for defrauding the U.S. Navy.The Government alleges that from 1994 to1999 Newport News, a wholly-owned sub-sidiary of Northrop Grumman Corp., billedthe Navy for independent research and devel-opment costs for double-hulled tankers thatthe company was building for its commercialcustomers. The Government alleges that morethan $72 million of fraudulent costs werepassed through as overhead on Newport News’major Navy shipbuilding contracts. DCIS, theNaval Investigative Service, and auditors fromthe Defense Contract Audit Agency investigat-ed this matter.

ALLEGATION: UNDERPAYING FOR CAREOF MEDICARE BENEFICIARIES

U.S. ex rel. Drescher v. Highmark Inc., No. 00-CV-3513 (E.D. Pa.)

In February 2003, DOJ announced that it hadpartially intervened in case filed by ElizabethDrescher against Highmark, Inc. TheGovernment alleges that Highmark, aPittsburgh-based private insurance company,knowingly underpaid the amounts due for careof certain Medicare beneficiaries underemployer group health plans insured oradministered by Highmark. Highmark pro-



vides health insurance under employer grouphealth plans and also contracts with HHS toprocess Medicare claims. Mitchell Kreindler ofKreindler & Associates (Pennsylvania) repre-sents the relator in this case.

ALLEGATION: FALSIFYING INVOICESFOR SECURITY SERVICES

U.S. v. MVM Inc. (D. Mass.)

In March 2003, the Government reportedlyfiled an FCA suit against MVM Inc. for submit-ting false invoices for security services providedto various federal buildings in New England.The Government alleges that MVM, Inc., asecurity contractor based in Virginia, billed forsecurity services it did not provide. In particu-lar, the Government alleges that MVM billedfor supervisors who had not been properlytrained and failed to provide the required ratioof security guards to supervisors as requiredunder its contract with the Government. TheGeneral Services Administration OIG investi-gated the matter. Assistant U.S. AttorneyJeremy Sternberg is handling the case for theGovernment.

ALLEGATION: FALSE CLAIMS FORAMBULANCE TRANSPORTATION

US v. Greybor Medical Transportation, No.CV 03-1770 (C.D. Cal.)

In March 2003, the Government filed an FCAaction alleging that Greybor Medical Trans-portation, its owner, and its former chairmansubmitted tens of thousands of false ambulancetransportation claims to the Medicare pro-gram. The Government alleges that GreyborMedical sought reimbursement for transport-ing patients who did not meet Medicare eligi-bility requirements, were never transported, or

were transported with other patients in a singleambulance but billed as if transported separate-ly. Assistant U.S. Attorney Vipal Patel is han-dling this case for the Government. HHS OIGinvestigated this matter.



Caremark Rx, Inc.

In January 2003, DOJ announced thatCaremark Rx, formerly known as MedPartners,had agreed to pay $7.5 million to settleMedicare fraud allegations. The Governmentalleged that pharmacy benefit managers atAmCare, a Caremark subsidiary, submitted $5million in fraudulent home health care servicesclaims. Caremark officials voluntarily reportedthe false claims to the Government in 1999.

Cleveland Clinic Foundation

In January 2003, Cleveland Clinic Foundationreportedly agreed to pay $4 million to settleallegations of Medicare billing fraud. TheGovernment alleged that from 1992 to 1996Cleveland Clinic, which has one of the nation’slargest residency teaching programs, falselyclaimed that supervising physicians had ren-dered patient services that were actually per-formed by medical residents. Assistant U.S.Attorney Alex Rokakis handled this case for theGovernment.

U.S. ex rel. Taylor v. Maury Regional Hospital,No. 1-99-0100 (M.D. Tenn.)

In January 2003, DOJ announced that MauryRegional Hospital had agreed to pay $2 millionto settle Medicare fraud allegations. TheGovernment alleged that from 1994 to 1999Maury Regional upcoded diagnosis codes inorder to increase its reimbursements. EdTaylor, a former hospital employee, filed thisqui tam action. The relator’s share is $350,000or 17.5% of the settlement recovery. RalphMello of the Brentwood Law Offices(Brentwood, Tennessee) and Kenneth Nolan(Ft. Lauderdale) represented the relator. HHSOIG investigated this matter.

ARV Assisted Living, Inc.

In January 2003, ARV Assisted Living, Inc.reportedly agreed to pay $1.6 million to settleMedicare fraud allegations. The Governmentalleged that from 1992 to 1998 GeriCare, an ARVsubsidiary, included unallowable costs on itsMedicare cost reports. HHS OIG investigatedthis matter. Assistant U.S. Attorney DonnaMaizel handled this case for the Government.

U.S. ex rel. Heiser v. Lockheed Martin Corp.,No. C-1-97-767 (S.D. Ohio)

In January 2003, DOJ announced thatLockheed Martin Corporation had agreed topay $1,407,834 to settle allegations that itdefrauded the Government on an Air Forcecontract. The Government alleged thatLockheed Martin’s predecessor, LoralCorporation, inflated estimated costs it wasrequired to disclose during contract negotia-tions, resulting in an inflated contract priceand false claims for payment. Glen Heiser, aformer Loral employee, filed this qui tamaction. The relator’s share is $274,527 or 19%of the total recovery. James Helmer, Jr. ofHelmer, Martins & Morgan Co., L.P.A.(Cincinnati) represented the relator. DCISinvestigated this matter.

U.S. ex rel. Wilkins v. North AmericanConstruction Corp., No. H-95-5614 (S.D. Tex.)

In January 2003, DOJ announced that NorthAmerican Construction Corporation and twoof its subcontractors had agreed to pay$765,000 to settle allegations that the compa-nies conspired to file false claims with theArmy. The Government alleged that NorthAmerican Construction, CH&A, Inc., and EVICherrington Environmental, Inc. filed arequest for money with the Army Corps of



Engineers falsely claiming that theGovernment was responsible for the compa-nies’ increased costs for performing contractwork at Tinker Air Force Base in OklahomaCity. The Government also alleged that thecompanies filed false claims for progress pay-ments. Patrick Wilkins, a former officer ofCH&A, filed this qui tam suit. The relator’sshare is $183,600 or 24% of the total recovery.Allan Levine of Christian, Smith & Jewel, LLP(Houston) represented the relator. DCIS inves-tigated this matter.

U.S. v. State University of New York HealthScience Center at Brooklyn

In January 2003, DOJ announced that StateUniversity of New York Health Science Center atBrooklyn had agreed to pay $655,000 to settleMedicare fraud allegations. The Governmentalleged that SUNY Brooklyn failed to provideproper documentation to establish that facultyphysicians, rather than medical students andinterns, provided the claimed patient services.HHS OIG investigated this matter. AssistantU.S. Attorney Richard Hayes handled this casefor the Government.

Integris Baptist Regional Health Center

In January 2003, Integris Baptist RegionalHealth Center reportedly agreed to pay$520,000 to settle Medicare fraud allegations.The Government alleged that from 1993 to1998, Integris upcoded pneumonia claims inorder to obtain higher Medicare reimburse-ments. HHS OIG investigated the matter.

U.S. ex rel. Mak v. Knapp, No. 00CV1530-JM(S.D. Cal.)

In January 2003, David Knapp reportedlyagreed to pay $500,000 to settle allegations of

health care fraud. The Government allegedthat Knapp, a San Diego-based physician, mis-represented the person rendering services attwo dermatological clinics he owned. LindaMak, a physician employed by Knapp, filed thisqui tam suit in 2000. The relator’s share is$90,000 or 18% of the total recovery. The FBI,HHS OIG, OPM OIG, and DCIS investigatedthis matter.

Cooper Health System, Inc.

In January 2003, Cooper Health System report-edly agreed to pay $400,000 to settle allegationsthat from 1992 to 1998 it improperly billedMedicare. The Government alleged thatCooper Health, a New Jersey-based hospital,submitted claims for inpatient hospital staysfor patients who actually received outpatientservices. HHS OIG investigated this matter.

U.S. v. Braun, No. 4:02CV00463 (E.D. Mo.)

In January 2003, Jeff Braun reportedly agreedto pay $126,217 to settle allegations that hesubmitted false claims to Medicare fromJanuary 1995 to June 1995. The Governmentalleged that Braun and his co-conspiratorsimproperly billed Medicare for medicallyunnecessary incontinence supplies for some600 Chicago area nursing home residents. TheGovernment estimated that a total of $1.5 mil-lion was improperly paid out as a result of thefalse billings. With this settlement, theGovernment’s total recovery from the scheme’sconspirators is approximately $3 million. Cf.U.S. v. Sandler (E.D. Mo.), 29 TAF QR 55 (Jan.2003). The FBI investigated the matter.Assistant U.S. Attorneys James Crowe Jr. andSuzanne Gau represented the Government inthe case.



U.S. ex rel. Schwiderski v. NorthwesternUniversity No. 02-CV-5287 (N.D. Ill.)

In February 2003, DOJ announced thatNorthwestern University had agreed to pay$5.5 million to settle allegations that it violatedNIH grant requirements. The Governmentalleged that Northwestern knowingly failed tocomply with a federal grant requirement that aspecific percentage of researchers’ effort bedevoted to the grant project. RichardSchwiderski, a former Northwestern researchadministrator, filed this qui tam suit in 2000.The relator’s share is $907,500 or approximate-ly 17% of the total recovery. EdwardCloutman, III (Dallas) represented the relator.

U.S. ex rel. Cosens v. Methodist Hospital, No.02-1449 (S.D. Tex.)

U.S. ex rel. Cosens v. Deaconess MedicalCenter, No. 02-CS-127 (E.D. Wash.)

U.S. ex rel. Cosens v. Good Samaritan Hospitaland Medical Center, No. 3-02-01251-JE (D. Ore.)

In February 2003, DOJ announced that five hos-pitals in Texas, Washington, and Florida hadagreed to pay $4.9 million to settle allegations ofMedicare fraud. The Government alleged thatThe Methodist Hospital, St. Luke’s EpiscopalHospital, Deaconess Medical Center, LegacyGood Samaritan Hospital and Medical Center,and Orlando Regional Medical Center falselycharged Medicare for procedures involvingexperimental cardiac devices that were not reim-bursable. Kevin Cosens, a former medical devicesalesman, has filed similar suits against 132 hos-pitals, 31 of which have previously settled for atotal of over $46 million. See 28 TAF QR 54(Oct. 2002); 29 TAF QR 55 (Jan. 2003); and thisissue’s “Interventions and Suits Filed/Unsealed”section above at page 68. Cosens will receive

approximately $1 million from the settlementannounced in February, and to date has receivedover $9 million in total settlement shares. DonWarren and Phil Benson of the Warren &Benson Law Group (San Diego & Los Angeles)and William Keller (Seattle) represented the rela-tor. HHS OIG investigated the matter.

U.S. ex rel. Health Outcomes Technologies v.Parkway Regional Medical Center, No. 01-3332-CIV (S.D. Fla.)

In February 2003, DOJ announced that TenetHealthcare had agreed to pay $4.3 million tosettle allegations that five of its Florida hospitalssubmitted fraudulent claims to Medicare. TheGovernment alleged that Parkway RegionalMedical Center, Coral Gables Hospital,Hollywood Medical Center, Hialeah Hospital,and Florida Medical Center upcoded pneumo-nia diagnosis codes in order to receive higherreimbursement rates from Medicare. HealthOutcomes Technologies, a Pennsylvania-basedsoftware company, filed a qui tam action againstthree of the defendants in this suit after analyz-ing their diagnostic code billing patterns. Therelator’s share of the recovery was $309,303.Michael Holsten of Drinker, Biddle & Reath(Philadelphia) represented the relator. TheHHS OIG investigated this matter.

U.S. ex rel. Health Outcomes Technologies v.Robert F. Kennedy Medical Center, No. CV 01-6840 (C.D. Cal.)

In February 2003, Robert F. Kennedy MedicalCenter (RFKMC) reportedly agreed to pay $2million to settle Medicare fraud allegations.The Government alleged that from 1994 to1998 RFKMC upcoded a pneumonia diagnosiscode in order to receive higher reimbursementrates from Medicare. Health OutcomesTechnologies, a Pennsylvania-based software



company, filed this qui tam action in 1998 afteranalyzing RFKMC’s diagnostic code billingpatterns. The relator’s share was $280,000 orapproximately 14% of the total recovery.Michael Holsten of Drinker, Biddle & Reath(Philadelphia) represented the relator. TheHHS OIG investigated this matter.

Johns Hopkins University

In February 2003, Johns Hopkins University(JHU) reportedly agreed to pay $800,000 tosettle Medicare fraud allegations. TheGovernment alleged that from January 1994 toDecember 1994, JHU failed to provide properdocumentation to establish that faculty physi-cians, rather than interns and residents, pro-vided the claimed patient services. HHS OIGinvestigated this matter.

U.S. ex rel. Finks v. Huda, No. 99-CV-108(S.D. Ill.)

In February 2003, Nurul Huda reportedly agreedto pay $525,000 to settle allegations of healthcare fraud. The Government alleged that Huda,an East St. Louis-based ophthalmologist, falsifiedrecords in response to an audit request from theMedicare program and submitted false claimsfor ophthalmology procedures. Linda Finks andWilliam Shanks filed this qui tam action.

U.S. v. Durango Construction Co., No. 01-CV-9824 (C.D. Cal.)

In February 2003, Durango ConstructionCompany, Westworld Contractors, and JetConstruction reportedly agreed to pay$500,000 to settle FCA allegations. TheGovernment alleged that the constructioncompanies falsely certified that they wereminority-owned businesses in order to winmilitary contracts.

Midwestern Medical Supply Company

In February 2003, Midwestern Medical SupplyCompany reportedly agreed to pay $150,000 tosettle allegations of Medicare fraud. TheGovernment alleged that Midwestern Medical,a Chicago-based company, submitted falseclaims for payment for unauthorized products.The Medicare program requires that medicalequipment suppliers obtain authorizationsfrom beneficiaries or their authorized repre-sentatives before billing Medicare. Accordingto the Government, Midwestern falsely statedthat it had obtained these authorizations.

U.S. ex rel. King v. San Diego Hospital Assoc.,No. 00-CV-00848 (S.D. Cal.)

In March 2003, San Diego Hospital Associationand one of its facilities, Sharp MemorialHospital, reportedly agreed to pay $6.2 millionto settle allegations that Sharp Memorialfraudulently misstated organ acquisition costsin its Medicare reports. The Governmentalleged that Sharp Memorial listed employeesalaries, medical director fees, lab costs, andrental expenses in cost reports for its organtransplant program, when in fact the costswere unrelated to organ transplants. JudithKing, a heart transplant coordinator at SharpMemorial, filed this qui tam action in 2000.The relator’s share is $1.2 million or approxi-mately 19% of the total recovery. BonnieHarbinger of Phillips & Cohen, LLP (SanFrancisco) represented the relator. HHS OIGinvestigated this matter.

U.S. ex rel. Health Outcomes Technologies v.Leesburg Regional Medical Center, No. 01-CV-1384 (M.D. Fla.)

In March 2003, DOJ announced that LeesburgMedical Center had agreed to pay $1,476,104



to settle Medicare fraud allegations. TheGovernment alleged that Leesburg Medical, aFlorida-based hospital, upcoded a pneumoniadiagnosis code in order to receive higher reim-bursements rates from Medicare. HealthOutcomes Technologies, a Pennsylvania-basedsoftware company, filed this qui tam action in1996 after analyzing Leesburg Medical’s diag-nostic code billing patterns. The relator’s shareof the recovery was $206,655 or approximately14% of the settlement recovery. MichaelHolsten of Drinker, Biddle & Reath(Philadelphia) represented the relator. TheHHS OIG investigated this matter.

U.S. ex rel. Lytel v. NYSERNet, Inc., No. 00-CV-0039 (W.D.N.Y.)

In March 2003, NYSERNet Inc. reportedlyagreed to pay $1.4 million to settle allegationsthat it violated federal grant requirements. TheGovernment alleged that NYSERNet, a non-profit consortium of New York universities,violated the conditions of its National ScienceFoundation grants by passing on grant moneyto AppliedTheory Communications, a relatedfor-profit corporation. Additionally, theGovernment alleged that NYSERNet soldassets developed and produced with federalgrant awards but failed to disclose these pro-ceeds as required under federal law. DavidLytel, a former NYSERNet president, filed thisqui tam action in 2000. Bonny Harbinger ofPhillips & Cohen LLP (Washington, D.C.) rep-resented the relator.

U.S. ex rel. Kazimiroff v. DentsplyInternational Inc., No. 2:99cv04203 (E.D. Pa.)

In March 2003, Dentsply International Inc.reportedly agreed to pay $600,000 to settle alle-gations that it violated the FCA. TheGovernment alleged that Dentsply, a

Pennsylvania-based dental devices manufac-turer, sold defective dental devices to the U.S.Government. Julie Kazimiroff, a formerDentsply employee, filed this qui tam suit. Therelator’s share has not yet been determined.

Temple Continuing Care Center

In March 2003, two Philadelphia-based nurs-ing homes affiliated with Temple UniversityHealth Care System reportedly agreed to pay$500,000 to settle health care fraud allegations.The Government alleged that TempleContinuing Care Center and Jeffries MemorialHome violated the FCA by providing substan-dard care to its elderly residents. Specifically,the Government alleged that the nursinghomes failed to provide sufficient residentassessments and evaluations, nutrition, hydra-tion, pressure ulcer treatment, dental care, andpain management.

U.S. v. Persons, No. 02-CV-164 (E.D. Mo.)

In March 2003, Michael Persons and his com-pany, KAJACS Contractors Inc., reportedlyagreed to pay $500,000 to settle an FCA suit.The Government alleged that Persons falselyclaimed to be of Native American ancestry inorder to win federal contracts under the SmallBusiness Administration’s 8(a) program, whichprovides assistance to small businesses ownedby members of socially or economically disad-vantaged groups.

James Bowen, Jr. and Bowen FamilyChiropractic Center, Inc.

In March 2003, DOJ announced that JamesBowen, Jr. and his company, Bowen FamilyChiropractic Center, Inc., had agreed to pay$90,000 to settle allegations of Medicare fraud.The Government alleged that Dr. Bowen billed



Medicare for treatment of conditions heclaimed were new or acute exacerbations ofprior conditions, when in fact he was treatingchronic, ongoing conditions that were notreimbursable under Medicare regulations. TheFBI and HHS OIG investigated this matter.

Michael Zahm and Central Vermont Urologyof Berlin

In March 2003, Michael Zahm and his clinic,Central Vermont Urology of Berlin, reportedlyagreed to pay $75,000 to settle allegations ofMedicare fraud. The Government alleged thatDr. Zahm billed Medicare for 39 samples of thedrug Lupron, which he received for free fromTAP Pharmaceutical Products Inc. HHS OIGinvestigated this matter. Assistant U.S.Attorney Scott Cameron handled this case forthe Government.

FCA Conference Materials

• As part of its information clearinghouseactivities, TAF has materials available fordistribution at conferences and otherprograms. Information can be tailoredto a legal or general audience. Resourcematerial, including statistical informa-tion, is also available for those writingarticles on the FCA.

Qui Tam Practitioner Guide

• The TAF Qui Tam Practitioner Guide:Evaluating and Filing a Case can beordered at no charge by phone, fax, ormail. This “how to” manual includessections on evaluating the merits andviability of a case, pre-filing and practi-cal considerations, and preparing andfiling the complaint.

TAF on the Internet

• TAF’s Internet presence is designed toeducate the public and legal communityabout the False Claims Act and qui tam.TAF’s site is located at http://www.taf.org.

Previous Publications

• Back issues of the Quarterly Review areavailable in hard copy as well as onTAF’s Internet site.

Quarterly Review Submissions

• TAF seeks submissions for future issuesof the Quarterly Review (e.g., opinionpieces, legal analysis, practice tips). Todiscuss a potential article, please contactQuarterly Review Editor Bret Boyce.

Anniversary Reports and Video

• To mark the anniversary of the 1986 FCAAmendments, TAF has available a varietyof resources including a Tenth Anniver-sary Report, an Assessment of EconomicImpact, and an educational video high-lighting the effectiveness of the Act.These materials are available at no charge.

Call for Experts and Investigators

• In response to inquiries, TAF is workingto compile a list of experts and investi-gators across an array of substantiveareas. Please contact TAF with any sug-gestions you may have.

Qui Tam Attorney Network

• TAF is continuing to build and facilitatean information network for qui tamattorneys. For an Attorney NetworkApplication or a description of activi-ties, please contact TAF. Be sure to askabout TAFNET, our electronic mail sys-tem for Attorney Network members.

TAF Library

• TAF’s FCA library is open to the public,by appointment, during regular businesshours. Submissions of case materialssuch as complaints, disclosure statements,briefs, and settlement agreements areappreciated.

Acknowledgments

• TAF thanks the Department of Justiceand qui tam counsel for providingsource materials.

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