The Seventh Circuit Significantly Heightens the Bar for Proof in False Claims Act "Worthless Services" Cases

by Akerman LLP
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The United States Court of Appeals for the Seventh Circuit recently dealt a stinging blow to the False Claims Act (FCA) plaintiff's bar in United States ex. rel. Absher v. Momence Meadows Nursing Center, Inc. et al., Case Nos. 13-1886 & 13-1936, 2014 WL 4092258 (7th Cir. Aug. 20, 2014). In one bold and decisive stroke, the Court essentially eviscerated the "worthless services" theory of liability in FCA cases, reversing a judgment of over $28 million in FCA fines and treble compensatory damages.

The Momence Decision

Momence owned a 140-bed long-term care facility in Kankakee County, Illinois. Between 1998 and 2006, almost all of Momence's residents were Medicare or Medicaid patients. For compensation, Momence received reimbursement on a "per patient day" basis – a flat per diem amount for each resident – rather than a la carte reimbursement for separately provided services.

In order to get paid, Momence was required to provide government regulators with a Minimum Data Sheet ("MDS"), that included patient information such as disease diagnoses and health conditions. Momence certified, under penalty of law on each MDS, that the information was accurate and that its residents received appropriate quality care, and therefore, the MDS information could be used as a basis for payment from federal funds. As a Medicare/Medicaid provider, Momence was subject to inspection and enforcement by the Centers for Medicare & Medicaid Services ("CMS"), a federal agency, and the Illinois Department of Public Health ("IDPH").

Between 1998 and 2006, government regulators inspected Momence 117 times and found numerous deficiencies. The relators in this case, two former nurse employees, alleged that Momence violated the FCA by knowingly submitting hundreds of false claims to Medicare and Medicaid, and then retaliated against them for allegedly reporting evidence of Momence's fraud. It was also alleged that Momence actively concealed its noncompliance from the government by directing its employees not to document symptoms of scabies or pressure ulcers and to hide existing charts containing such symptoms. Momence also allegedly used coded message to alert staff to the presence of regulators.

In fact, evidence at trial showed serious instances of noncompliant care and resultant harm, including evidence of problems relating to infection and pest control (such as scabies outbreaks), medication, food and water temperatures, cleanliness, and accidents. Expert witness testimony was also presented showing that Momence had systematically violated Medicare and Medicaid regulations concerning the duties of personnel at the facility, standard of care, and protocols for addressing patient care issues.

At trial, relators submitted evidence that Momence provided inadequate care to its residents while receiving full compensation from the federal government, thereby structuring their case, in part, to conform to a "worthless services" theory of recovery. Under the "worthless services" theory of FCA liability, a qui tam relator may bring claims for FCA violations if defendant received reimbursement for services that were seen to be "worthless." Although the Second, Sixth, Eighth, and Ninth Circuits have adopted the "worthless services" as a separate theory of FCA liability, in Momence, the Court declined the opportunity to decide whether "worthless services" actually stands separate as a distinct theory of FCA liability.

Rather, in a more rudimentary fashion, the Court found that the relators' action failed primarily because they "failed to offer evidence establishing that Momence's services were truly or effectively 'worthless.'" In a moment of admirable clarity, the Court observed that services that are just "worth less," that is, services which do not rise to the level of compensation received, are just not automatically propelled into the ambit of "worthless services" sufficient for FCA liability purposes. The Court explained that in order to prevail under a "worthless services" assertion, the "performance of the service [must be] so deficient that for all practical purposes it is the equivalent of no performance at all." In other words, services that merely reflect "diminished value" do not arise to level of "worthless services" sufficient to impose liability under the FCA.

For FCA defendants, the Court's ruling makes eminently intuitive sense. As the Court stated in its decision, it would be "absurd" to find that services are "worthless" given the fact that government inspectors repeatedly allowed Momence to continue operating over a period of years. In essence, the government itself recognized that Momence's services were of, at least, "some value," otherwise it would have shut Momence down completely. Adding the final nail to the coffin, the Court also noted that relator Absher's own mother resided at Momence during the time period when the alleged "worthless services" were provided to Momence's residents without objection by Absher, a trained nurse. In fact, the Court noted that at trial Absher even testified that her mother received "good care" at Momence.

The Effect of Momence

In Momence, the Court specifically refrained from ruling on whether the "worthless services" theory was sufficient to stand on its own as a legitimate basis for FCA liability, or whether it just should be seen as an evidentiary component of a false or fraudulent claim under the false certification theory of liability. This uncertainty was of no moment to the Court, however, because in the final analysis, given the deficits in the nature of the evidence, and the failure to present proper arguments for the jury, the requested relief and ultimate jury verdict was simply too much for the Court to countenance.

The amount of money involved in this case, over $28 million dollars in fines and treble damages, was significant. However, apart from Momence's own individual sigh of relief relative to the dollars involved in this particular case, the real value many litigants will see here is that the Court's decision in Momence offers a welcome and substantial respite to those who have constantly grappled in recent years with an amalgam of what seems to be constantly changing and disparate theories of FCA liability. For now, at least, there is one less pitfall for FCA defendants to avoid.

While Seventh Circuit en banc rehearing is possible in this case, there is no doubt that the Seventh Circuit has given litigants a clear signal. Certainly now in FCA litigation, "worthless services" does not just mean services that are "grossly or woefully inadequate," "materially substandard," "wholly deficient," or whatever other descriptive language plaintiffs often attach to describe a level of service that may not be equivalent to compensation received. Rather, "worthless" really does mean "worthless," and efforts to build an FCA complaint around a paradigm that suggests otherwise will no longer make the grade.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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