Recent Developments in False Claims Act Pleading Standards

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The Department of Justice (DOJ) recently released its report detailing the settlements and judgments obtained in 2019 from civil cases involving fraud and abuse claims. As in years past, the substantial majority of these settlements and judgments—$2.1 billion of the $3 billion total—were the result of qui tam whistleblower lawsuits filed under the False Claims Act (FCA).

Following the government’s intervention decision, the first test for many of these qui tam lawsuits is surviving a motion to dismiss. Because FCA suits allege fraud against the government, they must be pleaded with particularity as required by Rule 9(b) of the Federal Rules of Civil Procedure. This post discusses recent developments to those standards from 2019.

Courts have held that to satisfy Rule 9(b), FCA complaints must include a detailed description of the alleged fraud scheme and facts to show the scheme resulted in a request for reimbursement from the government. A failure on either account will result in dismissal.

Pleading Details of a Fraudulent Scheme in 2019

Historically, courts have agreed that an FCA complaint must identify the “who, what, when, where and how” of a fraud scheme to survive a motion to dismiss. 2019 was no different. A case from the Southern District of New York illustrated the necessity of pleading these details for each accused defendant. In U.S. ex rel. Aryai v. Skanska, the district court dismissed a relator’s allegations that several construction firms performing government-contracted work had engaged in a fraudulent payroll scheme to pay union foremen extra overtime pay, although they did not perform any overtime work. One firm was dismissed because the complaint made no specific allegations regarding its conduct, referring only to “the Defendants” as a group. Two more were dismissed because the only allegations specific to them were from a time period not contemplated by the complaint, and the relator merely speculated that their conduct continued into the relevant period. A fourth firm was dismissed even though the complaint included specific allegations that it was engaged in this practice but the allegations failed to specify which construction projects were implicated, where and when the overtime was submitted, which government entities were billed for the overtime, and what amount was paid.

By contrast, the relator’s second amended complaint in U.S. ex rel. Wollman v. Gen. Hosp. Corp. survived a motion to dismiss because, unlike the relator in Aryai, her allegations included all the necessary details of the scheme. She alleged the defendants were inappropriately billing Medicare and Medicaid for overlapping and concurrent surgeries where the assigned teaching physician was performing two or more procedures that required anesthesia at the same time without identifying another qualified teaching physician to be immediately available in the event of an emergency. To support her claims, the relator’s second amended complaint included 11 example procedures for which she identified the surgery type, start time, duration, services billed, physician name, billing provider, amount billed, and amount paid by the government. As a result, the U.S. District Court for the District of Massachusetts held that she had satisfied Rule 9(b).

It is not enough, though, to plead only the details of the fraud scheme. To state an FCA claim, a complaint must also allege that the scheme caused the submission of a “false” claim to the government. For example, in U.S. ex rel. Strubbe v. Crawford Cty Mem’l Hosp., the Eighth Circuit Court of Appeals held that the relators had adequately described the fraud scheme by providing the names of the individuals involved, the relevant time period, and by quoting specific statements by supervisors relating to the alleged scheme. But, because the complaint failed to allege how the scheme resulted in claims submitted to the government, the case’s dismissal was affirmed.

Pleading Submission of False Claims in 2019

Though courts generally agree on the details required to adequately describe a fraud scheme, they have split over how to plead “presentment” or “submission” of those claims to the government. This year brought no real clarity to that question. Some circuits, like the Sixth and Eleventh Circuits, continued to demand that relators provide a representative example or have personal, first-hand knowledge of a defendant’s billing practices to survive a motion to dismiss. Others, like the Eighth and Ninth Circuits, continued to require only that a relator provide “reliable indicia” leading to a “strong inference” that claims were submitted.

Pleading Actual Claims

Two cases from the Northern District of Ohio illustrated the Sixth Circuit’s narrow application of Rule 9(b). In U.S. ex rel. Petkovic v. Found. Health Sol., the district court dismissed a qui tam complaint filed by a podiatrist and podiatry technician against a company providing operational management services to several nursing homes where the podiatrist provided care. The relators alleged the management company accepted kickbacks from their former employer because the nursing homes would bill the management company directly for each pair of diabetic shoes they ordered, and the management company would in turn bill Medicare for the shoes at a higher rate, pocketing the profit. In dismissing the complaint, the court explained that in the Sixth Circuit, a relator must provide a representative claim that was actually presented to the government for payment, and only in rare occasions will courts apply a “relaxed” standard that allows a relator to rely on “personal knowledge” in lieu of a representative claim. Because the district court found that the relators’ personal knowledge related only to the alleged scheme, not to the submission of claims to the government, they did not fit into the “extremely narrow” exception. In U.S. ex rel. Holloway v. Heartland Hospice, Inc., the same court offered insight as to what constitutes a “representative claim.” There, a former employee alleged that the defendants implemented a corporate-wide scheme to certify non-terminally ill patients as hospice eligible. Her complaint included a list of patients she believed were ineligible for hospice, including the patients’ names, places of service, core clinical diagnoses, and start-of-care dates, but the district court concluded the patients were not “representative examples” as required by the Sixth Circuit because the allegations lacked key information about the claims and the reasons why the patients were not qualified for hospice. The court went on to explain that even in cases where the Sixth Circuit has applied a “relaxed” standard for relators with personal knowledge of billing practices, the court required more detail than what was included in this relator’s list.

In May, the Southern District of Florida applied a very similar analysis in U.S. ex rel. Fernandez v. Miami Cancer Inst., dismissing a qui tam complaint filed by a former pharmacy technician and an inventory manager, who alleged the hospital’s pharmacy was using left-over amounts of cancer drugs to fill compound prescriptions, but was billing the government as if new vials were being used. The relators alleged the orders were entered into the pharmacy’s electronic record system, which was used by the accounting department to create bills sent to insurers. But, they did not allege a representative claim. Instead, they asked for the court to apply a more “relaxed” Rule 9(b) standard based on their participation in and knowledge of the fraud scheme. The district court held that although their positions allowed them first-hand knowledge of the scheme, they did not have first-hand knowledge of the defendant’s billing practices, so they could not state an FCA claim without pleading a representative example.

Alternatives to Pleading Actual Claims

Other circuits have taken a broader view of what satisfies Rule 9(b). For instance, in U.S. ex rel. Streck v. Takeda Pharm. Am., Inc., the U.S. District Court for the Northern District of Illinois denied a motion to dismiss, holding that although the relators had not provided any of the specific false reports at issue, it was enough that they described the fraud scheme and cited regulatory requirements that those reports be filed every 30 days.

And, in September, the Ninth Circuit reversed the dismissal of a complaint in U.S. ex rel. Godecke v. Kinetic Concepts, Inc., where a relator alleged a manufacturer was delivering durable medical equipment to Medicare patients before obtaining a written order from a physician. The complaint did not identify any actually-submitted claims, but in reversing the district court’s dismissal, the court of appeals explained that in the Ninth Circuit, a relator is not required to identify actual examples of submitted false claims. Rather, a complaint will survive a motion to dismiss so long as it contains “reliable indicia” leading to a “strong inference” that false claims were actually submitted. The Ninth Circuit held that the complaint met this standard because the relator alleged sales representatives told her the defendant often delivered devices without the requisite order, the defendant set up a system to hide this fact, the relator’s review of data pinpointed claims that were paid without the order, and a former colleague told the relator she had personally reviewed claims that were submitted despite lacking the appropriate documentation.

By contrast, in Strubbe, the Eighth Circuit, applying the same standard, held that although relators provided all the necessary details of the fraud scheme, and had first-hand knowledge of the scheme, the alleged statements made by their supervisors that the fraudulent practices were “for billing and reimbursement purposes” showed only the possibility that claims were actually submitted, which fell short of creating the strong inference required to satisfy Rule 9(b).

In light of the continued frequency and expense of qui tam actions, litigants should expect to continue seeing challenges at the pleading stages of FCA cases.

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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