This Week at the Ninth: Delegation Clauses and the False Claims Act

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This week, the Court addresses whether a court or an arbitrator must consider a sovereign immunity defense to arbitration, and applies the False Claims Act to a defendant’s allegedly fraudulent Medicare billing practices.

The Court holds that an Indian tribe’s sovereign immunity and statutory challenges to the arbitrability of a contract dispute were properly delegated to an arbitrator for resolution in the first instance.

Panel: Judges Wallace, Boggs (CA6), and Friedland, with Judge Friedland writing the opinion.

Key Highlight: “The Nation’s proposed approach here would put the cart before the horse, requiring us to resolve whether there has been a waiver of tribal immunity for particular claims for which arbitration is sought before determining whether an arbitration agreement exists at all.”

Background: Chickasaw Nation, a federally recognized Indian tribe that operates its own health care system, contracted with Caremark to manage prescription drug benefits provided through a number of tribal pharmacies. The contracts, among other things, required that all disputes arising from the agreement be resolved in arbitration. The arbitration provision also included a “delegation clause” providing that an arbitrator, instead of a court, should resolve any threshold issues about the formation, scope, or enforceability of the arbitration agreement. 

Chickasaw Nation sued Caremark in federal court, alleging that the company had violated the Indian Health Care Improvement Act (sometimes called the Recovery Act) by improperly denying claims for covered medications its pharmacies had provided to tribal members enrolled in Caremark-managed health-insurance plans. The district court granted Caremark’s motion to compel arbitration.

Result: The Ninth Circuit affirmed. The Nation argued that its statutory claims were not arbitrable because, according to the tribe, it never waived sovereign immunity and the Recovery Act precluded arbitration. But the Court explained it first had to resolve the threshold question of who should decide arbitrability—an arbitrator or the court. Surveying a number of Supreme Court decisions, the Ninth Circuit laid out three basic principles governing delegation clauses: “First, a court must resolve any challenge that an agreement to arbitrate was never formed,” notwithstanding whether the arbitration agreement contained a delegation clause. Second, “a court must also resolve any challenge directed specifically to the enforceability of the delegation clause.” And finally, all other arguments “going to the scope or enforceability of the arbitration provision are for the arbitrator to decide in the first instance.” 

Applying those principles, the Court concluded that compelling arbitration was appropriate here. “The Nation does not seriously dispute that its pharmacies have contractual relationships with Caremark that are governed by the terms of the” parties’ agreements. And the Court could not simply excise arbitration clauses on the basis of sovereign immunity, because arbitration does not necessarily waive tribal immunity, and it would be improper “to resolve whether there has been a waiver of tribal immunity for particular claims . . . before determining whether an arbitration agreement exists at all.” Nor did the Recovery Act preclude operation of the delegation clause. The Nation “challenges the enforceability of the arbitration provision as a whole, on the ground that the Nation’s claims are not arbitrable” under the federal statute, but it did not specifically challenge the enforceability of the delegation clause itself. Accordingly, the Court held, the Nation’s “challenge raises exactly the type of threshold arbitrability issue that the parties have delegated to the arbitrator, and the district court was therefore correct not to decide it.” 

The Court holds that the defendant’s use of a billing shorthand that avoided individualized scrutiny of its claims for reimbursement could give rise to liability under the False Claims Act.

The panel: Judges Baldock (CA10), Berzon, and Collins, with Judge Collins writing the opinion.

Key highlight: [I]f stalled-cycle claims were consistently paid when subject to case-specific scrutiny, then a false statement that avoids that scrutiny and instead results in automatic payment would not be material to the payment decision. But the record does not show this to be the case, particularly when the record is considered—as it must be— in the light most favorable to the relator.”

Background:  Kinetic manufactured and sold a device that used “VAC Therapy” to help heal wounds. Under the applicable Medicare rules, such devices were not “reasonable and necessary”—and therefore not eligible for Medicare coverage—if the wound had not healed in the prior month. A supplier could use the shorthand “KX” to indicate whether this requirement was satisfied. 

In 2002, Kinetic sought clarification of whether it could seek reimbursement for “stalled-cycle claims”—where there had been no improvement in the wound one month, but then improvement in the following month. An official responded that such claims could not be reimbursed for any subsequent months. Kinetic challenged this policy in letters and other communications with the agency, and subsequently resumed affixing the “KX” modifier even for certain stalled-cycle claims.

Relator Steve Hartpence, who had worked for Kinetic, filed a False Claims Act qui tam action on behalf of the United States. He claimed that Kinetic had committed fraud by affixing the “KX” modifier to claims that were not, under the governing policy, reimburseable. The district court granted summary judgment to Kinetic, concluding there were no triable disputes of fact as to whether Kinetic’s use of the KX modifier was material to the government’s payment decisions or whether Kinetic had acted with scienter.

Result: The Ninth Circuit reversed. First, the Court held that there was a triable dispute of fact on materiality. “In the context of a false certification of compliance with a regulatory or statutory requirement for payment,” the Court explained, “the certification is material if the requirement is so central to the claims that the government would not have paid these claims had it known that the requirement was not satisfied.” Here, the Court concluded, there was evidence showing that the purpose of the “KX modifier” was to trigger an automatic payment by the government, obviating the need for any further individual consideration. And because the record also contained evidence suggesting that the government refused to reimburse many (albeit not all) stalled-cycle claims when it subjected them to individualized scrutiny, a certification that avoided such scrutiny was material. 

Second, the Court also held there was a triable dispute of fact as to whether Kinetic acted with scienter. Assuming without deciding that Hartpence had to prove that Kinetic acted with knowledge of not just falsity but also materiality, the Court concluded evidence demonstrated Kinetic “was plainly aware that using the KX modifier avoided a costly review and appeal process that it would sometimes win and sometimes lose.” And, the Court continued, the evidence would also allow a reasonable jury to conclude that Kinetic knew its use of the KX modifier constituted a false statement. The Court highlighted, among other things, emails in which Kinetic employees questioned how Kinetic’s billing practices could be reconciled with the government’s policy. And while Kinetic might be able to make a strong argument to the jury that its communications with the government informed the government of its billing practices, “a reasonable jury could find that [Kinetic] knew that it did not actually have the [government’s] endorsement of its billing practices and that it decided to take a calculated risk that it could get away with bending the rules.”

[View source.]

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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