Whistleblower Law Blog
Topic: False Claims Act (FCA)
On March 17, 2015, the First Circuit Court of Appeals reversed a District Court decision, holding that a counseling services’ failure to comply with state licensing requirements is a condition to payment under the False Claims Act.
The False Claims Act qui tam case at issue, US ex rel. Escobar v. Universal Health Services, Inc., was filed in the United States District Court for the District of Massachusetts. The suit alleges that Julio Escobar and Carmen Correa’s daughter, Yarushka Rivera, who died of a seizure in 2009, was treated by unlicensed and unsupervised staff at Arbor Counseling Services, a facility owned and operated by Universal Health.
Universal Health, according to the complaint, provided mental health services by unlicensed, unaccredited, and unsupervised therapists in violation of regulations set by MassHealth, a healthcare program administered by the Commonwealth of Massachusetts. Under MassHealth, mental health providers are required to employ qualified staff members as a condition to payment.
An unlicensed therapist employed by United Health then prescribed Trileptal to Rivera. Trileptal is a behavioral medication allegedly known to cause seizures after abrupt withdrawal. On May 13, 2009, Rivera suffered a fatal seizure after the unlicensed Universal Health therapist discontinued the medication.
In March 2014, the District Court dismissed the suit, concluding that Escobar’s claims were not actionable under the FCA because licensing requirements involve conditions for participation, rather than payment. Further, the District Court held that the FCA is designed to address financial fraud on the government rather than police general regulatory compliance.
The First Circuit, in reversing the District Court’s decision, held that Universal Health’s claims for reimbursement were within the meaning of the FCA. The Court of Appeals reasoned that services are only reimbursable when MassHealth standards are met.
In arriving at this decision, the First Circuit “ask[ed] simply whether the defendant, in submitting a claim for reimbursement, knowingly misrepresented compliance with a material precondition of payment.”
On March 11, 2015, the U.S. Court of Appeals for the Eleventh Circuit adopted the Ninth Circuit’s plaintiff-friendly approach to false certifications under the False Claims Act, preserving a former employee’s claim against a company that received funds under Title IV of the Higher Education Act.
Plaintiff Carlos Urquilla-Diaz alleged that Kaplan University, a for-profit education company, paid student recruiters based on the number of students they signed up. Urquilla-Diaz alleged that Kaplan falsely claimed to comply with the Higher Education Act, which forbids volume-based compensation of the sort it allegedly paid to recruiters. Urquilla-Diaz and co-plaintiff Jude Gillespie also named Kaplan Higher Education Corp. and Kaplan Inc. as co-defendants in the suit.
The district court dismissed all of the plaintiffs’ claims. On appeal, the Eleventh Circuit upheld the bulk of the district court ruling, including the dismissal of all of Gillespie’s claims on the grounds that he failed to establish the elements of an FCA claim. The three-judge panel also upheld the dismissal of all but one of Urquilla-Diaz’s claims for failure to plead with sufficient particularity The case is Urquilla-Diaz v. Kaplan University, case number 13-13672.
A typical FCA claim involves an entity submitting to the government a claim for payment that is false on its face. For instance, if an education company billed the government for teaching students who did not actually exist, its invoices would be false claims under the act.
But many U.S. Courts of Appeals, to varying degrees, have recognized a less direct theory of liability based on false certifications. Under this theory, a defendant can be liable for claims submitted to the government for work that was actually done, but which was performed in violation of some statutory, regulatory, or contractual provision. Under this theory, the claims are “false” because the company has falsely certified its compliance with all applicable provisions and the government would not have paid for the services without the false certification.
Urquilla-Diaz alleges that Kaplan violated the program participation agreement that it signed with the Department of Education to be eligible to receive Title IV funds. In conjunction with the agreement, Kaplan promised to abide by all statutes and regulations related to Title IV of the Higher Education Act. One such provision prohibits participants from paying recruiters “any commission, bonus, or other inventive payment based directly or indirectly on success in securing enrollments.”
Urquilla-Diaz’s false certification claim rests on the idea that the government would not have paid Title IV funds to Kaplan had it known that the company was violating its program participation agreement. Specifically, Diaz alleged that Kaplan increased and decreased recruiters’ salaries based on the number of students they signed up. The Eleventh Circuit determined that Urquilla-Diaz had plausibly stated a claim under the FCA, in part because he included specifics about former Kaplan employees whose salaries were modified based on their recruiting success.
The Eleventh Circuit’s embrace of the Ninth Circuit’s false certification standard will make it easier for relators to bring similar cases in the future.
On February 25, 2015, MetLife Home Loans LLC agreed to pay the U.S. Government $123.5 million to settle claims alleging that the company originated and underwrote loans insured by the Federal Housing Administration (FHA) to unqualified borrowers.
John Walsh, the U.S. Attorney for the District of Colorado, brought a False Claims Act action against Met Life Bank N.A., which merged into MetLife Home Loans LLC in June 2013. MetLife Home Loans is a wholly owned subsidiary of MetLife Inc., as was MetLife Bank before the merger.
The U.S. Government alleged that from September 2008 through March 2012, MetLife Bank knowingly submitted for FHA insurance numerous mortgage loans that did not meet Department of Housing and Urban Development (HUD) underwriting requirements. When FHA-insured loans default, the financial institution that originated the loans can submit insurance claims to the U.S. government. Therefore, when FHA-insured loans originated by MetLife Bank defaulted, U.S. taxpayers got stuck with the bill.
During the relevant period, MetLife Bank was as an FHA-approved Direct Endorsement Lender. Such lenders are authorized to originate, underwrite, and certify mortgages for FHA insurance. The FHA relies on Direct Endorsement Lenders to ensure that only loans that comply with HUD regulations are submitted for FHA insurance.
MetLife Bank’s internal findings showed that senior executives, including the CEO and the bank’s directors, had information showing that a substantial percentage of the loans were not eligible for FHA insurance. MetLife Bank’s records show that, between January 2009 and August 2010, between 25 percent and 60 percent of MetLife Bank’s FHA-insured loans had compliance deficiencies labeled “material/significant.” Despite these deficiencies, MetLife Bank moved many loans out of this category to the more favorable category of “moderate.” As one employee put it in an e-mail, “Why say significant when it feels so good to say moderate.”
Between January 2009 and December 2011, MetLife Bank self-reported only 321 FHA insured mortgages to HUD as materially violating HUD regulations, despite having internally identified 1,097 loans that it should have reported.
Although the government brought the FCA charges against MetLife Bank on its own, the False Claims Act allows private citizens (called “relators”) to file suits on behalf of the government for similar violations, such claims are known as a qui tam claims. On March 19, 2014, Keith Edwards, a former executive at JP Morgan, received a $69.3 million reward for blowing the whistle and disclosing allegations that JP Morgan violated the FCA by submitting toxic mortgages to the government for insurance.
In 2014, the U.S. government recovered nearly $6 billion through the False Claims Act.
The False Claims Act allows private citizens with knowledge of false claims to bring civil actions on behalf of the United States government and to share in the recovery from these actions. These private citizens, known as relators, may receive a portion of the government’s recovery even if the actions are settled. The following are examples of three settled false claims (or “qui tam”) actions in which the relators received large monetary sums as their share.
AstraZeneca entered into a settlement agreement for $7.9 million with the United States to resolve allegations that the company agreed to provide remuneration to a pharmacy benefits manager in exchange for maintaining exclusive status to formularies. The relator received $1.42 million from the settlement.
California-based C.R. Laurence Co. Inc., Florida-based Southeastern Aluminum Products Inc., and Texas-based Waterfall Group LLC agreed to pay $2,300,000, $650,000 and $100,000, respectively, to resolve a qui tam action. The action alleged that the companies schemed to elude customs duties on imports. The relator received a $555,000 reward. Customs regulations are in place to level the playing field between companies who purchase products domestically and those who import their products. Evading customs regulations poses serious harm to United States manufacturers.
Ageless Men’s Health, LLC agreed to pay $1.6 million to the United States to resolve allegations that it billed Medicare and Tricare for medically unnecessary evaluation and management services. Medicare and Tricare will only reimburse for medically necessary procedures. The relator and the United States alleged that Ageless Men’s Health improperly billed for each office visit during which a testosterone shot was administered. The relator will receive $250,000 from the settlement.
Fourth Circuit Holds that Disclosure to the Government is Not a “Public Disclosure” and Reinstates Long-Running Qui Tam Case
The United States Court of Appeals for the Fourth Circuit recently held that a disclosure outside of the government is required to trigger the False Claims Act’s public disclosure bar. The FCA’s public disclosure bar requires courts to dismiss a qui tam action if the action is based on information already made public, unless the relator bringing the action was the original source of the information.
In United States ex rel. Wilson v. Graham County Soil & Water Conservation Dist., Relator Karen Wilson alleged fraud in a federally-funded storm cleanup program in North Carolina. After discovering the fraud, Wilson wrote a letter to a government official disclosing her concerns. A few months later, a government agency prepared an audit report that included the information disclosed by Wilson. The report was distributed to other state and federal law agencies. Wilson’s case survived two trips to the Supreme Court and was most recently dismissed in district court for lack of jurisdiction based on the public disclosure bar.
The district court relied on a Seventh Circuit case to dismiss Wilson’s complaint, holding that disclosure to a public official is sufficient to trigger the bar, absent a disclosure to the public at large. In its February 3, 2015 decision, the Fourth Circuit rejected the Seven Circuit’s approach and, falling in line with five other circuits, reasoned that Congress did not intend public disclosure to extend to disclosure to the government.
On February 5, 2015, Maryland proposed a new, expanded state False Claims Act that would better allow Maryland to deter and recover damages for fraud against the state. Maryland Attorney General Brian Frosh urged adoption of the Act, which would expand Maryland’s current limited version that only applies to Medicaid and health-care related fraud.
Under the proposed False Claims Act, Maryland may receive triple the damages for its losses, while the whistleblower who initiates the claim is allowed to receive a portion of the state’s recovery and is also protected against retaliation in the work place. The state’s current version of the Act has allowed it to recover $28 million a year in each of the past two years from Medicaid-related cases alone. Adopting the proposed expansion will allow Maryland to achieve greater success in deterring fraud and recovering funds, much like the federal government.
Under the federal False Claims Act, the federal government recouped nearly $5 billion in 2012. To incentivize states to adopt laws more closely mirroring the federal False Claims Act, the federal government, under the Deficit Reduction Act of 2005, allows states to collect an additional 10% of federal Medicaid funds recovered through a state action.
CareAll Management, a home healthcare provider based in Nashville, Tennessee, recently agreed to pay $25 million to settle charges that it violated the False Claims Act by submitting false and “upcoded” billings to Medicare and Medicaid. The settlement resolves a suit filed in the U.S. District Court for the Middle District of Tennessee. The suit alleged that CareAll overstated the severity of patients’ conditions to increase billings (upcoding) and billed for services that were not medically necessary and were rendered to patients who were not homebound. CareAll is one of the largest home healthcare providers in Tennessee.
As part of the settlement, the relator, Toney Gonzales, will receive more than $3.9 million as his share of the total recovery. Gonzales brought the lawsuit against CareAll under the qui tam provisions of the False Claims Act, which allows private citizens to sue on behalf of the United States for fraudulent uses of federal funds (including Medicare and Medicaid) and to share in any recovery.
The CareAll settlement illustrates efforts by the Department of Justice (DOJ) to make home healthcare fraud a bigger enforcement priority. In many cases, the government is criminally prosecuting the individuals responsible for the fraud in addition to the corporate entity. In the same week that it announced the CareAll settlement, DOJ reached multi-million dollar settlements involving three other home healthcare fraud schemes. These settlements mark the success of the Health Care Fraud Prevention and Enforcement Action Team (HEAT) initiative, a partnership between the Attorney General and the Secretary of Health and Human Services to increase efforts to prevent Medicare and Medicaid fraud.
On December 17, 2014, the Court of Appeals for the Eighth Circuit affirmed a lower court ruling ordering Bayer Corporation to reinstate a former pharmaceuticals sales representative, Mike Townsend, wrongfully terminated by Bayer in violation of the anti-retaliation provisions of the False Claims Act (FCA), 31 U.S.C. § 3730(h). Bayer had opposed the court-ordered relief, arguing that reinstating Townsend constituted an abuse of discretion by the lower court because Bayer had planned to eliminate Townsend’s position in a reorganization and the FCA did not permit reinstatement in those circumstances.
In April 2009, Townsend disclosed to his manager that a Bayer customer, Dr. Kelly Shrum, was committing Medicare fraud by buying a cheaper Canadian version of a contraceptive device and submitting reimbursement claims for the more expensive FDA-approved contraceptive. Townsend eventually reported Shrum to the Arkansas attorney general.
On May 5, 2010, Bayer fired Townsend, claiming he couldn’t do his job because his credit card had been deactivated. At trial, Bayer argued that the deactivated card prevented Townsend from entertaining physicians. The jury rejected Bayer’s stated reason for terminating Townsend as pretextual and found Bayer fired Townsend in retaliation for reporting Shrum’s Medicare fraud.
Judge James M. Moody of the District Court for the Eastern District of Arkansas ordered Bayer to reinstate Townsend. The Eighth Circuit affirmed reinstatement as an appropriate remedy for the retaliatory firing, given that Townsend had no performance issues, enjoyed working at Bayer, and there was no evidence that Townsend’s coworkers would harass him upon his return. The Court rejected Bayer’s planned reduction in force as an affirmative defense to bar Townsend’s reinstatement. The Court held that Bayer did not have to reinstate Townsend to the exact same position, but, at a minimum, had to put him in a position with “the same seniority status” he would have had but for Bayer’s unlawful conduct.
Arbon Equipment Corporation and its holding company, Rite-Hite Holding Company, agreed to pay $4 million to settle a suit alleging they violated the federal and California False Claims Act by failing to pay employees prevailing wages on certain government-funded projects. A former employee, Mark Brooks, filed the qui tam suit in the U.S. District Court for the Southern District of California. Brooks and other employees installed and serviced loading dock equipment at facilities owned by the federal or California state government. Arbon and Rite-Hite, as part of the settlement, also agreed to change their compensation practices and policies.
The Service Contract Act and the Davis-Bacon Act require contractors and subcontractors working on certain government-funded projects to pay employees specified hourly wages that are higher than minimum wage and often higher than wages paid for similar work on private projects. Courts recognize that false certifications regarding the mandated payments can form the basis for qui tam actions.
Because of Brooks’ decision to blow the whistle, he will receive an award of $1,164,000. Additionally, Arbon and Rite-Hite Holding have agreed to pay approximately $1,500 to each current and former employee who was not paid the required wages.
The U.S. Department of Justice announced that taxpayers recovered nearly $6 billion from False Claims Act (FCA) cases in fiscal year 2014.
More than half the total came via lawsuits filed by individuals. Under the FCA’s qui tam provision, whistleblowers who uncover fraud may sue on behalf of the government — and get up to 30% of recovered funds as a reward.
In FY 2014, the Government paid out $435 million in such awards. It was the second consecutive year in which more than 700 qui tam suits were filed, and the first time FCA recoveries exceeded $5 billion.