Appellate rulings on whether continued government payment makes for a material defense, and what constitutes a kickback, contributed to a shifting False Claims Act litigation landscape in 2023.
In United States ex rel. Druding v. Care Alternatives Inc., the US Court of Appeals for the Third Circuit reinstated a Medicare fraud case, concluding the trial court assigned too much weight to the contention that the US kept making payments to the provider even amid allegations of fraud.
“We simply don’t know what the government knew and when,” the Third Circuit said in its Aug. 25 ruling, declining to equate government awareness of fraud allegations with actual knowledge that fraud occurred.
An FCA suit can fail for lack of materiality if an agency continues to pay a contractor despite knowledge of fraudulent conduct, the Supreme Court said in 2016’s Universal Health Servs. Inc. v. United States ex rel. Escobar.
In Druding, a New Jersey district court rejected the whistleblowers’ claim—first lodged in 2008—for lack of materiality, concluding they’d failed to show that hospice services provider Care Alternatives’ alleged failure to provide proper medical certification for the services affected Medicare’s decisions to pay.
The Third Circuit reversed, holding that the district court assigned too much weight to a single factor: government action.
The panel said “we are guided by Escobar, which indicates ‘[w]hether a provision is labeled a condition of payment is relevant to but not dispositive of the materiality inquiry,’” the unanimous panel said.
An FCA defendant’s continued payments argument “has not been seen as a dispositive factor although it is relevant,” said whistleblower attorney Colette G. Matzzie with Phillips & Cohen LLP.
The Third Circuit’s opinion is “a good example of where the courts have settled post-Escobar in weighing factors on materiality and not treating government continued payment as dispositive,” she told Bloomberg Law.
Kickback Causation
Another decision that Matzzie highlighted affects what the government or a whistleblower must show to demonstrate an unlawful kickback—and arguably increased an FCA circuit split.
In United States ex rel. Martin v. Hathaway, the US Court of Appeals for the Sixth Circuit on March 28 joined the Eighth circuit by adopting a “but-for” causation standard for alleging a kickback under the FCA.
This issue is important because under the “but-for” standard “a medical device or pharma company might be able to pay a provider cash intended to induce use of its device, but then avoid liability as a matter of law if the provider testifies they would have selected the same device or drug anyway,” Matzzie said.
Tirzah S. Lollar, who represents FCA defendants for Arnold & Porter Kaye Scholer LLP, said the “Third Circuit having held that a direct causal link between the alleged kickback and a false claim was not required in 2018, and an increasing number of circuit decisions on the issue suggest that this issue could be ripening” for US Supreme Court review.
“Given the number of kickback related FCA cases in the life sciences and healthcare space, guidance from the Supreme Court on this issue would have a significant impact,” she said.
No-Hire Tradeoff
The whistleblower in that case, ophthalmologist Shannon Martin, worked for defendant Darren Hathaway at South Michigan Ophthalmology PC, before unsuccessfully seeking a position with Oaklawn Hospital.
Martin alleged that the defendants engaged in a kickback scheme under which Oaklawn declined to hire Martin away from Hathaway in return for his promise to continue sending surgery referrals from the local community to Oaklawn.
The Sixth Circuit affirmed dismissal, ruling in part that the suit had a causation “problem,” and that neither Oaklawn nor Hathaway submitted claims for Medicare or Medicaid reimbursement for items or services resulting from an unlawful kickback.
“There’s not one claim for reimbursement identified with particularity in this case that would not have occurred anyway, no matter whether the underlying business dispute occurred or not,” the court said.
Martin sought US Supreme Court review, arguing that it should resolve a split pitting the Sixth and Eighth circuits against the Third Circuit’s less demanding standard, which recognizes that a kickback isn’t always a singular act and can include a broader scheme with multiple parts. Her petition was denied Oct. 2.
This standard is also being litigated at the First Circuit in United States v. Teva Pharmaceuticals USA Inc., and in United States v. Regeneron Pharmaceuticals Inc.
Supreme Court
The Supreme Court issued its own pair of consequential FCA rulings this year.
The justices, in United States ex rel. Schutte v. SuperValu Inc., unanimously said subjective intent evidence must be considered when assessing an alleged fraudster’s state of mind. That decision effectively prevents defendants from successfully arguing that they can’t be liable—even if they believed they were committing fraud—if they can later show they had a reasonable legal interpretation.
“The focus is on what a defendant thought when submitting a claim—not what a defendant may have thought after submitting it,” the justices said June 1.
Two weeks later, in United States ex rel. Polansky v. Exec. Health Resources Inc. the high court said the government may seek dismissal of an FCA action, over a whistleblower’s objection, so long as it has intervened in the case at some point.
The most remarkable aspect of the opinion, however, may be Justice Clarence Thomas’ dissent, which questioned the constitutionality of the FCA’s whistleblower provisions.
Knee replacement device maker Exactech Inc. cited the dissent in a bid to end an FCA suit against it, but it was denied Nov. 20.
The cases are United States ex rel. Druding v. Care Alternatives Inc., 3d Cir., No. 22-1035, 8/25/23; and United States ex rel. Martin v. Hathaway, 6th Cir., No. 22-1463, 3/28/23.