Last week, in LeadingAge New York, Inc. v. Shah, the New York Court of Appeals addressed Department of Health regulations limiting executive compensation and administrative expenditures by healthcare providers receiving state funds. The Court upheld limits related to state funding, but struck down a limit that applied regardless of the source of funding.

In 2012, Governor Cuomo directed agencies providing state funding to service providers to regulate provider use of state funds for executive compensation and administrative costs. DOH responded with regulations restricting state-funded expenditures on administrative expenses and executive compensation for certain defined “covered providers.”

The regulations had two “hard caps,” one limiting administrative expenses to 15% of covered operating expenses paid with State funds, and one limiting the use of State funds for executive compensation to $199,000, absent a waiver. The regulations also had one “soft cap,” providing for penalties to a covered provider if executive compensation exceeded $199,000 from any source of funding, with specified exceptions concerning comparable provider compensation and board approval. Covered executives included those for whom salary and benefits were administrative expenses, and excluded clinical and program personnel.

Several petitioners challenged the regulations, including nursing homes, assisted-living programs, home-care agencies and trade associations.

The Court of Appeals grounded its decision in the separation of powers doctrine, which requires that “the Legislature make the critical policy decisions, while the executive branch’s responsibility is to implement those policies.” Chief Judge DiFiore looked to the Court’s prior decision in Boreali v. Axelrod for guidance in finding “the difficult-to-define line between administrative rule-making and legislative policy-making.”

The Court first reviewed the function of DOH, which manages state funds earmarked for public health, oversees the Medicaid program, and contracts with private entities. The Court said that DOH carries out these functions with the goal of ensuring that the limited public funding available be directed as efficiently as possible toward high-quality services.

The Court concluded that the hard cap regulations on both administrative expenses and executive compensation did not exceed DOH’s authority. The Legislature directed that DOH oversee the efficient expenditure of state health care funds. The hard caps are tied to the specific goal of efficiently directing state funds toward quality medical care for the public by limiting the extent to which state funds may be used for non-service-related salaries and disproportionately high administrative budgets. The Court found the hard cap regulations to be directly tied to the Legislative policy goal without subverting it in favor of unrelated public policy interests.

In contrast, the Court struck down the soft cap regulation, which restricted executive compensation over $199,000 regardless of funding source, because it represented “an unauthorized excursion by DOH beyond the parameters set by the Legislature.” The Court found that while the hard cap regulations capped the use of public funding, the soft cap imposed an overall cap on executive compensation, regardless of the funding source. “The soft cap thus pursues a policy consideration – limited executive compensation – that is not clearly connected to the objectives outlined by the Legislature but represents a distinct ‘value judgment.’” The soft cap restriction on executive compensation was not “sufficiently tethered” to the enabling legislation which largely concerned state funding. The Court concluded that the soft cap regulation exceeded DOH’s administrative authority as it envisioned the additional goal of limiting executive compensation as a matter of public policy.

All members of the Court of Appeals agreed that the hard cap on administrative expenditures was permissible, but the dissenting Judges differed on executive compensation.  Judge Garcia would have stricken both hard and soft caps on executive compensation, because they represented a “policy choice about reasonable compensation aimed at influencing corporate behavior,” which is “law-making beyond DOH’s regulatory authority.”  In contrast, Judge Wilson would had found both limits to be permissible.  He criticized the majority’s reliance on Boreali, and saw the proper analysis to be whether the regulation exceeded the executive power.  He would have used that rationale to uphold the hard cap on executive compensation, and also would have found the soft cap permissible because it advance the statutory goals of preventing providers from circumventing the hard cap and advising providers the State may allocate taxpayer funds away from undesireable or inefficient vendors and toward competitors who provide superior value.

At least where State funds are at issue, LeadingAge provides the Governor and executive agencies with broad authority to police and restrict the use of State funding.

In United States ex rel. Wood v. Allergan, Inc., the Second Circuit addressed the issue of whether a violation of the False Claims Act’s “first-to-file” rule compels dismissal of an action or whether it can be cured by the filing of an amended or supplemental pleading. The Court’s acceptance of the interlocutory appeal was addressed here in a post last year. In August, the Second Circuit reversed the District Court, holding that a violation of the first-to-file bar cannot be remedied by amending or supplementing the complaint.

Relator John Wood brought FCA claims against Allegan, a pharmaceutical company that develops and manufactures eye care prescription drugs. Wood alleged that Allergan violated the FCA and the Anti-Kickback Statute by providing large quantities of free medical products to physicians to entice them to prescribe Allergan drugs. When Wood brought his action, two other actions alleging similar FCA violations were pending.

The Initial Qui Tam Complaint Violated the “First-to-File” Bar

The FCA’s “first-to-file” rule states that once a qui tam action has been brought, no person other than the Government may intervene or bring a related action based on the same facts. The first-to-file rule ensures that only one relator shares in the Government’s recovery and encourages potential relators to file their claims promptly. Because two prior actions were pending when Wood filed his qui tam complaint, it ran afoul of the first-to-file bar.

The Wood complaint, however, was under seal, and while it remained under seal, the two prior actions were dismissed. When the government declined to intervene in the Wood action and the case was unsealed, there were no longer any prior-filed pending actions. Wood thereafter filed a third amended complaint. Allergan moved to dismiss on several grounds, including the “first-to-file” bar, because when the Wood qui tam complaint was commenced, there were two pending actions alleging the same factual allegations.

The Second Circuit first held that the first-to-file rule applied, rejecting Wood’s argument that the earlier actions failed to adequately allege an FCA claim. Even if Wood’s allegations were broader than the prior complaints, the claims were related, as the alleged schemes were sufficiently similar, and the Government would have been equipped to investigate them. In addition, the Court rejected as unworkable the argument that the Judge in a later-filed case could address the sufficiency of an earlier-filed case pending before a different Judge, potentially even before the first Judge had done so.

An Amended Pleading Cannot “Cure” a First-to-File Violation

In Kellogg Brown & Root Services, Inc. v. United States ex rel. Carter, the Supreme Court had held that “an earlier suit bars a later suit while the earlier suit remains undecided but ceases to bar that suit once it is dismissed,” dismissing the later filed action without prejudice. Wood therefore would have been able to commence a new action once the two prior actions had been dismissed. However, due to the passage of time, statutes of limitation would have barred a new action.  Wood argued that the first-to-file bar could be “cured” by amending or supplementing the complaint after dismissal of the earlier actions. Other Circuits have split on this question.

The Second Circuit followed a D.C. Circuit decision to hold that Wood’s “action was incurably flawed from the moment he filed it.” The Court found that the plain language of the FCA provides that no individual may bring a related action when an FCA action is pending, and that the plain language required dismissal. The Court determined that Wood’s position—a first-to-file violation can be cured by a later amendment—is inconsistent with the language of the statute. The Court reasoned that the statute bars a person from bringing a related action when a prior FCA action is pending; it does not provide for the second action to be stayed until the first-filed action is no longer pending. An amended or supplemented pleading could not change the fact that Wood brought the action when another related action was pending.

The Court also posited several inefficiencies from Wood’s suggested approach: inequities among Relators with later-filed complaints depending on the happenstance of when their complaint was dismissed or whether their case was stayed; questions as to which later-filed case would proceed; and a potential lineup of later-filed cases waiting to take the place of a dismissed earlier action. Finally, the Court found support in legislative history, indicating that the primary, if not sole, purpose of the first-to-file rule is to help the Government uncover and fight fraud. The Court found it unlikely that Congress would have invited an inefficient process prone to anomalous outcomes, dependent on the chance considerations of one Court’s backlog and another Court’s timeliness of dismissal.

This Second Circuit decision, following the D.C. Circuit, now conflicts with a First Circuit decision finding the argument that amendment cannot cure a first-to-file violation to be “untenable.”  The Supreme Court may be called on to decide this Circuit split.

The recent New York Court of Appeals decision in Stega v. New York Downtown Hospital provides strong support for defamation claims arising out of witness testimony in investigations and quasi-judicial hearings. In Stega, the Court held that statements made in administrative proceedings that allegedly defame a person are not absolutely immune where the person has no recourse to challenge the accusations.

The plaintiff, Dr. Jeanetta Stega, a medical scientist and employee of New York Downtown Hospital, was chair of the hospital’s Institutional Review Board (IRB). She assisted Dr. Leonard Farber in arranging a clinical trial of a compound Luminant Bio-Sciences had developed to treat patients with metastatic cancer, which included human subjects. Dr. Stega recused herself from the Downtown Hospital IRB decision approving the trial.

The clinical study went awry as conflicts developed between Dr. Farber and Luminant. Dr. Farber made several allegations against Dr. Stega, including that she had stolen Luminent study money from him, that she had taken funds that did not belong to her, and that the drug compound was toxic and unsafe for patients. Downtown Hospital accused plaintiff of taking funds that did not belong to her and engaging in a conflict of interest by seeking IRB approval when she was a member of the IRB board. Downtown Hospital terminated Dr. Stega after concluding that she had violated the hospital’s conflict of interest policy and improperly taken Luminent money.

Dr. Stega submitted a complaint to the FDA. FDA inspectors interviewed Dr. Stega as well as officials from Downtown Hospital. The FDA inspection report included statements from the Downtown Hospital Acting Chief Medical Officer, Dr. Stephen Friedman, that Dr. Stega was terminated because she channeled Luminent funds to a research group using her home address and added patients to the study that the IRB would not approve, and because the IRB and their approvals were tainted.

After becoming aware of the FDA inspection report, Dr. Stega commenced a defamation action against Downtown Hospital, Dr. Friedman, and others.   Defendants contended that Dr. Friedman’s statements were protected by an absolute privilege because the FDA inspection was a quasi-judicial proceeding.

The Court of Appeals, in a decision by Judge Fahey, held that the statements were not protected by absolute privilege. The Court held that, for absolute immunity to apply in a quasi-judicial context, the process must make available a remedy for the allegedly defamed party to challenge the defamatory statements. The Court focused on the fact that Dr. Stega was not entitled to participate in the FDA’s review and therefore could not challenge Dr. Friedman’s accusations against her. As the FDA investigation process did not provide Dr. Stega with procedural safeguards to contest what was said against her, absolute privilege did not apply. In the Court’s words, “The absolute privilege against defamation applied to communications in certain administrative proceedings is not a license to destroy a person’s character by means of false, defamatory statements.”

Judges Rivera and Garcia dissented, arguing that whether an absolute privilege applies in a quasi-judicial proceeding depends on the nature of the proceedings rather than the status of the subject of the communication. Judge Rivera opined that the majority decision undermined the public policy of encouraging greater openness in communications with government officials. The dissenters would have applied absolute immunity, on the ground that the statements were made in a quasi-judicial proceeding, a federal investigation regarding clinical trials involving human subjects and treatment of life-threatening conditions.   The interesting oral argument before the Court of Appeals can be found here.

For the question of whether absolute immunity applies, the Stega decision places the focus on the allegedly defamed person rather than the nature of the proceedings.  Witnesses who are giving statements or testimony in administrative proceedings and investigations should be counseled to take care in what they say and how they say it, as absolute immunity may not protect them if their comments lead to a defamation claim.

In a decision last week that could affect $12 billion that insurers assert is owed by the federal government, the Federal Circuit decided that HHS was not required to pay amounts required by statute because Congress had repealed or suspended those obligations through riders to appropriations bills. In Moda Health Plan, Inc. v. United States, the Federal Circuit rejected one insurer’s claim that it was statutorily and contractually owed close to $210 million under the government risk corridors program.

The Patient Protection and Affordable Care Act (“ACA”) established health benefit exchanges in each state for individuals and small groups to purchase health coverage. Insurers, however, faced significant risk if they offered plans in the exchange, because they lacked reliable data to estimate the cost of providing care for an expanding pool of individuals seeking coverage. To mitigate that risk and discourage insurers from setting higher premiums to offset that risk, the ACA established the risk corridors program.

Under the risk corridors program, participating plans whose costs of coverage exceeded the premiums received would be paid a share of their excess costs by HHS (“payments out”), and plans whose premiums exceeded their costs would pay to HHS a share of their profits (“payments in”). HHS promulgated regulations providing that health plans would receive payments in from HHS or make payments out to HHS in the formulas set forth in the statute. Congress, however, provided in riders to appropriations bills that none of the funds appropriated for HHS in fiscal years 2015 through 2017 could be used for payments under the risk corridors program. The Congressional purpose was to make the risk corridor program budget neutral, so that HHS would not pay out more than it collected under the program. CMS reported that in the three year period of 2014-2016, payments in to HHS fell short of payments out by more than $12 billion. For that reason, HHS paid only prorated portions of the payments out to insurers.

Moda Health Plans sued under the Tucker Act, seeking almost $210 million, constituting the unpaid amounts it claimed it was owed under the risk corridors program under the ACA. Moda argued that the ACA itself obligated HHS to pay insurers the full amount under the risk corridors program, regardless of the amount of payments in, and that HHS breached its contractual agreement to pay the full amount required by the statute. The Federal Circuit rejected both arguments.

The Court agreed with Moda that the ACA obligated the government to pay the full amount of the risk corridors payments, but held that the Congressional appropriations riders effected a suspension of that obligation for each of the relevant years. The Court first held that the statute was mandatory with respect to payments out, and could not be read to require such payments to be budget neutral. Thus, the plain language of the statute created an obligation of the government to pay the full amount for payments out under the risk corridors program.

The Court held, however, that through HHS appropriations riders, Congress repealed or suspended the obligation to make any payments out if they exceeded payments in. Repeals by implication are generally disfavored, but the Court held that the appropriations riders adequately expressed Congress’s intent to suspend payments on the risk corridors program beyond the sum of payments in. Congress clearly indicated its intent to limit the funding of payments out to payments in, thus requiring the risk corridors program to be budget neutral. As a result, no taxpayer funds would be used for the risk corridors payments, and the government would not pay out more than it collected from insurers under the program.

The Federal Circuit also rejected Moda’s claim for HHS’s breach of an implied-in-fact contract. Absent clear indication, legislation and regulation cannot establish the government’s intent to bind itself in a contract. The Court held that the overall scheme of the risk corridors program lacked the trappings of a contractual arrangement.

The Moda Health Plan decision may affect billions of dollars that insurers claim they are owed by the federal government. The Supreme Court may be the next stop for the risk corridors program issues decide by the Federal Circuit, and the Justices may have yet another chance to examine the Affordable Care Act and Congressional intent.

EDNY Judge Brian Cogan recently addressed the False Claims Act public disclosure bar and original source rule in a decision based on a qui tam Relator’s claims that defendants marketed a test to measure the levels of a certain hormone knowing that the test was flawed. In United States ex rel. Patriarca v. Siemens Healthcare Diagnostics, Inc., Relator alleged that Medicare suffered significant losses because medical professionals ordered treatments based on the test’s inaccurate results.

The Background of PTH Testing

Judge Cogen started his opinion with a lengthy discussion of the medicine that led to Relator’s complaint. Patients with chronic kidney disease may have high levels of parathyroid hormone (“PTH”), which can lead to bone disease. Vitamin D analogs are used to treat high levels of PTH, but overdosing of these analogs can lead to serious health consequences. Accurate diagnosis of PTH levels is therefore critical.

In 1987, Nichols Diagnostics produced a PTH test, the “IRMA Test,” that was performed manually and required a several-hour long incubation period. The test was approved by the FDA and became the industry standard.

The Siemens Test, used to measure PTH levels, was a Second Generation PTH test, measuring the whole PTH molecule and large fragments of the molecule. The Siemens Test was purportedly aligned with the IRMA test. Third Generation tests report only the level of whole PTH molecules and omit the fragments, so Second Generation tests report PTH levels roughly twice that of Third Generation tests.

Later versions of the Nichols Tests “drifted” upward, consistently overstating patient’s PTH levels, leading to medically unnecessary prescriptions and surgeries. After a qui tam action relating to the tests’ inaccuracy and a substantial settlement with the government, Nichols withdrew its tests from the market.

In his qui tam complaint, filed in 2011, Relator alleged the Siemens Test had materially “drifted” from the IRMA test. Relator based his allegation primarily on separate parallel experiments he conducted. Relator compared the Siemens Test to the PTH test developed by his own company, the Scantibodies Test, a Third Generation test.

Public Disclosures of PTH Testing Issues

In the 2006 Souberbielle Study, European scientists studied various PTH tests, including the Siemens Test, compared them to the IRMA Test, and published their findings. The study concluded, among other things, that the values yielded by Second Generation tests varied widely. The study also determined that clinicians should monitor a patient’s PTH levels over a series of tests, as opposed to making clinical decisions on the basis of a single finding. The study also showed a significant differential between the Siemens and Scantibodies Tests.

An article published in 2007 noted that: (1) industry guidelines were based on the IRMA Test; (2) the absolute results obtained from various PTH tests varied from those of the IRMA Test; and (3) the 2006 Souberbielle Study documented this variability. Based on these observations, the author recommended that nephrologists use a single laboratory for results and look at trends in PTH as opposed to single values.

A 2009 study published by the relator who brought the successful Nichols qui tam action disclosed the results of parallel testing of various PTH tests. The study concluded that the Siemens Test generated results that were on average 36% higher than the Scantibodies Test. This was nearly the same differential as that disclosed in the 2006 Souberbielle Study.

Relator argued in his qui tam complaint that the upward drift he observed in the Siemens Test caused physicians to prescribe hundreds of millions of dollars of medically unnecessary Vitamin D, and to conduct untold numbers of medically unnecessary parathyroidectomies. Relator also alleged that Medicare paid for a portion of the cost of the Siemens Test, for prescribed Vitamin D and its analogs, and for surgeries related to elevated PTH levels.

The Public Disclosure Bar

Judge Cogan first addressed the FCA’s public disclosure bar, which bars claims for conduct that has already been made public. The bar discourages “opportunistic plaintiffs” with no significant information of their own who may bring “parasitic lawsuits.”

Prior to the 2010 FCA amendments, the public disclosure bar applied where a qui tam action was “based upon the public disclosure of allegations or transactions.” The Second Circuit and the majority of circuits had held that a relator’s claim was “based upon” the public disclosure if the allegations in the complaint were “substantially similar” to the publicly disclosed information. The 2010 FCA amendment generally followed this majority approach and identified the inquiry as whether “substantially the same allegations or transactions as alleged in the action or claim were publicly disclosed.”

The Second Circuit has applied a broad view of the public disclosure bar. Under that standard, earlier disclosures will bar a relator’s claim if they were sufficient to set the government squarely upon the trail of the alleged fraud. The bar is triggered if material elements of the fraud have been publicly disclosed, and does not require that the alleged fraud, itself, have been disclosed. Also, merely providing more specific details about what happened or translating technical information into digestible form does not negate substantial similarity. Public disclosures under the FCA include the news media and disclosures in scientific and scholarly journals.

After summarizing this caselaw, the Court held that before the Relator filed his complaint: (1) the variation between PTH tests was widely known; (2) physicians were advised to adjust their course of treatment accordingly; (3) Second Generation tests, such as the Siemens Test, were known to yield higher absolute results than Third Generation tests, such as the Scantibodies Test; and 4) the average difference between the Siemens and Scantibodies tests had been published in several studies. As a result, the public disclosure bar applied to Relator’s claims.

The Original Source Rule

Having decided that the public disclosure bar applied, the Court examined whether Relator qualified as an “original source” despite the earlier public disclosures. The FCA definition of “original source” was amended in 2010.

Under the pre-amendment version of the FCA, an original source was “an individual who has direct and independent knowledge of the information on which the allegations are based and has voluntarily provided the information to the Government before filing an action under this section which is based on the information.” Under the 2010 version, an “original source” is an individual who “has knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions, and who has voluntarily provided the information to the Government before filing an action under this section.”

Judge Cogan outlined various approaches Courts have taken in deciding whether a Relator is an original source: the new information “materially adds to what has already been revealed through public disclosures” (First Circuit); the Relator’s “key facts” are not “already thoroughly revealed” (Eighth Circuit); Relator’s information must “add value” (D.C. Circuit); Relator must bring “more than expertise or a novel analysis to the table” (S.D.N.Y.).

The Court determined that Relator was not an original source. First, over the course of years, the Siemens and Scantibodies tests had been repeatedly compared to each other in a number of published studies. Second, Relator’s findings did not materially depart from earlier ones and were not sufficiently or qualitatively different from the publicly disclosed information. The Court dismissed Relator’s complaint.

The last several years have brought increasing numbers of qui tam actions brought by Relators who are aware of the potentially significant recoveries those actions can bring. The public disclosure bar and the original source rule provide qui tam defendants with arguments to fend off these cases if they are brought by opportunistic relators who are seeking to trade on public information.

A hospital victimized by the sale of adulterated and mislabeled drug products successful obtained a Court order imposing restitution of over $825,000 earlier this month. EDNY Judge I. Leo Glasser’s decision in United States v. Tighe provides a helpful summary of restitution standards, and applies them to the response efforts of Yale-New Haven Hospital (“YNHH”) to protect patients from potential harm from mold-contaminated IV bags.

Defendants Pled Guilty To Selling Mold-Contaminated IV Bags

In Tighe, the two defendants were the owner and the director of pharmacy at Med Prep Consulting, Inc., a medical drug repackager. They pled guilty to wire fraud for failing to comply with professional standards for drug sterility and by introducing adulterated and misbranded drugs into the marketplace. YNHH sought restitution as one of the healthcare provider victims to whom Med Prep sold drug products.

The allegations of the superseding information were alarming. YNHH discovered visible floating particles in four IV bags of magnesium sulphate that were sold and labeled as sterile by Med Prep. The four IV bags were found to be contaminated with mold. Med Prep had sent YNHH four shipments of contaminated magnesium sulphate drug product. The defendants and Med Prep failed to meet acceptable industry standards in handling sterile drugs, including:

  • Air filters in Med Prep’s cleanroom repeatedly failed inspections over five years.
  • A cart was regularly pushed from Med Prep’s unsanitary warehouse (which contained mold) into the purportedly sterile cleanroom without being sterilized.
  • Med Prep continued to clean surfaces with non-sterile isopropyl alcohol, which is inadequate to kill mold spores.
  • Med Prep replaced expiration dates set by manufacturers with unsupported dates.

Mandatory Restitution for Health Care and Other Fraud

The Mandatory Victim Restitution Act (“MVRA”), 18 USC § 3663A, provides that, for all offenses against property, including fraud, the Court shall order that the defendant make restitution to the victim. Restitution under the MVRA is only available to a statutorily defined victim of the offense, and only for losses that were directly and proximately caused by the offense for which the defendant has been convicted.

Also, where the victim has not suffered injury or death, the MVRA only allows restitution for (1) “damage to or loss or destruction of property,” and (2) “necessary … expenses incurred during participation in the investigation or prosecution of the offense or attendance at proceedings related to the offense.” Although the necessary expenses category lacks definition, Judge Glasser quoted the Second Circuit admonition in United States v. Maynard that it “takes a broad view of what expenses are ‘necessary.’”

Yale-New Haven Hospital’s Restitution Claim

In addressing YNHH’s restitution claim, the Court first recognized that the MVRA applied to the fraud claim and that YNHH was a statutory victim entitled to restitution. While defendants asserted that YNHH’s losses were not proximately caused by the offense, the Court rejected this argument because it was made after the 14-day time period to object to the presentence report. The presentence report had found that the defendants’ conduct directly and proximately caused the contamination at YNHH and the financial losses YNHH incurred. The Court also determined that the defendants’ failure to timely object was strategic, because a timely objection could have undercut their arguments that they were remorseful and accepted responsibility.

The Court next addressed whether YNHH’s losses were (i) “damages to or loss or destruction of property” and (ii) “necessary … expenses incurred during participation in the investigation or prosecution of the offense or attendance at proceedings related to the offense.”

Damages to Property

The Court first determined that YNHH’s “straightforward” losses to property were recoverable, including:

  • The cost of drug products returned to Med Prep; and
  • The cost of terminating all consigned medication housed at Med Prep.

The Court accepted YNHH’s undisputed assertions as to the value of the recalled drug products and the consigned products that were terminated.

Legal Fees and Costs

YNHH also sought recovery of legal fees and costs associated with the collection, review and preservation of documents requested by the government. The Second Circuit has held that “necessary expenses” for restitution can include attorney fees and accounting costs. Here, the Court found these expenses were recoverable because they related to YNHH’s responses to various subpoenas issued by the Department of Justice in connection with the case.

Responses to the Discovery of Contaminated Drug Products

The most interesting question addressed by the Court was whether expenses incurred as a result of YNHH’s responses to the discovery of the contaminated drug products were subject to restitution. These included:

  • Patient and physician notification
  • Purchase of anti-fungal prophylactic medication
  • Patient disease surveillance
  • Hospital administrative time responding to the contamination
  • Pharmacy in-house admixture services and additional staffing
  • Pharmacy response to the contamination

The District Court first noted the Second Circuit’s “broad view” of necessary expenses for restitution, and held that these were necessary expenses for restitution. YNHH needed to sequester and inventory the contaminated drug product from Med Prep, examine the sequestered drug product for mold, and notify patients potentially affected by the contamination. The expenses were necessary to protect YNHH’s ongoing, legitimate interest in the health of its patients and its duty to protect that interest. In addition, YNHH had a need to purchase anti-fungal medication and an obligation to monitor potentially exposed patients. YNHH’s interest in its patients’ health also required it to participate in various regulatory responses, and it needed to replace the drugs that had been contaminated. 

Fraud Victims Should Take the “Broad View” in Seeking Restitution for Losses and Expenses Due to Fraud

Judge Glasser’s decision in United States v. Tighe provides a strong basis for victims of fraud to seek restitution for a broad array of monetary losses arising out of fraud and their involvement in addressing the consequences of the fraud and assisting in the government’s prosecution.

The Department of Justice issued two memoranda at the start of 2018 that may have important effects on health care fraud investigations and prosecutions under the False Claims Act.

The first, Factors for Evaluating Dismissal Pursuant to 31 U.S.C. 3730(c)(2)(A), was issued by Michael Granston, Director of the DOJ Commercial Litigation Branch, Fraud Section, and encourages DOJ attorneys to seek dismissal of a relator’s complaint if the government is declining to intervene in the case.  The memorandum describes the statute authorizing dismissal as “an important tool to advance the government’s interests, preserve limited resources, and avoid adverse precedent”, and it provides a non-exhaustive list of factors that DOJ attorneys should use as a basis for dismissal:

  • Does the qui tam complaint lack merit, whether based on an inherently defective legal theory or frivolous factual allegations?
  • Does the qui tam action duplicate a pre-existing government investigation and add no useful information?
  • Does the qui tam action threaten to interfere with an agency’s policies or the administration of its programs?
  • Is dismissal necessary to protect the government’s litigation prerogatives?
  • Is dismissal necessary to safeguard classified information?
  • Are the government’s costs in monitoring or participating in a qui tam action continued by the relator likely to exceed any expected gain?
  • Do the relator’s actions frustrate the government’s efforts to conduct a proper investigation?

The government has sought to dismiss declined qui tam complaints in the past, but more often has allowed the relator to go ahead with the case.  The Granston Memorandum emphasizes the advantages to the government in ending non-intervened qui tam cases early, particularly for saving government resources and avoiding adverse decisions from the Court.  If aggressively followed, this policy may result in less False Claims Act cases proceeding to litigation.

The second memorandum, Limiting Use of Agency Guidance Documents In Affirmative Civil Enforcement Cases, was issued by former Associate Attorney General Rachel Brand, and follows a November 2017 memorandum from Attorney General Sessions that prohibited DOJ components from issuing guidance documents that would effectively bind the public without undergoing the rulemaking process.  The Brand Memorandum extends this concept to government False Claims Act theories based on a failure to follow agency guidance documents.  “Department litigators may not use noncompliance with guidance documents as a basis for proving violations of applicable law” in affirmative civil enforcement cases.  The policy seeks to avoid allowing guidance documents to create binding requirements that do not exist by statute or regulation.  The government must prove noncompliance with the statute or regulation, and cannot use noncompliance with an agency guidance document as a substitute.  The Brand Memorandum will limit government theories of False Claims Act liability that are based on the violation of agency guidance documents as opposed to the relevant statute or regulation.

It’s flu season again. Your PCP at WPMG is thinking of you!

So began the health care provider’s text message that prompted this month’s Second Circuit decision applying the Telephone Consumer Protection Act to a flu shot reminder, Latner v. Mount Sinai Health System, Inc.

Plaintiff had gone to defendant West Park Medical Group (WPMG) in 2003 for a routine health examination. While there, he provided contact information including his cell phone number, and signed, among other forms, a notification record that consented to defendants using his health information “for payment, treatment and hospital operations purposes.”

In 2011, defendants hired a third party to send mass messages, including flu shot reminder texts for WPMG. In 2014, plaintiff received the text message above, which also stated: Please call us at 212-247-8100 to schedule an appointment for a flu shot. Defendants had sent flu shot reminder texts to all active patients of WPMG who had visited the office within the prior three years. Plaintiff had visited the office in 2011, declining immunizations.

Plaintiff alleged a violation of the Telephone Consumer Protection Act (TCPA), which makes it unlawful to send texts or place calls to cell phones through automated telephone dialing systems, unless the recipient consents or an exemption applies.

The Second Circuit engaged in a two-step process to decide that the defendants did not violate the TCPA. First, the Court held that the flu shot reminder text message was within the scope of an FCC Telemarketing Rule providing that written consent was not needed for text messages that deliver a health care message made by, or on behalf of, a HIPAA covered agency.

The Court next determined that, although the FCC Telemarketing Rule exempts written consent, text messages within the healthcare exception are still covered by the TCPA’s general consent requirement. The Court held, however, that plaintiff had given his prior express consent by providing his cell phone number, acknowledging receipt of privacy notices, and agreeing that defendants could share his information for treatment purposes and to recommend possible treatment alternatives or health-related benefits and services.

The lesson of this case: the pile of forms you sign on the clipboard in the waiting room may lead to texted health care messages down the road.

Last week, in United States v. Scully, the Second Circuit vacated the conviction of a distributor of pharmaceutical products on misbranding charges due to evidentiary issues surrounding his advice-of-counsel defense at trial.

The Rise and Fall of Pharmalogical

William Scully and Rodi Lameh founded Pharmalogical, Inc,, planning to acquire pharmaceutical products from manufacturers and sell them to doctors, hospitals and clinics. Eventually, Scully set the company on the course of “parallel importing,” importing foreign versions of FDA-approved products into the United States from European distributors. The company purchased these drugs at reduced prices and sold them to customers in the United States at under-market prices. The product labels for the products did not contain a National Drug Code, so Scully and Lameh obtained an attorney opinion that Pharmalogical had no reason to believe it was in violation of any statute or regulation.  This initially satisfied purchasers that Pharmalogical was authorized to sell.  Later, when Pharmalogical was advised by the FDA that foreign-made versions of FDA-approved drugs were considered unapproved, it obtained a second legal opinion that the importation of the product would not violate United States criminal laws. After the FDA executed warrants to search Pharmalogical’s offices, Scully and Lameh each retained individual lawyers, and Pharmalogical ceased selling products.

Scully and Lameh were indicted for using Pharmalogical to import foreign versions of prescription drugs and medical devices for use in the United States. Lameh pleaded guilty to conspiracy to distribute misbranded drugs and cooperated with the government. Scully went to trial.

At trial, Scully introduced an advice-of-counsel defense, contending that he relied in good faith on the advice of attorneys concerning the legality of his conduct. Scully called the attorney who provided opinions to Pharmalogical on the legality of the sales.  After the government effectively undermined the defense based on that testimony, Scully sought to testify himself that his individual attorney advised him the business was legal, rather than calling the second attorney to testify.  EDNY Judge Arthur Spatt ruled that such testimony, while not hearsay as it went to state of mind, was inadmissible under the balancing inquiry of FRE 403, particularly where the second attorney was available to testify.  The jury ultimately found Scully guilty. On appeal, Scully challenged the exclusion of evidence of his attorney’s legal advice and the jury instructions on the advice-of-counsel defense.

Evidence of Legal Advice

The Second Circuit held that the district court erred in balancing the probative value and prejudicial effect of the evidence of Scully’s testimony as to his individual attorney’s legal advice under FRE 403. The statement was not hearsay as it was offered to prove the defendant’s state of mind and not for its truth. Moreover, the Second Circuit held that it was not appropriate to require Scully to call his attorney as a witness, as the government had ample means to challenge Scully’s testimony, including by cross-examining Scully or by calling the attorney as a rebuttal witness. The Court determined that Scully was not legally required to call his attorney, but was competent to testify about his own state of mind, and the question of his credibility should have been up to the jury. Scully was therefore entitled to a new trial.

Advice-Of-Counsel Jury Instruction

While Scully waived arguments concerning the jury instruction on advice-of-counsel, the Second Circuit provided guidance on the jury instruction as the case was being remanded for a new trial.

The Circuit noted that, in a fraud case, the advice-of-counsel defense is not an affirmative defense, but is instead evidence that, if believed, can raise a reasonable doubt on whether the government has proved the required element of the offense that the defendant had an “unlawful intent.” The jury instruction must therefore advise the jury that the government at all times bears the burden of proving beyond a reasonable doubt that the defendant had the state of mind required for conviction. The district court should therefore not instruct the jury that the defendant “has the burden” of establishing the defense or must “satisfy” the elements of the defense. Instead, the Court referenced model jury instructions from Judge Leonard Sand and the Seventh Circuit, demonstrating that the defendant need not establish good faith, but that the government must carry its burden of proof to establish the intent element of the crime.

False Claims Act whistleblowers expose themselves to significant risks by coming forward and asserting claims of fraud against the government. Often, the whistleblowers, called relators under the False Claims Act, would prefer to maintain their anonymity for personal or professional reasons, but their options to do so are limited.

A False Claims Act case is initially filed under seal, and remains under seal while the government investigates. However, once the government either intervenes in the action or declines to intervene, the seal is lifted, and the False Claims Act complaint is publicly filed. The complaint, and the identity of the relator, become public knowledge, even if the relator does not intend to go forward with the case.

In United States ex rel. Nash v. UCB, Inc., SDNY District Judge Thomas Griesa addressed a relator’s multi-pronged effort to remain unknown. The relator alleged that his former employer, UCB, Inc., had defrauded the federal government out of millions of dollars in Medicaid funds. The Government declined to intervene, however, and the relator intended to not proceed and to dismiss the action. The relator feared that his current employer might retaliate against him when it became known that he had filed an FCA case against his former employer. The relator sought to permanently maintain a seal on all documents in the case, or alternatively, to allow use of the pseudonym “John Doe” and to remove any information from the complaint that could reveal his identity.

The Court first noted the “firmly rooted” presumption of public access to judicial documents, which applies to pleadings such as a complaint. As to relator’s fear of retaliation, the Court did not find this risk to outweigh the presumption of public access to judicial documents. Moreover, the Court pointed to the False Claims Act retaliation provision, 31 USC § 3730(h), which protects a relator from discrimination or retaliation based on acts taken under the False Claims Act. The Court determined that this provision would protect against what it considered a “speculative fear” of employment retaliation. The Court denied the application to keep the case under seal.

Next, relator sought to have the complaint filed under a “John Doe” pseudonym, with the elimination of any identifying information. Federal Rule of Civil Procedure 10(a), however, states that “The title of the complaint must name all the parties.” Courts have discretion to allow a pseudonym in special circumstances, where the need for anonymity outweighs prejudice to other parties and the public interest, but the bar is high. Factors courts consider include:

  • Highly sensitive and personal matters
  • Risk of retaliatory physical or mental harm to the party or innocent non-parties
  • Likely severity of alleged harms
  • Particular vulnerability of party to possible harms of disclosure
  • Whether challenge is to Government or private actions
  • Possible mitigation of prejudice by the Court

Judge Griesa found that the relator’s articulated need for anonymity was based on “attenuated and speculative risks of harm,” particularly where the concern was not with the former employer that the relator had sued, but with the current employer that he had not. The Court declined to allow a pseudonym, stating that the public “has a right to know who is using their courts.”

The Court did allow relator’s final request, that references to his current employer be redacted from the filed version of the complaint. The Court found the weight of presumption of public access to the identity of relator’s current employer to be low. Moreover, redactions would not affect the public interest, as the substance of the fraud allegations would be clear from the unredacted portions of the complaint.

Once a case is filed under the False Claims Act, the relator loses control over remaining anonymous. A resort to yet another lawsuit if there is retaliation may provide cold comfort, but the Courts are very reluctant to permit a relator to remain anonymous, even where the government has declined and the case will be dismissed.  Balancing this risk is one of the many considerations for relator and relator’s counsel in commencing a False Claims Act case.