Fraud and Abuse and Stark

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.

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.

Few, if any, in the medical industry are unfamiliar with the federal Anti-Kickback Statute (“AKS”).  Under AKS, those giving or receiving compensation for referrals for items or services reimbursed by the federal healthcare programs are subject to criminal prosecution.  The statute is intended to prevent exploitation of the federal healthcare system, avoid unnecessary inflation of program costs and encourage fair competition in the industry.

AKS prohibits, among other things, the knowing and willful payment or receipt of any form of compensation to induce or reward referrals involving any item or service payable by federal healthcare programs.  “Federal healthcare programs” include more than just Medicare and Medicaid – “any plan or program providing health care benefits, whether directly through insurance or otherwise, that is funded directly, in whole or part, by the United States government (other than the Federal Employees Health Benefits Program), or any state health care program” is included.  This means that remuneration for referrals in connection with items and services that are reimbursable under TRICARE, the Veterans Administration, Federal Employees’ Compensation Act, and block grant programs are all subject to prosecution under AKS.


Where items or services are not reimbursable by a federal healthcare program, providers and referring parties are not subject to AKS prosecution.  However, due to an emerging trend in prosecution, the absence of reimbursement from federal healthcare programs should no longer leave providers and referral sources with a sense of security that they cannot be prosecuted for kickback arrangements.


Prosecutors are increasingly bringing charges against payers and recipients of remuneration for referrals in the medical arena under the Travel Act.  The Travel Act criminalizes the use of the United States mail and interstate or foreign travel for the purpose of engaging in certain specified criminal acts.  The Travel Act typically enforces two categories of state laws – laws prohibiting commercial bribery (i.e. corrupt dealings to secure an advantage over business competitors) and laws addressing illegal remuneration, including specific provisions regarding improper payments in connection with referral for services.


In two very recent high profile cases, prosecutors brought charges against those allegedly involved in kickback schemes under the both AKS and the Travel Act – Biodiagnostic Laboratory Services in New Jersey and Forest Park Medical Center in Texas.  Both cases have resulted in several plea bargains, yet both have charges under AKS and the Travel Act that are still pending.  While no court has directly ruled on the merits of prosecuting kickback schemes for medical services and items under the Travel Act, it is noteworthy that, in the Forest Park Medical Center case, the charges under the Travel Act survived a motion to dismiss at the district court level just last month.


All parties involved in referral arrangements for medical items or services should be on heightened alert as a result of this development.  Whereas AKS can only be used to prosecute parties to a kickback arrangement where federal healthcare program funds are at issue, the use of the Travel Act may broaden prosecutors’ reach to the private payor sector, even where federal healthcare programs are not involved.

The Second Circuit recently agreed to accept an interlocutory appeal to decide the question whether a violation of the False Claims Act’s “first-to-file” rule compels dismissal of the complaint or whether it can be cured by the filing of an amended pleading.

In United States ex rel. Wood v. Allergan, Inc., Relator John Wood brought FCA claims against Allergan, 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 free drugs and other goods to physicians in exchange for them providing the company’s brand name drugs to Medicare and Medicaid patients.  SDNY District Judge Jesse Furman denied most of Allergan’s motion to dismiss in an 89-page decision, deciding several FCA first-to-file issues and certifying two for interlocutory appeal to the Second Circuit.

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 primary purpose of the first-to-file rule is to help the Government uncover and fight fraud. The rule encourages prompt disclosure of fraud by creating a race to the courthouse among those with knowledge of the fraud.

Wood was not the first relator to bring FCA claims against Allergan for the alleged conduct. Two prior actions had been brought and were pending when the Wood qui tam complaint was filed. Therefore, at the time Wood’s qui tam complaint was filed, it ran afoul of the first-to-file bar and was subject to dismissal.

The Prior-filed Actions Were Dismissed Before Wood’s Action Was Unsealed and the Third Amended Complaint Was Filed

The Wood complaint, however, was under seal for several years, and Wood amended his complaint twice before the seal was lifted. While the Wood complaint 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, arguing that when Wood’s initial qui tam complaint was filed, there were two pending actions alleging the same factual allegations.

The “First-to File” Bar Is Not Jurisdictional

Judge Furman first addressed whether the “first-to-file” bar is jurisdictional. Although the majority of circuit courts have held that it is, the district court’s holding in its March 31, 2017 decision that the bar is not jurisdictional foreshadowed the Second Circuit’s similar holding four days later, in United States ex rel. Hayes v. Allstate Insurance Co.  The Circuit in Hayes stated that the first-to-file rule provides that “no person other than the Government” may bring an FCA claim that is “related” to a claim already “pending.” The Court noted that the statutory language did not speak in jurisdictional terms or refer to the jurisdiction of the courts, in contrast to other sections of the FCA. As Congress is presumed to act intentionally when it includes jurisdictional language in one statutory section but omits it in another, the Court held the a court does not lack subject matter jurisdiction over an action barred on the merits by the non-jurisdictional first-to-file rule.

An Amendment After Dismissal of the Prior Action Can “Cure” a First-to-File Violation

The district court next addressed the question of whether the first-to-file bar required dismissal of Wood’s qui tam complaint. In Kellogg Brown & Root Services, Inc. v. United States ex rel. Carter, the Supreme Court had held that “an earlier [FCA] suit bars a later suit while the earlier suit remains undecided but ceases to bar that suit once it is dismissed.”  Wood therefore would be able to bring a new FCA claim as the two prior actions had been dismissed.

However, during the years that the case had been sealed, the statute of limitations had expired on most of Wood’s claims, so a dismissal without prejudice and a re-filing of his complaint would result in a dismissal of the claims on limitations grounds. The district court was therefore faced with a question the Supreme Court did not decide: whether a violation of the first-to-file bar can be “cured” by amending or supplementing the complaint in the later-filed action after dismissal of the earlier actions.

The district court held that first-to file violation can be cured by an amended or supplemented pleading.  The court noted that most courts answering this question in the negative had relied in large part on a conclusion that the first-to-file bar is jurisdictional. The district court in Wood, and later the Second Circuit, held that the bar is non-jurisdictional. The district court noted that courts routinely allow plaintiffs to cure violations of non-jurisdictional rules by amendment under Fed. R. Civ. P. 15. Also, allowing an amendment to cure a violation advances the primary purpose of the FCA, to permit the government to recover for fraud. The court opined that barring a relator in Wood’s position from curing his violation of the rule would undermine, rather than advance, the purposes of the FCA.

The Amendment Relates Back to the Date of the Original Complaint

The parties also disputed whether, for purposes of the statute of limitations, the relevant complaint was the initial complaint, filed when the prior actions were pending, or the third amended complaint, the first one filed after they had been dismissed. The court recognized that the “touchstone” of Rule 15 is whether the original pleading put the defendant on notice of the relevant claims, and that an FCA defendant is often not on notice of a qui tam complaint because it is under seal. Nevertheless, the court concluded that any such delay is beyond the relator’s control, and an otherwise diligent relator should not have claims stripped away when the government and not the relator is to blame for the defendant not receiving notice. The district court therefore held that the third amended complaint related back to the original complaint for limitations purposes.

The Second Circuit Will Address The First-to-File Issues

In August, the Second Circuit accepted the interlocutory appeal of two issues:

  1. Whether a violation of the FCA’s “first-to-file” rule requires dismissal or can be “cured” through the filing of a new pleading after the earlier-filed action has been dismissed; and
  2. If a violation of the first-to-file bar is curable, whether the FCA’s limitations period is measured from the date of the relator’s curative pleading or the original complaint.

Last week, the Second Circuit held that a False Claims Act relator does not have to plead details of specific alleged false billings or invoices to the government, as long as he can allege facts leading to a strong inference that specific claims were submitted and that information about them are peculiarly within the defendant’s knowledge.

In United States ex rel. Chorches v. American Medical Response, Inc., Paul Fabula was an emergency medical technician for AMR, the largest ambulance company in the United States. He alleged that AMR falsely certified ambulance transports as being medically necessary and submitted claims it knew were not medically reimbursable under Medicaid. He alleged that AMR routinely made EMTs and paramedics revise or re-create reports to include false statements demonstrating medical necessity in order to qualify for Medicaid reimbursement. Fabula subsequently declared bankruptcy, and the bankruptcy trustee became the relator.

Qui tam complaints, which allege fraud, are subject to Fed. R. Civ. P. 9(b)’s particularity requirement. The Second Circuit determined that relator had adequately alleged a scheme to defraud. Relator, however, admittedly did not have personal knowledge of exact billing numbers, dates, or amounts for claims submitted to the government.

The focus of the Second Circuit’s inquiry, therefore, was whether every qui tam complaint must allege specific identified false billings or invoices. The Court answered in the negative, holding that “a complaint can satisfy Rule 9(b)’s particularity requirement by making plausible allegations creating a strong inference that specific false claims were submitted to the government and that the information that would permit further identification of those claims is peculiarly within the opposing party’s knowledge.”

In Chorches, the Court found that the relator had met this standard by pleading sufficient facts, on personal knowledge, to demonstrate that billing information was peculiarly within the knowledge of AMR and that he was unable, without the benefit of discovery, to provide billing details for claims submitted by AMR to the government. Relator had also sufficiently alleged facts on personal knowledge supporting a scheme to defraud and a strong inference that false claims were actually submitted to the government.

This issue had been addressed by several other circuits, and in 2016, the Second Circuit noted a seeming circuit split on whether an FCA relator must allege the details of specific examples of actual false claims. In Chorches, however, the Court concluded that “reports of a circuit split are, like those prematurely reporting Mark Twain’s death, ‘greatly exaggerated.’” The Court then engaged in an extensive analysis of cases in other circuits, concluding that its pleading standard is fully consistent with both the emerging consensus in other circuits and its own precedents.

Several district courts in the Second Circuit have required a strict pleading of specific facts concerning individual billings or invoices to the government. Those decisions will now have to be re-examined in light of the pleading standard set by the Second Circuit in Chorches: “Rule 9(b) does not require that every qui tam complaint provide details of actual bills or invoices submitted to the government, so long as the relator makes plausible allegations . . . that lead to a strong inference that specific claims were indeed submitted and that information about the claims submitted are peculiarly within the opposing party’s knowledge.”

The Second Circuit also held in Chorches that the FCA’s public disclosure bar is not jurisdictional, and that an alleged refusal to falsify a patient report is sufficient at the pleading stage to qualify as protected activity for an FCA retaliation claim.

Health care fraud prosecutions in the Second Circuit and throughout the country have typically sought forfeiture money judgments against all defendants for the proceeds of the fraud obtained by all members of a health care fraud conspiracy.  The Supreme Court recently curtailed these efforts in Honeycutt v. United States.  In Honeycutt, the Court held that the forfeiture statute only permits a forfeiture money judgment for property a defendant actually acquired as part of the crime, not all proceeds of the conspiracy.

In Honeycutt, defendant Terry Honeycutt managed sales and inventory at his brother’s hardware store.  The brothers were prosecuted for conspiring to sell iodine with the knowledge that it was being used to manufacture methamphetamine.  The government sought a forfeiture money judgment of $269,751.98, constituting the hardware store’s profits.  The defendant’s brother pled guilty and agreed to forfeit $200,000.  The government sought and obtained a forfeiture money judgment against defendant Terry Honeycutt for $69,751.98, even though he did not personally benefit from the hardware store’s profits.  The Sixth Circuit held that the conspiring brothers were “jointly and severally liable for any proceeds of the conspiracy,” joining several circuits, including the Second Circuit, in an expansive view of criminal forfeiture.

Justice Sotomayor’s decision in Honeycutt strictly followed the language of the statute, 21 U.S.C. § 853, which mandates forfeiture of “any property constituting, or derived from, any proceeds the person obtained, directly or indirectly, as the result of” certain crimes.  The Court concluded that the provisions of the statute limit forfeiture to property the defendant himself actually acquired, not property obtained by other conspirators.  The Court held that the plain text of the statute and the limitation of forfeiture to property acquired or used by the defendant “foreclose joint and several liability for co-conspirators.”

Prosecutors have routinely sought to forfeit all proceeds of health care fraud and other conspiracies from all co-conspirators.  Thus, minor players in a conspiracy with significant assets could find themselves liable for a forfeiture money judgment well in excess of the proceeds they actually received from their crime.  In Honeycutt, the Supreme Court refused to apply the tort concept of joint and several liability to the forfeiture statutes, and has taken a sweeping tool away from the government.


According to the 2016 Kaiser/HERT Employer Health Benefits Survey, the average annual premium for employer-sponsored family health insurance coverage in 2016 was $18,142 – representing a 20% increase since 2011 and a 58% increase since 2006.  As the cost of healthcare coverage has continued to rise dramatically, patients are seeing a reduced level of personal care.  The average wait to schedule an appointment with a doctor in the United States is 24 days – up 30% since 2014.  Meanwhile, physicians report that they spend, on average, only 13 to 24 minutes with a patient and of that time, approximately 37% of it is spent on EHR and other administrative tasks.


In 2010, the Affordable Care Act imposed a requirement that most Americans have insurance coverage.  But it also identified direct primary care as an acceptable option.  Whereas concierge and direct-pay medicine had once been limited to a very wealthy consumer base, it was suddenly poised to hit the mainstream.  And it can be a win-win for both physicians and consumers – physicians have the potential to devote more time to each patient and less time to paperwork, and consumers can pay for faster, more personalized attention from a physician instead of paying the pricey premiums now charged in the market for traditional insurance coverage.


But is concierge medicine right for every physician?


  1. Do you want to continue to participate in Medicare? If so, you will still be required to bill Medicare for your concierge patients and will not be able to charge Medicare patients extra for Medicare covered services.  Nor can you charge a membership fee (aka an access fee) that includes extra charges for services Medicare usually covers.  (The exception is if you do not accept assignment, in which case you can charge up to 15% more than the Medicare-approved amount for a Medicare covered services.)  If Medicare usually covers a service but will not pay for it, you must still provide the patient with an ABN.  And even if you do choose to opt out of Medicare, give extreme care to following the proper procedures or you could be subjected to substantial penalties.


  1. You still need to price services at fair market value. Even if you opt out of Medicare, providing “free” services because they are included in the access fee could run afoul of state anti-kickback laws.  Obtain advice regarding your state laws before setting your contract, and set a fair market value at which you provide each service.


  1. Check with your state to make your concierge/direct-pay contract is in compliance. Some states – including New York and New Jersey – have questioned whether these arrangements are deemed to be the practice of insurance but even where they are not, certain provisions of state insurance law could apply to your contract.


  1. Termination of existing patients. You can expect attrition by many, if not most, of your existing patients when transitioning from a traditional practice to a concierge or direct-pay model.  You will need to comply with state laws and ethical rules with regard to finding alternate care.


  1. Compliance with HIPAA. To the extent you are not participating in insurance or Medicare, you might not be a “covered entity” under HIPAA; however, there are many state privacy and confidentiality laws that you will still be required to comply with.


In some instances, transitioning to a concierge or direct-pay business model could be a win-win for both doctors and patients.  However, there are many legal issues that require careful consideration as you set up your practice.  There are many consulting firms that specialize in planning this transition, and a good attorney can help you avoid any pitfalls and ensure compliance with all applicable laws and regulations.

The Medicaid Fraud Control Unit (MCFU) of the New York State Office of the Attorney General has recently issued restitution demand letters to providers for allegedly entering into percentage-based contracts with their billing agents. The MCFU letters cite the Medicaid Update March 2001, titled “A Message for Providers Using Service Agents as follows:

Billing agents are prohibited from charging Medicaid providers a percentage of the amount claimed or collected. In addition, such payment arraignments, when entered into by a physician, may violate the Education Law and State Education Department’s regulations on unlawful fee-splitting.

A physician will be guilty of misconduct if he or she permits:

any person to share in the fees for professional services, other than: a partner, employee, associate in a professional firm or corporation, professional subcontractor or consultant authorized to practice medicine, or a legally authorized trainee practicing under the supervision of a licensee. This prohibition shall include any arrangement or agreement whereby the amount received in payment for furnishing space, facilities, equipment or personnel services used by a licensee constitutes a percentage of, or is otherwise dependent upon, the income or receipts of the licensee from such practice, except as otherwise provided by law with respect to a facility licensed pursuant to article twenty-eight of the public health law or article thirteen of the mental hygiene law.

See Educ. Law §6530(19)*.

A physician is subject to professional misconduct charges if he or she has

directly or indirectly requested, received or participated in the division, transference, assignment, rebate, splitting, or refunding of a fee for, or has directly requested, received or profited by means of a credit or other valuable consideration as a commission, discount or gratuity, in connection with the furnishing of professional care or service . . .

See Educ. Law §6531.

The prohibition against fee-splitting is related to the state anti-kickback law which prohibits physicians from

[d]irectly or indirectly offering, giving, soliciting, or receiving or agreeing to receive, any fee or other consideration to or from a third party for the referral of a patient or in connection with the performance of professional services . . .

See Educ. Law §6530 (18).

Licensed professionals in New York State must review their contracts to verify that the compensation paid to their agents is not based on a percentage of fees for professional services.

*A similar rule applies to other licensed professionals. See N.Y. Rules of the Board of Regents §29.1(b)(4).

**In addition to the Federal Anti-Kickback Statute at 42 U.S.C. §1320a-7b(b), New York has enacted its own wide-reaching anti-kickback and anti-referral laws and regulations seeking to eliminate fraud and abuse in healthcare on a statewide basis. The state anti-kickback statue is set forth in the Social Services Law (See N.Y. Social Services Law § 366-d). The N.Y. Education Law addresses matters of professional misconduct rather than violations of fraud and abuse laws and regulations.

The Supreme Court recently allowed liability through the implied certification theory of the False Claims Act (FCA), which was raised and upheld in Universal Health Services, Inc. v. United States ex rel. Escobar. The decision provided for a new applicable standard and resolved the split among circuit courts on whether to recognize the theory.

In Escobar, a teenaged patient was receiving health services from a mental health facility. The patient had an adverse reaction to medication prescribed and died of a seizure. The parents later discovered United Health Services sought reimbursement from MassHealth (the Massachusetts State Medicaid Program) for mental health services provided at the facility by individuals who did not meet the standards for licensure and other requirements. The parents then filed a qui tam suit relying on the implied certification theory of liability. The District Court ruled against the parents finding the claims for reimbursement were not expressly false because the facility made no express statement regarding the service providers. United States ex. rel. Escobar v. Universal Health Services, 780 F.3d 504 (1st Cir. 2015). On appeal, the First Circuit rejected the bright line approach and determined that compliance with licensure and other MassHealth regulatory requirements were conditions of payment sufficient to support an FCA suit. United States ex. rel. Escobar v. Universal Health Services., 780 F.3d 504 (1st Cir. 2015)

The Supreme Court held that implied false certification is a proper basis for liability under the False Claims Act where (1) “the claim does not merely request payment, but also makes specific representations about the goods or services provided”, and (2) “the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths.” The Court focused on defining the FCA’s materiality standard as whether the government’s knowledge of the noncompliance “would have” affected their payment decision rather than “could have”. The Court further explained that whether an obligation was a condition of payment relates to, but is not dispositive of, materiality.

Now, after Escobar, FCA plaintiffs must overcome a more demanding materiality standard when relying on implied false certification to establish False Claims Act liability.

Special thanks to Law Clerk Joanna Lima for her assistance in preparing this blog post.

The Supreme Court held last week that in a federal health care fraud prosecution, the Sixth Amendment prevents the government from obtaining a pretrial freeze of assets that were untainted by the alleged crime and that defendant sought to use to pay her lawyer.

In Luis v. United States, the government alleged that the defendant had been engaged in paying kickbacks and conspiring to commit health care violations, and had fraudulently obtained close to $45 million.  The government sought a pretrial order restraining $2 million under 18 U.S.C. § 1345, which allows a restraint on property obtained as a result of health care fraud or “property of equivalent value.”  Here, however, the property the government sought to restrain was not connected with the alleged crime, and defendant sought to use those funds to hire counsel to defend her in the criminal case.

The Supreme Court held that the pretrial restraint of legitimate, untainted assets needed to retain counsel of choice violates the Sixth Amendment. Justice Breyer’s plurality opinion first emphasized that the Sixth Amendment right to counsel is “fundamental” and “guarantees a defendant the right to be represented by an otherwise qualified attorney whom that defendant can afford to hire.” The government argued that the important interests of keeping assets available for statutory penalties and compensation of victims justified the restraint.

Justice Breyer found controlling the fact that the funds at issue were untainted by the alleged crimes, so they belonged to the criminal defendant “pure and simple.” In contrast, tainted funds—assets connected to a crime—may be subject to pretrial restraint.  The Court, for example, has held that tainted funds subject to forfeiture may be restrained pretrial even if the defendant seeks to use those funds to pay a lawyer. Caplin & Drysdale v. United States, 491 U.S. 617 (1989); United States v. Monsanto, 491 U.S. 600 (1989).  A significant factor in the forfeiture cases was that title to forfeited property passes to the government at the time of the crime.  The government, however, had no present interest in the defendant’s untainted funds in the case before the Court.

While in some circumstances a party without a present interest may restrain property, here the criminal defendant sought to use the funds to hire counsel, and the Sixth Amendment right to counsel does not permit such a restraint.  Justice Breyer noted that accepting the government’s position could erode the right to counsel, as Congress may provide more statutory provisions allowing for restraint of untainted assets equivalent in value to the criminal proceeds.

The decision did not break along usual lines for the Court. The plurality opinion authored by Justice Breyer was joined by Chief Justice Roberts and Justices Ginsberg and Sotomayor.  Justice Thomas concurred in the judgment, writing that he would not engage in any balancing and would hold strictly that the Sixth Amendment does not allow a pretrial asset freeze infringing the right to counsel.  Justices Kennedy, Alito and Kagan dissented, asserting on various grounds that where the government has established probable cause to believe that it will eventually recover all of the defendant’s assets, she has no right to use them pretrial to pay for a lawyer.

In the end, the decision draws a clear Constitutional line between: (1) tainted funds, which may be subject to pretrial restraint, and (2) innocent or untainted funds needed to pay for counsel, which may not.