Whistleblower Law Newsletter
In This Issue
2. SEC Issues New Whistleblower Regulations
3. Vendor Gifts to Doctors: The Intersection of the Anti-Kickback Statute and the False Claims Act
4. Significant Whistleblower Settlements, First Half of 2011
5. Check Out Our Website and Blog
1. Can Information Obtained Through Freedom of Information Act Be the Basis for a Qui Tam Action Under the False Claims Act? Supreme Court Says “No.”
By Andrea Gold, Associate
On May 16, 2011, the Supreme Court issued its decision in Schindler Elevator Corp. v. United States ex rel. Kirk, No. 10-188, holding that a federal agency’s written response to a Freedom of Information Act (“FOIA”) request constitutes a “report” for purposes of the public disclosure bar of the False Claims Act (“FCA”). Writing for the Court, which was split 5-3, Justice Thomas explained that, because the term “report” is not defined in the public disclosure bar, the Court must rely upon its “ordinary meaning.” As such, the Court cited dictionary definitions that describe “report” as “something that gives information” and a “notification.” Thomas concluded that such expansive commonplace definitions were “consistent with the generally broad scope of the FCA’s public disclosure bar.”
The Court further explained that there was “no textual basis for adopting a narrower definition of report.” Specifically, Thomas criticized the lower court’s analysis because it only analyzed the words “immediately surrounding” the term “report” rather than employed an evaluation of the statute as a whole. The Court buttressed its position by arguing that the “ordinary meaning” of report-presumably something that gives information” and a “notification-does not “render superfluous other sources of public disclosure” contained in the statute.
Judge Thomas attacked the relator, Daniel Kirk, who is a former employee of Schindler Elevator, stating that his case is a “classic example of the ‘opportunistic’ litigation that the public disclosure bar is designed to discourage.” Yet, and as noted by Justice Ginsburg in her dissent, which was joined by Justices Breyer and Sotomayor, the Court reached this conclusion despite the fact that Kirk was using the FOIA request merely as “corroboration for his allegations”-which were based on personal knowledge-rather than as the sole evidentiary basis for his complaint.
One bright spot in the opinion for whistleblowers is certain language used by Justice Thomas in discussing whether a relator’s knowledge is “based upon” the information already publicly disclosed. Namely, in addressing Schindler’s argument that, if responses to FOIA requests are considered “reports” for purposes of the public disclosure bar, unscrupulous defendants will “insulate themselves from liability by making a FOIA request for incriminating documents,” Justice Thomas stated that Schindler’s argument, presumably wrongly, “assumes that the public disclosure..in a written FOIA response forever taints that information for purposes of the public disclosure bar.” Rather, as Justice Thomas noted, a relator could “come by that information from different source [other than the FOIA response]” and, as such, have “a legitimate argument that his lawsuit is not ‘based upon’ the initial public disclosure.”
This interpretation of “based upon” by Justice Thomas-which indicates that for a relator’s knowledge to be “based upon” the public information, the relator must have relied upon the information-supports the minority, and less stringent, view endorsed by the Fourth Circuit. See, e.g., U.S. ex rel. Siller v. Becton Dickinson & Co. By & Through Microbiology Sys. Div., 21 F.3d 1339, 1348 (4th Cir. 1994) (To “base upon” means to “use as a basis for.” Rather plainly, therefore, a relator’s action is “based upon” a public disclosure of allegations only where the relator has actually derived from that disclosure the allegations upon which his qui tam action is based.”) Most circuits have taken the broader view, which is more harmful to whistleblowers, that “a qui tam suit is ‘based upon’ a public disclosure whenever the allegations in the suit and in the disclosure are the same, ‘regardless of where the relator obtained his information.’” Minnesota Ass’n of Nurse Anesthetists v. Allina Health Sys. Corp., 276 F.3d 1032, 1044-7 (8th Cir. 2002) (adopting majority rule and collecting cases).
In sum, although the Court’s broad reading of the public disclosure bar in Schindler Elevator is damaging for whistleblowers who seek to bring well-supported FCA claims, there is at least some limited language that may be beneficial to relators and it is possible that Congressional action will limit, or nullify, the Court’s decision. Namely, just as Congress abrogated the Court’s decision in Graham County Soil and Water Conservation District v. United States ex rel. Wilson, 130 S. Ct. 1396 (2010)-a case relied upon by the Schindler Elevator Court-by amending the FCA (see 31 U.S.C. § 3730(e)(4)(A)(i)-(ii)), Congress could take similar action here. Indeed, Justice Ginsburg said as much in her dissent, stating that the Court’s decision “severely limits whistleblowers’ ability to substantiate their allegations” and calling the problem one that is “worthy of Congress’ attention.”
2. SEC Issues New Whistleblower Regulations
By Lorenzo Cellini, Associate
On May 25, 2011 the Securities and Exchange Commission (“SEC”) adopted final rules to implement the whistleblower provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). The Dodd-Frank Act created a whistleblower program that requires the SEC to pay an award to whistleblowers that “voluntarily” provide “original” information about violations of federal securities laws that result in monetary sanctions exceeding $1,000,000. The whistleblower is entitled to between 10% and 30% of the total amount of money collected by the SEC. The Dodd-Frank Act also prohibits employers from retaliating against employees for reporting securities violations to the SEC.
The rules, which go into effect on August 12, 2011, define certain terms from the Dodd-Frank legislation that are essential to the operation of the whistleblower program, and explain the SEC’s procedures for enforcing the program. The rules establish the Office of the Whistleblower, which will be responsible for administering the whistleblower program. In order to qualify for an award, whistleblowers must submit information regarding possible securities law violations to the Office of the Whistleblower by completing a Form TCR signed under penalty of perjury. The form may be submitted online via the Office of the Whistleblower’s website, facsimile, or regular mail. In addition, in order to protect whistleblowers from retaliation, the Act allows a whistleblower to anonymously submit information to the Office of the Whistleblower, as long as the whistleblower is represented by an attorney who submits the information on the whistleblower’s behalf. The SEC and any other government agencies assisting the SEC with its investigation must keep the information provided by the whistleblower confidential until the SEC is required to disclose the information in connection with a public proceeding initiated by the SEC.
Consistent with the Dodd-Frank Act, the rules explain that to qualify for an award, the information submitted by the whistleblower must be “original,” which they define as information derived from the whistleblower’s own independent knowledge that is not publicly available, unless the whistleblower was the original source of the publicly available information. But a whistleblower may still qualify for an award for submitting his or her own independent analysis of possible securities violations, even though that analysis is based on publicly available information. The rules also state that the information must be “voluntarily” submitted to the Office of the Whistleblower, meaning that it must be provided by an individual who does not have a contractual or other duty to provide the information to the SEC and is not being provided pursuant to a court order or request from the Government.
The nature and form of possible violations of securities law can vary widely. Common examples securities fraud schemes may, however, include:
- Market manipulation of securities prices or volumes
- Misstatements or omissions of fact about a company (including in statements submitted to the SEC)
- Offering fraudulent or unregistered securities
- Corporate mismanagement resulting in breach of fiduciary duties to shareholders
- Fraudulent accounting practices to misrepresent corporate assets
- Insider trading
- Abusive short selling practices
- Backdating stock options
- Ponzi, pyramid, or other high-yield investment schemes
In addition, the new SEC whistleblower program creates an avenue for whistleblowers to report violations of the Foreign Corrupt Practices Act, which prohibits bribery or improper payments to foreign officials in order to obtain or retain business, or to direct business to a certain person.
The rules also set forth the criteria that the SEC will consider in determining the percentage award the whistleblower will receive within the 10-30% range. The SEC will consider the following four factors in determining whether to increase the award: 1) the significance of the information provided by the whistleblower, 2) the degree of assistance provided by the whistleblower, 3) law enforcement’s interest in making the whistleblower award, and 4) participation by the whistleblower in his/her employer’s internal compliance systems. On the other hand, the SEC will look to the following three criteria in determining whether to decrease a whistleblower’s award: 1) culpability of the whistleblower, 2) unreasonable reporting delay by the whistleblower, and 3) the whistleblower’s interference with his/her employer’s internal compliance and reporting systems.
The SEC has publicly announced that it has a fund of $450 million set aside for the express purpose of paying rewards to whistleblowers under these rules. Hopefully, the SEC will use that fund to properly incentive whistleblowing by making timely and substantial rewards. How the SEC handles whistleblower tips over the next year or two will likely set the tone for the future of the program.
3. Vendor Gifts to Doctors: The Intersection of the Anti-Kickback Statute and the False Claims Act
By Jonathan Tycko, Partner and Andrea Gold, Associate
The Anti-Kickback Statute (“AKS”), 42 U.S.C. §1320a-7b(b), prohibits any person from knowingly and willfully offering to pay any remuneration to another person to induce the purchase, order, or recommendation of any good or item for which payment may be made in whole or in part under federal health care programs, including Medicare and Medicaid. As far back as 1994, the Department of Health & Human Services, through its Office of Inspector General (“HHS OIG”), addresses the question of when payments made to doctors-either by a hospital seeking referrals, or by a pharmaceutical company seeking prescriptions-would violated the AKA. HHS OIG, in a formal publication known as a Fraud Alert, made clear that the AKS was not limited to cash payments. Rather, gift that are “more than nominal in value” violate the AKS if they are tied in some way to referrals or prescriptions. See OIG Special Fraud Alerts, Dec. 19, 1994.
What was left unaddressed at that time was whether the claims made on federal health care programs as a result of such gifts were “false claims” subject to the False Claims Act (“FCA”). The intersection of the AKS and the FCA has now been clarified by the courts, in part through two appellate decisions issued this year.
U.S. ex rel. Hutcheson
On June 1, 2011, the United States Court of Appeals for the First Circuit handed down its decision in U.S. ex rel. Hutcheson v. Blackstone Medical, Inc., No. 10-1505. The Relator, Susan Hutcheson, worked as a Regional Manager of Blackstone for approximately two years. In her Complaint, Hutcheson alleged that “Blackstone paid kickbacks to doctors across the country so they would use its products in certain spinal surgeries.” The alleged “kickbacks,” according to Hutcheson’s complaint, including payments under “sham” consulting agreement, research grants, entertainment expenses, and “high-end” travel and accommodations. The surgeries conducted with Balckstone’s products included, surgeries on Medicare and Medicaid beneficiaries. Hutcheson alleged that these gifts and payment violated the AKS and, because compliance with the AKS is condition of receiving payment from Medicare, Blackstone knowingly caused healthcare providers to present false or fraudulent claims to the government when they submitted kickback-tainted claims.
The district court dismissed Hutcheson’s case under Fed. R. Civ. P. 12(b)(6), holding that Hutcheson failed to identify a materially false or fraudulent claim for purposes of the FCA. In doing so, the lower court employed a rigid interpretation of the express vs. implied certification framework laid out in some FCA jurisprudence and held that, because the relevant statutes and regulations did not expressly condition payment on AKS compliance, Hutcheson failed to state a claim under the “implied certification” theory. The district court also held that the claims submitted by the doctors were not materially false or fraudulent because, even though the doctors had submitted express false certifications, Hutcheson failed to allege that the kickbacks at issue induced doctors to submit claims for surgeries that were otherwise medically unnecessary.
On appeal, the First Circuit categorically rejected both the framework and substance of the lower court’s opinion. In doing so, the Court made clear that it would not “adopt any categorical rules as to what counts as a materially false or fraudulent claim under the FCA.” The Court further explained, “Courts have created these categories in an effort to clarify how different behaviors can give rise to a false or fraudulent claim. Judicially-created categories sometimes can help carry out a statute’s requirements, but they can also create artificial barriers that obscure and distort those requirements. The text of the FCA does not refer to ‘factually false’ or ‘legally false’ claims, nor does it refer to ‘express certification’ or ‘implied certification.’ Indeed it does not refer to ‘certification’ at all. … In light of this, and our view that these categories may do more to obscure than clarify the issues before us, we do not employ them here.”
The Court then went on to address the two primary issues in the case: (1) whether a claim can be false or fraudulent for impliedly misrepresenting compliance with a condition of payment if that condition is not expressly stated in the relevant statute or regulations; and (2) whether a certification of compliance made by the party actually submitting the claims to the government may incorporate an implied representation about the conduct of third parties.
In addressing the first question, the First Circuit rejected Blackstone’s reliance on non-binding case law-including the Second Circuit’s decision in Mikes v. Straus, 274 F.3d 687 (2d Cir. 2001)-for the proposition that FCA liability under the “implied certification” theory is limited to certifications of compliance with expressly stated preconditions of payment found in statutes or regulations. The Court noted that nothing in the FCA itself supported such a narrow reading and it rejected Blackstone’s protestations that failure to follow such an approach would lead to unchecked expansion of the FCA. To the contrary, the First Circuit explained that other checks-both in the plain language of the FCA and the relevant jurisprudence-exist to “cabin the breadth of the phrase ‘false or fraudulent’ as used in the FCA” including the knowledge and materiality requirements.
As to the second question related to “non-submitting party conduct[,]” the First Circuit again refused to impose limitations on FCA claims under the guise of “certification” theories. Specifically, the Court rejected Blackstone’s argument that a submitting entity’s truthful certification cannot be rendered false due to the unlawful acts of a non-submitting third party. Citing the provisions of the FCA that provide for liability against a person that “causes to be presented” a false claim or “causes to be made or used” a false record or statement, the First Circuit made it clear that FCA liability extends to non-submitting entities that knowingly cause a submitting entity to make false claims and that such liability is not conditioned “on whether the submitting entity knew or should have known about the non-submitting entity’s unlawful conduct.” And, again, the Court rejected Blackstone’s claims that such a holding would stretch the FCA beyond the intent of its drafters, noting, for example, that the term “causes”-and the case law concerning the meaning of that term-provides a necessary constraint.
U.S. ex rel. Wilkins
On June 30, 2011, the United States Court of Appeals for the Third Circuit issued its decision in United States ex rel. Wilkins v. United Health Group, Inc., No. 10-2747, which similarly concluded that violations of the AKS can give rise to liability under the FCA. Defendant United Health, through certain subsidiaries, offered Medicare Advantage plans (“MA plans”). Among the claims made by the Relator was the United Health made kickbacks to physicians for referring patients to the United Health MA plan. Relator alleged that these kickbacks violated the AKS, and thus that monies received by United Health from the government for the MA plans were obtained in violation of the FCA. The district court dismissed all of Relators claims, including the claims based upon the alleged AKS violations.
The Third Circuit reversed as the AKS violations. The Court adopted an “implied false certification” theory of liability under the FCA. The Court reasoned that not violating the AKS was a “condition of payment” for the MA plans. In other words, that had the government known of the alleged AKS violations, it would not have made payment to United Health. Adopting language from the government’s own amicus brief in the case, the Court noted that “[t]he Government does not get what it bargained for when a defendant is paid by [the Medicare system] for services tainted by a kickback.
In sum, both U.S. ex rel. Hutcheson and U.S. ex rel. Wilkins make clear that when a provider violates the AKS by making gifts or payments to physicians to induce the use of a particular product, or to induce a referral, that any subsequent claims to the Medicare or Medicaid systems may be considered “tainted,” and thus “false” within the meaning of the False Claims Act. We would note, finally, that this issue relates primarily to claims submitted prior to 2010, because a statutory amendment made as part of the 2010 healthcare overhaul legislation explicitly ties the AKS and the FCA. Congress amended the AKS to confirm that a “claim that includes items or services resulting from a violation of this section constitutes a false or fraudulent claim for purposes of [the False Claims Act]. Patient Protection and Affordable Care Act of 2010 (“PPACA”), Pub. L. No. 111-148, §6402(f), 124 Stat. 119 (codified at 42 U.S.C. 1320a-7b(g)). Accordingly, on a going-forward basis there is no question that gifts to doctors in violation of the AKS can give rise to FCA liability.
4. Significant Whistleblower Settlements, First Half of 2011.
In 2010, the government settled eight separate False Claims Act cases for amounts in excess of $200 million each. The first six months of 2011 did not see any such “blockbuster” settlements-at least in terms of dollars involved-but did see the announcement of a large number of significant resolutions. Here are our choices for the five most significant settlements of 2011, so far.
- Verizon Communications agreed to pay the U.S. Government approximately $93.5 million to settle a lawsuit brought under the False Claims Act alleging that the company improperly invoiced the Government Services Administration (GSA) for a variety of federal, state, and local taxes and surcharges in violation of government-wide voice and data telecommunications services contracts. According to the lawsuit, Verizon submitted false claims for reimbursement of property taxes, common carrier recovery charges, and unallowable surcharges that are not directly reimbursable under the GSA contracts.
- Medline Industries, Inc. and The Medline Foundation agreed to pay the Government $85 million to resolve allegations that the company violated the False Claims Act by paying kickbacks to health care providers to incentivize them to purchase Medline products. The qui tam lawsuit was brought on behalf of the Government by Sean Mason, a former Medline employee. As a reward for disclosing the illegal conduct to the Government, Mr. Mason will receive a $23,375,000 share of the settlement.
- Oracle America Inc. will pay the Government $46 Million to settle a qui tam lawsuit alleging that Sun Microsystems Inc., which Oracle purchased in 2010, violated the False Claims Act by paying illegal kickbacks to systems integrator companies to induce them to recommend Sun’s products to federal agencies. The allegations regarding the kickback scheme were first disclosed to the Government in a qui tam lawsuit filed in Arkansas in 2004. Since that time, the Government has conducted a much broader investigation of technology vendors that provide products to federal agencies that has resulted in settlements with six other companies.
- Pharmaceutical manufacturers Serono Laboratories, EMD Serono, Merck Serono S.A., and Ares Trading S.A. have agreed to pay $44.3 million to resolve allegations in a False Claims Act lawsuit that the companies submitted improper claims for payment to Medicare and Medicaid in connection with the drug Rebif, an injectable used to treat multiple sclerosis. Serono allegedly paid illegal kickbacks to health care professionals in the form of consulting meetings, speaking engagements, expense reimbursement, education grants, charitable contributions, and sponsorships to induce them to prescribe Rebif to their patients. The qui tam lawsuit was brought on behalf of the Government by whistleblower Tim Amato, who will receive a $5.19 million share of the settlement as a reward for disclosing Serono’s misconduct.
- The U.S. subsidiary of Belgian pharmaceutical giant UCB Pharmaceuticals has agreed to pay $34 million to settle two qui tam lawsuits asserting that the company violated the False Claims Act by illegally promoting its anti-epilepsy drug Keppra for off-label uses that were not medically accepted indications, such as treatment of migraines, bipolar disorder, and anxiety. The illegal marketing campaign ultimately resulting in improper claims for payment being submitted to Government health care programs. The whistleblowers will receive an approximately $2.8 million share of the settlement for reporting UCB’s unlawful conduct.
5. Check out our website and blog
We have a website and a blog devoted exclusively to qui tam litigation and whistleblower law. The website is FraudFighters.net, and the blog is FraudFighters.WordPress.com. We update the blog fairly regularly, whenever we get news of a significant development in the law, or a big settlement or other result in a case. Want to learn more about the other types of cases our firm is handling? Our general firm website is tzlegal.com.
