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California Court Issues Ruling In Favor Of Whistleblower In Case Alleging Use Of Kickbacks In Violation Of California Insurance Fraud Prevention Act

On March 28, 2019, in an important victory for California whistleblowers, the Superior Court for the County of Orange held that Insurance Code section 1871.7, the Insurance Fraud Prevention Act (“IFPA”) applies to claims made to workers’ compensation insurers resulting from patient referrals induced by kickbacks.  Tycko & Zavareei LLP represents the plaintiff in this case.

In State of California ex rel. James v. Southern California Sports Rehabilitation Center, et al., the plaintiff alleges that her former employers, Southern California Sports Rehabilitation Center, Inc. and Precision Occupational Medical Group, Inc., employed sales representatives to distribute kickbacks to physicians and staff in exchange for patient referrals. The kickbacks allegedly included cash-equivalent Visa gift cards, expensive meals, tickets to sporting events, and other valuable remuneration. After patients procured in exchange for those kickbacks visited the defendants’ offices for various type of therapies, the defendants submitted claims to workers’ compensation insurers seeking reimbursement for their services.

Plaintiff alleges that the kickback scheme violated the IFPA. The IFPA, which permits qui tam “relators”—the technical term for a whistleblower under the statute—to bring an action “in the name of the state” to enforce its provisions, makes it unlawful to “knowingly employ runners, cappers, steerers, or other persons” to procure patients and to obtain insurance benefits, and establishes statutory penalties and assessments for “fraudulent claims” presented to insurance companies. In this case, plaintiff’s lawsuit alleges that the kickback scheme violated both the prohibition on running, capping, and steering activity, as well as the prohibition on submitting false or fraudulent claims.

In its Order of March 28, 2019, the Court agreed with plaintiff that the IFPA does apply to kickback schemes like the one she alleges. First, the Court held that qui tam relators have standing under the IFPA to challenge kickback schemes. Defendants had argued that, because Labor Code section 3820(b)(3) specifically prohibits the payment of kickbacks in exchange for workers’ compensation referrals, the IFPA does not apply to such claims, and only the District Attorney has standing to challenge such schemes. The Court disagreed, noting that the Labor Code and Insurance Code provisions can coexist, and partially overlap, without rendering each other superfluous.

Next, the Court rebuffed the defendants’ argument that its kickback scheme could not amount to running, capping, and steering activity as a matter of law because, under the leading IFPA case State ex rel. Wilson v. Superior Court (2014) 227 Cal.App.4th 579, 609, whether particular conduct amounts to “employing” “runners, cappers, steerers, or other persons to procure clients or patients is a question of fact, not law.” In other words, the Court rejected the argument that kickback schemes like the one alleged in this case are automatically outside the scope of IFPA.

Finally, the Court rejected the defendants’ assertion that “no published authority holds that simply because the provider paid for the referral of the patient, the insurance claim based thereon becomes ‘false’ or ‘fraudulent.’” Instead, the Court explained that, under Wilson, fraudulent claims encompass those that “result from deceit or conduct that is done with an intention to gain unfair or dishonest advantage.” In light of the broad definition of “fraudulent” claims, the relator’s claims did not fail as a matter of law.

The Court’s ruling is important because both qui tam relators and the California Department of Insurance routinely bring cases challenging kickback schemes under the IFPA. A ruling that the IFPA is not the proper vehicle to combat kickback schemes and the insurance claims that result would have dealt a blow to an important mechanism for fighting insurance fraud in California. The Court’s ruling helps ensure that the Department of Insurance and individual whistleblowers can continue to use the powerful IFPA statute to combat fraud in the insurance market.

The case is State of California ex rel. James v. Southern California Sports Rehabilitation Center, et al., Case No. 16-00873013-CU-FR-CJC, in the Superior Court of the State of California for the County of Orange. The plaintiff is represented by Jonathan K. Tycko, Annick M. Persinger, and Katherine M. Aizpuru of Tycko & Zavareei LLP, and R. Scott Oswald and Janel E. Quinn of The Employment Law Group.