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Another Court Weighs in on Rule 9(b)'s Requirements Under the False Claims Act

Written by: Thomas S. Crane, Brian P. Dunphy, and Laurence J. Freedman

A federal district court recently dismissed a qui tam relator’s complaint in a declined case against the Hospital for Special Surgery (“Hospital”), its former CEO, and an outside billing company alleging that they violated the federal False Claims Act (FCA) and the New York FCA resulting from alleged violations of the Anti-Kickback Statute (AKS) and the Stark Law.  Relator, Corporate Compliance Associates (CCA), asserted nine claims apparently based in part on information obtained from the Hospital’s former Chief Compliance Officer and former Associate Vice President of Physician Services.  CCA alleged, among other things, that the Hospital sought to induce patient referrals to the hospital by purportedly paying kickbacks to its contract physicians in the form of (1) compensation arrangements that included salary payments tied to referral volumes, and (2) payments for allegedly sham administrative and teaching responsibilities.  The court's wide-ranging and thorough decision to dismiss is notable for at least two reasons, as discussed below. The Court's Decision

The Hospital moved to dismiss the relator's claims under Rules 12(b)(6) and 9(b), and the court dismissed relator’s allegations for failure to plead the claims with the required particularity.   In doing so, the court sided with a recent district decision in that district in concluding that “it is insufficient to allege a fraudulent scheme unless the complaint alleges with particularity the existence and content of false claims.”

It is significant that the court decided that relator’s allegations failed to meet the heightened pleading requirements of Rule 9(b) of the Federal Rules of Civil Procedure to allege fraud.  In its decision, the court examined several cases in which the U.S. Courts of Appeal are divided over whether a relator must identify specific claims for payment to the government to sufficiently allege an FCA violation.  Although the Circuit Court of Appeals for the Second Circuit has not weighed in on this issue, the district court required relator to allege “with particularity the filing of any false claim” to satisfy Rule 9(b) and decided that the complaint failed to meet this burden.

In addition, though this case was dismissed on Rule 9(b) grounds, we note that the United States declined to intervene notwithstanding the allegation that the hospital subsidized contract physician salaries with the hospital’s “derivative revenue” from its facility fees.  Realtors alleged that the hospital considered the volume and value of physicians’ referrals in order to ensure that “lucrative procedures were performed within the Hospital’s own facilities.”  But the court found that “[a] hospital that takes into account in its compensation decisions the doctor’s overall worth to the hospital has not engaged in a corrupt act, even when it seeks reimbursement for services from the government.”  The court held as a matter of law that the complaint did not sufficiently allege an express or implied theory of false certification on either hospital cost reports or CMS-1500 Part B claims.  Notably, in U.S. ex rel. Drakeford v. Tuomey, the United States’ central theory - on which it prevailed at trial - was that the hospital subsidized physicians under part-time employment contracts with revenue from facility fees, thus violating the Stark Law and that this fact rendered each resulting inpatient and outpatient claim as improperly paid.

Circuit Court Split Over the Proper Pleading Standard Under Rule 9(b)

The proper pleading standard under Rule 9(b) is a central issue in many FCA cases, but the Supreme Court recently declined to resolve the circuit split over the rule’s requirements.  The recent brief of the United States responding to a petition for certiorari in United States, ex rel. Nathan v. Takeda Pharmaceuticals, which asked the Supreme Court to resolve the split, explained the competing views taken by different courts.  Several circuits, including the Sixth and the Eleventh Circuits, require that a complaint under the FCA “allege with particularity that specific false claims actually were presented to the government for payment.”  By contrast, other circuits, recently joined by the Third Circuit, have decided that it is sufficient to allege the “particular details of the scheme to submit false claims together with sufficient indicia that false claims were submitted.”  The United States’ view is that a “qui tam complaint satisfies Rule 9(b) if it contains detailed allegations supporting a plausible inference that false claims were submitted to the government, even if the complaint does not identify specific false claims.”

From a litigation standpoint and in fairness to those accused of violating the FCA, Rule 9(b) serves an important gatekeeping function intended to ensure that only viable claims are permitted to reach discovery.  Following the stricter Rule 9(b) standard, Judge Castel used an example from relator’s complaint to explain why Rule 9(b) requires particularized allegations that “go toward the filing of false claims.”  The complaint asserted that the Hospital’s physicians filed approximately 355,000 claims misrepresenting that services were provided in a physician’s office, but the complaint failed to identify a single example of these claims.  As the court explained, although alleging that the Hospital “lied to the federal government more than 350,000 times” is a “useful club in claimant’s hands,” fraud is a serious allegation and Rule 9(b) provides meaningful protection against allegations unsupported by facts.




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