Wake Forest Law Review

By Mickey Herman

On Thursday, March 16, 2017, the Fourth Circuit issued a published opinion in United States ex rel. Carson v. Manor Care, Inc., a civil case. Plaintiff-appellant, Patrick Carson, on behalf of the United States, appealed the dismissal of his False Claims Act (“FCA” or “Act”) qui tam and retaliation claims as well as related state fraud claims, arguing that none were barred by the FCA’s first-to-file rule. After evaluating Carson’s claims in turn, the Fourth Circuit affirmed with respect to his qui tam claims, but vacated and remanded the portion of the trial court’s decision as it related to his retaliation and state fraud claims.

Facts & Procedural History

In early 2009, Christine Ribik filed a qui tam suit on behalf of the United States against Manor Care, alleging violations of the FCA arising from overbilling of the government for medical services. Specifically, she contended that the nursing facility operator “regularly and fraudulently classified . . . patients as needing more physical therapy than necessary,” “instructed its physical therapists to spend more time than needed with the patients,” “sent some patients to physical or occupational therapy who did not need it at all,” and “refused to discharge patients for whom physical therapy was no longer useful.”

In September 2011, Carson filed a qui tam suit on behalf of the United States and several states against Manor Care, alleging violations of the FCA (and its state-level equivalents) markedly similar to those asserted by Ribik. In addition, Carson asserted a FCA retaliation claim, contending that his termination from Manor Care was a direct and impermissible result of “his repeated complaints about the fraudulent . . . practices.”

The two cases were consolidated in 2012 and the United States Government subsequently intervened in the action. The district court denied Manor Care’s motion to dismiss the Government’s complaint. It granted, however, the defendant’s motion to dismiss Carson’s complaint, concluding that “the FCA’s first-to-file rule barred all of [his] claims.” Carson appealed.

Qui Tam Claims

The Court first considered whether the first-to-file rule barred Carson’s qui tam claims. Pursuant to its qui tam provision, the FCA permits private citizens to sue on the federal government’s behalf for violations of the Act. However, “[w]hen a person brings an action under [the qui tam] subsection, no person other than the Government may intervene or bring a related action based on the facts underlying the pending action.” To determine whether a subsequently-filed suit is based on the facts underlying a pending complaint, the Court applies the “material elements test,” which “bars later suit ‘if it is based upon the same material elements of fraud as the earlier suit, even though the subsequent suit may incorporate somewhat different details.’” Although Carson argued that his “allegations go well beyond [Ribik’s],” the Court, after thoroughly comparing the complaints’ allegations, disagreed. It also rejected Carson’s assertion that their complaints’ consolidation protects his claims from the first-to-file bar, emphasizing that the relevant statutory language explicitly prohibits intervenors other than the Government. It thus affirmed the district court’s dismissal of Carson’s qui tam claims.

Retaliation Claim

The Court turned next to Carson’s retaliation claim. “The FCA prohibits employers from retaliating against any employee ‘because of lawful acts done by the employee . . . in furtherance of an action under this section or other efforts to stop 1 or more violations of this subchapter.’” Noting that the district court dismissed this claim on the same grounds as the qui tam claims—the first-to-file rule—the Court endeavored to determine whether retaliation claims fall within the scope of that rule. Considering first the relevant statutory language and structure, the Court emphasized that the first-to-file rule is subsumed by, and therefore only limits, the Act’s qui tam provisions. The Court continued by emphasizing that barring a whistle-blower’s retaliation claim on such grounds makes little sense, both because such claims are considered personal to the plaintiff (unlike the qui tam claims, which effectively belong to the Government) and due to the risk of deterring whistle-blowers. For these reasons, the Court vacated the district court’s dismissal as to Carson’s retaliation claim and remanded the issue for proceedings consistent with the proper scope of the first-to-file rule.

State Fraud Claims

Finally, the Court considered whether the FCA’s first-to-file rule was properly applied to Carson’s state fraud claims. Determining that the district court failed to “support its decision with any discussion or authority to establish that any of the states apply the FCA first-to-file rule, or its equivalent, to that state’s statute,” the Court vacated and remanded the issue to the district court.

Conclusion

Agreeing that the FCA’s first-to-file rule barred Carson’s qui tam claims, the Court affirmed the district court to that extent. It refused, however, to extend the scope of the first-to-file rule to Carson’s retaliation and state fraud claims. It therefore vacated the district court’s judgment as to those issues, and remanded for further proceedings.

By Matthew Meyers

Oberg v. Pennsylvania Higher Education Assistance Agency

Jon Oberg sued three student loan corporations on the grounds that they defrauded the Department of Education – and therefore violated the False Claims Act, 31 U.S.C. § 3729– in connection with claims for Special Allowance Payments.  These payments are generous student loan subsidies. The False Claims Act imposes liability on “any person who knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval” to an agent of the United States.

The three student loan corporations, the Pennsylvania Higher Education Assistance Agency, the Vermont Student Assistance Corporation, and Arkansas Student Loan Authority, moved to dismiss the action under Rule 12(b)(6).  They argued, both to the district court and on appeal, that they were not “persons” within the meaning of the Act.  The Supreme Court had held in Vermont Agency of Natural Resources v. United States that a state or state agency is not a “person.”  But, corporations, even municipal corporations, are persons subject to suit under the Act.

To determine whether a given entity is a corporation is a “state agency” such that it is not a person under the Act, the Fourth Circuit employs the “arm-of-the-state” analysis used in Eleventh Amendment jurisprudence.  A corporation is a part of the state when four factors militate in favor of such a finding:  (1) whether any judgment paid by the corporation will be paid by the state, (2) the degree of autonomy the corporation has from the State, (3) whether the corporation is involved with state, in contrast to non-state or local, control, and (4) whether the treatment of the corporation under State law makes it an arm of the State.

The district court had held that all three agencies were arms of the State.

Applying the four factors, a Fourth Circuit panel found that the Pennsylvania Agency is not an arm of the state.  The State is not bound by any judgment for which the agency is liable, and the agency receives no operational funding from the State (though state officials are appointed to the board of directors and the state has some veto power over its operations) .  The third and fourth factors weighed in favor of a finding that the agency was a state, as the agency primarily directs its operations towards providing financial aid to students within the state.  And a state statute states that the agency performs an essential government function. Construing the facts in favor of Oberg, the panel concluded that the first two factors outweighed the latter two.

The panel found that the Vermont Agency is not an arm of the state as well.  The first factor was inconclusive. The state is required to maintain the agency, but a state statute expressly disavowed any obligation to repay debts resulting from student loans the agency issued.  The second factor was not dispositive either.  While the agency exercises corporate powers and is not funded by the State, it is subject to a state laws that allow the State to alter, amend, or change the agency, and appoint eight of the agency’s eleven directors for the board.  The third and fourth factors weighed in favor of finding that the agency is an arm of the State, as it is involved with statewide concerns and is considered an instrumentality of the state under State law.  Because it was a close call, the panel vacated the district court’s judgment and permitted limited discovery to decide the question.

Finally, the panel affirmed the trial court’s judgment as to the Arkansas agency.  The factors weighed in favor of a finding that the agency is an instrumentality of the state.  There is no law dealing with the state’s obligation to pay the agency’s judgments, but the money earned by the agency becomes state funds.  The state has substantial control of the agency’s operations.  Furthermore, Oberg alleged no facts that the agency was not not involved primarily in state concerns.  Arkansas law treats the agency as an instrumentality of the state.

The Fourth Circuit affirmed in part, vacated in part, and remanded the case to the district court,

 

By Jordan Crews

Today, in United States v. Pennsylvania Higher Education Assistance Agency, the Fourth Circuit vacated and remanded the decision of the district court, holding that the plaintiff had alleged sufficient facts that Pennsylvania Higher Education Assistance Agency (“PHEAA”) is a “person” for purposes of the False Claims Act (“FCA”).

The plaintiff, Dr. Oberg, as relator for the United States, brought action against PHEAA (a Pennsylvania Corporation), among others, alleging that it defrauded the Department of Education by submitting false claims for Special Allowance Payments (“SAP”), a federal student loan interest subsidy.  According to Dr. Oberg, PHEAA engaged in “noneconomic sham transactions to inflate [its] loan portfolio eligible for SAP, and the Department of Education overpaid hundreds of millions of dollars to [PHEAA] as a result of the scheme.”  Thus, Dr. Oberg alleged that PHEAA violated the FCA when it knowingly submitted these false SAP claims.

The FCA provides a cause of action against “any person” who engages in certain fraudulent conduct, including “knowingly presenting, or causing to be presented, a false or fraudulent claim for payment or approval” to an officer, employee, or agent of the United States.  The FCA does not define “person,” but the Supreme Court has held that a state or state agency does not constitute a “person” subject to liability under the FCA.  By contrast, corporations are presumptively covered by the term “person.”  Municipal corporations like counties are “persons” subject to suit under the FCA.  The legal framework for this inquiry is the “arm-of-the-state” analysis used in the Eleventh Amendment context.  The district court concluded that PHEAA is part of its respective state and thus not a “person” under the FCA; accordingly, it granted PHEAA’s motion to dismiss.

In applying the arm-of-the-state analysis, four nonexclusive factors are considered to determine whether an entity is “truly subject to sufficient state control to render it a part of the state.”  The Fourth Circuit explained the factors as follows:

First, when an entity is a defendant, we ask “whether any judgment against the entity as defendant will be paid by the State.” . . .  Second, we assess “the degree of autonomy exercised by the entity, including such circumstances as who appoints the entity’s directors or officers, who funds the entity, and whether the State retains a veto over the entity’s actions.” . . .  Third, we consider “whether the entity is involved with state concerns as distinct from non-state concerns, including local concerns.” . . .  Fourth, we look to “how the entity is treated under state law, such as whether the entity’s relationship with the State is sufficiently close to make the entity an arm of the State.”

In applying the first factor, whether Pennsylvania would pay a judgment against PHEAA in this case, the Court stated that this factor weighed “decidedly against holding that PHEAA is an arm of the state.”  Pennsylvania law expressly provides that obligations of PHEAA are not binding on the state.  The state “explicitly disavows liability for all of PHEAA’s debts.”

When looking at the second factor, the degree of autonomy exercised by PHEAA, the Court noted that this is a much closer question.  PHEAA’s board of directors is composed of gubernatorial appointees and state legislators or officials, and as the Court noted, such an arrangement “frequently indicates state control.”  Additionally, state officials exercise some degree of veto power over PHEAA’s operations.  However, other factors strongly suggested that PHEAA is not an arm of the state.  Significantly, PHEAA is financially independent, and receives no operational funding from the state.  PHEAA also has the power to enter into contracts, to sue and be sued, and to purchase and sell property in its own name–all of which suggest operational autonomy.  The Court found that this factor also counseled against holding that PHEAA is an arm of the state.

The third factor, whether PHEAA is involved with statewide, as opposed to local or other non-state concerns, weighed in favor of recognizing PHEAA as an arm of the state.  The state created PHEAA to finance, make, and guarantee loans for higher education, and “higher education is an area of quintessential state concern and a traditional state government function.”

The fourth and final factor, how PHEAA is treated under state law, also supported a finding that PHEAA is an arm of the state.  A state statute provides that “the creation of [PHEAA] was in all respects for the benefit of the people . . . and [PHEAA] performs an essential governmental function.”  Moreover, Pennsylvania state courts have concluded that PHEAA is a state agency for jurisdictional purposes.

In sum, the third and fourth factors suggested that PHEAA is an arm of the state, while the first and second pointed in the opposite direction.  Thus, at this point in the case, “Dr. Oberg [had] alleged sufficient facts that PHEAA is not an arm of the state, but rather a ‘person’ for FCA purposes.”

The Fourth Circuit vacated the judgment of the district court and remanded to permit limited discovery on the question of whether PHEAA is “truly subject to sufficient state control to render it a part of the state.”

By Karon Fowler

In Rostholder v. Omnicare, Barry Rostholder, a licensed pharmacist, filed a qui tam action under the False Claims Act (“FCA”) against his former employer, Omnicare, Inc., and its affiliated companies. Under the FCA, Rostholder is the “relator” of the claim.  This means he is a private person that has brought a lawsuit on behalf of the U.S. under the FCA based on information that the named defendant has knowingly submitted or caused the submission of false or fraudulent claims to the U.S. The qui tam cause of action provides that, if successful, Rostholder would receive a portion of the recovered damages.

Rostholder claimed that Omnicare violated several FDA safety regulations requiring that penicillin and non-penicillin drugs be packaged in complete isolation from one another. Violations of these regulations result in a legal presumption of penicillin cross-contamination. According to the complaint, these contaminated drugs were not eligible for reimbursement by Medicare and Medicaid. Therefore, any claims presented for reimbursement were “false” under the FCA. The district court granted Omnicare’s 12(b)(6) motion and denied any further leave to amend because Rostholder had already filed two amended complaints.

The Fourth Circuit first reviewed Omnicare’s assertion that the district court lacked subject matter jurisdiction under to the “public disclosure bar” in the FCA. Such review was de novo and the Court examined the lower court’s jurisdictional findings of fact for clear error. The version of the public disclosure bar in place at the time of Rostholder’s complaint states that “[n]o court shall have jurisdiction over an action under this section based upon the public disclosure of allegationsunless the action is brought by the Attorney General or the person bringing the action is an original source of the information.” 31 U.S.C. § 3730(e)(4)(2006) (emphasis provided by Court). The Court concluded that Rostholder’s complaint was not “based upon” the warning letter or SEC filings, despite Omnicare’s objection to the “substantial similarities” between the allegations in the complaint and the public disclosures. It was Rostholder’s discovery of the penicillin-related violations during his employment that provided the basis for his complaint. His allegations that Omnicare supplied drugs to patients residing in nursing care facilities who were primarily insured by government health programs illustrate his independent knowledge that Omnicare caused claims to be submitted to the government for payment. Therefore, the public disclosure bar did not divest the district court of jurisdiction over the claims.

However, the Fourth Circuit held that Rostholder’s complaint failed to allege that Omnicare made a false statement or that they acted with the necessary knowledge. Under the FCA, a person is liable to the U.S. government if he “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval.” Four elements are required for a well-plead FCA claim: “(1) [] there was a false statement or fraudulent course of conduct; (2) made or carried out with the requisite scienter [knowledge]; (3) that was material; and (4) that caused the government to pay out money or to forfeit moneys due (i.e., that involved a ‘claim’).” Although Rostholder adequately plead that compliance with the FDA’s Current Good Manufacturing Practice regulations (“CGMPs”) is material to the government’s decision to provide reimbursement for related drugs, he failed to adequately allege the existence of a “false statement or fraudulent course of conduct.” Compliance with the FDA’s CGMPs is not required for payment by Medicare and Medicaid, so Omnicare had not falsely stated such compliance with the government, as contemplated by the FCA.  The Fourth Circuit explains that the correction of regulatory problems is important, but it does not provide a basis for FCA claims in the absence of actual fraudulent conduct.

The Court further concluded that the district court did not abuse its discretion in denying Rostholder’s request to file a third amended complaint. The District of Maryland’s local rules require a plaintiff attach to a motion to amend “the proposed amended pleading.” Rostholder failed to comply with this rule, which justified the district court’s denial of leave to amend. The Court adds that any amendment would have futile because adultered drugs are not barred from reimbursement and, therefore, claims for reimbursement for these drugs cannot be “false” under the FCA.