Some Strategies for Defending Health Care Qui Tam Cases

PRELIMINARY: HAVE A COMPLIANCE PLAN

Compliance plans have many merits, several of which relate to possible quitam actions. Many individuals, particularly nurses, become relators because of frustration stemming from repeated unsuccessful reports of suspected misconduct to management. An effective compliance plan provides a mechanism for action to be taken on such reports and in some cases will foreclose potential relators from concluding they have no alternative other than filing a qui tam. In addition, effective compliance plans are designed to prevent and/or detect inappropriate conduct through reliance on intensive training, internal auditing, hotlines and other mechanisms. It is obviously the preferable course to have identified and resolved a potential problem through a compliance plan than to have it uncovered by a relator and employed as the foundation for a whistleblower action.

I. THE FIRST STEP: CAREFUL REVIEW OF COMPLAINT

Virtually all qui tam complaints are brought in the hope that the government will intervene in the action and expend its resources to prosecute it to a successful (and profitable) conclusion. Often, relator has retained solo practitioners, or small firms, who are not familiar with the technicalities of the False Claims Act ("FCA"), practice under the Federal Rules of Civil Procedure, or the details of how health care providers function. Once the government declines intervention, if the relator opts to continue the action, usually the relator will rely upon the counsel who drafted the original complaint.

Therefore, it is usually advisable to file a motion to dismiss pursuant to Rules 9(b),12(b)(1), and 12(b)(6) in lieu of an answer. This strategy is based upon several tactical considerations. First, defense counsel may be able to eliminate or at least force repleading of significant portions of the complaint, or possibly even secure dismissal of the entire action. In addition, a substantial and well founded motion to dismiss will test the resolve the relator, particularly if he is an individual with limited resources, by suggesting a long and expensive road lies ahead.

Finally, and of critical importance, properly constructed motions to dismiss, even if not successful, begin the process of educating the district judge to understand that while relator's counsel lack experience and are not well versed in appropriate procedure or the intricacies of the FCA, the court can place reliance upon the professionalism and competence of defense counsel. If the district judge reaches this conclusion, it will afford defense counsel a substantial degree of influence in structuring discovery, will enhance possible success when the motion for summary judgment is filed, and will pay substantial dividends in organizing the case for trial (if necessary). See Section II: "Strategic Considerations."

Elements of the Complaint to Evaluate

(1) Some Technical Points that Can Cause Relators Problems

A. Has the Relator Complied with Rule 4(m), Federal Rules of Civil Procedure?

Because the government has declined to prosecute the action, the responsibility for serving the complaint falls to the relator. Any service after 120 days from the date of unsealing, however, is contrary to the explicit directive contained in Rule 4(m), Federal Rules of Civil Procedure.¹ FCA complaints, once unsealed however, are accorded no special consideration under Rule 4(m). United States v. Metzinger, No. 94-7520, 1996 U.S. Dist. LEXIS 13666 at *8 (E.D. Pa. Sept. 18, 1996). If Rule 4(m)'s directive is violated, the complaint should be dismissed unless relators can show "good cause." Chung v. Lee, 852 F. Supp. 43, 46 (D.D.C. 1994).

B. Does the Complaint Properly Plead Subject Matter Jurisdiction?

Due to lack of experience, relators' counsel often incorrectly plead subject matter jurisdiction. This is an important point to check because federal courts are courts of limited jurisdiction and the failure to properly plead jurisdiction can serve as the predicate for a motion to dismiss. Pleading 31 U.S.C. § 3729, which delineates the bases for liability under the FCA and defines key terms, does not create jurisdiction for relators under the Act. Similarly, merely alleging § 3730 is inadequate, since § 3730(a) vests jurisdiction exclusively in the United States. "An action for violation of the False Claims Act may be brought by the Attorney General under 31 U.S.C. § 3730(a) or by private persons under the qui tam provisions of 31 U.S.C. § 3730(b)." United States v. Vanoosterhout, 898 F. Supp. 25, 28 (D.D.C. 1995), aff'd, 321 U.S. App. D.C. 43; 96 F.3d 1491 (D.C. Cir. 1996).

Unless the complaint pleads § 3730(b), the relator has failed to establish standing to litigate the matter. Moreover, even if relators could establish their standing by pleading § 3730 alone, the complaint still is defective because it must allege that the district court jurisdiction to entertain a qui tam action. Consequently, the complaint should allege 31 U.S.C. § 3730(b) and 28 U.S.C. § 1331 as bases for jurisdiction. Pleading 31 U.S.C. § 3732(a) does not establish subject matter jurisdiction. This provision only governs personal jurisdiction and venue - it is not a grant of subject matter jurisdiction. As the Second Circuit recently clarified, "§ 3732(a) does not govern subject matter jurisdiction." United States ex rel. Thistlethwaite v. Dowty Woodville Polymer, 110 F.3d 861, 863 (2d Cir. 1997). Similarly, 28 U.S.C. § 1345 is inapposite because the language of § 1345 applies only to "civil actions, suits or proceedings commenced by the United States."

C. Has the Relator Filed a Disclosure Statement with the Government as Required by 31 U.S.C. § 3730(b)(2)?

Upon the filing of a FCA action by a private individual, the relator must serve a copy of the complaint "and written disclosure of substantially all material evidence and information the person possesses" upon the Government. 31 U.S.C. § 3730(b)(2). In the complaint, Relator should allege compliance with this requirement. If a relator has failed to satisfy this requirement, the complaint should be dismissed for failure to comply with the statutory prerequisite of § 3730(b)(2). That section plainly requires service of the complaint and substantially all material evidence and information the person possesses. See United States ex rel. Made in the USA Foundation v. Billington, 985 F. Supp. 604, 608 (D. Md. 1997) (qui tam complaint dismissed, in part due to relator's failure to serve government with adequate disclosure statement).

(2) Proper Pleading of the False Claims Act

D. Has the Relator Properly Pled Conspiracy Under 31 U.S.C.§ 3729 (A)(3)?

A properly framed allegation under § 3729(a)(3) must assert: "(1) that the defendant conspired with one or more persons to have a fraudulent claim paid by the United States, (2) that one or more conspirators performed any act to have such a claim paid by the United States, and (3) that the United States suffered damages as a result of the claim." United States v. Bouchey, 860 F. Supp. 890, 893 (D.D.C. 1994). The mere conclusory allegation of a "conspiracy" is not sufficient under § 3729(a)(3). "The essence of conspiracy under the Act is an agreement between two or more persons to commit a fraud."United States ex rel. Stinson v. Provident Life, 721 F. Supp. 1247, 1259 (S.D. Fla. 1989).

Any conspiracy claim under this section "must be supported by an allegation of an agreement among the parties allegedly involved in the conspiracy. Absent such an allegation, a claim under 3729(a)(3) is due to be dismissed for failure to state a claim." United States ex rel. Sanders v. East Alabama Healthcare Authority, 953 F. Supp. 1404, 1410 (M.D. Ala. 1996); Stinson at 1259.

E. Does the Complaint Properly Plead a Cause of Action under 31 U.S. C. § 3729(A)(2)?

Inexperienced relators' counsel often confuse § 3729(a)(1) and (a)(2). The distinction between these two separate sections of the FCA is well illustrated by Jana v. United States, 34 Fed. Cl. 447 (1995). There, the government's counterclaim alleged that false progress payments had been submitted "substantiated by individual daily time cards" that were fraudulent. Id. at 448. The time cards were actionable under § (a)(2). "The difference between § 3729(a)(1) and § 3729(a)(2) is that the former imposes liability for presenting a false claim, while the latter imposes liability for using a false record or statement to get a false claim paid." Id. at 449. To properly plead a violation of § a(2), the complaint must allege that false documents were utilized separately or in conjunction with the submission of the alleged false claims in order to facilitate their payment.

F. Does the Complaint Allege Mere Failure to Comply with Administrative Regulations?

It is well established that the mere failure to comply with administrative regulations cannot, standing alone, constitute a violation of the FCA. United States ex rel. Hopper v. Anton, 91 F.3d 1261, 1265-67 (9th Cir. 1996), cert. denied, 519 U.S. 1115 (1997). Otherwise, every breach of a federal contract would be transformed into a FCA violation. Nor may the FCA be used to enforce "regulatory compliance" with representations made by a contractor in its original contracts with the government regarding prospective compliance with specified regulations, particularly where the contracts"clearly define the remedy for [the contractor's] failure to comply with any applicable statutes or regulations ...." Luckey v. Baxter Healthcare Corp., 2 F. Supp. 2d 1034, 1046 (N.D. Ill. 1998).

(3) Procedural Issues

G. Has the Relator Satisfied Rule 9(b)?

The most frequently invoked device to argue a qui tam complaint should be dismissed (if only temporarily) in Rule 9(b).² As one district court has recognized, the purposes behind Rule 9(b) are "to discourage nuisance suits, to prevent a plaintiff from sullying the reputation of a defendant with baseless allegations, and to put a defendant on notice of the actions he must investigate and defend."United States ex rel. Grynberg v. Alaska Pipeline Co., Civ. No. 95-725, 1997 U.S. Dist. LEXIS 5221 at *10 (D.D.C. March 27, 1997). Rule 9(b) requires that certain elements be pled.

Those elements include "the time, place, and content of false representations, the facts misrepresented, and the consequence of the fraud." Id. The goal is to plead sufficient facts to "inject precision into the complaint." Id. at *11- 12. "Rule 9(b) applies to all allegations of fraud, including actions brought pursuant to the False Claims Act." United States ex rel. DeCarlo v. Kiewit/AFC Enterprises, Inc., 937 F. Supp. 1039, 1049 (S.D.N.Y. 1996); seealsoCooper v. Blue Cross and Blue Shield of Florida, 19 F.3d 562, 566-67 (11th Cir. 1994). Rule 9(b) is fully applicable to qui tam actions as well. Grynberg at *8-12;United States ex rel. Mayman v. Martin Marietta Corp., 894 F. Supp. 218, 223 (D. Md. 1995); United States ex rel. Detrick v. Young, 909 F. Supp. 1010, 1019 & n. 26 (E.D. Va. 1995).

Should the district court deny the motion, immediately request as an alternative that it unseal any documents (including affidavits/ declarations) filed by the government under seal. Virtually every court that has considered the issue has ordered that materials filed incamera with the district court by the government prior to its decision to intervene or decline intervention in a qui tam case can be unsealed upon the request of defendant. See United States ex rel. Coughlin v. IBM Corp., No. 93-CV-1408, 1998 U.S. Dist. LEXIS 601 at *6-7 (N.D.N. Y. Jan. 14, 1998); United States ex rel. O'Keefe v. McDonnell Douglas Corp., 902 F. Supp. 189,190-192 (E.D. Mo. 1995); Mikes v. Straus, 846 F. Supp. 21, 23 (S.D.N.Y. 1994).

Only if the documents contain information that would harm the government should unsealing be declined by the district court. Documents such as status reports which disclose routine investigative procedures do not rise to this level. Mikes, 846 F. Supp. at 23. Also request that the district court direct relator to promptly produce its disclosure statement to the government to assist the defendant in assessing the complaint's otherwise vague allegations.

An effective argument toward this end is that the government has opted out of the case, the allegations of the complaint lack precision (even if the district judge has denied the 9-B motion), this material will assist in adding definition to the complaint and could be gotten in discovery, so why not require its immediate production to defendant? As a consolation prize, district courts on occasion will grant such requests.

H. Does the Complaint Allege that Relator is the Original Source?

The complaint should allege that the relator is the original source of the information upon which the complaint is based. 31 U.S.C. § 3730(e)(4). While it is virtually impossible to get a complaint dismissed on this ground alone, you may be able to persuade the district court that some detailed facts need to be added to the complaint to satisfy this requirement. If the court accedes to your request, it will assist the shaping of discovery designed to support an eventual summary judgment motion contesting the relator's jurisdictional standing.

II. SOME STRATEGIC CONSIDERATIONS

Careful analysis of the relator and developing an appropriate strategy at the outset will pay substantial dividends. It seems to me that two primary strategic choices are available. The first, which for lack of a more precise term can be designated as the "aggressive" approach, involves vigorous opposition from the outset, unleashing extensive motions to dismiss, frequently clashing with relator during discovery, and fighting every possible issue every step along the course of the litigation.

Many qui tam defendants, facing almost inconceivable penalties and multiple damages, are inclined to favor this approach because they often feel it unfair to have been sued in the first place by a current or former employee, patient or competitor. In those situations where the relator is well-financed and has retained experienced counsel who can deploy abundant resources, this strategy has much to commend it. However, many quitams are filed by individuals or small groups who are represented by solo practitioners or very diminutive firms or alliances of small firms.

The backgrounds of these counsel may well include personal injury litigation, labor representation issues, medical malpractice or other areas were contingency fees are customary. If they have represented relators previously, it may well be in situations where the government entered the case and handled most if not all of the litigative responsibilities. In short, often in defending these actions your opposing counsel will not be technically proficient in FCA issues or even in federal court litigation; costs will continually be a consideration since the government has opted out. While these are significant sources of advantage, it seems advisable to consider an alternative strategy.

An important consideration is the fact that many district court judges still are inclined to be overly deferential to relators and to picture them as heroic crusaders defending the interests of the United States. Because hundreds of quitams have been filed, this is less true than in the past but it is still an important consideration. Particularly where the defendant is a substantial institution, such as a hospital or laboratory, individual relators represented by solo practitioners or small firms, still have the potential to evoke sympathetic responses of the part of district judges.

This factor always needs to be borne in mind in selecting a defensive strategy. In my experience, qui tam actions even more than other types of litigation are won or lost at the motions and discovery stages. Particularly critical is controlling discovery.

In my opinion, the best way to offset the "sympathy" advantage of relators is through establishing credibility with the district judge. When critical decisions need to be made, having established credibility will yield handsome dividends.

How does one establish credibility? One of the most obvious ways in through the quality of written and oral argument. Ideally, the district court will conclude, as the litigation proceeds, that while the it may not always agree with defendant's legal positions, there are generally reasonable and carefully considered. Therefore, in motions to dismiss, one should avoid "hail Mary" arguments such as launching constitutional attacks upon the qui tam provisions.

Put differently, not every contention that can be made in support of a motion to dismiss should be made. Otherwise, you risk depleting your credibility with the district court. Given the backgrounds of many quitam counsel, who often rely upon emotion rather than solid legal analysis, it is not an overwhelming task to win the court's confidence.

Therefore, defendant's written and oral presentations to the court should manifest trustworthy and reasonable legal analysis. Enhancing credibility through discovery is somewhat more challenging. The key to winning most qui tam actions is through controlling discovery since inexperienced relators counsel may have a very limited idea of how to prepare a FCA case for trial. In contrast to opposing every proposal put forward by the relator, defendant's counsel should only oppose requests which lack a reasonable foundation.

Yes, that means that, on occasion, defendant will support a relator's proposal- at least one that does not involve a critical issue. Always put forward a comprehensive discovery plan at the outset and try to maintain the initiative throughout the discovery process. Save opposition for relator requests that are unreasonable or which touch upon vulnerable areas of your own case. Typically, inexperienced relators counsel will serve unduly broad and burdensome discovery requests (since they do not really know what they are looking for) which often will raise patient confidentiality and other troublesome issues. Point out these deficiencies to the district court and emphasize the expansive burdens imposed upon defendant because of these slipshod and over inclusive discovery requests.

By contrast, defendant's discovery requests should be the model of conformity to the federal rules and, above all, appear reasonable to the district court. In addition, avoid triggering motions to compel unless the unreasonableness of the relator's position is self-evident and opposition will enhance your credibility with the court. Establishing credibility becomes most important at two stages. Inevitably, serious disputes will arise over the scheduling and scope of discovery. Defendants' counsel who have acted in a professional and reasonable fashion throughout the litigation will find it much easier to persuade the district judge to impose limits on discovery than counsel who automatically have opposed every proposal put forward throughout discovery by the relator.

Controlling the duration of discovery is particularly one goal that should be pursued from the outset, since relators without fail will demand extended discovery schedules. Requesting tight discovery schedules is one of the most effective ways to hamper relators in developing their cases. The other point at which credibility is critical are motions for summary judgment. The core strategy followed by defense counsel should be to "wrap it up" at the summary judgment stage. If defense counsel has established credibility with the district court, and used that credibility to control discovery, then counsel has a tremendous advantage in persuading the district court that there is no need for trial since there are no disputed facts and defendant is entitled to judgment as a matter of law.

In my experience, Rule 56 rulings reflect not simply the paper submitted or the arguments made, but to some extent the district court's judgment upon the entire course of the litigation to that point.

III. Selected Substantive Issues

A. Enforcing the Anti-kickback Law through the FCA

A much debated issue is whether kickbacks that violate the Medicare/ Medicaid Anti-kickback law thereby become actionable under the False Claims Act. Given the rather severe penalties under the False Claims Act, it is advisable to consider whether and when kickbacks can ever serve as the predicate for actions under the False Claims Act.

Some relators have filed qui tam actions using a theory that whenever there is an illegal kickback paid to a source of referrals, the illegal kickback causes claims that are filed for services furnished to referred patients to be false or fraudulent, even if there is no false information contained in the claim. Several courts have had an opportunity to consider the issue. In United States ex rel. Roy v. Anthony, 914 F. Supp. 1504 (S.D. Ohio 1994), a federal district judge refused to dismiss a qui tam complaint against participants in a joint venture for an imaging center involving referring physicians. The complaint alleged that the imaging center and the physician shareholders had violated the kickback statute, and hence that claims submitted to Medicare and Medicaid were false and fraudulent.

Despite the lack of any allegations that the services ordered by the physician shareholders were medically unnecessary, the court refused to dismiss the complaint, concluding that the plaintiff might be able to prove some set of facts that would demonstrate that the claims were somehow tainted by the kickbacks.

Also in an action filed and settled simultaneously among the DOJ, OIG, and a home infusion therapy company, T2, the government filed a complaint alleging that T2 had violated the civil False Claims Actbecause it had violated the anti-kickback statute: [B]ecause T2 has paid extensive amounts of remuneration to physicians to induce their referrals of Medicare and Medicaid patients to T2 in violation of the anti- kickback statute, T2 has also caused false and fraudulent claims to be presented to the United States in violation of 31 U.S.C. § 3729(a).³ The government took the same position in its settlement with Radiation Care, Inc., involving similar allegations.

The complexity surrounding the issue is well illustrated by issues arising from a qui tam complaint filed in Nashville. The central question presented there was whether a claim submitted as the result of a kickback which is otherwise true and accurate on its face, and involves a medically necessary service, can ever become a false claim. Initially, the district court dismissed the qui tam complaint for failure to state a claim upon which relief could be granted under a kickback theory:

First, [relator] has failed to allege that any of the claims submitted by Defendant [Medical Center] were themselves false. He has not alleged that the services were unnecessary, [or] not rendered . . . . Rather, he asserts that the claims are false because they were submitted in knowing violation of federal anti-kickback and self-referral statutes that would bar participation in Medicaid and Medicare programs.

Even if defendants submitted these claims in knowing violation of the antikickback ... statute[], however, that would not render the claims themselves false.⁴ Upon reconsideration, however, the district court announced a complete reversal of its position. The district court acknowledged a line of cases holding "that the breadth of the Federal False Claims Act extends well beyond intentional false claims for payment of money by the government."⁵ These cases indicated to the district court that the Act is designed to cover "fraudulent acts that cause the government to pay ... money to claimants [the government] did not intend to benefit."⁶ The district court also recognized the submission of claims, evidencing participation in a federal program, implies compliance with the relevant statutes and regulations, and that intentional noncompliance with these requirements is fraudulent behavior.⁷ Thus, in the district judge's opinion, the relator's allegation that the defendants submitted claims for payment from the government while knowingly violating the anti-kickback and self-referral statutes stated a cause of action under the False Claims Act.

However, a diametrically contrary position was taken by the district court in another qui tam filed in Texas. There, the district judge asserted: this Court must follow Fifth Circuit law that still requires that a claim itself be false or fraudulent in order for liability under the FCA to exist. [Relator] has not stated a claim unless he has sufficiently alleged that the defendants have submitted claims that are false or fraudulent (i.e., claims or claim amounts that the government would not have had to pay but for the fraud). Allegations that medical services were rendered in violation of Medicare anti-fraud statutes do not, by themselves, state a claim for relief under the FCA. United States ex rel. Thompson v. Columbia/HCA Healthcare Corp., 938 F. Supp. 399, 405 (S.D. Tex. 1996).

The Thompson holding was appealed to the Fifth Circuit, which handed down its decision on October 23 of last year. United States ex rel. Thompson v. Columbia/HCA Healthcare Corp., 125 F.3d 899 (5th Cir. 1997). There, relying upon authority from the Ninth Circuit,⁸ the Fifth Circuit took the position that offenses under other statutes could only serve as a predicate for a FCA violation "where the government has conditioned payment on a claim upon a claimant's certification of compliance with, for example, a statute or regulation, a claimant submits a false or fraud claim when he or she falsely certifies compliance with that statute or regulation." Thompson at 902.

The Fifth Circuit remanded the decision so that the district court could determine if the submission of claims to Medicare entailed making any such certification. Id. at 903. On remand, the district court found that a viable claim under § 3729(a) had been asserted in the complaint due to the allegation that the defendants had executed certifications on yearly cost reports attesting to compliance for those specified services with pertinent laws and regulations governing the provision of Medicare services, including the Anti-kickback and Stark laws. United States ex rel. Thompson v. Columbia/HCA Healthcare Corp., 20 F. Supp. 2d 1017, , 1998 U.S. Dist. LEXIS 14350 at *98-107 (S.D. Tex. August 18, 1998).

Moreover, there is no authority holding that an infraction of the Stark law standing alone can constitute a violation of the FCA, as long as the claim submitted to the government contains no inaccurate or misleading information, or is not submitted in violation of some manner of explicit certification. As the Ninth Circuit has succinctly explained: "In short, the claim must be a lie." Hindo v. University of Health Sciences/ The Chicago Medical School, 65 F.3d 608, 613 (9th Cir. 1995), cert. denied, 516 U.S. 1114 (1996) (citingWang v. FMC Corp., 975 F.2d 1412, 1420 (9th Cir. 1992)).

Following Thompson, several district courts have rejected the automatic conversion of a kickback violation into a breach of the FCA. SeeUnited States ex rel. Joslin v. Community Home Health of Maryland, Inc., 984 F. Supp. 374, 383-86 (D. Md. 1997). As Senior Judge Young there held: "As Defendants note, mere non-compliance with a statute or regulation, in the absence of a false certification, is insufficient to constitute a false statement within the meaning of the FCA." Id. at 383, citing to the Ninth Circuit's holding in United States ex rel. Hopper v. Anton Only where the government "conditions payment of a claim upon certification of compliance with a statute or regulation" can non-compliance with a statute serve as the predicate for a FCA violation.Id. at 383-84. The Joslin court also held there is no "implied certification" which can constitute a violation of the FCA. Noted Judge Young:

To hold that the mere submission of a claim for payment, without more, always constitutes an "implied certification" of compliance with the conditions of the Government program seriously undermines this principle permitting FCA liability potentially to attach every time a document or request for payment is submitted to the Government, regardless of whether the submitting party is aware of its noncompliance ... the Court declines to follow [Ab-Tech Constr., Inc. v. United States, 31 Fed. Cl. 429 (1994), aff'd, 57 F.3d 1084 (Fed. Cir. 1995)]. Id. at 384-85. To justify invocation of the FCA, there must be an explicit certification of conformity with the Stark law or Anti-kickback law, which the district court characterized as "the sine qua non of FCA liability." Id. at 385.

Whatever the merits of the issue, in actual practice, the usual pattern is that such kickback cases are resolved through negotiation. DOJ's Criminal Division (or the local United States Attorney) negotiates the Anti-kickback Act issues; the Civil Division undertakes to address False Claims Act liability. In order for a matter to be resolved completely (including avoiding administrative sanctions), the putative defendant is usually quite willing to enter into a civil False Claims Act settlement as part of a global resolution.

Therefore, the practical result is that the Civil Division is able to negotiate False Claims Act settlements utilizing an Anti-kickback Act theory even though were the matter to go to trial, there is some question whether the government's complaint would survive a motion to dismiss.

IV. SETTLEMENT ISSUES

Because almost all health care fraud cases are resolved through settlement, the negotiation process assumes particular importance. A fundamental consideration in shaping negotiation strategy is to insure that the provider's vulnerabilities as to all pertinent governmental enforcement agencies, federal and state, have been addressed, particularly relating to releases and compliance agreements.

Failure to address fully all criminal, civil and administrative dimensions of a potential settlement can have the most deleterious effects upon the provider. Equally central to an effective negotiation strategy is the recognition that a provider's criminal plea or settlement agreement with one government agency may have serious consequences relative to another agency.

Before reaching an agreement regarding criminal, civil or administrative liability, counsel must consider the full ramifications of each agreement for the provider. Moreover, due to the qui tam provision of the False Claims Act, 31 U.S. C. § 3730, depending upon whether a case has been unsealed or remains sealed, satisfying the relator is another consideration in fashioning a sound negotiation strategy.

1. Civil Cases

There are a number of issues that should be borne in mind while conducting civil negotiations with DOJ, the OIG, and (possibly) relators. Of first importance is insuring that all appropriate government parties have signed off on any civil settlement agreement. Usually, the position of the OIG has been that if a satisfactory settlement is reached with DOJ, then it will decline to exercise its permissive exclusion authority.

Normally, the Assistant Inspector General for Legal Affairs or his designee should be a signatory to any settlement agreement with DOJ.⁹ While DOJ probably has authority to execute any monetary settlement on behalf of the government, it has no authority to release any administrative sanctions HHS has in its arsenal.¹⁰ Similarly, under DOJ regulations, there is a clear division of authority between the Civil Division and the United States Attorneys.

Generally, any settlement in which single damages and penalties exceed $1 million must be signed off on by either the Assistant Attorney General for the Civil Division, the Associate Attorney General, or in some cases the Deputy Attorney General.¹¹ United States Attorney agreements which seek to preempt Civil Division authority are without effect unless signed off on by the appropriate DOJ official. SeeUnited States v. Killough, 848 F.2d 1523 (11th Cir. 1988).

It is also beyond dispute that the Civil Division has no authority to sign off on any provisions relating to possible criminal action unless the appropriate United States Attorney or Criminal Division official is a signatory to the agreement.¹² Several other DOJ settlement practices merit attention. The tax consequences of a substantial settlement must be considered. DOJ's position is that it will not characterize to any extent the recovery as either restitution, ordinary business expenses, or contract damages in a settlement agreement. DOJ prefers to characterize the payment as simply settling all outstanding claims.

Therefore, IRS may consider the entire settlement amount to be penalties and damages, rather than restitution, and refuse to permit it as a lawful business deduction. In fact, it is standard DOJ policy to include in every agreement a provision exempting the agreement from any impact upon the provider's tax liability.¹³ It is also now standard policy that the Civil Division will insist upon a "cost clause," similar to those found in agreements with defense industry contractors, specifying that costs related to the settlement shall be treated as unallowable costs for government contracting purposes.¹⁴ Departmental procedures do permit the inclusion of clauses indicating that the settlement agreement is made in compromise of disputed claims, that the provider is not confessing any liability, and that the agreement shall not be construed or used as an admission of wrongdoing on the part of provider.

The financial terms of a settlement are subject to negotiation between the parties. Generally speaking, while the government will agree to a payout over time, there are some important parameters that should be kept in mind. DOJ is usually willing to accept a more extensive payout period for non-profit and charitable providers. A substantial down payment is ordinarily required, although multiple payments within the initial year of the agreement are an acceptable compromise.

The amount to be paid over time must be guaranteed in some manner with appropriate collateral.¹⁵ If this is not possible, the government will usually accept a clause in the agreement whereby the provider agrees that should there be any failure to make timely payments, it agrees that any pending and future Medicare reimbursement will be applied to rectify the deficiency, or that the provider will be excluded (without any right of hearing) until payment has been made.

Contrary to the government's likely assertions to the contrary, the interest rate paid on the unpaid portion of the settlement is subject to negotiation, and in some instances it is possible to negotiate a flat settlement amount that is inclusive of interest.¹⁶ 2.Qui Tam Cases When the negotiations seek to resolve a qui tam complaint, additional considerations come into play. If the complaint has not yet been unsealed, pursuant to 31 U.S.C. § 3730(b), the relator cannot become involved in negotiations because that would disclose the existence of the complaint. However, DOJ does not consider it a violation of the seal to conduct negotiations in a matter that is the subject of a qui tam complaint as long as the existence of the complaint is not disclosed.¹⁷ If the complaint has been unsealed, and the defendant is aware of the qui tam action, then there is no bar to relators participating in negotiations, although generally speaking the Civil Division prefers to negotiate in the absence of relators.

However, since relators have a statutory right to challenge the adequacy of any settlement that is reached, 31 U.S.C. § 3730 (c)(2)(B), DOJ will be sensitive as to whether any potential settlement is acceptable to relators. It is not uncommon for the Government and a defendant to reach what they consider a reasonable settlement, only to have it challenged - sometimes successfully - by relators.¹⁸ Because quitams have become such a substantial portion of the government's health care fraud caseload, the actual or possible involvement of relators must be factored into any negotiation strategy.

The relator and his counsel should be signatories to the agreement. The agreement should contain a release from the relator to the provider and the United States.¹⁹ There should also be a clause in which the relator and his counsel agree with the provider as to the amount of "reasonable" legal fees and costs to be paid pursuant to 31 U.S.C. § 3730(d). Relators usually will insist that the provider furnish a release to relator from any claim arising out of the transactions and occurrences alleged in the complaint and from relator's employment (if a former employee).

Footnotes:

¹ Rule 4(m) of the Federal Rules of Civil Procedure, captioned "Time Limit for Service," specifically provides: "If service of the summons and complaint is not made upon a defendant within 120 days after the filing of the complaint, the court, upon motion or on its own initiative after notice to the plaintiff, shall dismiss the action without prejudice as to that defendant or direct that service be effected within a specified time; provided that if the plaintiff shows good cause for the failure, the court shall extend the time for service for an appropriate period..."

² Rule 9(b) reads: (b) Fraud, Mistake, Condition of the Mind. In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally.

³ Shalala v. T2 Medical, Inc., No. 94-CV-2549-GET (N.D. Ga., complaint filed Sept. 26, 1994).

⁴ United States ex rel. Pogue v. American Healthcorp. Inc., No. 3-94- 0515, U.S. Dist.LEXIS 16710 (M.D. Tenn. Sept. 14, 1995), at 11*-12*

⁵ United States ex rel. Pogue v. American Healthcorp. Inc., 914 F. Supp. 1507, 1511 (M.D. Tenn. 1996).

⁶ Id. at 1513.

⁷ Id. at 1512-13

⁸ For example, United States ex rel. Hopper v. Anton, 91 F.3d 1261, 1266 (9th Cir. 1996).

⁹ The OIG cannot release HCFA's administrative exclusion authority. Normally, unless the provider has a direct contract with HCFA, such as a hospital provider agreement, or is a fiscal intermediary or carrier (e. g., Blue Cross of Michigan), it is not necessary to seek a release from HCFA. In some instances, OIG will consent to a settlement provision in which it agrees not to recommend exclusion to HCFA. If there is any potential for adverse administrative sanctions being imposed by HCFA, the only safe course is to require that HCFA sign off on the settlement agreement along with OIG. A less satisfactory alternative is to negotiate a side letter with HCFA in which it states its enforcement intentions.

¹⁰ On occasion, some United States Attorneys' offices have included within settlement agreements, usually in conjunction with a plea agreement, provisions professing to release the signatory provider from any HHS administrative sanctions, without the signature of the Assistant Inspector General. Such provisions are nullities and it is OIG's position that such clauses provide no protection for the provider.

¹¹ The Civil Division and the United States Attorneys only have authority to release potential liability under the False Claims Act, 31 U. S.C. §§ 3729-33, the Program Fraud Civil Remedies Act, 31 U.S.C. §§ 3801-12, common law theories of fraud, payment by mistake, unjust enrichment and breach of contract, and on occasion the Contract Disputes Act, 41 U.S.C. §§ 601 etseq., and the Truth-in-Negotiations Act, 10 U.S.C. § 2306a. Any efforts to secure a general release as to all federal statutes or agencies will be unsuccessful, unless the authorized representative of the pertinent agency signs off on the agreement. In addition, neither United States Attorneys nor the Civil Division will agree to any provision foreclosing the issuance of press releases.

¹² Ordinarily the Civil Division prefers to limit its settlement agreements to civil and administrative issues, leaving criminal matters to be addressed by the United States Attorney or the Criminal Division. The one exception is inclusion of a clause designed to foreclose application of United States v. Halper, 490 U.S. 435 (1989), in which the Supreme Court held that a criminal conviction coupled with excessive civil penalties could violate the double jeopardy clause of the Constitution.

¹³ "This settlement agreement is not intended to relieve and shall not be construed to relieve any liability [the signatory provider] has or may have under the Internal Revenue Laws, Title 26 of the United States Code, or regulations promulgated thereunder."

¹⁴ A typical cost clause reads: "[The signatory provider] agrees to treat as unallowable costs for government contracting purposes all costs (as defined in the Federal Acquisition Regulations ("FAR") 31.205-47(a)) incurred by or on behalf of [the provider] or any of its current or former officers, directors, agents or employees, in connection with: (a) the matters covered by this Settlement Agreement; (b) the Government's investigation of the matters covered by this Settlement Agreement; (c) [the provider's] investigation, defense of the matters, and corrective actions in response to the government's investigation of the matters covered by this Settlement Agreement or alleged in the Complaint; (d) the negotiation of this Settlement Agreement; (e) all payments made pursuant to the terms of this Settlement Agreement; and [if a qui tam case] (f) the payment, if any to [relator] and his attorney for costs, expenses and fees under 31 U.S.C. § 3730(d)."

¹⁵ Usually, a promissory note is attached to the settlement agreement which specifies the collateral pledged, payment schedule, interest rate, and other pertinent information. While the precise format of the note is subject to negotiation, usually it contains a provision authorizing the United States Attorney for the appropriate district to act as the provider's attorney and consent to entry of judgment against the provider should there be a default.

¹⁶ The Inspector General frequently demands inclusion of a clause in the agreement specifying that the obligations undertaken by the provider cannot be affected by any subsequent declaration of bankruptcy. It is not clear whether such a provision has any validity or is enforceable.

¹⁷ Frequently, where negotiations have been underway for a substantial period, DOJ will move the district court where the quitam complaint is filed for permission partially to unseal the complaint to the extent of being authorized to notify the defendant(s) of the existence of the complaint and even to disclose the contents of the allegations or the complaint itself. Seldom, if ever, has a district court denied such a request.

¹⁸ Two recent examples are U.S. ex rel. Burr v. BCBS of Fla., 1995 U. S. Dist. Lexis 5134 (M.D. Fla. Mar. 23, 1995) and U.S. ex rel. McCoy v. CA Medical Review, Inc., 723 F.Supp 1363 (N.D. Cal. 1989), later proceeding, 133 F.R.D. 143 (N.D. Cal. 1990) (concerning the construction and application of "public disclosure" and "original source" jurisdictional bars).

¹⁹ A typical release reads: "[Relator] hereby waives, releases and forever discharges the United States and [the provider], its affiliates, divisions, or subdivisions, their successors or assigns, and any of their present or former directors, officers, employees and agents, from any claim pursuant to 31 U.S.C. § 3730(d) for an award from the proceeds of the Complaint, except for such obligations as may arise pursuant to the terms of this Settlement Agreement and for such claims for attorneys' fees and costs to which [relator] may be entitled under 31 U. S.C. § 3730(d)(2)."

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