Cross-posted at WLF’s contributor site

Federal and state governments are clearly “feeling their oats” in the area of False Claims Act (FCA) enforcement. FCA enforcement has never been more lucrative, with recoveries doubling to $9 billion over the last year. A large bulk of that profit has come from settlements, meaning that prosecutors’ theories and tactics face no judicial scrutiny. Big profits + little oversight = aggressive pursuit of increasingly novel FCA claims.

Challenges to government’s FCA theories and positive outcomes are increasingly few and far between, so we will actively assess and promote them whenever they arise. The U.S. Court of Appeals for the Sixth Circuit’s October 5 U.S. ex rel Williams v. Renal Care Group opinion firmly rejected federal efforts to expand key aspects of the FCA and offers some important lessons for FCA targets.

Background. The Justice Department intervened in a FCA qui tam action against a kidney dialysis provider (RCG), which had a wholly-owned subsidiary to offer dialysis equipment for home care. RCG created this subsidiary to take advantage of a particular method of Medicare reimbursement. The qui tam relator, and subsequently DOJ, argued that RCG’s creation of a subsidiary was a knowingly false and fraudulent attempt to claim federal Medicare reimbursement. A district court agreed, granting DOJ’s summary judgment motion and imposing nearly $83 million in fines. On appeal, the Sixth Circuit reversed the lower court and remanded the case. The unanimous decision provides four important takeaways:

1. Maximizing profit ≠ falsity. The court took DOJ to task for its “somewhat obsessive” focus on why RCG created a subsidiary for the home dialysis market. Nothing in the FCA or its legislative history clearly demonstrated that RCG’s actions circumvented the law, and absent such evidence, the Sixth Circuit wrote, “Why a business ought to be punished solely for seeking to maximize profits escapes us.”

2. Seeking counsel & clarification ≠ reckless disregard. The district court ruled that RCG acted with “reckless disregard” of Medicare statutes and rules. The Sixth Circuit disagreed, and pointed to seven actions and facts which undercut DOJ’s argument that RCG knew it was violating the FCA. Those factors included RCG’s seeking not only legal counsel, but also formally asking the opinion of federal Medicare officials (more on that below). Judge Rosen’s concurring opinion emphasizes RCG’s reaction when a chief operating officer questioned the legality of the home care subsidiary. Rather than stick its head in the sand, RCG actively circulated the opinion and explored the issue with counsel and the government.

3. FCA ≠ general regulatory statute. DOJ argued that because RCG’s subsidiary was not in compliance with certain technical standards for home care medical devices, RCG’s general certification to regulatory compliance in its government contract constituted a false claim. The Sixth Circuit disagreed, stating that “The False Claims Act is not a vehicle to police technical compliance with complex federal regulations.” The regulations were a condition of participation in the Medicare program not conditions of payment.

4. It’s worth challenging DOJ enforcement tactics. As mentioned above, RCG’s outside counsel sought federal officials’ opinion on the subsidiary’s Medicare participation. The counsel had a conversation with federal official Gene Richter, and subsequently memorialized the conversation in a letter. RCG’s counsel never received a response, and during discovery, Mr. Richter denied having the conversation or receiving a letter.

Just weeks before discovery ended, DOJ informed RCG that the letter had possibly been “inadvertently archived,” but it had now been found. The letter had annotations indicating that a draft response had been prepared.  RCG moved to compel the documents and sought sanctions against the government; the district court denied both motions.

Although the Sixth Circuit did find that the federal official’s “false testimony” prejudiced RCG, the court remanded the sanctions issue back to the district court judge rather than rule on the issue. Even though the appeals court didn’t act on the sanctions, it’s fair to say that the government’s suspicious actions troubled the court, and may have fortified RCG’s case that DOJ was tilting at false (claims) windmills.