A California judge approved a $68.5 million settlement yesterday to resolve allegations that Office Depot violated the California False Claims Act (CFCA) by overcharging California public entities for office and classroom supplies. More than 1000 cities, counties, school districts and other government entities in California will share in the settlement. The settlement agreement provides the precise allocation among those entities based on the amount of supplies that they purchased from Office Depot. The City of Los Angeles will receive the largest share—$11.6 million.
A California trial court recently overturned a jury verdict finding Recology San Francisco liable for violating the California False Claims Act (CFCA) and granted Recology’s motion for a new trial. The court’s ruling comes three months after the jury awarded over $1.3 million in penalties and damages.
In McVeigh, et al, v. Recology, et al., San Francisco Superior Court, Case No. CGC10504569, the qui tam plaintiff, Brian McVeigh, alleged that Recology submitted 157 false claims to the State of California relating to reimbursements Recology received for recycled goods. McVeigh, a former Recology employee, alleged that Recology received inflated payments from the California Department of Conservation based on Recology’s inaccurate representations of the weight and source of goods Recology sold to third parties. According to the complaint, Recology’s employees engaged in “tag inflation”—a process whereby Recology attendants weighed customers’ recyclables and issued a “tag” to customers indicating the weight of goods submitted, but recorded more weight on the tag than the weight of the recyclables actually submitted. This resulted in inflated payments to customers and potential kickbacks to the attendants.
Throughout 2014, Akin Gump has consistently persevered in multiple high stakes False Claims Act (FCA) cases on behalf of several clients facing qui tam actions.
These victories include:
- U.S. District Court for the District of Delaware decision in United States ex rel. Moore & Company, P.A. vs. Dongwon Industries Company, et al, No. 12-1562 SLR (D. Del. Sept. 23, 2014) holding that plaintiff’s FCA lawsuit was barred under the FCA’s public disclosure bar. This is a complete win for the client in a significant case.
- Fifth Circuit’s decision in United States ex rel. Johnson v. Planned Parenthood of Houston, No. B-20206, 2014 U.S. App. LEXIS 10604 (5th Cir. June 4, 2014) affirming dismissal of FCA complaint alleging that client submitted false Medicaid claims. The ruling in this case was particularly notable as it reinforced the viability of the FCA’s “first to file” doctrine as a bar to duplicative lawsuits, benefitting corporate entities who are or may become targets for multiple, overlapping FCA lawsuits brought by purported whistleblowers.
- U.S. District Court for the District of New Jersey decision in United States ex rel. Portilla v. Riverview Post Acute Care Ctr., 2014 U.S. Dist. LEXIS 44002 (D.N.J. Mar. 31, 2014) dismissing FCA complaint alleging that client, a chain skilled nursing facility operator, submitted false Medicare and Medicaid claims.
In a False Claims Act (FCA) roundtable held by California Lawyer magazine, Akin Gump litigation counsel Maria Ellinikos once again participated along with three other public and private sector attorneys.
The topics covered included the Wartime Suspension of Limitations Act, penalties in false claims cases, implied certification and voluntary disclosure to the government.
The U.S. Attorney General recently intervened in a qui tam case brought by a current employee of California-based computer software giant Symantec Corporation, alleging violations of the federal, California, Florida and New York False Claims Acts (FCA) (United States ex rel. Morsell v. Symantec Corp., No. 1:12-cv-00800 [D.D.C.]). The first amended complaint (the “complaint”) alleges that Symantec fraudulently induced the U.S. General Services Administration (GSA) to purchase its computer software products by providing false information about its commercial pricing practices. The complaint alleges that Symantec deliberately failed to disclose to GSA the discounts that it routinely offered to commercial purchasers of its computer software products, and, thus, charged GSA higher prices than it did for its commercial purchasers. According to the complaint, GSA would have insisted on the same discounts had Symantec disclosed them during the contract negotiations, and Symantec’s alleged deliberate failure to so disclose rendered Symantec’s claims for payment under the GSA contracts, false.
Federal law requires government contractors to participate in a full and open competitive bidding process. They must provide GSA with true and extensive information about their commercial sales and practices, including all price and discount information, 41 U.S.C. § 253 (a) (1). GSA contracting officials must be able to “seek to obtain the offerer’s best price (the best price given to the most favored customer)” and to “compar[e] the terms and conditions . . . with the terms and conditions of agreements with the offeror’s commercial customers.” (48 C.F.R. § 538.270 (a).) As the complaint notes, “GSA contracting officers therefore rely heavily on the accuracy and truthfulness of the information provided by the offeror regarding its commercial sales in negotiating the terms of [a] contract” (Complaint ¶ 15).
Los Angeles County Sues Hospital Owner for False Surgical Implant Claims to County Workers’ Compensation Program
On July 18, 2014, the County of Los Angeles (“the County”) filed a lawsuit in Los Angeles Superior Court again Michael D. Drobot, Sr., his son Michael R. Drobot, Jr. and their controlled entities, Pacific Hospital of Long Beach and International Implants LLC, among other defendants, alleging that they violated the California False Claims Act (FCA), Cal. Government Code § 12650 et seq. and the California Insurance Frauds Prevention Act (IFPA), Cal. Insurance Code § 1871 et seq., by submitting false bills to the County’s workers’ compensation program. The County also claimed violations of California Business and Professions Code §§ 17200 et seq. and intentional and negligent misrepresentation.
Prior to January 1, 2013, California Labor Code § 5318 permitted reimbursements for surgical implants on a cost-plus basis, allowing providers to recover 110% of “documented paid cost” up to $250.00. The County alleges that the Drobots formed a shell entity, International Implants, which purchased surgical implants from third-party manufacturers and “sold” them to Pacific Hospital. International Implants then submitted invoices to Pacific Hospital charging “grossly inflated” prices, and Pacific Hospital passed these costs on to the County under the Labor Code’s cost-plus scheme. The Drobots’ actual cost to procure these items was significantly lower than the costs that they represented to the County when seeking reimbursement, enabling them to receive a greater profit margin than what is mandated by law.
On June 10, 2014, a New York federal court dismissed, in part, state and federal False Claims Act (FCA) claims brought against Novartis Pharmaceuticals Corporation and pharmacies to which it distributed (CVS Caremark Corp., Accredo Health Group Inc. and Curascript Inc.) in United States ex rel. Kester v. Novartis Pharmaceuticals Corp., No. 11 Civ. 8196 (CM) (S.D.N.Y.).
A former Novartis employee filed the lawsuit, alleging that Novartis routinely paid kickbacks to the pharmacy defendants as rewards for promoting the following Novartis drugs which the relator alleged caused serious side effects: Myfortic, Exjade, Gleevac, Tasigna and TOBI. The relator further alleged that the pharmacy defendants submitted false reimbursement claims to Medicare, Medicaid, Tricare and other government health coverage providers. Specifically, they allegedly falsified claim forms by certifying compliance with the federal Anti-Kickback Statute (42 U.S.C. § 1320a-7b[b]). According to the complaint, the false anti-kickback representations rendered the claims false under the federal False Claims Act (31 U.S.C. § 3729, et seq.) and similar state False Claims Acts, including those of New York (State Finance Law § 187, et seq.), California (Government Code § 12650, et seq.), Virginia (Code § 8.01-216.1, et seq.), and Texas (Human Resources Code § 32.039, et seq.). The United States intervened April 2013 and New York and California intervened in January 2014. The defendants moved to dismiss.
After four years of litigation, Bank of New York Mellon (BNY) recently won dismissal of allegations that it violated the California False Claims Act (CFCA). In this multi-district case titled, In re Bank of N.Y. Mellon Corp. FOREX Transactions Litig. (No. 12 MD 2335 [LAK] [S.D.N.Y.]), several California state pension funds (the “Funds”) claimed that BNY, its affiliates and unnamed individuals defrauded them by inflating transactional costs that BNY imposed on foreign currency transactions that it handled for the Funds. They also alleged several common law claims arising from their contracts with BNY.
The Funds alleged that they had custodial agreements with BNY, and BNY held cash and securities on their behalves. BNY’s monthly invoices to the Funds assessed “custodial fees” and “transaction fees,” the latter representing fees assessed, in part, on BNY’s “standing instruction” transactions, whereby BNY automatically converted the Funds’ foreign currency into U.S. dollars (“Foreign Exchange Trading” or “FX Trading”) as it deemed fit. BNY informed the Funds about the executed price for such conversions after the fact and described its service as providing “best execution.” According to the Funds, that term has an industry meaning different than the actual pricing protocols that BNY employed and did not disclose to the Funds. The Funds alleged that BNY’s profit margins significantly exceeded those ordinarily earned from directly negotiated FX Trades. The Funds further alleged that they were given the worst rates instead of the “best execution” rates that they had anticipated from the trades. BNY allegedly assessed transaction fees between $12 and $75 per trade. Notably, although the Funds’ accounts were automatically debited or credited for such trades, they had the opportunity to object to any invoiced transaction.
The Office of New York Attorney General Eric T. Schneiderman recently announced a $475,000 settlement with Office Depot to resolve allegations that Office Depot overcharged New York state agencies for office supplies. Office Depot contracted with the New York State Office of General Services (“OGS”) to sell office supplies to OGS at prices equal to or lower than those offered to the United States General Services Administration. However, according to the New York Attorney General, Office Depot overcharged OGS by hundreds of thousands of dollars. Affected agency purchasers served by OGS included police, fire departments, prisons, and schools throughout the state. Office Depot’s contract with OGS has not been renewed. The NY AG’s press release discussing the settlement is available here.
Office Depot has denied any overcharging, stating that the settlement avoided the burden and expense of litigation and further business disruption. Office Depot’s decision to settle may have been influenced by the ongoing litigation it faces in California alleging that it violated the California False Claims Act by overcharging for supplies. For more information, see previous blog posts here and here.
In San Francisco Unified School District ex. rel. Contreras v. First Student, Inc., No. A136986, Cal. Court App. (1st Dist. Mar. 11, 2014), the court held that “a vendor impliedly certifies compliance with express contractual requirements when it bills a public agency for providing goods or services.” In other words, the mere submission of an invoice exposes a government contractor to CFCA liability if it knowingly breached a material contract term.
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The Regents of the University of California v. Computer Methods International Corp. et al., Case No. CGC-13-531850 (San Francisco Superior Court): The San Francisco Superior Court recently sustained the demurrer of defendants Computer Methods International Corp. and its subsidiary, Computer Facilities Services Inc. on the grounds that plaintiff Regents of the University of California (“the University”) did not plead sufficient facts supporting the claims in its First Amended Complaint for fraud and violations of the California False Claims Act (CFCA).
The defendants argued that the University did not plead sufficient facts to demonstrate “how, when, where, to whom, and by what means the representations were tendered” in support of its fraud and CFCA claims. See Lazar v. Superior Court, 12 Cal.4th 631, 645 (1996). The defendants argued that under City of Pomona v. Superior Court, 89 Cal. App. 4th 793, 801 (2001), which provides that CFCA allegations must be pleaded with particularity, the University had failed to identify what information in the invoices for payment was false, who sent the invoices to the University, and who accepted or paid the invoices. The University responded that its allegations showed that the defendants falsely promised to perform work and then submitted the invoices for work that was not performed.
People ex rel. Farmers Insurance Exchange, et al v. Maurice Hale, M.D., et al, case No. BC515676 (California Superior Court, County of Los Angeles; filed July 18, 2013):
In a recently unsealed qui tam lawsuit, Farmers Insurance and several other insurers allege that two imaging providers, Glendale Diagnostic Imaging Network and Central Imaging Network LLC, and their owners, Maurice Hale, M.D and Snezana Pavlovic, violated California’s Insurance Frauds Prevention Act (Cal. Ins. Code Section 1871.7), as well as California’s Unfair Business Practices Act (Cal. Bus. & Prof. Code Section 17200), by submitting false bills for “3D Rendering” of MRI and CT scans which were never prescribed or performed. The complaint alleges that from 2006 to 2011, these defendants submitted these bills for “3D Rendering” on 270 automobile casualty and workers compensation claims, even though the defendants’ MRI and CT machines never had 3D rendering capability for the type of claims at issue. The complaint also alleges that one of the defendants, Central Diagnostic Imaging Network, LLC, is improperly owned by a lay person, and not a doctor, as required by California law. The plaintiffs seek over $3 million in damages.
Earlier this month, Caremark Incorporated – a drug benefit management company operated by drug retail giant CVS Caremark Corporation –agreed to pay $4.25 million to settle allegations that it knowingly failed to reimburse Medicaid, Tricare, and other governmental health care programs, for prescription drug costs paid on behalf of beneficiaries who were also covered by private insurance companies administered by Caremark. The federal government will receive approximately $2.31 million and five states – Arkansas, California, Delaware, Louisiana and Massachusetts – will share $1.94 million under the settlement agreement.
The settlement, one of the largest settlements in the history of the False Claims Act, will resolve a case brought by Janaki Ramadoss, a former Caremark quality assurance representative in Texas. Ms. Ramadoss filed the action, titled United States ex rel. Ramadoss v. Caremark Inc., No. SA99CA0914 (W.D. Tex.), in 1999, alleging “reverse false claims” by defendants Caremark and several affiliates “to avoid, conceal, or decrease Defendants’ . . . obligation to pay or transmit money to the Government . . . .” Ms. Ramadoss alleged that although the law requires private insurers to assume the costs of health care for “dual eligibles” – individuals covered by Medicaid and private insurance plans – defendants did not reimburse the government for payments made on behalf of dual eligibles.
On October 23, 2013, the US Chamber of Commerce published a paper co-authored by Peter Hutt of Akin Gump proposing a number of reforms to the False Claims Act. The reforms aim to deter genuine fraud while discouraging questionable and abusive lawsuits under the statute. The paper first proposes a model for incentivizing the adoption of voluntary compliance programs that, if adopted, offer companies the benefit of certain proposed False Claims Act reforms. Second, the paper describes eight proposed reforms that would address current inefficiencies in the way the statute operates and is enforced. These reforms seek, in part, to curb excessive and unjustified payments to whistleblowers and their attorneys. A copy of the paper is available here.
In a second roundtable on the topic of False Claims Act (FCA) cases held by California Lawyer magazine, Akin Gump litigation counsel Maria Ellinikos once again participated along with three other public and private sector attorneys.
The topics covered included the impact of whistleblower provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Whistleblower Protection Enhancement Act on each attorney’s practice, damages and penalties in play in FCA cases currently on appeal and issues specific to California’s own False Claims Act.
On November 14, 2013, a federal jury in California found that JM Eagle (formerly J-M Manufacturing Company, Inc.) defrauded several states and municipalities by selling them defective plastic pipe in violation of several false claims acts. A former JM Eagle quality assurance engineer initiated the qui tam action, United States of America, et al., v. J-M Manufacturing Company, Inc., Case No. 5:06-CV-00055, alleging that JM Eagle used inadequate manufacturing and testing processes and faulty materials to produce polyvinyl chloride (“PVC”) pipe. As a result of JM Eagle’s practices, the PVC pipe sold to the plaintiffs allegedly had only a fraction of the strength and endurance JM Eagle represented the pipe to have, requiring the plaintiffs to replace the pipe. The case went to trial after the court denied JM Eagle’s motion for summary judgment. A discussion of the court’s decision is available here.
Three states and 42 municipalities participated in the trial, and dozens of other states and municipalities who were named in the suit as “real parties in interest” as a result of their purchases of the defective pipe, but were not actively involved in the litigation, may also be eligible to recover damages from JM Eagle. The total amount of damages will be determined in a separate trial.
The former owner of JM Eagle, Formosa Plastics, has agreed to pay $22.5 million to settle claims in the qui tam lawsuit for its role in the fraud. The court must approve the settlement before it becomes final.
On November 12, 2013, the United States Department of Justice announced that CA Technologies (formerly CA, Inc.) will pay the federal government $8 million to settle whistleblower allegations that the company violated the federal False Claims Act by double-billing federal agencies for software maintenance services and preventing Department of Defense customers from utilizing pre-paid software inventory and discounts by directing the customers to purchase more expensive products. The settlement resolves a lawsuit filed by Ann-Marie Shaw, a former CA Technologies employee, in the Eastern District of New York, titled United States of America, and the States of California, Florida, Hawaii, Illinois, Massachusetts, Nevada, Virginia, New York, the District of Columbia, and the State and City of New York ex. rel. Anne-Marie Shaw v. CA, Inc., Civil Action No. 06-3552 (LDW) (WDW) (E.D.N.Y). The lawsuit alleged that CA Technologies asked federal and state customers to renew their software maintenance agreements with CA Technologies several months before the agreements expired. CA Technologies would then allegedly date the renewal as of the date it processed the renewal order, rather than at the end of the current maintenance agreement, thereby double-charging customers for its maintenance services. The Department of Justice’s press release is available here.
CA Technologies also entered into separate settlement agreements totaling $3 million to resolve claims by California, Florida, Hawaii, Illinois, Massachusetts, Nevada, Virginia, New York, the District of Columbia, and the City of New York arising out of related allegations under state and local false claims statutes.
In United States and State of California ex rel. Fryberger et al. v. Kiewit Pacific Company, et al., No. 12-CV-02698, 2013 WL 5770514 (October 24, 2013), a California federal court in the Northern District of California dismissed the relators’ complaint pursuant to the “public disclosure bar” in the federal False Claims Act (FCA) and the California False Claim Act (CFCA). The public disclosure bar applies where a plaintiff alleges fraud against the government that has already been publicly disclosed and the plaintiff is not the “original source” of the information. The court found that both requirements had been met and addressed two interesting issues: (1) whether it could take judicial notice of the defendants’ evidence; and (2) whether the relators could claim original source status based on information that they obtained from another person.
The qui tam plaintiffs, SSL, LLC and Surecast, LLC along with their individual owners, alleged that defendant Kiewit Pacific Company and the individual defendant employees and managers of Kiewit falsely certified compliance with the terms of Kiewit’s contract to install Mechanically Stabilized Earth (MSE) walls as a part of the Los Angeles County Metropolitan Transportation Authority’s project to expand the 405 freeway’s lanes. Funded with grants from the United States federal government and the State of California beginning in April 2009, the project required Kiewit to adhere to the terms of a Design Build Contract, which provided for installation of the MSE walls in accordance with SSL’s proprietary MSE system. In late 2011, several media outlets reported that the MSE walls installed by Kiewit had begun to shift and fail. The plaintiffs alleged that Kiewit falsely certified that it had complied with SSL’s system when, in fact, Kiewit had deviated from several specifications and falsified the quality assurance and quality control documents that it had submitted under the contract.
California Insurance Commissioner Announces Settlement with Sutter Hospitals Over False Claims Allegations
Insurance Commissioner Dave Jones announced yesterday that Sutter Health, which operates over 20 hospitals in northern California, agreed to pay $46 million and change its billing and disclosure of anesthesia charges and services to its patients, insurers and other payers. These changes require Sutter to: (1) stop billing for anesthesia in the operating room on a chronometric basis and instead charge on a fully disclosed flat-fee basis; (2) describe every component of its anesthesia billing; (3) post on its website and provide to insurers and the commissioner the cost to each Sutter hospital of its anesthesia services, updated annually; and (4) clarify the relationship between its master schedule of charges (known as chargemasters in the health care industry) and the bills that consumers and insurers receive.
State and Federal False Claims Act Defendant Seeks to Prevent Use of Claims Documents in Case Filed By Former Employees
United States ex rel. Bahnsen v. Boston Scientific Neuromodulation Corp., No. 11 CV 1210 (SDW) (MCA) (D.N.J.).: Two former employees of Boston Scientific Neuromodulation Corporation (BSNC) – one from its Customer Service Department and the other from its Billing and Collections Department – brought this action alleging that BSNC violated the federal and several state False Claims Act, including New York, California, Texas, and Virginia. The complaint alleges that BSNC submitted claims for medically unnecessary services that contained false diagnosis codes and falsely certified that its submissions complied with the law. The complaint, which includes 15 pages describing the alleged false claims, survived BSNC’s motion to dismiss. The court found that the “[r]elators have pled with adequate particularity their claims, including those regarding improper billing, adverse event reporting, off-label allegations, and kickback payments, as well as retaliation.”
Drug Manufacturer’s Liability Under Insurance Frauds Prevention Act May Not Be Inferred From Alleged Kickbacks to Physicians
Three former employees of Bristol Myers Squibb, Inc. (BMS) brought a qui tam action alleging that BMS violated California’s Insurance Frauds Prevention Act, California Insurance Code section 1871.7 et seq. (IFPA), by giving physicians lavish gifts to induce them to prescribe its drugs or to reward high-prescribing physicians. The California Insurance Commissioner intervened in the case. According to the second amended complaint, BMS “engaged in a course of illegal and fraudulent conduct aimed at doctors, health care providers, pharmacists, and insurance companies” in marketing several drugs. Specifically, the plaintiffs allege that BMS gave physicians lavish gifts to induce them to prescribe its drugs or reward high-prescribing physicians, rendering false and fraudulent the claims for payment submitted to insurers in connection with the drugs prescribed by these physicians.
On September 25, 2013, the United States Department of Justice announced that Diagnostic Laboratories and Radiology will pay $17.5 million to settle whistleblower allegations that the California-based company violated the federal and California false claims acts by giving kickbacks for referral of mobile lab and radiology services, which were subsequently billed to Medicare and Medi-Cal (California’s Medicaid program). The settlement resolves a lawsuit filed by Jon Pasqua and Jeff Hauser, two former Diagnostic labs employees, in the Central District of California, titled United States and State of California ex rel. Pasqua et al. v. Kan-Di-Ki LLC f/k/a Kan-Di-Ki Inc. d/b/a Diagnostic Laboratories and Radiology, Civ. Action No. 10 0965 JST (Rzx) (C.D. Cal.). The lawsuit alleged that Diagnostic Labs charged Skilled Nursing Facilities (SNFs) in California discounted rates for inpatient services paid by Medicare in exchange for the facilities’ referral of outpatient business to Diagnostic Labs. The alleged scheme enabled the SNFs to maximize profitability by decreasing the cost of providing in-patient services and generated a steady stream of lucrative referrals to Diagnostic Labs that it could directly bill to Medicare and Medi-Cal. The DOJ’s press release is available here.
People ex rel. Allstate Insurance Company v. Platon, Case No. BC 475239 (Los Angeles Superior Court, March 8, 2013): A California Superior Court awarded Allstate Insurance Company (Allstate) over $7.7 million in a qui tam lawsuit brought under California’s Insurance Fraud Protection Act (IFPA). The court found that defendants – unlicensed medical and chiropractic personnel – submitted to Allstate more than 390 false chiropractic claims.
In December 2011, Allstate sued defendants Maria Miranda, Frank Rivera, and L.A. Healthcare Management Inc., alleging they prepared and presented to Allstate fraudulent medical reports for alleged accident victims. After defendants failed to answer the complaint, Allstate requested entry of default. The court entered default in 2012, and in 2013 Allstate filed a brief in support of its request for entry of default judgment. Allstate argued, among other things, that defendants (1) generated and billed for false “narrative” reports – including medical findings, diagnosis, and prognosis – for each patient without consulting with licensed practitioners; (2) implemented a standard protocol for patient treatment for every patient regardless of age, gender, type of injury, or severity of injury; and (3) intentionally falsified records using identical notes in charts for patients involved in different accidents in different years. Superior Court Judge William Fahey entered default judgment in favor of Allstate and ordered defendants to pay over $7.7 million.
Although the matter was uncontested, Allstate’s brief and the court’s award provide insight into the use of experts to prove an alleged insurance fraud and the calculation of IFPA penalties. Allstate cited extensively to expert declarations to establish the alleged fraud. Expert testimony established, for example, that the uniformity of medical notes at the clinic “could only be the product of intentional and improper recordation by defendants which equates to clinical fraud.” It also established that the amount of time billed to Allstate was a “categorical impossibility” due to the number of patients seen and number of chiropractors employed. Allstate’s brief also provides a good reminder of how fees and assessments are calculated under the IFPA. Allstate was entitled to penalties of not less than $5,000 and not more than $10,000 per claim and an assessment of up to three times the amount fraudulently billed to the insurer. Allstate sought – and the court granted – the maximum statutory award of $3.94 million for the 394 claims submitted and treble damages of $3.6 million. The court also awarded plaintiffs reasonable attorney’s fees, expenses, and costs totaling over $200,000.
People ex rel. Allstate Insurance Company v. Choe, Case No. RG10-510153 (Alameda Superior Court, June 12, 2013): A California Superior Court recently held that California’s anti-SLAPP statute did not immunize an attorney against allegations that he violated the California Insurance Frauds Prevention Act, California Insurance Code section 1871 et seq (IFPA), by submitting allegedly fraudulently insurance claims even though his claims submissions constituted protected pre-litigation conduct.
In Choe, Allstate Insurance Company (Allstate) brought a qui tam action alleging that defendants participated in a scheme to submit false claims to auto insurance companies. Allstate amended its complaint to substitute attorney William L. Berg (Berg) for a Doe defendant and alleged that Berg submitted the allegedly fraudulent insurance claims. Berg moved to strike the substitution under the anti-SLAPP statute, California Code of Civil Procedure section 425.16, claiming that his allegedly fraudulent demand letters to Allstate constituted protected pre-litigation conduct. Allstate responded that: (1) the action was exempt from the protections of the anti-SLAPP statute because it was an “action brought solely in the public interest or on behalf of the general public;” (2) Berg’s conduct was not protected activity because it was per se illegal; (3) Berg’s conduct was not protected activity because he submitted the insurance claims in the ordinary course of business; and (4) even if Berg’s conduct was protected activity, Allstate had established the “minimal merit” necessary for the case to proceed.
Standard & Poor’s Cannot Escape California Attorney General’s Lawsuit Alleging it Violated the California False Claims Act
Last week, San Francisco Superior Court Judge Curtis E.A. Karnow refused to dismiss the California Attorney General’s complaint alleging that S&P and McGraw-Hill Companies, Inc. violated the California False Claims Act. This lawsuit is one of many state lawsuits that followed the U.S. Department of Justice’s lawsuit alleging that S&P’s fraudulent ratings contributed to the 2008-2009 financial crisis and caused banks and federal credit unions to lose $5 billion. But California uniquely alleges violations of its false claims act statute. A full description of the AG’s complaint is available here.
The defendants had asked the court to dismiss the lawsuit, arguing that the Attorney General failed to allege a false claim for payment, let alone one paid with state funds, and that the Attorney General missed the three-year deadline to bring the CFCA claims. A detailed discussion of the defendants’ arguments is available here.
United States and State Of California Decline to Intervene In False Claims Act Case Involving Cancer Research Grant Money
Earlier this week, the United States and State of California declined to intervene in an action alleging that several medical research developers violated the federal and California state false claims acts (FCA) by lying about their ability to develop “microdosing” – a method for the delivery of chemotherapy and related cancer treatments to patients. The relators, Michael DeGregorio and Gregory Wurz, allege that they are affiliated with the University of California at Davis Department of Internal Medicine and that they participated in a research project which gave them access to defendants’ grant application. According to the complaint, the defendants misrepresented the nature and extent of their research, diagnostic ability, and professional sponsorship, to induce the National Institutes of Health, National Center for Research Resources, Department of Energy, National Cancer Institute, Small Business Innovation Research Program, Medicaid, Medicare, Tricare, and the federal student loan program to fund their research. Specifically, the relators allege that the defendants violated the federal and California state FCAs by “knowingly misrepresent[ing] that they were the originators of the microdosing technology and state of art, all for their personal and professional gain, financial and otherwise[.]” The relators claim that the defendants received millions of dollars in grant funds and seek statutory civil penalties for each fraudulent claim for payment, plus three times the amount of damages incurred by the government.
After the United States and State of California declined to intervene, the district court unsealed the action, which is titled United States ex rel. DeGregorio v. Accelerated Medical Diagnostics, LLC, et al., No. 2:12-cv-2931 (KJM) (GGH) (E.D.Cal.). We will report on any future developments in this case, which presents two interesting aspects. First, the whistleblowers are not defendants’ employees or former employees, but third parties who allegedly had access to the defendants’ fraudulent grant submissions. Second, the claims will involve complex scientific analysis.
People ex. rel. Sounhein v. Big Oil & Tire Co., et al., Case No. C066021 (3d. App. Dist. July 11, 2013): In an unpublished decision filed July 11, 2013, a California Court of Appeal reversed a trial court’s dismissal of qui tam plaintiff Greg Sounhein’s complaint alleging that Big Oil & Tire Company, an owner of 13 small town gas stations along California’s north coast, violated the California False Claims Act (CFCA). The Court of Appeal held that the claimed public disclosure did not trigger the CFCA’s jurisdictional bar.
Big Oil retained Sounhein’s company, SounPacific, to perform environmental services related to cleanup of releases from underground storage tanks on Big Oil properties. The parties agreed that Big Oil would pay SounPacific for its services after Big Oil received reimbursement from the California Underground Storage Tank Cleanup Fund (Fund). California law required Big Oil to pay for the services rendered within 30 days of Big Oil’s receipt of reimbursement from the Fund. By early 2005, a Fund manager became aware that Big Oil was not reimbursing its service providers within 30 days of claim reimbursements. SounPacific began to experience cash flow problems and, in July 2008, sued Big Oil, alleging that it retained the Fund’s reimbursements and, in some instances, diverted them to pay for Big Oil’s unrelated business expenses.
On July 18, 2013, the United States Department of Justice announced that pharmaceutical manufacturer Mallinckrodt LLC agreed to pay $3.5 million to settle whistleblower allegations that it violated the federal and several state false claims acts by paying kickbacks to doctors and thereby causing the submission of false claims to Medicare and Medicaid. The settlement resolves a lawsuit filed by John Prieve, a former Mallinckrodt employee, in 2008 in the Northern District of California, titled Unites States ex rel. Prieve v. Mallinckrodt, Inc., Case No. 3:08-cv-01863-TEH. Prieve alleged that Mallinckrodt paid doctors kickbacks and engaged in improper off-label promoting and marketing practices to increase prescriptions of three drugs, causing the submission of false claims for reimbursement to Medicare and Medicaid. The United States will receive approximately $3.173 million, and eight states, including California, New York, Texas and Virginia, will split the remaining settlement funds. The DOJ’s press release is available here.
City of Oakland et al. v. Mann et al.
City of Oakland et al. v. Mann et al., Case No. RG12652651 (Alameda County Superior Court): On October 18, 2012, the City of Oakland (City) and the Oakland Redevelopment Successor Agency (Agency) filed a complaint alleging that several individuals and entities to whom the City and Agency had granted funds for real property improvements violated the California False Claims Act (CFCA) and breached their contracts with the City and Agency. The City and Agency allege that the defendants applied for, and received, reimbursement grant funds for specific projects aimed at improving real property values and encouraging business investment, and then renegotiated with their contractors or revised the scopes of the projects to lower costs. The defendants allegedly did not inform the City or Agency about the revised project scopes or reduced costs, which may have rendered them ineligible for the reimbursement grant funds or required a reduction in their grant awards. The City and Agency further allege that the defendants submitted false claims for payment of the grant funds based on the original project scopes and submitted false documentation in support of their claims for payment, including false checks and invoices. They seek treble damages, civil penalties of $10,000 for each false claim and attorneys’ fees and expenses. The City and Agency amended their complaint on December 20, 2012 to add another defendant.
The Regents of the University of California v. Computer Methods International Corp. et al., Case No. CGC-13-531850 (San Francisco Superior Court): On June 3, 2013, the Regents of the University of California (the University) sued Canadian software company Computer Methods International Corp. (CMIC) and its subsidiary, Computer Facilities Services Inc. (CFSI), alleging that the defendants violated the California False Claims Act (CFCA) when they misrepresented the stability of the software program they contracted to provide to the University. The University also alleges claims for fraud, breach of contract and breach of express and implied warranties.
In 2010, the University awarded to the defendants a contract to provide Enterprise Resource Planning (ERP) software to manage various construction projects at the University of California, San Francisco. The University claims that when the parties executed the purchase agreement in December 2010, the defendants falsely represented that they would provide “fully integrated” ERP software meeting the University’s requirements for a stable and secure platform. The defendants allegedly represented that they would implement CMIC’s “Open Enterprise v2006” ERP software, but then later announced they would instead implement their newest (and allegedly untested) “Open Enterprise v10x.” The University claims that this new software was defective and “inherently unstable” and caused numerous delays and costs, which led the University to terminate the contract in November 2012.
According to the complaint, the invoices the defendants submitted to the University pursuant to the contract were false because the defendants knew but did not disclose that the v10x software was unstable and, as of 2009, still “under development.” The University seeks treble damages and civil penalties under the CFCA.
Standard & Poor’s Asks Court to Dismiss California Attorney General’s Lawsuit Alleging Violations of the California False Claims Act
On May 31, 2013, defendants Standard & Poor’s Financial Services, LLC (S&P) and the McGraw-Hill Companies, Inc. urged the San Francisco Superior Court to dismiss the California Attorney General’s (AG) lawsuit against them alleging that the defendants violated the California False Claims Act (CFCA). The AG claims that S&P intentionally inflated its ratings of structured finance securities, thereby causing the submission of false claims to the state’s largest pension funds, CALPERS and CALSTERS. A detailed discussion of the complaint is available here.
The defendants argued the court should dismiss the complaint on two separate and independent grounds. First, the AG’s complaint fails to state a claim because the AG did not allege a false claim for payment or that any allegedly false claim was paid with state funds. According to the defendants, the AG “expanded the notion of a false claim beyond recognition to include a subjective, forward looking opinion about something that a State entity might decide to buy.” The proper avenues to address such alleged misstatements are federal and state securities laws, not false claims act statutes.
False Claims Act Case Against Office Depot
A California False Claims Act (CFCA) case filed against Office Depot will go forward, at least as to claims asserted by several public entities that intervened in the original lawsuit filed by a former employee. A full description of the claims asserted against Office Depot is available here.
Office Depot had moved to dismiss the relator’s and intervenors’ claims back in February, but the court never heard the motion and ordered the parties to try to resolve any disputed issues. On May 23, 2013, Office Depot answered the Intervenors’ complaints in intervention. However, Office Depot renewed its motion to dismiss the relator’s claims and set that motion for hearing on June 27, 2013. Office Depot urges the court to dismiss the relator’s complaint on two separate grounds. First, the relator’s claim is barred because he already brought and lost the same claim in a lawsuit that he filed in Florida in 2008. Second, the relator did not allege facts sufficient to establish a CFCA claim or allege his claim with sufficient particularity.
Illinois and Hawaii recently amended their false claims acts and became the latest states to receive a stamp of approval from the Department of Health and Human Services Office of Inspector General (OIG). A state is eligible for a ten percent increase in its share of any Medicaid recovery made under its state FCA if the act is as robust as the federal FCA. The specific requirements for this financial incentive are available here. In 2011, the OIG notified 17 states, including Illinois and Hawaii, that their state FCAs did not meet the OIG’s requirements, and gave them a grace period to amend their state FCAs to meet OIG requirements. The OIG gave nine of the 17 states until August 31, 2013 to amend their state FCAs. On May 22, the OIG informed Hawaii and Illinois that their state FCAs met the OIG’s requirements.
The OIG letter to Hawaii is here.
The OIG letter to Illinois is here.
Two months ago, the OIG informed California that its state FCA met the OIG’s requirements, and informed Georgia that its state FCA did not. The OIG’s letter to California is here. The OIG’s letter to Georgia is here.
On May 3, 2013, Adventist Health and its affiliated hospital White Memorial Medical Center agreed to pay $14.1 million to the federal government and the State of California to settle a lawsuit alleging that it violated the federal and California False Claims Acts (FCA) by improperly compensating physicians who referred patients to the White Memorial facility. In addition, White Memorial agreed to enter into a comprehensive five-year Corporate Integrity Agreement with the Office of Inspector General of the U.S. Department of Health and Human Services to ensure compliance with federal health care benefit programs.
The settlement resolves a lawsuit filed in 2008 by two physicians formerly employed by defendant White Memorial Medical Center. The lawsuit, captioned U.S. ex rel. Hector Luque et al. v. Adventist Health et al., No. 2:08 CV1272 (E.D. Cal.), alleged that defendants’ improper financial relationships with referring physicians violated federal and California state laws that prohibit payments for referrals and kickbacks, and by extension the federal and California FCAs. According to the complaint, “[t]hose financial relationships took various forms over time, ranging from ownership of medical practice groups through a sham foundation, to cash payments disguised as teaching stipends, to recruitment loans and lines of credit to physicians that were not required to be paid back.”
State of California ex. rel David Sherwin v. Office Depot, Inc., Case No. BC 410135 (Los Angeles County Superior Court): In 2009, David Sherwin, a former Account Manager III at Office Depot’s Business Solutions Division, filed under seal a qui tam action on behalf of the State of California alleging that Office Depot violated the California False Claims Act, Government Code section 12650 et seq (CFCA), by overcharging for office and classroom supplies pursuant to a contract with the U.S. Communities Government Purchasing Alliance (U.S. Communities). The court recently unsealed the action, and public entities on whose behalf Sherwin brought the action intervened and filed their own complaints in intervention largely adopting the relator’s original allegations and adding claims for breach of contract and fraud.
The complaints in intervention allege that U.S. Communities selected Los Angeles County to negotiate and manage on its behalf a contract with Office Depot pursuant to which state and local public entities purchased office and classroom supplies from Office Depot (USC Contract) and Office Depot earned $122 million in annual revenue. Intervenors allege five different practices by which Office Depot overcharged the public entities pursuant to the USC Contract.
Maa v. Ostroff, Case No. 12-CV-00200-JCS (N.D. Cal. April 19, 2013): The court dismissed a complaint alleging that a doctor and other employees of UCSF Medical Center violated California Insurance Code section 1871.7(b) by presenting false claims to private insurance companies. The plaintiff alleged that the defendants performed medically unnecessary procedures and then billed private insurance companies for those procedures, violating section 1871.7(b). The plaintiff also alleged that the defendants, among other things, submitted claims for such medically unnecessary procedures to Medicare, violating the federal False Claims Act. The court dismissed the complaint in its entirety with leave to amend. It dismissed the plaintiff’s claim under section 1871.7(b) for two separate and independent reasons. First, the court found that the plaintiff failed to allege any unnecessary procedures with the requisite particularity. Second, it found that the plaintiff could not allege a claim under section 1871.7(b) because he did not identify any statute that requires claims submitted to private insurance companies to be medically necessary. The court explained that Penal Code section 550(b) prohibits several types of fraudulent conduct, but “says nothing about medically unnecessary procedures.”
McVeigh v. Recology San Francisco et al., 213 Cal. App. 4th 443 (Jan. 31, 2013): The California court of appeals recently held that a “fraud-alert” employee may pursue a retaliation claim under the California False Claims Act (CFCA) if the employee engaged in protected conduct, the employer was on notice that the employee was engaged in protected conduct and the employer discriminated against the employee based on such conduct.
After California amended the California False Claims Act (CFCA), effective January 1, 2013, it asked the Office of the Inspector General (OIG) of the U.S. Department of Health and Human services to review the amended CFCA and determine whether it meets the requirements of section 1909 of the Social Security Act (Section 1909), which provides a financial incentive for states to enact false claims acts as robust as the federal FCA. In a letter dated April 3, 2013, the OIG informed California’s Attorney General that the amended CFCA meets the requirements of Section 1909. A copy of the letter may be found here.
For additional information on the California False Claims Act statute, see our previous blog post.
Turner v. City and County of San Francisco, Case No. C-11-1427 EMC, 2012 U.S. Dist. LEXIS 961 (N.D. Cal. August 29, 2012): The court dismissed the qui tam plaintiff’s claim alleging violations of the California False Claim Act because the plaintiff failed to identify any false claim for payment made by the defendants to the government. The plaintiff alleged that the defendant, the San Francisco Department of Public Works (DPW), underbid on survey work to “corner the market” and then overcharged the public for “mapping fund fees” to offset the cost of the low survey bids. The court refused to expand the definition of a false claim to include claims for payment to the members of the general public, and found that the plaintiff failed to show “how overcharging persons other than government entities could constitute a false claim.” Further, the court found that even if the defendants had received such mapping fund fees from other government entities, the complaint failed to allege what was unlawful about the alleged overcharges. The profits that the defendants derived from the mapping fund fees did not render the fees wrongfully inflated. Thus, absent some allegation that the defendants inflated the fees in an unlawful manner, the plaintiff could not plausibly allege a false claim.
State of California ex rel. Bates v. Mortgage Electronic Registration System, Inc., Case No. 11-15894, 2012 U.S. App. LEXIS 19469 (9th Cir. September 17, 2012): The Ninth Circuit upheld the district court’s decision dismissing a qui tam action under the California False Claim Act’s public disclosure jurisdictional bar where the plaintiff’s allegations were similar to information publicly available through other cases and published articles, and the plaintiff alleged that he became aware of the allegedly false claims after the public disclosures.
Order Denying Summary Judgment in United States v. J-M Manufacturing Co., Case No. CV06-00055-GW (E.D. Cal. March 4, 2013): On March 4, 2013, the district court denied Defendant J-M Manufacturing Company, Inc.’s (J-M) Motion for Summary Adjudication, and held that the plaintiffs may sustain a false claims act (FCA) action against J-M by showing that J-M did not adequately test its products. The qui tam plaintiff, a former J-M quality assurance engineer, brought the suit in 2006 on behalf of the United States, several states, including California, Delaware, Florida, Illinois, Indiana, Nevada, New Mexico, New York, Massachusetts, Virginia, and the District of Columbia, and various political subdivisions and public water and sewer agencies thereof. The plaintiffs allege that J-M violated the federal and state FCAs by using inadequate manufacturing and testing processes and faulty materials to produce polyvinyl chloride (PVC) pipe that they purchased from J-M. They further allege that the PVC pipe had only a fraction of the strength and endurance J-M represented the pipe had, requiring the plaintiffs to replace the pipe.
Mao’s Kitchen Inc. v. Mundy, Case No.B233557, 2012 Cal. App. LEXIS 961 (Sept. 10, 2012): The court held that the California False Claim Act’s public disclosure jurisdictional bar applies only if the alleged disclosure is to a member of the public outside of the court system. Relying on analogous federal case law distinguishing between the government and the public domain, the court found that the following documents did not trigger application of the jurisdictional bar: (1) a confidential fee waiver application filed with the court; (2) a letter sent to the presiding judge’s office; and (3) deposition transcripts lodged with the court. As to the deposition transcripts, the court reasoned that lodged documents should be treated differently than filed documents because of the temporary and often voluminous nature of lodged documents.
On February 5, 2013, the California Attorney General (AG) filed a complaint against Standard & Poor’s Financial Services, LLC (S&P) and the McGraw-Hill Companies, Inc., alleging that they violated the California False Claims Act. The AG alleges that S&P intentionally inflated its ratings of structured finance securities to increase its market share and revenue. California’s two largest public pension funds, CALPERS and CALSTRS, purchased billions of dollars worth of securities relying on S&P’s allegedly false and fraudulent ratings. Further, the public pension funds had rules that required them in many instances to purchase only AAA-rated structured finance securities, and S&P knew that the public pension funds relied on its ratings to meet these requirements. According to the AG, S&P knowingly inflated its ratings to influence the public pension funds’ purchase of the securities, thereby causing the submission of false or fraudulent claims for payment to CALPERS and CALSTRS in violation of the California False Claims Act. The AG further alleges that S&P knowingly made these false statements about its ratings to get the false or fraudulent claims paid or approved by CALPERS and CALSTRS. The AG also alleges that S&P’s conduct violated Business & Professions Code sections 17200 and 17500. A copy of the complaint is available here.
The California Attorney General’s lawsuit against S&P followed a similar suit filed by the U.S. Department of Justice on February 4, 2013, alleging that S&P’s fraudulent ratings contributed to the 2008-2009 financial crisis and caused banks and federal credit unions to lose $5 billion. To date, twelve other states and the District of Columbia have filed similar suits against S&P. However, California is the only state to pursue claims under its false claims act.
On March 12, 2013, the court issued an order extending the defendants’ deadline to demur, answer, move to strike or otherwise respond to the complaint to July 12, 2013.
City of Calabasas ex rel. Brent Carpenter v. Bernards Bros. Inc. et al., Case No. B234205 (Cal. App. 2d Dist. Oct. 30, 2012): In an unpublished opinion, a California appellate court reversed, in part, and affirmed, in part, the trial court’s decision dismissing a qui tam action alleging that a contractor and subcontractor violated the California False Claims Act (California FCA). The plaintiff alleged that the defendant contractor fired him from a city project after he notified the defendant contractor about substandard work performed by other subcontractors, and that the defendant contractor then submitted to the city false claims for payment for such deficient work. The plaintiff further alleged that the contractor replaced him with an unlicensed subcontractor and then falsely claimed that the unlicensed subcontractor’s sister entity performed the work that the unlicensed subcontractor had actually performed. First, the appellate court found that because the defendant subcontractor’s sister company, which shared the same workforce as the defendant subcontractor, was licensed, the falsity about which entity performed the work was not material, and neither the defendant contractor nor the defendant subcontractor could be held liable for violating the California FCA on this basis. However, the appellate court also found that the plaintiff’s allegations that the subcontractors performed deficient work, that the defendant contractor knew about the deficient work, or acted in deliberate indifference or reckless disregard of that fact, and that the contractor submitted to the city claims for payment for such deficient work sufficed to state a cause of action against the contractor because they informed both the defendant and the court of the factual basis for the cause of action.
In 2006, the OIG issued guidelines on how it would determine whether a State’s false claims act (FCA) meets the requirements of Section 1909 of the Social Security, which creates a financial incentive for States to enact legislation that establishes liability to the State for false or fraudulent claims to the State Medicaid program. Qualifying States receive an additional 10 percent of the recovery in Medicaid fraud actions.
The OIG updated those guidelines effective March 15, 2013 to reflect the 2009 and 2010 amendments to the federal FCA and to provide greater specificity regarding OIG’s reviews when evaluating whether a State’s FCA qualifies for the additional 10% recovery. The OIG must determine, in consultation with the U.S. Attorney General, whether a State’s FCA:
Although California ethics rules generally prohibit ex parte communications between plaintiffs and the employees of defendants, a recent California appellate court decision held that this prohibition does not apply to communications in California state False Claims Act matters between a qui tam plaintiff and a defendant’s employees. San Francisco United School District ex. rel. Contreras v. First Student, Inc., --- Cal. Rptr. 3d ---, 2013 WL 628318 (Cal. App. Feb. 19, 2013). If extended to its logical conclusion, this decision would mean that qui tam plaintiffs and their attorneys could routinely contact the employees of defendants in state or federal False Claims Act matters, without the defendants’ consent or knowledge.
The California Appellate Decision
The California False Claims Act, California Government Code section 12650 et seq. (California FCA), establishes a cause of action for false claims for payment submitted to the State of California. Like the federal False Claims Act, the California FCA provides specific remedies for any employee who is “discharged, demoted, suspended, threatened, harassed or in any other manner discriminated against…because of lawful acts done by the employee…in furtherance of a [California FCA action] or to stop a [California FCA] violation.” Cal. Gov’t Code § 12653(a).
People ex rel. Allstate v. Dahan, Case No. BC-397695 (L.A. Sup. Ct.): On November 6, 2012, a court awarded Allstate Insurance Company over $7 million in a suit alleging that a chiropractor, Daniel H. Dahan, D.C., and his company, Progressive Diagnostic Imaging, Inc. prepared fraudulent medical reports and invoices in violation of the Insurance Frauds Prevention Act (IFPA) (Cal. Ins. Code 1871.7) and Unfair Competition Law (UCL) (Cal. Bus. & Prof. Code 17200).
Overview of the State Statute. California enacted its civil False Claims Act (CFCA) in 1987 to establish a cause of action for false claims for payment submitted to the State of California. The state statute was modeled after the 1986 amended version of the federal False Claims Act (FCA). The CFCA provides that the Attorney General, the “prosecuting authority” of a political subdivision or a private citizen may prosecute cases under the Act.
Comparison with FCA. The CFCA is very similar to the federal False Claims Act, and as discussed below, was amended effective January 1, 2013 to match changes to the FCA between 2009 and 2010. However, the CFCA still differs from the FCA in several minor respects. For example: