General Schemes vs. Specific Claims

But how much detail must a relator provide to survive a Rule 9(b) challenge?

Sufficient Detail

The issue of sufficient detail to support a claim takes center stage in the FCA context, in which relators often have (or have a belief that they have) knowledge of alleged wrongdoing, but have no knowledge of a single specific claim with false information that was submitted to the government.

The Fourth, Sixth, Eighth and Tenth Circuits and, to a lesser extent, the Eleventh Circuit, have applied the same rule barring such complaints for FCA cases as they apply consistently in all civil fraud cases; that is, dismissal of a qui tam complaint is required if the relator fails to identify at least some of the false claims submitted to the government. In these Circuits, a relator must plead, “at a minimum, the time, place and contents of the false representations, as well as the identity of the person making the misrepresentation.” U.S. ex rel. Nathan v. Takeda Pharms. N. Amer., Inc., 707 F.3d 451 (4th Cir. 2013) (Nathan).

The First, Fifth, Seventh and Ninth Circuits, on the other hand, take a broader approach, finding that it is sufficient in the FCA context for a relator to allege “particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted,” even if the relator does not, or cannot, identify a single specific claim submitted to the government. U.S. ex rel. Grubbs v. Kanneganti, 565 F.3d 180, 190 (5th Cir. 2009).

Recently, and for the second time in five years, the U.S. Supreme Court declined to review a case (the Fourth Circuit's Nathan case) that could have resolved this circuit split. Without resolution, the issue of what Rule 9(b) requires of a False Claims Act relator will continue to be a battle of legislative purposes, with Rule 9(b)'s focus on giving notice to defendants and preventing weak claims pitted against the False Claims Act's interest in encouraging insiders to bring their knowledge to bear on behalf of the government. With no imminent guidance from the Supreme Court, this battle rages on.

The Nathan Case

In Nathan, the Eastern District of Virginia dismissed a qui tam complaint accusing Takeda Pharmaceuticals North America Inc. of a scheme to submit false billings to Medicare by encouraging off-label use of its acid reflux drug, Kapidex. The complaint alleged that Takeda sent 60-mg samples of Kapidex to doctors, knowing that this dosage was only approved for treatment of erosive esophagitis (EE), and was unapproved for treatment of gastroesophageal reflux disease (GERD). The relator alleged that some of the doctors who received free samples were rheumatologists, who, he believed, would not see patients with any digestive issues; while others were gastroenterologists, who, he alleged, would treat far more patients with GERD than patients with EE.

The relator argued that the provision of the free samples and other alleged off-label marketing by the manufacturer caused the doctors to prescribe off-label, and caused the patients, in turn, to submit false claims to Medicare, in violation of 31 U.S.C. ' 3729(a)(1)(A). The complaint did not identify specific submissions to the government for off-label use as a result of the alleged scheme; instead, it identified the type of practice the physicians had who received free samples from the manufacturer and subsequently wrote prescriptions for Kapidex that were submitted for reimbursement. The relator argued that this was sufficient under Rule 9(b) since, statistically, many of these prescriptions were likely to be 60-mg dosages prescribed off-label for treatment of GERD.

While the relator's claims may well have failed under either approach to Rule 9(b) ' arguably, he neither identified specific false claims nor created a “strong inference” that such claims were submitted ' the Fourth Circuit Court of Appeals affirmed the Eastern District of Virginia's dismissal of the case under 9(b), holding that False Claims Act relators must identify specific false claims. On March 31, 2014, the Supreme Court denied the petition for certiorari submitted by the relator after the government filed an amicus brief arguing that, while clarification of this issue may be necessary, the facts in Nathan were not the appropriate vehicle for such clarification.

A Purpose-Driven Analysis

In its opinion in Nathan, the Fourth Circuit anchored its analysis in the “multiple purposes of Rule 9(b): ' providing notice to a defendant of its alleged misconduct, preventing frivolous suits, eliminating fraud actions in which all the facts are learned after discovery, and protecting defendants from harm to their goodwill and reputation.” 707 F.3d at 456 [emphasis added]. Because accusations of defrauding the government can have a significant impact on a business, the court found that “such purposes may apply with particular force in the context of the Act.” Id. Other circuit courts that have established the same rule have similarly made much of the fact that, unlike other pleading standards, Rule 9(b) is not only about notice to defendants; it is also designed to protect defendants from “spurious charges of immoral and fraudulent behavior.” U.S. ex rel. Clausen v. Lab. Corp. of Amer., Inc., 290 F.3d 1301, 1310 (11th Cir. 2002). The focus in this analysis is on the impact a deficient complaint can have on a defendant.

In contrast, the First, Fifth, Seventh and Ninth Circuits have emphasized the role of the relator in advancing the legislative purpose of the False Claims Act: to expose fraud. In Grubb s, for example, the Fifth Circuit focused on finding a “workable construction of Rule 9(b) under the False Claims Act; that is, one that effectuates Rule 9(b) without stymieing legitimate efforts to expose fraud.” Grubbs, 565 F.3d at 190. This approach centers not on what must be alleged (the “who, what, where, when and why” usually required to allege a fraudulent representation), but, rather, on whether the facts presented by a relator lead to “the logical conclusion” of fraudulent submissions. Id. at 192.

The government, of course, supports this broader approach. In the briefing opposing the relator's petition for certiorari in Nathan, the government noted that it “rarely if ever needs a relator's assistance to identify claims for payment that have been submitted to the United States. Rather, relators typically contribute to government's enforcement efforts by bringing to light other information that shows those claims to be false.” Gov't Br. at 16. The Seventh Circuit has used similar language, noting in a defense contracting case that “[s]ince a relator is unlikely to have [billing] documents unless he works in the defendant's accounting department,” a narrow construction of Rule 9(b) “takes a big bite out of qui tam litigation.” U.S. ex rel. Lusby v. Rolls-Royce Corp., 570 F.3d 849 (7th Cir. 2009) (Easterbrook, J.).

Reconciling Dueling Purposes in Support of a Focused Interpretation

We suggest that a defendant arguing for an interpretation of Rule 9(b) more in line with its plain language has the benefit of common sense: Why, after all, should a relator standing in the shoes of a fraud victim (the government) be allowed to plead with less particularity than would be required of any other fraud victim? Given courts' concern with not stymieing the purpose of the FCA, practitioners ' particularly those appearing in the Second and Third Circuits, which have not yet picked a side in the circuit split ' are well advised to frame their argument in those terms. Put differently, arguments clarifying that this interpretation of Rule 9(b) will not upset the purpose of the False Claims Act are more likely to succeed than arguments simply demanding that Rule 9(b) trumps the FCA.

This approach is supported by a separate purpose of the FCA's provisions, little discussed in the Rule 9(b) context: the desire to “strike a balance between encouraging private persons to root out fraud and stifling parasitic lawsuits.” Schindler Elevator Corp. v. U.S. ex rel. Kirk , 131 S. Ct. 1885 (2011). Congress, recognizing the possibility that relators could use the FCA more as a get-rich-quick vehicle than one concerned with rooting out fraud, enacted a “public disclosure bar,” preventing relators from using already public information to pursue awards under the FCA. 31 U.S.C. ' 3730(e)(4)(A). Seen from this perspective, both the FCA's and Rule 9(b)'s particularity requirements share the common goal of preventing abuse of the FCA. Both the public disclosure bar and 9(b) can, and should, act as gatekeepers to prevent a federal statute from being turned on its head and used for personal gain instead of the common good.

Another approach to reconciling the purposes of Rule 9(b) with the FCA's interest in rooting out fraud could be to identify alternative means for the relator to recover damages in the event of dismissal. In the health care context, for example, a proposed HHS rule change to the Medicare Incentive Reward Plan seeks to replace that plan ' which currently awards to whistleblowers who report fraud and abuse in Medicare submissions up to 10% of the overpayment or $1,000, whichever is less ' with a much more generous plan that would award such a whistleblower 15% of the final amount collected by Medicare, capped at $9.9 million. See 78 Fed. Reg. 25013 (Apr. 29, 2013). Similarly, the Dodd-Frank Act created an SEC Whistleblower Program, which allows whistleblowers in the less FCA-prone financial services industry to receive monetary awards when they raise issues with the Securities and Exchange Commission that lead to a successful enforcement action. 15 U.S.C. ' 78u-6. Programs such as these allow a defendant to persuasively address courts' concerns that dismissing qui tam actions would destroy any incentive to reveal wrongdoing.

Conclusion

Until the Supreme Court resolves the question of what an FCA relator needs to plead, companies doing business with the government can expect relators to bring suit in the forums with the broadest pleading standards, particularly if they lack knowledge of specific claims submitted to the government. In seeking to dismiss these claims for lack of particularity, the burden in such jurisdictions will be on FCA defendants to demonstrate why the purposes of Rule 9(b) and the FCA favor them.

Jacqueline Wolff is the Co-Chair of the Corporate Investigations and White Collar Defense Group at Manatt, Phelps & Phillips, LLP, and a member of this newsletter's Board of Editors. Nirav Shah is a litigation associate at the firm.

The qui tam provisions of the False Claims Act, which allow private individuals (“relators”) to bring suit on behalf of the federal government and keep a percentage of the proceeds, continue to be some of the most potent weapons in the government's antifraud arsenal. In fiscal year 2013, over three-quarters of the $3.8 billion recovered by the Department of Justice (DOJ) from FCA cases came from cases brought by relators. Over that same period, relators brought 752 new FCA suits.

Congress has telegraphed its belief in the value of whistleblower suits: In recent years, blockbuster legislation, such as the Affordable Care Act and the Dodd-Frank Act, has increased the potential bounties and legal protections available to whistleblowers.

FCA suits present significant challenges to defendants, including potentially massive actual and statutory damages, criminal investigations arising out of civil allegations, exclusion or debarment from government contracts, and the significant reputational harm that comes when a company is accused of fleecing the government. Faced with these risks, FCA defendants have found appropriate shelter in Rule 9(b) of the Federal Rules of Civil Procedure, which requires that a party alleging fraud “state with particularity the circumstances constituting fraud.” Rule 9(b) allows dismissal of a complaint early in the course of a lawsuit, prior to expensive and intrusive discovery, if a defendant can show that the relator has not alleged (and, perhaps, does not possess) sufficient detail as to the alleged fraud against the government.

But how much detail must a relator provide to survive a Rule 9(b) challenge?

Sufficient Detail

The issue of sufficient detail to support a claim takes center stage in the FCA context, in which relators often have (or have a belief that they have) knowledge of alleged wrongdoing, but have no knowledge of a single specific claim with false information that was submitted to the government.

The Fourth, Sixth, Eighth and Tenth Circuits and, to a lesser extent, the Eleventh Circuit, have applied the same rule barring such complaints for FCA cases as they apply consistently in all civil fraud cases; that is, dismissal of a qui tam complaint is required if the relator fails to identify at least some of the false claims submitted to the government. In these Circuits, a relator must plead, “at a minimum, the time, place and contents of the false representations, as well as the identity of the person making the misrepresentation.” U.S. ex rel. Nathan v. Takeda Pharms. N. Amer., Inc. , 707 F.3d 451 (4th Cir. 2013) ( Nathan ).

The First, Fifth, Seventh and Ninth Circuits, on the other hand, take a broader approach, finding that it is sufficient in the FCA context for a relator to allege “particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted,” even if the relator does not, or cannot, identify a single specific claim submitted to the government. U.S. ex rel. Grubbs v. Kanneganti , 565 F.3d 180, 190 (5th Cir. 2009).

Recently, and for the second time in five years, the U.S. Supreme Court declined to review a case (the Fourth Circuit's Nathan case) that could have resolved this circuit split. Without resolution, the issue of what Rule 9(b) requires of a False Claims Act relator will continue to be a battle of legislative purposes, with Rule 9(b)'s focus on giving notice to defendants and preventing weak claims pitted against the False Claims Act's interest in encouraging insiders to bring their knowledge to bear on behalf of the government. With no imminent guidance from the Supreme Court, this battle rages on.

The Nathan Case

In Nathan, the Eastern District of Virginia dismissed a qui tam complaint accusing Takeda Pharmaceuticals North America Inc. of a scheme to submit false billings to Medicare by encouraging off-label use of its acid reflux drug, Kapidex. The complaint alleged that Takeda sent 60-mg samples of Kapidex to doctors, knowing that this dosage was only approved for treatment of erosive esophagitis (EE), and was unapproved for treatment of gastroesophageal reflux disease (GERD). The relator alleged that some of the doctors who received free samples were rheumatologists, who, he believed, would not see patients with any digestive issues; while others were gastroenterologists, who, he alleged, would treat far more patients with GERD than patients with EE.

The relator argued that the provision of the free samples and other alleged off-label marketing by the manufacturer caused the doctors to prescribe off-label, and caused the patients, in turn, to submit false claims to Medicare, in violation of 31 U.S.C. ' 3729(a)(1)(A). The complaint did not identify specific submissions to the government for off-label use as a result of the alleged scheme; instead, it identified the type of practice the physicians had who received free samples from the manufacturer and subsequently wrote prescriptions for Kapidex that were submitted for reimbursement. The relator argued that this was sufficient under Rule 9(b) since, statistically, many of these prescriptions were likely to be 60-mg dosages prescribed off-label for treatment of GERD.

While the relator's claims may well have failed under either approach to Rule 9(b) ' arguably, he neither identified specific false claims nor created a “strong inference” that such claims were submitted ' the Fourth Circuit Court of Appeals affirmed the Eastern District of Virginia's dismissal of the case under 9(b), holding that False Claims Act relators must identify specific false claims. On March 31, 2014, the Supreme Court denied the petition for certiorari submitted by the relator after the government filed an amicus brief arguing that, while clarification of this issue may be necessary, the facts in Nathan were not the appropriate vehicle for such clarification.

A Purpose-Driven Analysis

In its opinion in Nathan, the Fourth Circuit anchored its analysis in the “multiple purposes of Rule 9(b): ' providing notice to a defendant of its alleged misconduct, preventing frivolous suits, eliminating fraud actions in which all the facts are learned after discovery, and protecting defendants from harm to their goodwill and reputation.” 707 F.3d at 456 [emphasis added]. Because accusations of defrauding the government can have a significant impact on a business, the court found that “such purposes may apply with particular force in the context of the Act.” Id. Other circuit courts that have established the same rule have similarly made much of the fact that, unlike other pleading standards, Rule 9(b) is not only about notice to defendants; it is also designed to protect defendants from “spurious charges of immoral and fraudulent behavior.” U.S. ex rel. Clausen v. Lab. Corp. of Amer., Inc. , 290 F.3d 1301, 1310 (11th Cir. 2002). The focus in this analysis is on the impact a deficient complaint can have on a defendant.

In contrast, the First, Fifth, Seventh and Ninth Circuits have emphasized the role of the relator in advancing the legislative purpose of the False Claims Act: to expose fraud. In Grubb s, for example, the Fifth Circuit focused on finding a “workable construction of Rule 9(b) under the False Claims Act; that is, one that effectuates Rule 9(b) without stymieing legitimate efforts to expose fraud.” Grubbs, 565 F.3d at 190. This approach centers not on what must be alleged (the “who, what, where, when and why” usually required to allege a fraudulent representation), but, rather, on whether the facts presented by a relator lead to “the logical conclusion” of fraudulent submissions. Id. at 192.

The government, of course, supports this broader approach. In the briefing opposing the relator's petition for certiorari in Nathan, the government noted that it “rarely if ever needs a relator's assistance to identify claims for payment that have been submitted to the United States. Rather, relators typically contribute to government's enforcement efforts by bringing to light other information that shows those claims to be false.” Gov't Br. at 16. The Seventh Circuit has used similar language, noting in a defense contracting case that “[s]ince a relator is unlikely to have [billing] documents unless he works in the defendant's accounting department,” a narrow construction of Rule 9(b) “takes a big bite out of qui tam litigation.” U.S. ex rel. Lusby v. Rolls-Royce Corp. , 570 F.3d 849 (7th Cir. 2009) (Easterbrook, J.).

Reconciling Dueling Purposes in Support of a Focused Interpretation

We suggest that a defendant arguing for an interpretation of Rule 9(b) more in line with its plain language has the benefit of common sense: Why, after all, should a relator standing in the shoes of a fraud victim (the government) be allowed to plead with less particularity than would be required of any other fraud victim? Given courts' concern with not stymieing the purpose of the FCA, practitioners ' particularly those appearing in the Second and Third Circuits, which have not yet picked a side in the circuit split ' are well advised to frame their argument in those terms. Put differently, arguments clarifying that this interpretation of Rule 9(b) will not upset the purpose of the False Claims Act are more likely to succeed than arguments simply demanding that Rule 9(b) trumps the FCA.

This approach is supported by a separate purpose of the FCA's provisions, little discussed in the Rule 9(b) context: the desire to “strike a balance between encouraging private persons to root out fraud and stifling parasitic lawsuits.” Schindler Elevator Corp. v. U.S. ex rel. Kirk , 131 S. Ct. 1885 (2011). Congress, recognizing the possibility that relators could use the FCA more as a get-rich-quick vehicle than one concerned with rooting out fraud, enacted a “public disclosure bar,” preventing relators from using already public information to pursue awards under the FCA. 31 U.S.C. ' 3730(e)(4)(A). Seen from this perspective, both the FCA's and Rule 9(b)'s particularity requirements share the common goal of preventing abuse of the FCA. Both the public disclosure bar and 9(b) can, and should, act as gatekeepers to prevent a federal statute from being turned on its head and used for personal gain instead of the common good.

Another approach to reconciling the purposes of Rule 9(b) with the FCA's interest in rooting out fraud could be to identify alternative means for the relator to recover damages in the event of dismissal. In the health care context, for example, a proposed HHS rule change to the Medicare Incentive Reward Plan seeks to replace that plan ' which currently awards to whistleblowers who report fraud and abuse in Medicare submissions up to 10% of the overpayment or $1,000, whichever is less ' with a much more generous plan that would award such a whistleblower 15% of the final amount collected by Medicare, capped at $9.9 million. See 78 Fed. Reg. 25013 (Apr. 29, 2013). Similarly, the Dodd-Frank Act created an SEC Whistleblower Program, which allows whistleblowers in the less FCA-prone financial services industry to receive monetary awards when they raise issues with the Securities and Exchange Commission that lead to a successful enforcement action. 15 U.S.C. ' 78u-6. Programs such as these allow a defendant to persuasively address courts' concerns that dismissing qui tam actions would destroy any incentive to reveal wrongdoing.

Conclusion

Until the Supreme Court resolves the question of what an FCA relator needs to plead, companies doing business with the government can expect relators to bring suit in the forums with the broadest pleading standards, particularly if they lack knowledge of specific claims submitted to the government. In seeking to dismiss these claims for lack of particularity, the burden in such jurisdictions will be on FCA defendants to demonstrate why the purposes of Rule 9(b) and the FCA favor them.

Jacqueline Wolff is the Co-Chair of the Corporate Investigations and White Collar Defense Group at Manatt, Phelps & Phillips, LLP, and a member of this newsletter's Board of Editors. Nirav Shah is a litigation associate at the firm.