False Claims Act Resource Center

Confidentiality Agreement Does Not Curb Former Employee’s Whistleblower Suit

May 12th, 2016 by Qui Tam

A whistleblower’s retention and disclosure of confidential documents did not amount to breach of his employment contract, according to the U.S. District Court for the Northern District of Illinois.

In United States ex rel. Cieszyski v. LifeWatch Services, Case No. 13-cv-4052 (N.D. Ill.), relator and one-time LifeWatch salesperson Matthew Cieszyski alleges that his former employer violated federal and state False Claims Acts (“FCAs”) by submitting for government reimbursement claims for heart monitoring services that violated relevant Medicare and Medicaid regulations. LifeWatch counterclaimed that Cieszyski had breached a confidentiality agreement and privacy policy – both of which, it contended, were components of his employment contract – by retaining and disclosing to the government confidential company documents.

Breach of Contract Must Be Independent from Any Fraud Investigation

The court held that LifeWatch failed to state a claim for breach of contract and thus dismissed the counterclaims. There was no dispute that Cieszyski had signed a confidentiality agreement as a condition of his employment, or that he removed documents from the company’s premises, contrary to the agreement’s terms. But, according to the court, enforcing the agreement would undermine the protections against retaliation afforded relators by the federal and state FCAs.

At root of the dismissal was the court’s conclusion that LifeWatch’s counterclaims derived completely from the FCA claims lodged against it. LifeWatch did not contend that Cieszyski had retained or disclosed the information for any reason other than alleging the company’s FCA violations. There was no evidence that he shared the documents with anyone other than his attorneys or the government. Nor did LifeWatch claim harm beyond its exposure to the FCA suit or damages beyond the fees and costs associated with bringing the counterclaims – “a self-inflicted wound,” in the court’s parlance. Cieszyski had not, for example, revealed trade secrets that could have jeopardized LifeWatch’s standing in the market.

Interest in Confidentiality Subordinate to Anti-Retaliation Protections

Finally, the court rejected LifeWatch’s argument that Cieszyski had collected and shared more information than was needed to support his allegations of fraud. The court declined to burden relators with the obligation to know the precise quantum of evidence necessary to make their FCA cases and to limit their disclosures accordingly. The key question is whether the relator has gathered the evidence for a reason other than furthering an investigation of possible FCA violations. LifeWatch could not persuasively attribute an ulterior motive to Cieszyski. Accordingly, his statutory right to be free from retaliation overwhelmed LifeWatch’s interest in having its confidential information protected.

CFTC Approves Record $10 Million Award to Whistleblower

April 7th, 2016 by Qui Tam

The U.S. Commodities and Futures Trading Commission (“CFTC”) has approved an award of more than $10 million to a tipster through its whistleblower program. The award – only the third in the program’s five-year history – is not only the largest ever approved by the agency, it is more than 30 times larger than its closest competitor, a $290,000 award paid in 2015. The CFTC redacted the tipster’s identity – along with the precise amount of the award and the percentage of total recovery – from the final order, which is available here.

The CFTC’s whistleblower program arose from the Dodd-Frank Act in 2010, and it exists to reward tipsters who voluntary provide information that leads to successful enforcement actions for violations of the Commodity Exchange Act (“CEA”). Such tipsters are eligible to receive between 10 to 30% of the CFTC’s recovery where sanctions imposed exceed $1 million. The awards are paid through the CFTC Customer Protection Fund, which is financed wholly from sanctions paid by violators of the CEA.

Eligibility to receive a reward, however, does not amount to a guarantee. Indeed, the CFTC has issued 38 denial orders, as compared to the three orders approving awards. Participants in the U.S. Securities and Exchange Commission’s (“SEC’s”) whistleblower program – also a product of Dodd-Frank – have a much higher batting average. The SEC has approved 21 applications for awards, while denying 33.

In a press release announcing the award, Aitan Goelman, CFTC’s Director of Enforcement said, “By providing robust financial incentives and enhanced protections to whistleblowers, the Commission incentivizes people to come forward with high quality information about serious violations of the law that we might not otherwise uncover. An award this size shows the importance that the Commission places on incentivizing future whistleblowers.” Encouraging participation in the program is one thing. Would-be tipsters are left to hope that the award also signals the CFTC’s new-found dedication to compensating those individuals who provide information that leads the agency to significant recoveries.

Naming Additional Defendants and Identifying Their Fraudulent Conduct Defeats Operation of First-to-File Bar

March 30th, 2016 by Qui Tam

On March 28, the U.S. District Court for the District of South Carolina advanced a plaintiff-friendly interpretation of the False Claims Act’s (“FCA’s”) first-to-file rule. It recognized that naming new defendants who are related to defendants named in previously filed complaint and complicit in the alleged fraud renders the subsequent complaint sufficiently different to pass muster under the rule.

The first-to-file rule, 31 U.S.C. § 3730(b)(5), provides that “no other person than the Government may intervene or bring a related action based on the facts underlying the pending action.” In many U.S. Circuits, including the Fourth, where the District of South Carolina sits, courts apply the “same material elements” test, meaning that a relator is not “first to file” if his complaint describes the same material elements of a fraud documented in a previously filed complaint.

United States ex rel. Lutz v. Berkeley HeartLab, Inc., et al., No. 9:14-cv-230 (D.S.C.), is an FCA case in which three separate qui tam actions were consolidated for government intervention. The three complaints – one filed by relators Scarlett Lutz and Kayla Webster, one filed by relator Michael Mayes, and one filed by relator Chris Reidel – allege a nationwide scheme in which physicians were offered and paid kickbacks to order often-medically-unnecessary tests from diagnostic laboratories (Berkeley HeartLab, Health Diagnostic Laboratory, Inc. [“HDL”], and Singulex, Inc.), through a marketing agent (BlueWave Healthcare Consultants), in violation of the FCA. Government healthcare programs then reimbursed the laboratories for those impermissible payments. Mayes filed his complaint first, Reidel’s complaint followed, and Lutz and Webster filed their complaint thereafter. Unlike Mayes and Reidel, Lutz and Webster named the individuals who concocted, directed, and implemented the scheme – as opposed to only the corporate entities they represent – as defendants.

Those individual defendants – HDL’s Latonya Mallory and BlueWave’s Floyd Calhoun Dent and Robert Bradford Johnson – moved to dismiss the Lutz-Webster action, arguing that the first-to-file rule divested the court of subject matter jurisdiction because the Lutz-Webster complaint alleged the same general fraudulent scheme as that alleged in the Mayes complaint and the Reidel complaint. The court rejected the argument, holding that Lutz and Webster were first-filed as to the individual defendants. Put differently, “a later-filed action is not based on the facts of a pending action when it identifies a new defendant who is not a subsidiary of an already-named defendant.”  Because Lutz and Webster were the only relators to name the individual defendants and allege that they personally committed fraudulent conduct, their complaint “contains different material elements of fraud than the pending action[s].”

Notably for future relators, the court’s analysis suggests that the addition of any defendant – except for a subsidiary of a previously named defendant – will defeat the first-to-file rule, as long as their involvement in fraud can be documented with particularity. Each relator should thus draft her complaint as broadly as the facts allow, in order to support the identification and naming of all parties involved in the fraud alleged. Doing so will increase the odds that the relator’s complaint names and inculpates different defendants – and thus, under the Lutz court’s analysis, alleges different material elements – than any potentially related and previously filed complaint.

The Supreme Court Endorses Statistical Sampling to Prove Liability

March 28th, 2016 by Qui Tam

Last week, in Tyson Foods v. Bouaphakeo, — S. Ct. —-, 2016 WL 1092414, the U.S. Supreme Court affirmed a district court decision certifying a class of workers who sued Tyson Foods under the Fair Labor Standards Act (“FLSA”) and Iowa state labor law for short-changing them the time it took to change in and out of their protective gear, thus unlawfully depriving them of overtime pay.  To establish that the “donning” and “doffing” of protective gear pushed them over the 40-hour overtime threshold, the workers used sampling evidence.  An expert videotaped a representative number of employees donning and doffing the gear, calculated the average time that the process lasted, and applied that number on a class-wide basis.

Tyson appealed the order granting certification, contending that the time it took employees to change in and out of protective gear was an individual question that substantially predominated the class-wide issues, and that the use of sampling evidence “assum[ed] away the very differences that make the case inappropriate for classwide resolution.” Tyson sought a ruling not only that the use of sampling evidence was inappropriate in this case, but also that it was necessarily an improper means of establishing liability in a class action.

The Court, in a 6-2 opinion, rejected Tyson’s arguments. “A representative or statistical sample,” it concluded, “is a means to establish or defend against liability. Its permissibility turns not on the form a proceeding takes—be it a class or individual action—but on the degree to which the evidence is reliable in proving or disproving the elements of the relevant cause of action. Indeed, “[i]n many cases, a representative sample is the only practicable means to collect and present relevant data establishing a defendant’s liability.”  This, the Court held, was one such case.

While Boutaphakeo involves a class action and labor law, its language – the Court’s most definitive statement on the propriety of statistical samples as a means of proving liability – suggests broad applicability. In the False Claims Act (“FCA”) context, courts often permit statistical sampling to prove damages once liability is established, but cases permitting such evidence to prove liability exclusively based on representative evidence are far fewer in number.  Perhaps most notably, in United States ex rel. Martin v. Life Care Centers of America, 2014 WL 4816006 (E.D. Tenn. Sept. 29, 2014), the government alleged that skilled nursing facilities submitted false claims to Medicare for medically unnecessary services. The government sought to establish its case by identifying a small sample of these claims and extrapolating to the more than 154,000 claims alleged to be at issue.  The court permitted the sampling over Life Care Centers’ objection, concluding that “limiting FCA enforcement to individual claim-by-claim review would open the door to more fraudulent activity because the deterrent effect of the threat of prosecution would be circumscribed.”

Thus, in Boutaphakeo, the Supreme Court seemingly endorsed the proposition set forth in Martin: where it is impractical to “collect and present” all of the false claims at issue, presenting a “representative sample” may suffice in establishing a defendant’s liability.

$34.8 Million to be Paid by Respironics for False Claims Related to Sale of Sleep Apnea Masks

March 24th, 2016 by Qui Tam

Respironics is to pay $34.8 million for alleged False Claims Act violations related to the sale of sleep masks designed to treat sleep apnea.  Allegedly Respironics, a Murrysville, PA based company, paid kickbacks in the form of free call center services to durable medical equipment (DME) companies that purchased the masks.  The DME companies; otherwise, would have had to pay a monthly fee based upon the number of patients who used the masks manufactured by a Respironics competitor.  The alleged conduct occurred between April 2012 and November 2015.  Approximately $34.14 million will be paid to the federal government and about $660,000 will be paid to various state governments based on their Medicaid program participation.

Dr. Gibran Ameer initially brought the lawsuit under the False Claims Act qui tam provisions.  Dr. Ameer had worked for different DME companies.  He will receive $5.38 million out of the federal government’s share of the settlement.  The Civil Division’s Commercial Litigation Branch, the U.S. Attorney’s office of the District of South Carolina, and HHS Office of Counsel to the Inspector General and Office of Investigations and the National Association of Medicaid Fraud Control Units all worked together to bring about the settlement in this lawsuit.


Lockheed Martin Agrees to Pay $5 Million to Settle Alleged Violations of the FCA and the Resource Conservation and Recovery Act

March 14th, 2016 by Qui Tam

On Monday, February 29, 2016, the Justice Department announced that the Lockheed Martin Corporation and its subsidiaries Lockheed Martin Energy Systems and Lockheed Martin Utility Services (collectively, Lockheed Martin) agreed to pay the United States $5 million to resolve allegations that they violated the Resource Conservation and Recovery Act (RCRA).  By misrepresenting their compliance with RCRA to the Department of Energy (DOE), Lockheed Martin knowingly submitted false claims for payment under its contracts with DOE to operate the Paducah Gaseous Diffusion Plant in Paducah, Kentucky.  Lockheed Martin is a global security, aerospace, and information technology corporation that provides environmental services to the government and commercial customers.

The RCRA is a statute that establishes how hazardous wastes are managed.  The government’s lawsuit alleged that Lockheed Martin violated the RCRA by failing to identify and report hazardous waste produced and stored at the facility, and failing to properly handle and dispose of the waste.  Furthermore, the government alleged that this conduct resulted in false claims for payment under Lockheed Martin’s contracts with the DOE.

Of the $5 million settlement, Lockheed Martin will pay $4 million to resolve the government’s False Claims Act allegations and its subsidiaries will pay $500,000 each in RCRA civil penalties.

From 1984 to 1999, Lockheed Martin operated the Paducah Gaseous Diffusion Plant under contracts with the DOE and a government corporation, the U.S. Enrichment Corporation.  Lockheed was responsible for the facility’s uranium enrichment operations.  Uranium enrichment, through a process called “gaseous diffusion,” increases the proportion of uranium atoms that can be used to produce nuclear fuel for weapons and civilian energy production.

In addition to uranium enrichment, Lockheed Martin was responsible for the environmental restoration, waste management, and custodial care of the site, which operates 3,500 acres in McCracken County, Kentucky.  Uranium operations concluded at the plant in 2013.  The government is working to remediate any contamination at and near the site consistent with the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA).

The lawsuit resolves two lawsuits filed under the qui tam provision of the False Claims Act.  The lawsuits were filed by the Natural Resources Defense Council, Inc. and several former employees of Lockheed Martin who worked at the Paducah facility. The United States partially intervened in the lawsuits, which were then consolidated into one action.  The whistleblowers will collectively receive $920,000 from the United States’ portion of the settlement.

The case was a coordination effort between the U.S. Attorney’s Office for the Western District of Kentucky, the Civil Division’s Commercial Litigation Branch, the Environment and Natural Resources Division’s Environmental Enforcement Section, the U.S. Environmental Protection Agency, the Department of Energy and the Department of Energy Office of the Inspector General.

The case caption is: United States, ex rel. John David Tillson, Natural Resources Defense Council, Inc., et al. v. Lockheed Martin Corp., et al., Civil Action No. 5:99CV00170-GNS (W.D. Ky.).  The claims resolved in this settlement are allegations only; there has been no determination of liability.

Ninth Circuit Endorses Relator-Friendly Interpretation of Public Disclosure Bar

March 11th, 2016 by Qui Tam

The U.S. Court of Appeals for the Ninth Circuit reversed a district court order dismissing the False Claims Act (“FCA”) lawsuit brought by Relator Steven Mateski against his former employer, Raytheon. The suit, which potentially exposes Raytheon to more than $1 billion in damages, is based on allegations that the company failed to comply with provisions of its contract with the government to develop a sensor for a meteorological satellite, covered up its noncompliance, and improperly billed the government for incomplete work.

The district court dismissed the case for lack of subject matter jurisdiction under the Public Disclosure Bar, 31 U.S.C. § 3730(e)(4)(A), which prohibits FCA suits that are “based upon the public disclosure of allegations or transactions.” Specifically, the court found that public documents, such as reports from the Government Accountability Office and various newspaper articles, described the rampant mismanagement and deviations from protocol that characterized the sensor project. The district court conceded that Mateski added detail to the publicly available information, but concluded that such amplification did not render the allegations sufficiently distinct to survive scrutiny under § 3730(e)(4)(A).

The Ninth Circuit Court of Appeals, however, held that the lower court had erroneously compared the Mateski complaint with the public documents at “the highest level of generality.” While the complaint and the documents both described problems with the project, Mateski provided the government with useful, “infinitely more precise” details that were lacking from the public documents, including numerous false waivers and certifications, as well as documentation of the use of substandard materials in production of the sensor. Barring his action, according to the Court, would upset the FCA’s carefully struck balance between encouraging private litigants to discover fraud, yet stifling parasitic lawsuits.

In deciding the matter, the Mateski Court expressly endorsed and adopted the “levels-of-generality” approach employed by the Seventh Circuit Court of Appeals. But Mateski also shares analytical common ground with the U.S. Court of Appeals for the Third Circuit’s recent decision in Moore & Company (also discussed on this blog). There, the Court held that the operative question under the Public Disclosure Bar was whether the relator’s allegations materially added to the “who, what, when, where, and how” of the events set forth in public documents. Although they frame the issue differently, both Mateski and Moore & Company strictly construe the Public Disclosure Bar to ensure that relators who add significant relevant details to fraud generally described in newspapers and other public documents retain the ability to pursue FCA claims on behalf of the federal government.

Importers Settle False Claims Act Suit for $3 Million

March 2nd, 2016 by Qui Tam

Ameri-Source International, Inc.; Ameri-Source Specialty Products, Inc.; Ameri-Source Holdings, Inc. and SMC Machining, LLC are Pennsylvania-based importers.  Arjay Goel and Thomas Diener owned the first three companies while SMC Machining, Inc. was incorporated at Goel’s direction.  The businesses and Goel and Diener were named as defendants in a False Claims Act lawsuit alleging that that they had schemed to avoid customs duties for the import of small-diameter graphic electrodes which were manufactured in the Peoples Republic of China.  These electrodes are used as fuel in electric arc and ladle furnaces, such as those utilized in steel-making.

The government imposes what are known as antidumping duties to protect domestic manufacturers from foreign companies who import goods into the country at below cost prices.  Imports of small-diameter graphite electrodes that are made in the Peoples Republic of China have been subject to antidumping duties since August 21, 2008.  Custom duties are not charged for large-diameter electrodes.

The lawsuit, which was originally brought by whistleblower Graphite Electrode Sales, Inc., claimed that between December of 2009 and March of 2012, Ameri-Source International, Inc. evaded duties on 15 shipments of small-diameter graphite electrodes from the Peoples Republic of China by claiming that they were large-diameter electrodes.  Goel, Diener and the other companies were said to have taken part in the misrepresentations.  All of the defendants named in the suit have agreed to pay $3 million to settle the claims that were brought against them.  This money will be applied to the lost antidumping duties that amount to $2,137,420.  Graphite Electrode Sales, Inc. will receive approximately $480,000 as its share of the settlement.

Ameri-Source International also pled guilty to two counts of smuggling goods into the United States.  It was ordered to pay a $250,000 fine.

White House Seeks $309.6 Million to Fund DOJ-Civil Division

February 17th, 2016 by Qui Tam

On Tuesday, February 9, 2016, President Barack Obama announced that he was seeking $29 billion in funding for the U.S. Department of Justice (“DOJ”) in his budget for fiscal year 2017. The requested funds will support federal law enforcement priorities and includes increases in funding for countering violent extremism and other national security areas, civil rights and advancing equality under the law. This amount represents an increase of less than 1 percent over what the department received in 2016.

The budget for 2017 allocates approximately $309.6 million to the DOJ-Civil Division, up 17.4 percent over what the section was given for 2016. The Civil Division is the largest litigating component of the DOJ, involved in litigating matters on behalf of over 100 federal agencies each year. The Civil Division handles contract disputes, efforts to combat fraud and the abuse of federal funds, benefits programs, multi-million dollar tort claims, alleged takings of property, intellectual property disputes, defending constitutional and other challenges to Congressional enactments, and defending national security prerogatives and decisions. In addition to litigation, the Civil Division aids in administering three compensation programs – the Vaccine Injury Compensation Program, the Radiation Exposure Compensation Program, and the September 11th Victim Compensation Program. In fiscal year 2015, the Civil Division secured over $4 billion in settlements, judgments, fines, and restitution.

The Civil Division budget request provides for 1,334 authorized positions, including 960 attorneys, and includes increases for Immigration Enforcement ($729,000 and 7 positions), Elder Justice ($558,000 and 2 positions), and E-Records ($1.6 million) as well as an increase to the appropriated reimbursement for the Vaccine Injury Compensation Program.

The Who, What, When, Where, and How of Clearing the Public Disclosure Bar

February 9th, 2016 by Qui Tam

Last week, the U.S. Court of Appeals for the Third Circuit interpreted the False Claims Act’s (“FCA’s”) public disclosure bar, as modified by the 2010 amendments, in a manner favorable to potential relators.  The bar, added to the FCA in 1986, precludes a would-be relator from filing suit based on allegations of fraud that were publicly disclosed in certain sources, unless she is the “original source” of those allegations.  As initially defined, an “original source” was a person with “direct and independent knowledge” of information that she voluntarily provided to the government before the information was publicly disclosed. In 2010, Congress amended the public disclosure bar by, among making other changes, expanding the definition of “original source” to include relators with knowledge that “materially adds” to publicly disclosed information.[1]  That change was the focal point of the Third Circuit’s decision in United States ex rel. Moore & Company, P.A. v. Majestic Blue Fisheries.[2]

The plaintiff and appellant, Moore & Company, is a law firm that filed an FCA action against Korean-based tuna-fishing company, Majestic Blue Fisheries, and related companies and individuals. While representing a plaintiff in a wrongful death suit against Majestic Blue Fisheries, Moore & Company acquired information that would become the basis for its FCA allegations that the Korean companies violated the South Pacific Tuna Treaty by fraudulently certifying to the U.S. Coast Guard that they were controlled by, and that their fishing boats were captained by, U.S. citizens.

Before Moore & Company filed its FCA suit, two articles concerning Majestic Blue Fisheries’ vessel, the aptly name F/V Majestic Blue, were published on websites. Both articles documented the tribulations of a U.S. citizen, who claimed that he was the nominal captain of the ship but lacked actual authority over the crew and the vessel. Additionally, before filing the suit, Moore & Company acquired the allegedly false certifications and related emails from the Korean entities through the Freedom of Information Act (“FOIA”).

The district court and the Third Circuit agreed that the articles and the FOIA documents constituted public disclosures of fraud.  The question was whether Moore & Company was nevertheless an “original source” under the amended FCA.  The district court held that Moore & Company was not an original source and granted the defendants’ motion to dismiss.  However, the Third Circuit reversed and remanded the case for further proceedings, effectively reinstating the complaint.

According to the Third Circuit, the district court had not adequately considered whether Moore & Company’s allegations “materially add” to the publicly disclosed information, as courts must now do in light of the 2010 FCA amendments.  Relying on the New Oxford Dictionary, the Third Circuit determined that to “materially add” to a publicly disclosed allegation of fraud, a relator must “contribute significant additional information to that which has been publicly disclosed so as to improve its quality.”

Significantly, under this standard, relators need not be the first to disclose essential elements of fraud.  They need only add to “the who, what, when, where, and how of the events at issue.”  Other courts have invoked the same language – which reflects the ingredients of an effective newspaper story – to describe the particularity with which plaintiffs must allege fraud to state a claim under the Federal Rules of Civil Procedure.

Here, the articles and FOIA documents already provided the basis for the allegations that the Korean entities had submitted false certifications in violation of the South Pacific Tuna Treaty.  Moore & Company enhanced the narrative by alleging “significant details,” including that two Americans served as straw-owners of Majestic Blue Fisheries, and that representatives of the Korean companies used the pseudonym “William Phil” when emailing with the government in order to make it seem like the communications were coming from an American citizen.

Though Moore & Company leaves some questions to be answered by future cases – like, for example, where the line between “significant details” and insignificant details lies – one implication from the decision is clear.  At least in the Third Circuit, a relator can survive a motion to dismiss even if she is not the original source of all essential elements of the alleged fraud, as long as her allegations develop the factual background in a way that the court finds meaningful.  Thus, when drafting an FCA complaint, it is more important than ever that counsel not only plead the elements of fraud with particularity, but also tell the story surrounding the fraud with as much compelling detail as it can include.

[1] 31 U.S.C. § 3730(e)(4)(B).

[2] — F.3d  —-, 2016 WL 386087, Case No. 14-14292 (Feb. 2, 2016).


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