Blowing The Whistle: Italian Style

November 12th, 2018 by Marc Raspanti

The Event

On November 30, 2017, the Italian Government enacted Law 179: “Provisions for the protection of whistleblowers who report offences or irregularities which have come to their attention in the context of a public or private employment relationship.” This Law established the first set of whistleblower protections in the private sector in all of Italian legislative history.

The Background

Before the enactment of Law 179, Italian anti-corruption law was mainly governed by Legislative Decree 231, enacted on June 8, 2001, and Law 190, enacted on November 6, 2012. Legislative Decree 231 concerning the “administrative liability rules for legal persons, companies and associations, including those without legal personality.” This Decree established direct liability of legal entities for crimes committed by their agents while acting on behalf of the entity for the purpose of benefiting the entity for the first time in Italian history. Even though Decree 231 was groundbreaking in and of itself, this Decree did not contain any protections for whistleblowers. Eleven years later, the Italian Government enacted Law 190 concerning “measures for the prevention and repression of corruption and illegality in the Public Administration.” This Law established the first set of whistleblower rules in Italian history; however, the rules only applied to public entities. Although both of the aforementioned laws were revolutionary and the first of their kind in Italy, they were not enough to effectuate real change.

The Motivation For The Change In The Law

Historically, Italy has been regarded by some as one of the more corrupt countries in the European Union. Even though Decree 231 established direct liability of legal entities for certain crimes committed by their representatives, and Law 190 established regulations for whistleblowing against public entities corruption was still widespread. The Organization for Economic Co-operation and Development’s 2014 Foreign Bribery Report concluded that less than 2 % of the foreign bribery cases were detected through whistleblowing. This motivated the Italian Government to enact Law 179 which amended portions of Decree 231 and Law 190 to provide whistleblowers greater protection and extend those same protections for whistleblowers in private entities.

Who Can Be A Whistleblower Under Italian Law?

In the public sector, whistleblower protections apply to public employees, employees of publically owned private companies, economic public entities, and employees or collaborators of private companies supplying goods or services while carrying out works for public entities that report or denounce misconduct discovered while performing their services under Law 190 and Law 179. In the private sector, whistleblower protections apply to private employees who report or denounce misconduct pursuant to Legislative Decree 231that they witnessed in carrying out of their functions under Law 179. In both the public and private sector, whistleblower protection does not apply to reports that are slanderous, defamatory, or those that either maliciously or negligently turn out to be unfounded.

What Protections Can A Whistleblower Receive?

In both the public and private sector, entities are prohibited from imposing conditions that directly or indirectly affect whistleblowers in a negative way including, but not limited to, imposing disciplinary measures, sanctions, demotions, or dismissals of whistleblowers. If entities are found to have implemented any of the aforementioned measures, those measures are to be considered null and void. In the event that whistleblowers are discriminated or retailed against, they can report the event to the Anticorruption Authority (ANAC) in the public sector, and the Italian Labor Authorities and relevant trade unions in the private sector. Those authorities are supposed to determine if discrimination or retaliation has occurred, and if so, impose sanctions.

How To Blow The Whistle In Italy

In the public sector, public entities are required to adopt internal whistleblower protection measures to preserve the whistleblower’s identity, and establish procedures for managing whistleblower reports under Law 190 and Law 179. If the public entity fails to establish adequate procedures sanctions may be imposed. In the private sector, Law 179 only imposes reporting requirements on private entities that had already enacted a reporting system under Decree 231. Private entities must create one or more channels that allow employees to internally report misconduct, at least one alternative reporting channel to guarantee the confidentiality of the whistleblower’s identity, and appropriate measures to protect the whistleblower’s identity and to maintain the confidentiality of information. If a private entity interferes with any of the reporting requirements sanctions are to be imposed.

The Take Away

The Italian Government is taking steps to combat corruption; however, it is likely not enough. Law 179 fails to include any financial incentives. It is interesting that even though monetary rewards have proven to be an effective tool in whistleblower cases, European countries have not been including them in their whistleblower laws. It raises the question if these countries are actually trying to root out corruption, or if they are just trying to convince the electorate that they are doing so.

Abbott Laboratories To Pay $25 Million To Settle Non-Intervened Whistleblower Lawsuit Alleging that it Illegally Promoted its Cholesterol Drug TriCor and Paid Kickbacks to Prescribing Physicians

October 29th, 2018 by Qui Tam

PHILADELPHIA, PA – The United States Attorney’s Office for the Eastern District of Pennsylvania announced on Friday, October 26, 2018, that global healthcare giant Abbott Laboratories (“Abbott”) has executed a settlement agreement and will pay $25 million to settle a non-intervened whistleblower lawsuit alleging that it illegally promoted its blockbuster cholesterol drug Tricor for off-label uses and paid kickbacks to prescribing physicians.

In September 2009, Amy Bergman, a former Abbott sales representative, filed a qui tam whistleblower lawsuit in federal district court before the Honorable C. Darnell Jones, II in Philadelphia alleging that Abbott violated the federal False Claims Act (“FCA”) and numerous state false claims laws by:


In 2012, the United States, and all of the plaintiff states receiving payment from this settlement, declined to intervene in Ms. Bergman’s lawsuit. Thereafter, Ms. Bergman and her legal team from Pietragallo Gordon Alfano Bosick & Raspanti, LLP, Nicholson & Eastin, LLP and Kelley/Uustal, continued litigating the case on behalf of federal and state taxpayers, as well as their client on their own. After years of litigation, including robust motion practice, discovery and depositions, they ultimately secured the global $25 million settlement announced by the government. The federal government will receive $23.2 million and state Medicaid programs will receive $1.8 million. Ms. Bergman will receive a relator’s share of over $6,000,000, plus pro rata interest, for her efforts and those of her entire legal team.

The United States Attorney for the Eastern District of Pennsylvania William McSwain said in his press statement:

“We thank Ms. Bergman for coming forward and providing essential assistance to the government. Preserving government program funds would be far more difficult without relators who are willing to shine a spotlight on alleged illegal practices like the ones involved in this case. Ms. Bergman’s efforts, and those of her attorneys, were critical to our favorable resolution of this case.”

Marc S. Raspanti, co-lead counsel for Ms. Bergman and founder of the False Claims Act practice at Pietragallo Gordon Alfano Bosick & Raspanti, commented that “Patients deserve to know that their medical professional is making decisions based on their best interests and not because a company is marketing its drugs for unapproved uses or offering incentives to steer patients to specific drugs.” Michael Morse, co-lead counsel for Ms. Bergman, commented that “the significant recovery for federal and state taxpayers in this case was the result of Ms. Bergman’s courage in stepping forward as well as the tremendous work, over many years, of her entire legal team who handled the case in a non-intervened posture.”

The Off-Label Marketing Allegations

Under Food and Drug Administration (“FDA”) rules, prescription drug manufacturers and marketers may only promote their products for approved uses. Physicians are free to prescribe drugs for conditions beyond those for which approval has been received but marketing to induce off-label, unapproved use is not permitted.

Ms. Bergman’s Complaints alleged that, from 2000 through 2008, Abbott marketed TriCor for purposes not approved by the FDA, and not supported by relevant medical compendia. The alleged off-label uses included the use of Tricor in combination therapy with statins, as a first line treatment in diabetics, and to address cardiac risk factors in diabetics. Medicare, Medicaid and other federally-funded health insurance programs do not cover off-label uses of drugs. Therefore, insurance claims submitted for Tricor for the unapproved uses were not payable by these programs.

The Kickback Allegations

The federal Anti-Kickback Statute (“AKS”) and similar state rules prohibit the offering, paying, soliciting or receiving remuneration to induce referrals of items or services covered by federally funded programs. The Anti-Kickback Statute is intended to ensure that a physician’s medical judgment is not compromised by improper financial incentives and is instead based on the best interests of the patient.

Ms. Bergman’s Qui Tam Complaints alleged that Abbott increased sales of Tricor by directly and indirectly providing remuneration to prescribing physicians in order to incentivize the physicians for prescribing Tricor. This remuneration included, but was not limited to, gift baskets and certificates and other items of value.

The Legal Team

The settlement announced today by the government was achieved through the significant efforts of Ms. Bergman’s whistleblower legal team, including: Marc S. Raspanti, Michael A. Morse, and Pamela Coyle Brecht from Pietragallo Gordon Alfano Bosick and Raspanti, LLP; Robert N. Nicholson and Parker Eastin from Nicholson Eastin, LLP; and John J. Uustal and Cristina M.  Pierson from Kelley/Uustal.

Ms. Bergman and her legal team would like to express their appreciation for the efforts by the team of federal and state government supervising lawyers, and, in particular the substantial efforts of Assistant United States Attorney Charlene Keller Fullmer, Deputy Chief of Affirmative Litigation for the United States Attorney’s Office for the Eastern District of Pennsylvania, who helped steer this matter to its successful conclusion.

In executing the settlement agreement in this case, Abbott expressly denied liability, wrongdoing, or that it engaged in any improper or illegal conduct. Moreover, Abbott denied all the allegations raised in Ms. Bergman’s complaints. The government did not file a complaint.

The lawsuit is styled as U.S. ex rel. Amy Bergman v. Abbott Laboratories, Civil Action Civil Action No. 2:09-cv-04264999 (CDJ), which has been pending in the United States District Court for the Eastern Pennsylvania before U.S. District Judge C. Darnell Jones.

A copy of Ms. Bergman’s Complaints, along with other pleadings publicly filed in the case, can be found at or on the Department of Justice’s website.

Whistleblowing: French Style

October 18th, 2018 by Marc Raspanti

What Happened?

On December 9, 2016, the French Parliament enacted Sapin II: “the law on transparency, the fight against corruption and the modernization of economic life.” This marked the first time in French history that a whistleblower was offered protection in an anti-corruption case.

The Background

Before the historical enactment of Sapin II, France was governed by a series of anti-corruption laws and enforcement agencies from the enactment of Sapin I in 1993 to the establishment of the National Financial Prosecutor, the High Authority for Transparency in Public Life, and the Central Bureau of Anti-Corruption and Investigation of Financial Crimes in 2013. However, the French government focused on the transparency of and prevention of bribery in public officials, and neglected to mention anything about the whistleblower. The courts looked to European case law, the French Constitution’s principles of freedom of expression, and the European Convention of Human Rights for guidance on how to treat the whistleblower, but this lead to rampant inconsistency and ineffectiveness.

The Motivation

Without any incentives or guarantees for protection whistleblowers were not coming forward and corruption was perceived to be rampant in French companies and public officials. This led to widespread criticism by the Organization for Economic Co-Operation and Development (OECD) and various other international anti-corruption agencies. This condemnation motivated the French government to enact Sapin II which offered whistleblower protection for the first time in French history.

Who Can Be A Whistleblower Under The French Law?

Sapin II defines a whistleblower as:
a physical person who reveals or reports, in a selfless manner and in good faith, a crime or an offense, a grave and obvious violation of an international commitment lawfully ratified or approved by France, of a unilateral Act of an international organization taken on the ground of said commitment, of the law or regulation, or a grave threat or harm to the general interest, of which this person has acquired personal knowledge.
This requires the whistleblower to be selfless and report the violation in good faith. In order to ensure the whistleblower is motivated by their desire to protect the general public and not their own personal interests, French law prohibits the whistleblower from being monetarily rewarded. This automatically excludes those who are employed to report matters of general interest, such as news reporters and journalists, from receiving whistleblower status. From this definition, the whistleblower does not have to be an employee of the violating company. Aside from selfness and good faith, the only other whistleblower requirements are personal knowledge of the violation, and reasonable grounds to believe the violation did happen.

What Protections Can A Whistleblower Receive?

Since the whistleblower is not offered any financial incentives, the French government standardized a set of protections offered to the whistleblower, for the first time in French anti-corruption law, to entice the whistleblower to come forward. Under Sapin II, procedures to guarantee the confidentiality of the whistleblower must be established. This works to prevent retaliation of any kind from taking place including, but not limited to, firing or imposing hardships on the employment conditions of the whistleblower. If a company does not set up confidentiality protocols or is caught retaliating against a whistleblower, the company will be subject to fines based upon the company’s size. Also, the whistleblower is not held liable for revealing any information protected by law (aside from military secrets, Hippa information, or conversations protected by attorney-client privilege). Even though the whistleblower is not rewarded per se, the whistleblower is guaranteed that they will not be punished for reporting a violating company; a promise that was not offered prior to the enactment of Sapin II.

How To Blow the Whistle In France

In addition to the protections offered, Sapin II also includes reporting requirements for the whistleblower. First, the whistleblower must report the violation to their employer. The report could be made to the whistleblower’s supervisor or to the person designated by the whistleblower’s employer to handle this type of matter. Then, if the employer does not respond in a reasonable time, the whistleblower can report the violation to a judicial authority or administrative authority. Finally, if the authority does not respond in a reasonable time, the whistleblower may go to public with the information in order to have their concerns heard.

The Take Away

Sapin II’s unique take on the whistleblower signifies the French government’s intent to eliminate corruption. By incorporating the term “selflessness” into the definition and forbidding monetary rewards, the French government is working to ensure that all whistleblower claims have merit and are in the best interests of the country. Instead of financial compensation, the whistleblower is rewarded with the guarantee that they will not be punished for the act of whistleblowing itself. While this might not seem like much of an incentive compared to those countries who offer monetary payments like the United States, this is the first time in France’s history that whistleblowers are offered protection of any kind. Only time will tell if the French method is effective in getting whistleblowers to come forward and root out foreign corruption.


The Fifth Circuit’s Determination of Prejudice With A Non-Intervening Government

September 14th, 2018 by Pamela Coyle Brecht

The Issue

On September 7, 2018, the Fifth Circuit Court of Appeals decided a previously unanswered question regarding the False Claims Act (FCA) in United States ex rel. Vaughn: can a non-intervening Government plaintiff be dismissed without prejudice in FCA cases where the relator voluntarily dismisses its qui tam claims with prejudice?

The Facts

In April 2013, four board certified allergists, the Vaughn Relators, brought a qui tam action alleging that United Biologics improperly billed Medicare for unnecessary medical treatments, and then used the illegal Medicare payments to pay kickbacks to non-allergist physicians. In November 2015, the Government declined to intervene in their action. In October 2016, the Vaughn Relators filed a motion to voluntarily dismiss the case with prejudice as to themselves but without prejudice as to the United States which was granted by the District Court in March 2017. In April 2017, United Biologics appealed the dismissal on the grounds that the District Court erred when it dismissed the Vaughn Relators with prejudice, but dismissed the Government without prejudice.

Under the False Claims Act, relators bring qui tam actions on behalf of themselves and the Government. 31. U.S.C. § 3730(b)(1). After relators file suit, the Government has the option to intervene in the action or decline to intervene. Id. § 3730(b)(4). Even if the Government declines to intervene, relators must act in the best interests of the Government. Id. § 3730(c)(3). In this case, United Biologics argued that the District Court should have dismissed Government with prejudice because the Vaughn Relators were acting on behalf of the Government. The Fifth Circuit rejected this argument, and determined that, when relators act on private interests unrelated to the legal merits of the case, the Government is not bound by the relators’ decision which was apparently based on their inability to continue with the litigation, and was not based upon the merits of the case.

For the Record

“The Government-even one that chooses not to intervene-should not be bound by this decision, powerless to vindicate the public’s interest in other actions that may have a stronger basis or a relator more able to shoulder the burdens of litigation.” United States ex rel. Vaughn, No. 17-20389, 2018 U.S. App. LEXIS 25450 at *11 (5th Cir. September 7, 2018).

The Take Away

The Fifth Circuit’s decision in United States ex rel. Vaughn determined a previously undecided aspect of qui tam litigation: when relators act on their own private interest, rather than acting on behalf of the Government, the Government is not bound by those actions. In order for the Government’s claims in a non-intervening FCA case to be dismissed with prejudice, the dismissal must be based on the merits of the case.

6th Circuit Court of Appeals Upholds Health Care Fraud Conviction for Urinalysis Testing Company Owners

August 30th, 2018 by Elisa Boody

The United States Court of Appeals for the Sixth Circuit recently ruled on a case involving 5 defendants accused of health care fraud in their operation of a jointly-owned urinalysis company.

Urinalysis is frequently used by drug treatment centers and behavioral health hospitals as a way to monitor recovering addicts’ progress toward sobriety and track permissible medications. Given the increased number of drug treatment facilities, there has also been an increase in the demand for urinalysis testing. As a result of the fact that these particular urinalysis tests are meant to track progress, physicians prefer to get those results very soon after collection in order to tailor their treatments.

The 5 defendants in United States v. Bertram recognized a need for urinalysis testing in rural Kentucky and jointly formed PremierTox. Two of the defendants were physicians already operating a substance abuse treatment company (SelfRefind), one of the defendants previously worked for that company, and two additional defendants owned a drug testing service. Together, they formed and opened PremierTox and began accepting specimens for testing from Selfrefind and other treatment facilities. However, the company began to accept frozen samples without yet having the proper equipment to test frozen samples. Once they obtained the correct equipment, the equipment malfunctioned. The result was that PremierTox did not test samples for more than seven to ten months after collection. PremierTox then sent insurers the bills for the testing without indicating the date of collection. PremierTox submitted these claims despite the fact that the results were of little to no use to the ordering physicians.

The defendants argued that they had provided the services they billed for, they never made any material misrepresentations, and they did not omit any information that the doctors requested. The court disagreed. It held that when PremierTox submitted bills for services rendered many months after they were requested, the defendants knew that the tests were no longer medically necessary and failed to inform the doctors of this fact. The court found that the defendants knowingly concealed material facts which constituted a scheme to defraud. The court affirmed the defendants’ convictions.

Notably, the court also pointed to a similar case in the 4th Circuit where health care providers performed medical unnecessary urinalysis tests and billed insurers for them. In that case, the providers omitted information that the test was duplicative and thus medically unnecessary. Again, the court concluded that the omissions constituted “a scheme to defraud.”

Urinalysis testing is clearly on the government’s radar, and it will be interesting to see additional cases brought by the government or whistleblowers that are critical of testing companies looking to cash in on the opioid epidemic.

Mandatory Two Part Test for Implied Falsity as Decided by the Ninth Circuit

August 28th, 2018 by Pamela Coyle Brecht

What Happened?

In United States ex rel. Rose v. Pjh Stephens Inst., the United States Court of Appeals for the Ninth Circuit affirmed the district court’s order denying Defendant’s motion for summary judgment, and determined that the two part test created in States ex rel. Escobar for showing implied false certification under the False Claims Act is mandatory.

The Rundown

To bring a qui tam action under the False Claims Act, relators have to establish the following four elements: (1) an implied or expressed false statement or fraudulent course of conduct, (2) made with the intent or knowledge of wrongdoing, (3) that was material, causing (4) the government to pay out money or forfeit moneys due. Ebeid ex rel. Unisted States v. Lungwitz, 616 F.3d 993 (9th Cir. 2010). In 2010, Ebeid established that implied false certification could be proven simply by showing that defendant requested payment from the government, said payment was dependent on compliance with a law, rule, or regulation, and defendant was not compliant. However, in 2016 Escobar laid out its own two part test for implied falsity: (1) defendant must make specific representations about the services provided and (2) defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths. States ex rel. Escobar, 136 S. Ct. 1989 (2016). The emergence of this test that required defendants to do more than simply request payment caused confusion as to what the standard for implied falsity should be.

The Ninth Circuit was forced to decide this quandary in United States ex rel. Rose v. Pjh Stephens Inst., on August 24, 2018. In Rose, the Academy of Art University is accused of violating the False Claims Act by providing bonuses and docking admissions representatives’ pay up to $30,000 based upon their enrollment numbers from 2006-2010. These allegations brought by former admissions representatives violates the incentive compensation ban which prohibits schools from providing any incentive payments based on securing enrollments or financial aid to any person engaged in admissions activities. 20. U.S.C. The University agreed to abide by this ban in order to qualify for federal funding under Title IV of the Higher Education Act.

The Court of Appeals decided that in order to prove implied falsity, Escobar’s two part test must be met. Using this standard the Court determined that the Defendant met this standard as the University failed to disclose its noncompliance with the incentive compensation ban even though they continued to receive federal financial aid.

For the Record

The three judge panel agreed with the decision to mandate Escobar’s two part test in regards to implied falsity, however, Judge Smith disagreed with the majority’s analysis of materiality. Material is defined under the False Claims Act as having a natural tendency to influence, or be capable of influencing, the payment or receipt of payment. 31. US.C. § 3729(b)(4). Concerning materiality for implied falsity, materiality was dependent on whether the falsity was relevant to the government’s decision to confer a benefit. United States ex rel. Hendow v. Univ of Pheonix, 461 F.3d 1174 (9th Cir. 2006). Judge Graber and Judge Zipps agreed that this test was met due to the Department of Education’s past enforcement of the incentive compensation ban and the substantial size of the incentive payments. Judge Smith argued that his fellow judges applied the wrong standard of materiality since Escobar introduced a more rigorous standard that looks to the effect on the behavior of the recipient of the alleged misrepresentation. He concluded that he would reverse and the district court’s materiality finding “because the majority failed to recognize that Hendow’s materiality holding is no longer good law after Escobar,” and remand the case for additional discovery.

The Take Away

After Escobar was decided in 2016, the standard for proving implied false certification under the False Claims Act was unclear. Escobar determined that in order for implied falsity to be found, the defendant must make specific representations about goods or services, and their failure to disclose noncompliance makes those representations misleading half-truths. However, the court in Escobar did not specifically say that Ebeid’s standard which only required realtors to point to the fact that defendant request payment while being noncompliant was no longer good law. On August 24th, 2017, the Court of Appeals for the Ninth Circuit settled this debate in Rose, and determined that Escobar’s two part test was indeed mandatory. The question as to materiality is still ongoing and will undoubtedly be the topic of litigation in the future.

Pennsylvania-based Long-Term Care and Rehab Company Agrees to Pay Over $13 Million to Settle Kickback and Stark Allegations

August 23rd, 2018 by Elisa Boody

Post Acute Medical, LLC and its affiliated entities, operators of long‑term care and rehabilitation hospitals across the country (collectively, “PAM”) have agreed to pay the United States, Texas, and Louisiana more than $13 million dollars to resolve claims that it violated the False Claims Act and similar state laws.  The government alleged that the company submitted claims to Medicare and Medicaid that resulted from violations of the Anti-Kickback Statute and the Stark Law.

PAM is based in Enola, Pennsylvania, but it operates more than two dozen long-term care and rehabilitation hospitals in several states including Texas, Louisiana, Arkansas, Nevada, Oklahoma, and Pennsylvania.  According to the Department of Justice, detailed in a press release on August 15, 2018, PAM entered into numerous physician-services contracts on behalf of its hospitals dating back to PAM’s creation in 2006.  Although these physician-services contracts were supposedly to retain physicians as medical directors or in other administrative positions, the DOJ alleged that the company’s payments for these contracts were actually intended to induce physician to refer patients to PAM’s facilities.  These physician-services contracts often take the form of administrative stipends or compensation for additional duties, but when examined closely, the recipients are performing very limited or zero additional responsibilities.

In addition to the sham administrative stipends, the DOJ alleged that the company also entered into “reciprocal referral relationships” with unaffiliated healthcare providers such as home health companies.  Under that alleged scheme, the DOJ believed that PAM referred patients to other providers with the understanding that those providers would refer other patients to PAM’s facilities. These arrangements violate the Stark and Anti-Kickback laws.

Alleged kickbacks and improper physician relationships threaten the impartiality of medical decision-making process, and as such, the DOJ stated that it is committed to preventing illegal financial relationships that undermine the federal health care programs.

The settlement resolves allegations originally brought by a qui tam whistleblower, Douglas Johnson.  The underlying case is United States ex rel. Johnson v. Post Acute Medical, LLC et al., Civil Action No. 17-cv-1269 (M.D. Pa.).

Under the settlement agreement, PAM will pay $13,031,502 to the United States, $114,016 to Texas, and $22,482 to Louisiana.  The whistleblower will receive $2,345,670 as his share of the federal government’s recovery in this case.  As a part of resolving the matter, PAM has also entered in to the five-year Corporate Integrity Agreement with the HHS OIG.  They are also required to undertake an arrangements review that is to be conducted by an Independent Review Organization.

When Private Equity Meets the False Claims Act

August 15th, 2018 by Alexander Owens

The United States recently filed a False Claims Act Complaint in Intervention against Florida-based compounding pharmacy Patient Care America (“PCA”), two PCA employees, as well as Riordan Lewis & Haden, Inc. (“RLH”), the private equity (“PE”) firm that acquired PCA and helped manage the company.  United States ex rel. Medrano, et al. v. Patient Care America, et al., 15-62617 (S.D. FL.)  The scheme alleged by the government was a common one: the payment of kickbacks for referrals of expensive compound drugs, which were often paid for by TriCare.  What was uncommon was the government’s focus on a PE firm.  Following the filing of the Complaint in Intervention, RLH, along with other defendants, filed Motions to Dismiss.  The government’s recently filed response brief opposing the Motions to Dismiss provides further insight into the interplay between the FCA and private equity investments in healthcare.

In opposing RLH’s Motion to Dismiss, the government focused on the fact that RLH was not a “passive investor,” but rather an active participant in PCA’s management, involved in PCA’s move to the compounding pharmacy space, and even oversaw PCA’s CEO.  RLH was also an experienced healthcare investor.  RLH quickly became aware of how much of PCA’s revenue came from TriCare and that much of PCA’s revenue was paid out in the form of commissions to independent contractor sales representatives, a violation of the Anti-Kickback Statute.

While the facts in the PCA matter may seem unique, they may be more common than a financial layperson would expect.  Private equity transactions nearly always operate under a “buy to sell” model.  The PE firm (or a consortium of firms investing together) effectuate a leveraged buyout (“LBO”) of the target company, using massive amounts of debt to finance the acquisition.  The cash flow from the acquired company is then expected to service the debt from the LBO.

PE firms believe that by acquiring the company and taking over its management they can drive profitability, allowing them to sell the company at a later date (typically around four to six years after the LBO) at a substantial profit.  The problem with the managerial facet of the private equity model is that the more the PE firm takes over operations, the more likely it is that they may face FCA liability.  The risk is particularly acute in highly regulated industries like healthcare.


As noted above, PE firms operate under a “buy to sell” model.  They are, virtually by definition, not passive investors; to the contrary, PE firms are usually highly active managers of their portfolio companies.  This is not a mutual fund but a company taking over equity and management.  These sorts of transactions are called “takeovers” for good reason.  PE firms do not just pore over balance sheets but often get involved in various managerial tasks, from marketing strategy to compliance oversight.  By providing managerial knowhow, the PE firm can take the reins and build a more profitable company that can then be sold at a handsome profit.

Either individually or with partner PE firms, a PE firm will tend to own a majority of the company’s equity.  Few PE firms will take the risk of such a sizable investment in an illiquid asset unless they hold a controlling portion of the company’s voting shares.  Accordingly, PE firms tend to have multiple seats on the acquired company’s board, have full power (given their equity stake) to hire and fire executives, and may also take part in management decisions outside the scope of the board.

Individual PE firms also frequently focus on certain industries.  As the RLH matter shows, if a PE firm is familiar with a certain industry it will be difficult for the firm to claim that it was ignorant of the regulatory mandates governing that industry, either in relation to its pre-LBO due diligence or its subsequent managerial role.  That is likely to be particularly apt in the case of healthcare and the Anti-Kickback Statute, a broad law that any healthcare investor would be expected to be intimately familiar with.

Financial Dynamics  

Given that the lifeblood of private equity is the LBO, the financial structure at play makes a PE firm an attractive target for FCA enforcement.  PE firms may siphon off much of a company’s profits in the form of distributions (e.g., dividends) and fees (e.g., monitoring fees paid to the PE firm for advising and managing the company).  As the PCA matter shows, at least in some cases, the government may think twice about allowing PE firms to profit off of fraud without facing liability.

Further, in light of the substantial debt service from an LBO (which commonly involves interest rates from 6% to 15%) much of the remaining cash flow from an acquired company is sent to debt investors.  This creates a dynamic where the target company may be unable to fund anything approaching a fair settlement with the government.  The ill-gotten gains have already been funneled out of the company to investors.  Perhaps more obviously, PE firms tend to have deep pockets and access to additional capital, making them particularly appealing targets when damages are substantial and the entity in which they have invested is strapped for cash.

Ultimately, as private equity continues to invest in industries which have high FCA exposure like healthcare, it may be that cases like PCA become more common.  More robust due diligence by private equity firms should be the norm moving forward.  After all, once the PE firm takes over and enters the company’s driver’s seat, it should come as no surprise if the government seeks to hold the driver liable.

The U.S. Attorney for Philadelphia Forges a Strike Force of Seasoned Prosecutors

August 7th, 2018 by Pamela Coyle Brecht

William M. McSwain, Esquire was nominated by President Donald J. Trump to be the 39th U.S. Attorney for the Eastern District of Pennsylvania. The Eastern District of Pennsylvania is one of the original 13 federal judiciary districts created by the Judiciary Act of 1789. It is also one of the nation’s largest districts covering over 4,700 square miles with over five million people residing within the district. The U.S. Attorney was unanimously confirmed and assumed his office on April 6, 2018. Mr. McSwain has reported he is in the process of revamping his Office which is not unusual after a change in administration. To that end, he has announced new initiatives and new hires, along with a change of supervisory attorneys throughout the Office.

Since his installation as U.S. Attorney, McSwain has vowed to bring more prosecutions of every kind within his nine county district. In accordance with earlier pronouncements, McSwain announced on Wednesday, August 1, 2018, that he is establishing an “Affirmative Civil Enforcement Strike Force” to “investigate and prosecute the abuse of government programs – including health care and procurement fraud.” Significantly, the Strike Force will investigate and litigate cases brought under the now 32 year old Federal False Claims Act. Similarly in 2007, the DOJ launched a Medicaid Fraud Strike Force in efforts to combat health care fraud, waste, and abuse. It has charged nearly 2,000 defendants since its enactment.

Recently, McSwain’s Office settled a case involving two pharmacy owners and the False Claims Act – the type of case the new Strike Force aims to handle. The Eastern District of Pennsylvania was one of the first U.S. Attorneys’ Offices in the nation to investigate and prosecute vigorously both procurement fraud and health care fraud cases. This had often been done with the assistance of qui tam relators and their counsel, under the False Claims Act. Mr. McSwain has signaled to the public that he wishes to build upon and expand the Office’s historic franchise in this area.

The Office’s Civil Division Chief Gregory B. David stated the new strike force “will continue the civil division’s long history of successfully combating fraud and enforcing important federal laws through civil investigations and actions.” McSwain explained the ACE Strike Force will assist our talented attorneys by supplying “additional firepower to focus on these critical matters.” The Strike Force will be led by Assistant U.S. Attorney John T. Crutchlow and supervised by ACE veteran litigators Gregory David and Deputy Civil Chief Charlene Keller Fullmer.

Puerto Rico Establishes its own False Claims Act

August 1st, 2018 by Elisa Boody

On July 23, 2018, the Governor of Puerto Rico, The Honorable Ricardo Rosselló, signed House Bill 1627 into law, which establishes Puerto Rico’s version of the federal False Claims Act.  Puerto Rico’s new law is called “The Fraudulent Claims to Programs, Contracts, and Services of the Government of Puerto Rico Act.”  This is a significant development for Puerto Rico.  The act creates a civil recovery method when false claims are submitted to the government of Puerto Rico.  It also allows for a statutory reward for whistleblowers and allows for the recovery of costs and attorneys’ fees for those who file successful qui tam suits under the act.

Governor Rosselló’s press release specifically touts the measure as a method to prevent Medicaid fraud and secure federal healthcare funds for Puerto Rico.  The law creates a Medicaid Fraud Control Unit at the Puerto Rico Department of Justice.  Further, it outlines the duties of the new Fraud Unit as well as the required structure of the unit.  The unit will be headed by a director, be comprised of a team of experienced lawyers, and have assigned auditors to monitor and review records.

Due to the fact that Congress conditioned 1.2 billion dollars for Puerto Rico’s Medicaid program on the territory taking affirmative steps to create a Medicaid Fraud Control Unit, the enactment of the law grants Puerto Rico additional federal funds to be used for healthcare. Governor Rosselló commented that this additional money will benefit the over 600,000 Puerto Rican Medicaid beneficiaries.

Significantly, the new law is not limited to Medicaid fraud; it also applies to other types of claims made to and contracts entered into by the Puerto Rican government.  While Chapter Three of the law specifically considers Medicaid fraud, Chapter Four provides for “fraudulent claims” generally.  The law is more expansive under Chapter Four, and it applies to any false or fraudulent claim made to any government program.

The broad drafting of the law is especially noteworthy given the fact that Puerto Rico is still actively recovering from Hurricanes Irma and Maria. The scale and scope of the catastrophe in Puerto Rico after Hurricane Maria was unprecedented.  Experts have estimated that recovery efforts will total in excess of $95 billion dollars.  The government of Puerto Rico is currently entering into contracts with third parties for the repair, restoration, and recreation of various critical infrastructures such as Puerto Rico’s electrical power grid and wastewater system.   Having a mechanism through which the territory can recover from individuals or corporations who knowingly defraud the government allows Puerto Rico to protect itself from bad actors seeking to take advantage of recovery efforts.

Under the law, the Relator or Whistleblower is entitled to receive no less than fifteen percent (15%) but not more than twenty-five percent (25%) of the proceeds of the action or settlement of the claim when the Puerto Rican government elects to intervene.  In instances where Puerto Rico declines to intervene, the Relator is entitled to no less than twenty-five percent (25%) and no more than thirty percent (30%) of the recovery.  The law also provides for a limited recovery of a fixed ten percent (10%) for those individuals who file a complaint based on information was easily accessible to the public.

The law further states that when the Government and/or Relator prevail, the court may impose additional costs on the defendant for reasonable litigation expenses and attorneys’ fees.  The compensation provisions of the law are a signal that Puerto Rico is actively encouraging its residents with knowledge of fraud to come forward.

The Fraudulent Claims to Programs, Contracts, and Services of the Government of Puerto Rico Act also considers jurisdiction for future complaints.  It states that the Court of First Instance, Superior Court of San Juan will be the primary and exclusive forum for filing causes of action under the act.  It will be interesting to watch the implementation of this law.

According to the Puerto Rican Office of Legislative Services, as of July 31, 2018, there has not yet been a formal English translation of the law.  The office stated that it will be approximately 5-6 months before an official English translation is made publically available.  In order to read the full text of the law, for purposes of this article, we used an online translation program and consulted a native Puerto Rican who is fluent in Spanish.