Archive for September, 2019

First of Its Kind? Private Equity Firm Riordan, Lewis & Hayden Inc. and its Portfolio Company Patient Care America Settle False Claims Act Lawsuit

Monday, September 23rd, 2019

On September 18, 2019, the Department of Justice announced a $21.35 million settlement with compounding pharmacy Patient Care America, PCA executives Patrick Smith and Matthew Smith, and, most notably, the pharmacy’s private equity backer, Riordan, Lewis & Haden Inc.  The private equity firm and the pharmacy will fund substantially all of the settlement ($21.036 million).  The case has been closely watched for the Department of Justice’s targeting of a private equity firm.  The case appears to be the first time the federal government has intervened against a private equity firm in an FCA matter.  The government’s efforts have proven fruitful. 

The case stems from a whistleblower complaint filed in 2015 in the Middle District of Florida.  United States ex rel. Medrano, et al. v. Patient Care America, et al., 15-62617 (S.D. FL.)  In early 2018, the United States, joining in the action, filed a False Claims Act Complaint in Intervention against the defendants.  The government alleged that the pharmacy had paid kickbacks to independent marketers to procure prescriptions for compound pain medications, a violation of the Anti-Kickback Statute and False Claims Act.  The government sought to hold the private equity firm liable as well, alleging that the investment firm knew and approved of the illegal referral arrangement. 

While the settlement with a private equity defendant appears to be a first of its kind, it is unlikely to be the last.  See, e.g., Commonwealth ex rel. Martino-Fleming v. South Bay Mental Health Center, Inc., CV 15-13065-PBS, (D. Mass.) (state of Massachusetts intervened in FCA complaint against healthcare company and its private equity firm).  In recent years, private equity firms have been investing more and more heavily in the healthcare space, particularly in retail healthcare companies, which have perhaps the highest level of exposure to FCA liability.  As the allegations in Patient Care America show, private equity firms often take a very hands management role in their portfolio companies. That level of control brings with it the potential for extensive FCA liability.  FCA liability is not limited to the individual or entity that files a false claim.  In fact, the law is clear that individuals owning or managing companies engaged in fraud may be held liable under the FCA.   See, e.g., Martino-Fleming, CV 15-13065-PBS, 2018 WL 4539684, at *5 (D. Mass. Sept. 21, 2018) (refusing to dismiss claims against private equity firm that owned healthcare company allegedly involved in fraud); U.S. ex rel. Schagrin v. LDR Industries, LLC, 14-cv-09125, 2018 WL 6064699, at *6 (N.D. Ill. Nov. 20, 2018) (individuals that owned and managed company engaged in fraud could be held liable for failing to stop fraudulent conduct).  In announcing the settlement, United States Attorney Ariana Fajardo Orshan referred to the government’s “commitment to hold all responsible parties to account for the submission of claims to federal health care programs that are tainted by unlawful kickback arrangements.”  The comment echoes the DOJ’s Yates memo which reminded individuals that liability does not end at the corporate boundary.  Patient Care America may serve as a corollary to the Yates memo, putting private equity firms on notice that their liability may not be limited to just their financial exposure in the portfolio company.  A private equity firm may itself face direct liability.  The settlement in Patient Care America is likely to embolden relators and prosecutors in future cases where private equity firms have benefitted from their investment in, and management of, enterprises alleged to have engaged in fraud.

You Didn’t Ask – 3rd Cir. Affirms DOJ Dismissal of Whistleblower Case Without a Hearing

Friday, September 13th, 2019

The Third Circuit ruled on September 12, 2019 that a relator is not automatically guaranteed a hearing when the government moves to dismiss a whistleblower action – they need to ask for one. In United States ex rel., Chang v. Children’s  Advocacy Center of Delaware, No. 18-2311, at 3 (3rd Cir. Sept. 12, 2019), the Court affirmed the District of Delaware’s dismissal of a whistleblower lawsuit  pursuant to 31 U.S.C. § 3730(c)(2)(A), which allows the government to “dismiss the action notwithstanding the objections of the person initiating the action if the person has been notified by the Government of the filing of the motion and the court has provided the person with an opportunity for a hearing on the motion.” 

The whistleblower had alleged that a child advocacy organization had applied for and received funds from the United States and the state of Delaware by misrepresenting certain material information. After the federal and state plaintiffs declined to intervene, the whistleblower amended his complaint and the defendant answered. Thereafter, the United States and Delaware each moved to dismiss the case, asserting that the investigation had found the allegations to be “factually incorrect and legally insufficient.” Chang at 4. The whistleblower opposed the government’s request for dismissal, arguing that the case should proceed to summary judgment. Critically, according to the Third Circuit, the whistleblower did not request oral argument or a hearing. After the district court granted the government’s request for dismissal without conducting an in-person hearing or issuing a supporting opinion, the whistleblower appealed.

The Third Circuit noted that Chang provided “an opportunity for us to take a side in a putative circuit split” on the issue. The Court acknowledged that both the Ninth and Tenth Circuits had adopted a standard requiring that the government to first show “a valid government purpose” in dismissal and a rational relationship between the requested dismissal and that purpose, and if met, the burden shifts to the whistleblower to show that “dismissal is fraudulent, arbitrary and capricious, or illegal.” Id. at 4-5 (citing United States ex rel. Sequoia Orange Co. v. Baird-Neece Packing Corp., 151 F.3d 1139, 1145–46 (9th Cir. 1998)); see also United States ex rel. Ridenour v. Kaiser-Hill Co., LLC, 397 F.3d 925, 934–35 (10th Cir. 2005). The Court then noted countervailing D.C. Circuit cases holding that the government has “unfettered discretion to dismiss.” Chang at 5 (citing Swift v. United States, 318 F.3d 250, 252–53 (D.C. Cir. 2003)); see also Hoyte v. Am. Nat’l Red Cross, 518 F.3d 61, 65 (D.C. Cir. 2008).

The Chang Court concluded the whistleblower failed to meet either test. The Court noted the federal and state government’s goal in dismissing the whistleblower’s case was: “minimizing unnecessary or burdensome litigation costs,” to the taxpayer for the “enormous internal staff costs” of litigating the non-intervened FCA claims. Chang at 5.

The Court then held that the district court had not erred in failing to schedule a hearing on its own initiative, citing 31 U.S.C. § 3730(c)(2)(A) and Delaware Code Title 6, § 1204. The Court reasoned that the term “opportunity for a hearing” required that the relators seek the “opportunity,” and that the whistleblower failed to even ask. Chang at 6-8.

Whistleblowing Down Under

Wednesday, September 4th, 2019

What Happened

On July 1, 2019, The Treasury Laws Amendment (Enhancing Whistleblower Protections) Bill 2019 (“Bill 19”) came into effect that amended the Corporations Act 2001 and Taxation Administration Act 1953 to provide more protections for whistleblowers in Australia.

The Background

Prior to Bill 19, Australia did not have legislation specifically pertaining to the protection of whistleblowers. This made individuals hesitant to blow the whistle as they were unaware of the protections available to them under the law. For years, whistleblower organizations and attorneys lobbied for a reform to Australia’s whistleblowing laws. In response, Parliament enacted Bill 19.

Who Can Be A Whistleblower in Australia?

According to Bill 19, a whistleblower may be a current or former employee, contractor, officer, supplier, or associate of a regulated entity that is incorporated or registered in Australia. Interestingly, a family member or dependent of the previously mentioned individuals may become a whistleblower as well. A whistleblower must make a disclosure concerning specific subject matter to specific parties to be eligible for whistleblower protection under Bill 19.

A whistleblower will only receive protection if the disclosure concerns danger to the public or financial system, offenses against the Commonwealth punishable by imprisonment for at least one year, breaches of financials acts prescribed in the Corporations Act, or misconduct related to tax affairs of regulated entities. The whistleblower must have reasonable grounds to suspect that the misconduct is occurring.

What Protections Can a Whistleblower Receive?

Bill 19 permits a whistleblower to anonymously disclose misconduct and protects the whistleblower’s confidentiality. Bill 19 also protects the whistleblower from a wide range of detriments including, but not limited to, dismissal, alteration of employment position, harassment, intimidation, physical and psychological harm, and damage to whistleblowers’ property, reputation, and business and financial position.

If the court finds that a whistleblower’s confidentiality was breached, or the whistleblower suffered a detriment, the breaching party may be subject to criminal charges resulting in imprisonment and/or fines. The court may also impose a civil penalty on the breaching individual of up to $1.05 million and on the breaching entity for $10.5 million, or 10% of the entity’s annual turnover [maximum of $525 minimum].[1]

The court may grant an injunction to prevent, stop or remedy the detrimental conduct. It can order an apology to the whistleblower, order the whistleblower to be reinstated if terminated, order the breaching individual or entity to compensate the individual for any loss or harm suffered from the detrimental conduct, or issue any other order that the court deems appropriate. Bill 19 also provides criminal and civil immunities for whistleblowers.

How to Blow the Whistle in Australia

A whistleblower will only qualify for protection if the disclosure is made to an eligible recipient such as an officer, senior manager, auditor, or actuary; legal practitioner for the purposes of obtaining legal advice or representation; trustee; or entity prescribed in Bill 19 such as ASIC or APRA. Bill 19 also permits the whistleblower to make an emergency disclosure and a disclosure in the public interest.

A whistleblower may make an emergency disclosure to the government or media if the whistleblower has reasonable grounds to believe there is a substantial and imminent danger to the health or safety of the public or the environment. 

A whistleblower may make a public interest disclosure to the government or media if the whistleblower 1) made a protected disclosure; 2) 90 days have passed since making the protected disclosure; 3) the whistleblower does not have reasonable grounds to believe that the disclosure is being addressed; 4) the whistleblower has reasonable grounds to believe that making a public disclosure would be in the public interest; 5) the whistleblower notified the authority of their intention to make a public interest disclosure in writing; and 6) the information disclosed is narrowly tailored to inform the recipient of the misconduct.

The Take Away

Bill 19 has been compared to the United States False Claims Act (“FCA”). While the two acts offer some similar protections, Bill 19 is missing a distinct feature of the FCA: the whistleblower award. Bill 19 only compensates whistleblowers if they were harmed, whereas the FCA compensates all whistleblowers who bring successful claims – regardless of harm. The FCA was designed to reward whistleblowers for the inherent risk of being a whistleblower. As time progresses it will be interesting to observe if the protections offered under Bill 19 are enough to motivate whistleblowers to come forward, or if other modifications to the law are needed.


[1] Note, this penalty only applies to disclosures made under the Corporations Act.