Department of Justice (DOJ) settlements and resolutions in 2024 indicate that those trends continue. While the DOJ pursues a diverse set of cases under the FCA, it continued its focus on fraud related to COVID-19 programs, cybersecurity, and Medicare Advantage. The DOJ also resolved several lawsuits and investigations involving alleged violations of the Anti-Kickback Statute (AKS). A few recent settlements are notable:
- On October 10, 2024, DOJ announced a $450 million settlement with Teva Pharmaceuticals to relating to claims that Teva violated the AKS. The settlement resolved a lawsuit brought by the United States in the District of Massachusetts in 2020 alleging that Teva improperly paid Medicare patients’ copays for the drug Copaxone, which is used to treat multiple sclerosis. DOJ alleged that Teva conspired with others to direct the use of donations to foundations to cover Copaxone copays. The settlement also resolved separate allegations that Teva conspired with other generic drug manufacturers to fix prices for cholesterol drug pravastatin, which was the subject of a deferred prosecution agreement and a separate $225 million criminal penalty. Of note, DOJ stated that the settlement with Teva was based on Teva’s ability to pay.
- On October 2, 2024, DOJ announced a $5.3 million settlement with the CEO of a Texas critical access hospital. The settlement stems from a 2022 lawsuit filed by DOJ alleging that laboratory companies conspired with small Texas hospitals to pay for referrals to those hospitals for laboratory testing. DOJ also alleged that the testing was performed by the laboratories outside of Texas but billed as hospital outpatient services. While DOJ’s pursuit of individual defendants is still a rare occurrence, DOJ highlighted its decision to do so in this case and its broader commitment to hold individual defendants accountable.
- On October 2, 2024, DOJ announced a $27 million settlement with a toxicology business to resolve claims that the business caused physicians to order unnecessary urine tests through “custom profiles” that operated as standing orders. The government also alleged that the provision of free urine drug test cups violated the AKS because the cups were required to be returned to the company for testing.
- On September 13, 2024, DOJ announced a $106.8 million settlement with Walgreens resolving claims that Walgreens charged Medicare and Medicaid for prescriptions that were processed but never picked up by beneficiaries. The settlement follows litigation in three qui tam cases and a self-disclosure in which Walgreens already refunded more than $66 million. The press release stated that Walgreens received credit under the DOJ’s cooperation guidelines.
Legal Developments
With two-thirds of FCA recoveries coming from the healthcare industry, it is no surprise that many FCA legal developments come in the healthcare arena. The DOJ and private relators continued their focus on healthcare companies and providers in 2024 with government enforcement and qui tam lawsuits. And courts at all levels continue to grapple with legal issues new and old implicating the continued viability of private relator enforcement of the FCA.
Constitutionality of the FCA’s Qui Tam Provisions
A blockbuster development occurred in September with United States ex rel. Zafirov v. Florida Medical Associates, LLC, when a federal court in Florida held that the qui tam provisions of the FCA—allowing private relators to enforce the FCA on behalf of the government—was unconstitutional. The Zafirov case was filed in 2019 and unsealed in 2020 when the United States declined to intervene. After nearly four years of litigation, the defendants moved for judgment on the pleadings, arguing that the qui tam provisions violate the Constitution. The timing of the defendants’ motion was driven in large part by the Polansky case decided in the Supreme Court’s final term in 2023. Followers of FCA developments may recall that Polansky concerned the government’s power to dismiss a qui tam action over the relator’s objection. In a dissent, Justice Thomas provided his view that “There are substantial arguments that the qui tam device is inconsistent with Article II and that private relators may not represent the interests of the United States in litigation.” Two other justices concurred for the sole purpose of agreeing with Justice Thomas’s statement and invited consideration of those arguments in an appropriate case.
With the defendants’ encouragement, the Zafirov court accepted that invitation and determined that the qui tam provisions of the FCA violate the Appointments Clause, Article II of the U.S. Constitution. The Appointments Clause provides that two types of Officers may assist the President in performing duties of the Executive Branch: Principal Officers nominated by the President and confirmed by the Senate; and Inferior Officers appointed by the President, Courts of Law, or Heads of Departments. An individual performing duties for the Executive Branch is an Officer if they exercise significant authority and occupy a continuing position. The court determined that qui tam relators satisfy both conditions, making them Officers:
The FCA allows a relator not only to direct litigation, but also to bind the federal government without direct accountability to anyone in the Executive Branch. A relator need not consult with the federal government before filing suit, nor does she receive a commission or swear an oath of loyalty to the United States. Instead, a relator enjoys unfettered discretion to decide whom to investigate, whom to charge in the complaint, which claims to pursue, and which legal theories to employ.
Nor does a relator’s discretion stop at final judgment. A relator determines whether to appeal and which arguments to preserve, thereby shaping the broader legal landscape for the federal government. In that way, a relator acts with greater independence than a Senate-confirmed United States Attorney or Assistant Attorney General, who must obtain the approval of the Solicitor General to appeal.
Because qui tam relators are Officers of the United States, they are subject to the Appointments Clause. But the court determined that relators are not appointed consistent with the Appointments Clause, making the FCA’s qui tam provisions unconstitutional.
For now, one judge in one district court has offered her opinion on the matter. The decision is not controlling in any court. But courts across the country will likely see renewed efforts to advance similar arguments. And all of this may end up where it began, in the Supreme Court, with at least three justices expressing openness to these arguments.
Eighth Amendment Concerns Regarding Statutory Penalties
In another FCA case touching on the Constitution, United States ex rel. Grant v. Zorn, the Eighth Circuit addressed the applicability of the Eighth Amendment’s prohibition on excessive fines to the FCA’s treble damages and civil penalties provisions. The Zorn case was filed by an employee and part owner of a sleep lab and CPAP business who alleged that the defendants overbilled for initial and established patient visits. The government declined to intervene and the case proceeded to a bench trial. The district court judge found that the defendants submitted 1,050 false claims resulting in actual damages of $86,332, which were trebled to $258,996. The district court calculated civil penalties of $7,699,525, which it reduced to $6,474,900 citing the Eighth Amendment’s Excessive Fines Clause.
The Eighth Circuit first declared that the Eighth Amendment applies to qui tam cases in which the government declines to intervene, following the Eleventh Circuit’s opinion in Yates v. Pinellas Hematology & Oncology, P.A. The court then analyzed whether the “punitive sanction imposed by the district court is ‘excessive.’”
The court started with the principle that “A punitive sanction under the FCA is ‘excessive’ when it is ‘grossly disproportional to the gravity of a defendant’s offense.’” The court then evaluated the civil penalties following the guidance of Supreme Court cases analyzing punitive damages under the Due Process Clause, including State Farm Mutual Auto Insurance Co. v. Campbell, which concluded that a single-digit multiplier was usually consistent with the Due Process Clause. Within the guidance provided by those cases, the court concluded that the civil penalties awarded by the district court violated the Excessive Fines Clause. The court started with the proposition that the actual damages, not treble damages, were the proper denominator for a Constitutional analysis. Using that number, the civil penalties awarded by the district court were 78 times the actual damages. Noting that it upheld punitive sanctions of 4.3 actual damages in cases involving only economic loss, the court concluded that civil penalties in the case should be limited to a single-digit multiplier, which would impose a cap of approximately $775,000.
Causation in Anti-Kickback Cases
The issue of causation in FCA cases based on a violation of the AKS is near a boiling point. The AKS was amended in 2010 to specifically allow FCA claims based on a violation of the AKS: “a claim that includes items or services resulting from a violation of this section constitutes a false or fraudulent claim for purposes of [the FCA].” The issue is what level of causation is required to prove that a false claim is “resulting from” a kickback. Relators and the government argue that only a link (or less) is required, while defendants argue that but-for causation is the correct test.
The first court of appeals to contend with the issue was United States ex rel. Greenfield v. Medco Health Solutions, Inc. The Third Circuit rejected arguments to require but-for causation and adopted a more lenient standard requiring the government to prove a link between the kickback and medical care that is the basis of a false claim. At the same time, the court also rejected the theory that the taint of a kickback renders every claim false.
Since then, the Sixth and Eighth Circuits have gone the opposite direction to require but-for causation. The Seventh Circuit considered the issue in Stop Illinois Health Care Fraud, LLC v. Sayeed. The Seventh Circuit rejected the district court’s adoption of the taint theory and stated that some “causal nexus” is required. But the court did not decide whether the statute requires but-for causation or something less and remanded the case for further determination. The First Circuit will speak on this issue soon, after hearing oral arguments in July on United States v. Regeneron Pharmaceuticals, Inc., a case from the District of Massachusetts that adopted but-for causation.
The impact of the causation issue may be extending to DOJ’s enforcement actions. On July 26, 2024, DOJ partially intervened in a case filed in the Western District of North Carolina. The qui tam complaint was filed by relators in 2021 alleging violations of the AKS and Stark Law. Of note, DOJ intervened on the Stark Law claims and not the AKS claims. This supports predictions of a broader trend away from AKS claims given the uncertainty with the level of proof required for causation.
Scienter Following Schutte
Courts are beginning to grapple with the Supreme Court’s decision on scienter last year in United States ex rel. Schutte v. SuperValu Inc. The court in Schutte held that scienter in an FCA case depends on a defendant’s actual knowledge and subjective beliefs. The court rejected the defendant’s argument that an objectively reasonable interpretation could disprove scienter even where that interpretation was not held at the time of the decision at issue. The primary impact of Schutte is to make the scienter analysis fact-intensive and less able to resolve on a motion to dismiss or summary judgment. While that impact may seem to favor relators and the government, it can cut both ways.
An example is the decision in United States ex rel. Edalati v. Sabharwal. The court there granted the relators’ motion for summary judgment as to falsity of 1,383 claims, finding that the defendant did not comply with the unambiguous regulatory requirements for provider-based billing. But the court determined that scienter could not be established at summary judgment because even though there were facts indicating that the defendant should have been aware that the claims were not compliant—and there was no reasonable interpretation of the regulations to support his actions—the defendant said that he held a subjective belief that he met the billing standards. Although it was “not entirely clear from the current record” why he held that belief, the court determined that it precluded summary judgment.
The court also highlighted the defendant’s lack of consultation with a legal expert or other person regarding the regulations and the defendant’s lack of legal compliance department. This is notable for the potential implications on the attorney-client privilege and possible reliance of counsel defense. If failure to consult an attorney is evidence against a defendant’s state of mind, defendants may be pressured to disclose their discussions with counsel, which risks waiving privilege.
Advice of counsel in the context of summary judgment motions on scienter was also at issue in United States ex rel. Brooks v. Stevens-Henager College, Inc. Analyzing the relator’s motion and relying on Schutte, the court determined that the defendant’s decision to have legal counsel review its compliance precluded summary judgment. That compliance review, however, did not entitle the defendant to summary judgment. The court noted that only 2.2 hours were billed for the review, which raised issues of whether that was sufficient to make the defendant’s reliance reasonable.
The Brooks court also noted Schutte’s lack of position on whether an objective test would apply to a theory of scienter shown by reckless disregard. The court declared that evidence of what the defendant should have known (an objective theory of knowledge) could be considered by the jury because the Supreme Court left the issue open and the Tenth Circuit previously adopted a test “weighing inferences derived from objective analysis.”
Conclusion
The constantly changing legal landscape of the FCA is driven by the high level of exposure, especially in healthcare cases where alleged noncompliance over a few years can involve thousands of claims. With the current civil penalties set at $13,946 to $27,894 per claim, it does not take much time to reach millions of dollars in potential penalties. Given that exposure, both sides of the “v.” are incentivized to challenge the status quo to expand or contract the FCA’s reach.
