Recent False Claims Developments

1. Recent False Claims Developments Robert J. Sherry K&L Gates May 2009

2. Overview • Prologue: Federal Civil False Claims Act Developments • The Impact of the Federal DRA on State/Local FCA Activity • State of Play: Existing State/Local FCAs • Recent State FCA Cases • Predictions

3. Federal FCA Developments • FCA cases/recoveries multiplying • FY 2008 recoveries: $1.34B • 1986-08 recoveries: $21B • 2006-08 recoveries: $6+B • Yet Congress dissatisfied with scope of FCA/enforcement trends • Pending legislation would amend FCA

4. Federal FCA Developments • HR 1788, False Claims Correction Act (reported out of committee April 28): • Eliminates “presentment” requirement • Claim need only be for government money/property -- need not be presented to government official • Reaches funds held in trust or administered by government, money provided to a recipient, or money which the government will reimburse • “Public disclosure” bar may be raised only by United States • Cripples defendant’s and court’s ability to limit qui tam cases to those where relator provides new information • New contractor “mandatory disclosures” could become basis of qui tam action • Eliminates “particularity” obligation for relators’ FCA complaints • General rule: complaint must allege “who, what, where, when, and how” • Bill: need not identify “specific claims” if allegations provide “reasonable indication” that FCA violated and “adequate notice” of “specific misconduct” to allow defense

5. Federal FCA Developments • S. 386, Fraud Enforcement and Recovery Act (approved by Senate April 28): • Similar provisions regarding presentment • S. 458, False Claims Clarification Act • Still before Judiciary Committee • Similar to legislation introduced last term in Senate

6. Impact of the Federal DRA on State/Local FCA Activity • DRA provides enhanced FCA recoveries for states with qualifying FCAs • State FCAs must meet certain standards and receive HHS OIG approval: • Establish FCA liability for false/fraudulent claims related to state Medicaid plans • Provisions “at least as effective” concerning qui tam claims as those in federal FCA • Sealed qui tam filing provision with state AG review • Civil penalties at least equal to those in federal FCA

7. Impact of the Federal DRA on State/Local FCA Activity • Status: • 20 states have submitted FCAs for review • 13 approved (including TX, CA, NY) • 7 rejected (including FL, MI, NJ, NM, OK) • Reasons include: • Relaxed standards for awards of fees to defendants • Limitations on relators (right to proceed, size of recovery share) • Intent standard stricter than federal FCA

8. State of Play: Existing State/Local FCAs • Existing FCAs: 25 states • 22 with qui tam provisions • 3 with relator recovery provisions up to 50% • 15 are “general” FCA statutes • 6 are limited to health care/Medicaid fraud • 2 have separate general and health care provisions • Pending FCAs: 9 states • 2 states with pending amendment legislation

9. Recent State FCA Cases • Armenta (Cal. App. 2006): Unique “passive beneficiary” in CFCA • Third party (parent) which becomes aware of inadvertent provision or intentionally submitted false claim and does not disclose may be liable • Subsidiary falsely represented that its products complied with code • Parent later learned through testing that representations were false • Court found that parent could be liable even if claims were submitted inadvertently by subsidiary

10. Recent State FCA Cases • Fassberg (Cal. App. 2007): • CFCA authorizes treble damages for knowingly presenting false claim or false record • CFCA authorizes civil penalties only (of up to $10,000) for each false claim, not false record • Only progress payment requests were false claims • Federal FCA precedent not employed – difference in construction • Demonstrates risks of possible “counterattack” by government when claiming breach of contract

11. Recent State FCA Cases • Kennedy (N.D.Ill. 2008): Both federal and Illinois FCA claims • Relators allege Aventis marketed a drug for numerous off-label uses • Caused medical providers to submit fraudulent Medicare claims • Court dismissed federal and “parallel” Illinois FCA claims • Payments not based on drugs prescribed/used • Payment based on diagnosis-related group codes (“DRGs”) • DRGs based on diagnosis/age, not on drugs prescribed • Individual patient charges for drug not material to decision to pay

12. Recent State FCA Cases • Abbott Labs (TX 2008): Settlement under Texas Medicaid Fraud Prevention Act • Latest of drug pricing settlements with several pharmaceutical companies • Three-way settlement involving relator and Texas AG • Alleged false reporting of pricing to the Texas Vendor Drug Program • Result: Inflated reimbursement by Medicaid to providers • $28M settlement • Shares to state, relators, United States • Includes fees to state, relators

13. Predictions • Federal FCA amendments will enhance prospects for liability • State/local FCA enactments/amendments will continue; issues for non-health care contractors • Will states be required to amend FCAs to comport with any federal FCA amendments? • Impact of December 2008 federal ethics/disclosure rule and DRA: creating new “whistleblowers”