For the second time in a two-to-one ruling, the United States Court of Appeals for the Sixth Circuit has revived a relator’s complaint against a home health provider under the False Claims Act after it was dismissed by the trial court. See U.S. ex rel. Prather v. Brookdale Senior Living Communities, Inc., et al. No. 3:12-cv-00764 (6th Cir. June 11, 2018.). The first time the complaint was dismissed, the district court ruled that the relator had failed to plead the alleged fraud with particularity. The Sixth Circuit reversed, ruling that the home health provider’s delay in obtaining the required certifications was unjustified and potentially fraudulent. See Prather I, 838 F.3d 750, 775 (6th Cir. 2016).
After the reversal, the district court allowed the relator to amend her complaint in light of the Supreme Court’s decision in Escobar—which clarified the materiality element of a False Claims Act claim. After the relator amended, however, the district court ruled that the relator had not sufficiently alleged materiality or scienter, and therefore dismissed the complaint.
The Sixth Circuit reversed on both grounds. First, the Sixth Circuit concluded that the timing of the certification requirement was an express condition of payment which weighed in favor of finding materiality. Second, the Sixth Circuit ruled that a relator need not put forward any allegations concerning the Government’s reaction to claims submitted in violation of the supposed material regulation. Instead, a relator may simply allege that the Government did not know that the submitted claims were false. Third, the Sixth Circuit found that the timing requirement went to the essence of the bargain with the Government, because the timing requirement was necessary to prevent fraud. The Sixth Circuit also noted that the Government’s guidance documents, which emphasized the importance of the timing requirement, further supported this conclusion.
As to scienter, the Sixth Circuit found that the relator adequately alleged that the defendants acted with reckless disregard with respect to their compliance with the timing requirements. In support of this conclusion, the Sixth Circuit noted that the relator alleged that reviewers were told to review claims cursorily, that the defendants ignored concerns that were raised by nurse-reviewers, and that relator alleged the existence of an email that noted concerns with compliance. “All of these factual allegations,” the Court wrote, “support the inference that the defendants were on notice that their claim-submission process was resulting in potential compliance problems.” And according to the relator, the defendants did not conduct an adequate inquiry into their compliance with the applicable regulations. Therefore, the Court ruled, those factual allegations were sufficient at the motion to dismiss stage to show scienter.
In dissent, Judge McKeague argued that the majority in Prather I had created a timing-and-explanation requirement “out of whole cloth and grafted it onto the Medicare regulations” in 2016, and was now applying that ruling retroactively to say that the requirement was material to the Government’s decision to pay claims in 2011 and 2012—and that the defendants knew seven years ago that the requirement was material. Judge McKeague thus criticized the majority for creating “judicial legislation” that warps the law. Thus, he wrote, rulemaking must be left to legislators and administrators to facilitate the orderly development of the law.
On the one hand, this opinion underscores the difficulty, at times, of securing the dismissal of a qui tam complaint at the motion to dismiss phase. Nevertheless, as observed even by the majority in this case: “Discovery may reveal that the defendants did conduct an inquiry into their compliance with [the timing requirements] that was ‘reasonable and prudent under the circumstances.’” Therefore, in light of the ever-shifting materiality and falsity requirements as fashioned by the courts, a diligent and proactive compliance department likely remains the best defense against costly qui tam complaints such as these.