FraudA federal district court has rejected a novel attempt to impose False Claims Act (FCA) liability for Medicare billings based on a theory that the underlying purchase of the home healthcare agency submitting those billings was allegedly tainted by fraud.  The court’s decision delimits the scope of fraud that will support an FCA claim and reaffirms the important principle that the FCA “is not an all-purpose antifraud statute.”

In United States ex rel. Freedman v. Bayada Home Healthcare, et al., Chief District Judge Freda L. Wolfson of District of New Jersey, dismissed a private relator’s qui tam complaint that alleged the defendants fraudulently induced a state government health department to sell a home healthcare agency, concluding that the alleged fraud did not “touch or concern” the United States.

In his complaint, Relator alleged that defendants retained a lawyer on a contingency fee basis to lobby the health department to accept its bid for the healthcare agency.  This contingency fee arrangement not disclosed in the bidding process; rather, the defendants falsely certified to the contrary.  The defendants’ bid was accepted, despite not being the lowest bid, and they enrolled the healthcare agency in Medicare, submitting approximately $36 million in billing over a four-year period.

Relator’s qui tam action alleged violations of the FCA, its state counterpart, and various state law claims.  Relator claimed that defendants knowingly failed to disclose the illegal lobbying, which caused defendants’ Medicare submissions to be tainted with fraud.  Specifically, Relator advanced the theory that defendants defrauded the healthcare department when they purchased the healthcare agency, and that “but-for” this fraud, defendants would never had been able to bill Medicare and receive government payments.  Thus, according to Relator, FCA liability attached to every single payment defendants received.  Relator claimed to know of this fraud both as a former employee of defendants and as a participant in the undisclosed lobbying process.  The government declined to intervene, and the complaint was unsealed.

The court rejected Relator’s FCA claims and granted defendants’ motion to dismiss.  The court, accepting Relator’s allegations as true for the purposes of the motion, agreed that the facts were “concerning.”  But it rejected the idea that he could advance a fraudulent inducement theory under the FCA where the alleged fraud occurred in an antecedent transaction that did not involve Medicare or the federal government.  The court reaffirmed the proposition that fraudulent inducement in the contract bidding process must “touch or concern” the federal government – i.e., here, the federal government must have been fraudulently induced to enroll defendants in Medicare.  Because Relator’s allegations did not identify how the federal government was defrauded, the court dismissed this theory.

The court also rejected Relator’s theory of implied false certification in the billing process based on the same alleged underlying fraud in the acquisition of the healthcare agency. Relator’s theory, although poorly pled, appeared to be predicated on requirement that defendants had to certify the truthfulness and accuracy in their application to enroll in Medicare.  The court, however, distinguished the accuracy of the information submitted to Medicare from the accuracy of information submitted to the local health department in the bidding process, noting that the former encompasses the entire sequence of events leading up to the defendants’ enrollment in Medicare.”

Two footnotes in the court’s decision stand out:  First, the court noted that not only was Relator aware of the defendants’ fraud at the time it occurred – as is common for whistleblower relators – but it appeared Relator “facilitated” the fraud as well.  Although the court did not rely on this fact in its analysis, it explicitly noted that his role “calls into question his motives for bringing this suit.”  In other words, Relator’s own conduct may have led the court to view his FCA claims skeptically.

Second, in dismissing Relator’s FCA claims and declining to exercise supplemental jurisdiction over his remaining state law claims, the court nevertheless explained that “accepting the facts he has pled as true,” the defendants “seemingly violated both the RFP and state law by failing to disclose its contingency fee arrangement.”  The court then noted that others “who were potentially harmed by these undisclosed actions, may have viable causes of action in state court.”  Thus, the court made it clear that, even with Relator’s own potential involvement in the fraud, it did not view Relator’s allegations as meritless, but, instead, they did not support a claim for liability under the FCA.

Notwithstanding the clear holding in the Bayada case, and its reaffirmance of longstanding limits to the FCA, we should expect to continue to see relators – and their counsel – attempting to bring FCA cases with novel theories of liability in the hopes of setting new precedent and achieving favorable settlements.