July 10, 2015

Ninth Circuit Victory For Whistleblowers In Narrowing “Public Disclosure” And “First-To-File” Bars To Bringing Qui Tam Actions

9thBy Gordon Schnell

In a major victory for whistleblowers, the Ninth Circuit in United States ex rel. Hartpence v. Kinetic Concepts, Inc. narrowed the reach of two significant bars to bringing qui tam lawsuits under the False Claims Act.  Under the so-called “public disclosure” bar, the Ninth Circuit reversed its own precedent and ruled the “original source” exception to the bar does not require the whistleblower to have played a role in the public disclosure.  And under the so-called “first-to-file” bar, the Court took a similarly expansive approach, narrowing the circumstances under which one whistleblower action will bar a subsequently filed related action.  Taken together, these twin rulings in this en banc decision reflect a clear recognition by the Ninth Circuit of the strong Congressional policy of encouraging and rewarding whistleblowers for supplementing government fraud enforcement.

This consolidated action involves two whistleblower suits against the medical device companies where they worked, Kinetic Concepts, Inc. and KCI-USA, Inc., alleging they submitted fraudulent reimbursement claims to Medicare.  In the first-filed case, whistleblower Steven Hartpence alleged the defendants knowingly misused a specific Medicare billing code (the “KX modifier”) that is supposed to certify compliance with all Medicare billing criteria.  In the later-filed case, whistleblower Geraldine Godecke further alleged the defendants failed to comply with the Medicare requirement of receiving Detailed Written Orders from the treating physician before dispensing medical supplies covered by Medicare.  While each of these allegations focused on a different Medicare program requirement, both complaints related to the same physical therapy device, involved the same relevant time period, shared nearly 100 identical paragraphs and were drafted by the same counsel.

The district court dismissed both actions under the public disclosure bar which blocks a qui tam lawsuit based on allegations already disclosed to the public (under varying circumstances) unless the whistleblower bringing the action is the original source of the disclosure.  The court found there had been a public disclosure of the alleged Medicare fraud in the form of a federal audit report and at least one decision by an administrative law judge.  The court further found that neither whistleblower could be considered an original source of these disclosures since neither “had a hand” in making the disclosures.  The district court also held that Godecke’s claims were precluded by the first-to-file bar since they were no more than a “slight variation” of Hartpence’s earlier-filed claims.

The Ninth Circuit reversed the district court on both its rulings.  On the public disclosure bar, the Court found the lower court applied the wrong standard on the original source exception to the rule.  Relying on the Circuit’s prior decision in Wang ex rel. United States v. FMC Corp. (975 F.2d 1412), the district court imposed a three-part test for determining whether a whistleblower is an original source under the statute: (i) direct and independent knowledge of the alleged fraud, (ii) voluntary disclosure of the information to the government prior to filing suit, and (iii) having a hand in the public disclosure.  It was this last requirement with which the en banc panel took issue.  It was not that the lower court misapplied this prior precedent in imposing the third requirement.  It was that the Circuit Court no longer agreed this requirement was warranted.

The Court reasoned there was no basis in the statutory text for this third-prong of the original source rule and that this was a view shared by “many of our sister circuits.”  The Court also found support in the Supreme Court’s decision in Rockwell Int’l Corp. v. United States (549 U.S. 457), which according to the Ninth Circuit panel “makes clear that Congress did not intend to link original-source status to information underlying the public disclosure.”  Finally, and perhaps most notably, the Court found its ruling entirely consistent with the False Claims Act goal of incentivizing whistleblowers to both report fraud and prosecute it on behalf of the government as “private Attorneys General.”  As such, the Court seemed to have no trouble in giving a “respectful burial” to Wang’s “hand-in-the-public-disclosure requirement” erected more than two decades ago.

While not quite as dramatic, the Ninth Circuit’s reversal of the district court’s first-to-file ruling was equally enlightened and favorable to whistleblowers.  Recognizing there need not be identical allegations for the first-to-file bar to kick in, the Court nevertheless found sufficient differences between the Hartpence and Godecke complaints to conclude the bar should not apply.  Most importantly, they involve different Medicare program requirements and allegations of two “materially different” and independent frauds — one involving the payment for medical devices used but allegedly not medically necessary; the other for devices allegedly never used at all.  The Court further highlighted the additional benefit the latter-filed Godecke complaint provided the government in identifying a fraud it “may never have discovered” on its own.

In reaching its decision, the Court was careful to weigh the dual purpose of the first-to-file bar; namely, “promot[ing] incentives for whistle-blowing insiders and prevent[ing] opportunistic successive plaintiffs.”  The Court believed its ruling best served these goals.  As to the first, “allowing claims for related but distinct fraud claims encourages broader investigation and increases the total potential for recovery.”  As to the second, there is no risk in encouraging “piggyback claims” as the second complaint here “provided information about a different type form of fraud,” without which the government might have never investigated beyond the more limited conduct challenged in the first complaint.

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