White Collar Posts

Third Circuit Decision Adopts More Lenient Pleading Standard in False Claims Act Litigation

June 23, 2014

Summary

• On June 6, 2014, the Third Circuit adopted a more lenient pleading standard in False Claims Act (FCA) actions in Foglia v. Renal Ventures Management, LLC, No. 12-4050, 2014 U.S. App. LEXIS 10726 (3d Cir. June 6, 2014).
• The Third Circuit only requires plaintiffs to describe particular details of a scheme to submit false claims which can lead to a strong inference that claims were submitted.
• This more lenient standard will allow more plaintiffs to proceed to the discovery phase of litigation with limited allegations of actual wrongdoing by a health care provider.

Discussion

On June 6, 2014, the Third Circuit Court of Appeals published an opinion in Foglia v. Renal Ventures Management, LLC, in which the Third Circuit, for the first time, addressed the pleading requirements under Federal Rule of Civil Procedure 9(b) (“Rule 9(b)”) in an FCA action. Rule 9(b) requires a plaintiff to “state with particularity the circumstances constituting fraud or mistake” when filing a complaint that alleges fraudulent conduct by a defendant. Because an FCA action requires a showing of fraudulent conduct on the part of the defendant, an FCA plaintiff must comply with the 9(b) requirements in order for his complaint to proceed past the pleading stage. 

Various Circuits have adopted different standards with respect to the 9(b) requirement. For instance, in the Fourth, Sixth, Eighth and Eleventh Circuits, the plaintiff must describe “representative samples” of fraudulent conduct in the pleading, including the “time, place and content of the acts and the identity of the actors.” However, the First, Fifth, and Ninth Circuits have adopted a more lenient standard, requiring the plaintiff to only allege “particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted.”

In determining which standard to apply, the Third Circuit noted that it has never required a plaintiff to identify a specific claim for payment in a complaint in order to proceed past the pleading stage. Furthermore, the text of the FCA itself does not require “the exact content of the false claims in question to be shown.” Consequently, the Third Circuit determined that requiring “representative samples” of fraudulent conduct would be “one small step shy of requiring production of actual documentation with the complaint, a level of proof not demanded to win at trial and significantly more than any federal pleading rule contemplates.” 

The Third Circuit emphasized that its interpretation of the pleading standard is supported by the Solicitor General of the United States. In a recent brief for the United States, the Solicitor General indicated that the “rigid” pleading standard required by the Fourth, Sixth, Eighth and Eleventh Circuits “undermines the FCA’s effectiveness as a tool to combat fraud against the United States.” Further, the Solicitor General pointed out that many of the Circuits that follow the more rigid standard do not consistently adhere to that standard. 

Therefore, the Third Circuit determined that if the purpose of Rule 9(b) is to “provide defendants with fair notice of the plaintiffs’ claims,” the more lenient 9(b) pleading standard will suffice. As a result, in order for a plaintiff to proceed to the discovery phase in an FCA action in the Third Circuit, the plaintiff needs only allege details sufficient to establish a strong inference that false claims were submitted to the government.

The specific facts of the Foglia case exemplify how truly lenient this standard can be. In Foglia, the plaintiff, Thomas Foglia, alleged that Renal over-charged the government for Zemplar, a drug used to prevent and treat secondary hyperparathyroidism. Zemplar is distributed in single-use vials requiring any unused medicine to be discarded. When used in this fashion, Medicare is charged for the full vial, even if part of the vial is not actually used. Foglia alleged that Renal harvested the unused portion of the vial, but charged Medicare as if it had used the entire vial. 

In his complaint, Foglia stated that Renal’s inventory logs showed that Renal used 29-35 vials of Zemplar per day in the month of October. However, in order to service the number of patients Renal had seen each day, Renal would have needed 50 vials of Zemplar, if the vials were used in the single use fashion. Therefore, because Renal only used 29-35 vials each day, Renal must have been harvesting the extra Zemplar, but charging Medicare as though it had used a full 50 vials. 

While the Third Circuit acknowledged that this is a close case in terms of the 9(b) pleading requirements, the Third Circuit determined that Foglia’s allegations suffice “to give Renal notice of the charges against it, as required by 9(b).” Therefore, the Third Circuit reversed the District Court’s dismissal of Foglia’s complaint and remanded the case to the District Court for further proceedings.

Conclusion

The Third Circuit’s adoption of the more lenient pleading standard in FCA cases could encourage more whistleblower plaintiffs to file cases against health care providers based on limited evidence of wrongdoing. Additionally, complaints that previously would have been dismissed for failure to plead sufficient specificity will likely now proceed to discovery, leading to higher litigation costs for health care providers or additional pressure to resolve the matter early.

In order to stem the potential for FCA litigation, health care providers should ensure that their compliance officers are reviewing corporate compliance policies and educating staff regarding the providers’ dedication to compliance with Medicare and Medicaid program requirements.

Disclaimer: this E-Flash does not offer specific legal advice, nor does it create an attorney-client relationship. You should not reach any legal conclusions based on the information contained in this E-Flash without first seeking the advice of counsel.