Source: http://www.morelaw.com/verdicts/case.asp?n=15-3548%20&s=PA&d=108310
Timestamp: 2018-02-22 20:52:40
Document Index: 753435704

Matched Legal Cases: ['§ 1395', '§ 423', '§ 423', '§ 423', '§ 3730', '§ 3730', '§ 6', '§ 232', '§ 3730', '§ 3730', '§ 4', '§ 3729', '§ 3729', '§ 3729', '§ 3729', '§ 3729', '§ 3729', '§ 3729', '§ 4', '§ 3729', '§3729', '§ 3729', '§ 3729', '§ 3729', '§ 3729', '§ 4', '§ 3729', '§ 3729', '§ 3729', '§ 3729', '§ 3729']

UNITED STATES OF AMERICA, EX REL ANTHONY R. SPAY v. CVS CAREMARK CORPORATION; CAREMARK RX
Judge: Theodore McKee
Marc S. Raspanti, Esq. a>
Attorneys for Amicus Appellant
Joy P. Clairmont, Esq.
Jeffrey F. Keller, Esq.
Kathleen R. Scanlan, Esq.
Gordon Schnell, Esq.
Claire M. Sylvia, Esq.
Enu Mainigi, Esq.
Grant A. Geyerman, Esq.
Craig D. Singer, Esq.
Description: Part D of the Medicare program is a voluntary prescription drug benefit program that subsidizes the cost of prescription drugs and prescription drug insurance premiums for Medicare enrollees.2 The Part D program operates as a public-private partnership between the Centers for Medicare and Medicaid Services (“CMS”) and government contractors. CMS contracts with private insurance companies called “Sponsors” that administer prescription drug plans. The Sponsors, in turn, subcontract with “first-tier entities,” such as Pharmacy Benefit Managers (“PBM”s), that provide administrative and healthcare services, including claims processing. PBMs then contract with the pharmacies that actually dispense prescription medications to Medicare enrollees. Defendant Caremark Rx LLC3 was one of the largest PBMs in the United States from 2006 to 2007.
Unlike many other government healthcare programs, Medicare Part D is not a fee-for-service program, in which the healthcare provider is reimbursed for providing specific services. Instead, a Sponsor submits a bid in the year prior to the calendar year in which Part D benefits will actually be delivered, and CMS—after calculating average costs— prospectively compensates Sponsors for their anticipated costs through regular monthly payments.4 At the end of the year, CMS undertakes a reconciliation process, wherein it compares actual costs to payments made to Sponsors during the past calendar year.5 This suit stems from plaintiffs’ claim that Sponsors intentionally submitted false information about their costs during the reconciliation process. According to plaintiffs, this false information resulted in CMS paying Sponsors more than they were actually entitled to during the reconciliation.
2 The Medicare Part D program was enacted as part of the Medicare Modernization Act of 2003 and began on January 1, 2006. 42 U.S.C. § 1395w-101(a)(2). 3 “On March 22, 2007, Caremark Rx LLC merged with CVS Corporation to form Defendant CVS Caremark Corporation. The Defendants are various subsidiaries of Defendant CVS Caremark Corporation.” U.S. ex rel. Spay v. CVS Caremark Corp., No. 09-4672, 2015 WL 5582553, at *3 (E.D. Pa. Sept. 22, 2015). 4 42 C.F.R. §§ 423.265, 315. 5 42 C.F.R. § 423.343.
Before a pharmacy dispenses drugs to a Medicare recipient, it first submits an electronic pharmacy claim to the recipient’s Part D Sponsor (or the Sponsor’s agent). The pharmacy claim contains information about the patient and the patient’s prescription. If the pharmacy claim is accepted, the PBM transmits its approval to the pharmacy, and the drug is dispensed to the Medicare recipient. If the pharmacy claim is rejected, the PBM sends the pharmacy a “Reject Code” that explains why it was rejected. Once the pharmacy claim is approved and the medication dispensed, the Sponsor reimburses the pharmacy for the cost of the prescription, minus the amount of any copay that the pharmacy may have received from the Medicare recipient. This process is called the claims “adjudication.” Although it sounds rather laborious and timeconsuming, modern technology allows the adjudication to occur in real-time, and PBMs typically inform pharmacies whether a claim has been approved or rejected within seconds—while the Medicare recipient waits at the pharmacy counter.
Additionally, throughout the year, Sponsors submit PDE records to CMS for all prescriptions dispensed to Medicare recipients under Part D. Sponsors often submit those records to CMS through PBMs that act as the Sponsor’s agent. These PDE records are created electronically. They consist of summary extracts that include at least 34 mandated data fields about each prescription that was filled and the drug that was dispensed. Sponsors are required to give CMS a PDE for all of the prescriptions dispensed to a Part D Medicare recipient.6 From 2006 to 2007, the PDEs were only used for the end-ofyear reconciliation. This dispute focuses on two of the 34 data
7 “In 2006–2007, few prescribers used the NPI since there was no universal form of Prescriber ID issued to all prescribers in the United States.” Spay, 2015 WL 5582553, at *8. 8 Spay, 2015 WL 5582553, at *15.
Appellant Relator Spay is a former pharmacist and cofounder of a company that audits pharmacies. In 2007, during an audit of one of Caremark’s9 insurance company clients, Spay identified six categories of alleged discrepancies in Caremark’s pharmacy claims processing. One of these categories was the use of “dummy” Prescriber IDs. After discussion with Caremark, its client dropped all six issues identified in the audit, collected no recovery from Caremark, and did not pay Spay for the audit.
9 In 2006-2007, Caremark served as a PBM for 39 different Part B Sponsors. 10 “Qui tam is short for the Latin phrase qui tam pro domino rege quam pro se ipso in hac parte sequitur, which means ‘who pursues this action on our Lord the King's behalf as well as his own.’” Vt. Agency of Nat. Res. v. U.S. ex rel. Stevens, 529 U.S. 765, 768 n.1 (2000) (citation omitted). A qui tam lawsuit is a private enforcement action under the False Claims Act where the private party bringing the suit referred to as the “relator.” U.S. ex rel. Eisenstein v. City of N.Y., 556 U.S. 928, 932 (2009) (citation omitted).
Medicare recipients at various pharmacies.11 The government declined to intervene in the suit.12
11 Specifically, Spay alleged that Caremark failed to comply with 42 C.F.R. § 423.505(k), which requires, as a condition for payment, that Part D Sponsors certify the “accuracy, completeness, and truthfulness of all data related to payment.” 12 “When a relator initiates [a qui tam] action, the United States is given 60 days to review the claim and decide whether it will ‘elect to intervene and proceed with the action.’” Eisenstein, 556 U.S. at 932 (quoting 31 U.S.C. §§ 3730(b)(2), (b)(4)). 13 Spay also moved for partial summary judgment, which was denied in its entirety. 14 The District Court did not address Caremark’s additional arguments for why Spay’s dummy Prescriber ID claim failed: (1) the dummy Prescriber IDs were not deceptive and, therefore, not “false;” (2) Spay could not prove the “knowledge” element; and (3) Caremark did not make a false certification. Spay, 2015 WL 5582553, at *23. 15 Id. at *23–*25. 16 Id. at *24. 17 Id. (citing U.S. ex rel. Burlbaw v. Orenduff, 548 F.3d 931, 951 (10th Cir. 2008); United States v. Southland Mgmt. Corp., 326 F.3d 669, 683-84 (5th Cir. 2003) (en banc) (Jones, J., concurring); U.S. ex rel. Becker v. Westinghouse Savannah
River Co., 305 F.3d 284, 289 (4th Cir. 2002); U.S. ex rel. Durcholz v. FKW Inc., 189 F.3d 542, 544-45 (7th Cir. 1999); U.S. ex rel. Kreindler & Kreindler v. United Techs. Corp., 985 F.2d 1148, 1157 (2d Cir. 1993); U.S. ex rel. Hagood v. Sonoma Cty. Water Agency, 929 F.2d 1416, 1421 (9th Cir. 1991)). 18 Id. (citing United States v. Educ. Mgmt. LLC, No. 2:07-cv00461, 2013 WL 3854458, at *11 (W.D. Pa. May 14, 2013); U.S. Dep’t of Transp. ex rel. Arnold v. CMC Eng’g Inc., 947 F. Supp. 2d 537, 545 (W.D. Pa. 2013), aff’d, 567 F. App’x 166 (3d Cir. 2014); U.S. ex rel. Watson v. Conn. Gen. Life. Ins. Co., No. Civ.A.98-6698, 2003 WL 303142, at *8 (E.D. Pa. Feb. 11, 2003)). 19 Id. (citing S.F. Bay Area Rapid Transit Dist. v. Spencer, No. C 04-4632, 2007 WL 1450350, at *8 (N.D. Cal. May 14, 2007); Boisjoly v. Morton Thiokol, Inc., 706 F. Supp. 795, 809 (D. Utah 1998); U.S. ex rel. Lamers v. City of Green Bay, 998 F. Supp. 971, 988 (E.D. Wisc. 1998)). 20 Id. at *25. 21 Id. at *44. 22 Id.
Taxpayers Against Fraud Education Fund (“TAFEF”), a nonprofit organization “dedicated to combating fraud against the government and protecting public resources through public-private partnerships” and “committed to preserving effective anti-fraud legislation at the federal and state levels;”23 and Senator Charles E. Grassley, “the leading sponsor of the 1986 and 2009 amendments” to the FCA, filed amicus briefs in support of Spay’s claims and arguing against the continued viability of the government knowledge inference.24
23 TAFEF Br. 1. Caremark notes that Spay’s counsel is a major donor to TAFEF and sits on its Advisory Board. Appellees’ Br. 43. 24 Grassley Br. 2. 25 In re Ikon Office Solutions, Inc., 277 F.3d 658, 665 (3d Cir. 2002). 26 Fed. R. Civ. P. 56(a). 27 Knopick v. Connelly, 639 F.3d 600, 606 (3d Cir. 2011) (internal quotation marks omitted). 28 Fairview Twp. v. U.S. Envtl. Prot. Agency, 773 F.3d 517, 525 n.15 (3d Cir. 1985).
rampant fraud in Civil War defense contracts.”29 The frauds included the government paying for artillery shells filled with sawdust instead of explosives,30 uniforms made of “shredded, often decaying rags, pressed . . . into a semblance of cloth” that “would fall apart in the first rain,”31 and the same horses being sold “two and three times to the Union cavalry.”32 Congress hoped that enacting the FCA would combat these dishonest government contractors, who had become “bands of conspirators . . . knotted together . . . for the purpose of defrauding and plundering the Government.”33
29 Kellogg Brown & Root Sers., Inc. v. U.S., ex rel. Carter, 135 S. Ct. 1970, 1973 (2015) (quoting S. Rep. No. 99-345, at 8 (1986), 1986 U.S.C.C.A.N. 5266, 5273). See also Act of Mar. 2, 1863, ch. 67, 12 Stat. 696 (1863). 30 Cong. Globe, 37th Cong., 3d Sess. 955 (1863) (statement of Sen. Howard). 31 Ron Soodalter, The Union’s ‘Shoddy’ Aristocracy, N.Y. Times Opinionator (May 9, 2011, 9:30 PM), http://opinionator.blogs.nytimes.com/2011/05/09/the-unionsshoddy-aristocracy. See also James B. Helmer, Jr., False Claims Act: Incentivizing Integrity for 150 Years for Rogues, Privateers, Parasites and Patriots, 81 U. Cin. L. Rev. 1261, 1264–65 (2013) (listing reports of misappropriated war funds and collecting sources). 32 132 Cong. Rec. H6482 (daily ed. Sept. 9, 1986) (statement of Rep. Berman). 33 Cong. Globe, 37th Cong, 3d Sess. 955 (1863) (statement of Sen. Howard). 34 31 U.S.C. §§ 3730(d)(1)–(2) (outlining the award to a qui tam plaintiff to be “at least 15 percent but not more than 25 percent of the proceeds of the action or settlement of the
claim” when the Government intervenes and “not less than 25 percent and not more than 30 percent” when the Government does not intervene); 3729(a)(1) (providing for treble damages and civil monetary penalties for FCA claims). Under the original FCA, individuals bringing qui tam suits were entitled to half of the government’s recovery. Act of Mar. 2, 1863, ch. 67, 12 Stat. 696, § 6 (1863). 35 See U.S. ex rel. Jamison v. McKesson Corp., 649 F.3d 322, 332 (5th Cir. 2011) (explaining that court’s holding would prevent qui tam relators from “arbitrarily select[ing] a large group of defendants in any industry in which public disclosures have revealed significant fraud, in hopes that [their] allegations will prove true for at least a few defendants”); James F. Barger, Jr., Pamela H. Bucy, Melinda M. Eubanks, Marc S. Raspanti, States, Statutes, and Fraud: An Empirical Study of Emerging State False Claims Acts, 42 False Cl. Act and Qui Tam Q. Rev. 15 (2006) (“Because the FCA’s damages and penalty provisions tend to generate exceptionally large judgments, relators’ taxable recoveries involve substantial sums.”). 36 See Graham Cty. Soil and Water Conservation Dist. v. U.S. ex rel. Wilson, 559 U.S. 280, 310 (2010) (Sotomayor, J., dissenting) (citing S. Rep. No. 99–345, at 10–11) (“To be sure, Congress was also concerned in 1986, as in 1943, with guarding against purely opportunistic, ‘parasitic’ qui tam relators.”). 37 145 Cong. Rec. E1546-01 (daily ed. July 14, 1999) (statement of Rep. Berman). The government knowledge bar was a response to the Supreme Court’s decision in U.S. ex rel. Marcus v. Hess, 317 U.S. 537 (1943), where the Court “upheld the relator’s recovery even though he had discovered
the fraud by reading a federal criminal indictment—a quintessential ‘parasitic’ suit.” Graham Cty., 559 U.S. at 294. 38 Id. (quoting Marcus v. Hess, 317 U.S. at 545). The pre1986 version of the FCA barred jurisdiction over any claim “whenever it shall be made to appear that such suit was based upon evidence or information in the possession of the United States, or any agency, officer, or employee thereof, at the time such suit was brought.” 31 U.S.C. § 232(C) (1943). 39 192 F.3d 402, 408 (3d Cir. 1999), superseded by statute, FERA, Pub. L. No. 111-21, as recognized in U.S. ex rel. Hill v. Univ. of Med. & Dentistry of N.J., 448 F. App’x 314, 317 n.4 (3d Cir. 2011). 40 See id. 41 S. Rep. No. 110-507, at 3 (2008).
mechanism referred to as a ‘public disclosure bar.’”42 The public disclosure bar was enacted “in an effort to strike a balance between encouraging private persons to root out fraud and stifling parasitic lawsuits.”43 Under this new standard, a qui tam suit would only be barred if it was based on information that was “publicly disclosed at various hearings, in certain types of reports, or by the media.”44 “Once public disclosure became the linchpin of the jurisdictional scheme, the effect of government knowledge on the viability of an FCA claim was thrown to the courts to decide.”45
42 Id. at 5. 43 Graham Cty., 559 U.S. at 295. 44 Cantekin, 192 F.3d at 408 (internal quotation marks omitted) (citing 31 U.S.C. § 3730(e)(4)(A) (1994)). The public disclosure must have occurred “in a criminal, civil, or administrative hearing, in a congressional, administrative, or Government Accounting Office report, hearing, audit, or investigation, or from the news media . . .” 31 U.S.C. § 3730(e)(4)(A) (1994). 45 Lamers, 998 F. Supp. at 988 (citing U.S. ex rel. Butler v. Hughes Helicopters, Inc., 71 F.3d 321, 326 (9th Cir. 1995)). 46 See James B. Helmer, False Claims Act: Whistleblower Litigation 247–48 n.873 (6th ed.) (2012) (cataloguing pre2008 circuit cases imposing materiality requirement). 47 See id. at 248 (discussing circuit split on materiality standard). 48 Fraud Enforcement and Recovery Act of 2009 (FERA), Pub. L. No. 111-21 (2009).
“recently been undermined by court decisions which limit the scope of the law and, in some cases, allow subcontractors paid with Government money to escape responsibility for proven frauds.”49 With this background in mind, we will first address Spay’s argument that the District Court’s decision here created “an unprecedented ‘industry practice’ government knowledge inference that undermines the purpose of the FCA.”50 We will then more generally address the issue of materiality under the FCA.
49 S. Rep. No. 111-10, at 4 (2009). The Report later clarifies that the amendments were meant to “clarify and correct erroneous interpretations of the law that were decided in Allison Engine Co. v. United States ex rel. Sanders, 128 S. Ct. 2123 (2008) and United States ex rel. Totten v. Bombadier Corp., 380 F.3d 488 (D.C. Cir. 2004).” Id. at *10. 50 Appellant’s Br. 15. 51 Arnold, 567 F. App’x at 170 n.9 (explaining that the Third Circuit had not yet adopted the government knowledge inference in 2014); Spay, 2015 WL 5582553, at *24 (collecting circuit cases). 52 Becker, 305 F.3d at 289.
in order to determine if the defendant acted knowingly.”53 “The ‘government knowledge inference’ helps distinguish, in FCA cases, between the submission of a false claim and the knowing submission of a false claim—that is, between the presence and absence of scienter.”54 The government knowledge inference may arise “when the government knows and approves of the facts underlying an allegedly false claim prior to presentment”55 and the defendant knows that the government is aware of the false information in a claim. In other words, there is a two-prong test that must be met before the government knowledge inference can preclude liability. The two-prong test requires that (1) the government agency knew about the alleged false statement(s), and (2) the defendant knew the government knew.56
A “classic example” of the government knowledge inference occurs “when the government, with knowledge of the facts underlying an allegedly false claim, authorizes a contractor to make that claim.”57 For instance, in United States ex rel. Durcholz v. FKW, Inc.,58 officers at a naval facility directed the defendant general contractor to use incorrect lineitems in order to expedite the bidding process. The officers did so because “[they] were more interested in speed than cost and made their decisions in accordance with these priorities.”59 The
53 Michael J. Davidson, The Government Knowledge Defense to the Civil False Claims Act: A Misnomer by Any Other Name Does Not Sound as Sweet, 45 Idaho L. Rev. 41, 47 (2008) (citations omitted). 54 Burlbaw, 548 F.3d at 951. 55 Id. at 952. 56 See Educ. Mgmt., 2013 WL 3854458, at *11; Southland Mgmt. Corp., 326 F.3d at 682 (Jones, J., concurring) (“Most of our sister circuits have held that under some circumstances, the government’s knowledge of the falsity of a statement or claim can defeat FCA liability on the ground that the claimant did not act ‘knowingly’, because the claimant knew that the government knew of the falsity of the statement and was willing to pay anyway.”). 57 Burlbaw, 548 F.3d at 952 (citing Wang, 975 F.2d at 1421). 58 189 F.3d 542 (7th Cir. 1999). 59 Id. at 545.
Court of Appeals for the Seventh Circuit “decline[d] to hold [the defendant] liable for defrauding the government by following the government’s explicit directions.”60 The court explained that “[t]he government knew what it wanted, and it got what it paid for.”61 Though such direct and contractspecific authorization is not required to support the government knowledge inference,62 generally, “[w]here the government and a contractor have been working together, albeit outside the written provisions of the contract, to reach a common solution to a problem, no claim arises.”63 In other words, the easy case in which to apply the government knowledge inference is where the defendant and the government engage in open and ongoing discussions about the purportedly false claims.64 This is the “easy case” because both prongs are easily met.
60 Id. 61 Id.; see also Becker, 305 F.3d at 289 (applying government knowledge inference where the Department of Energy’s “full knowledge of the material facts underlying any representations implicit in [the defendant’s] conduct negates any knowledge that [the defendant] had regarding the truth or falsity of those representations”). 62 See Burlbaw, 548 F.3d at 953 (applying the government knowledge inference where there was evidence of governmental knowledge and cooperation, the defendant was “completely forthcoming” with the government, and there was no evidence that the information the defendant provided was “materially inaccurate”). 63 Southland, 326 F.3d at 682 (Jones, J., concurring). 64 See, e.g., Wang ex rel. United States v. FMC Corp., 975 F.2d 1412, 1421 (9th Cir. 1992) (“The government knew of all the deficiencies identified by [the relator], and discussed them with [the defendant]. The fact that the government knew of [the defendant’s] mistake and limitations, and that [the defendant] was open with the government about them, suggests that while [the defendant] may have been groping for solutions, it was not cheating the government in the effort. Without more, the common failings of engineers and other scientists are not culpable under the [FCA].”), overruled on other grounds by U.S. ex rel. Hartpence v. Kinetic Concepts, 792 F.3d 1121 (9th Cir. 2015); Butler, 71 F.3d at 327 (finding
the government’s knowledge of allegedly false claims negated defendant’s intent where “the only reasonable conclusion a jury could draw from the evidence was that [the defendant] and the Army had so completely cooperated and shared all information . . . that [the defendant] did not ‘knowingly’ submit false claims”). 65 213 F.3d 519 (10th Cir. 2000). 66 71 F.3d 321. 67 975 F.2d 1412. 68 Shaw, 213 F.3d at 534 (emphasis omitted) (quoting Butler, 71 F.3d at 327). 69 Id. 70 Id. 71 In Shaw, the defendant government photography contractor was required to provide equipment necessary for silver recovery—a “process by which trace silver is removed from
film processing solution”—and to “dispose of the used [solution] and other chemicals in accordance with Environmental Protection Agency . . . guidelines and standards.” Id. at 527. The plaintiff relator alleged that the contractor failed to do so. Id. at 523. 72 Id. at 534–35. 73 Kreindler, 985 F.2d at 1156 (quoting Hagood, 929 F.2d at 1421); see also U.S. ex rel. A+ Homecare, Inc. v. Medshares Mgmt. Grp., Inc., 400 F.3d 428, 454 n.21 (6th Cir. 2005) (explaining that the government knowledge inference is typically applied where “the Government’s knowledge was used to demonstrate that what the defendant submitted was not actually false but rather conformed to a modified agreement with the Government,” and that, because the defendant had neither altered the Government’s understanding of reimbursement nor disclosed all pertinent information, that inference was not available in this case), superseded by statute, FERA, Pub. L. No. 111-21 (2009), as recognized in U.S. ex rel. Harper v. Muskingum Watershed Conservancy Dist., 842 F.3d 430, 436 (6th Cir. 2016).
74 As we explained at the outset, the False Claims Act was amended in 2009. Those amendments were deemed to “take effect on the date of enactment of this Act [May 20, 2009] and shall apply to conduct on or after the date of enactment.” Pub. L. 111-21 at § 4(f). Because the alleged conduct in this case occurred before 2009, we will use the pre-2009 version of the FCA to assess the claims here, just as the District Court did. 2015 WL 5582553, at *21 n.10. 75 31 U.S.C. § 3729(a)(1) (1994). 76 Id. at § 3729(a)(2). 77 Id. at § 3729(a)(7). 78 Id. at § 3729(b)(1)–(3). 79 Id. at § 3729(b).
claims over the administrative requirement of populating the physician identifier field and did not want valid claims rejected due to the absence of that number; (c) CMS knew that, in order to submit PDEs for valid pharmacy claims, Sponsors and PBMs were submitting PDEs containing dummy prescriber identifiers, yet never sanctioned any Sponsor, terminated any Sponsor, or required the submission of any PDE from 2006 or 2007 as a result of this practice; (d) although CMS preferred the use of a unique identifier, CMS affirmatively instructed Sponsors and PBMs to submit dummy prescriber IDs when a unique number was not available; (e) only after the 2006–2007 time frame did CMS issue affirmative instructions mandating the use of a unique identifier; (f) Defendants understood that CMS permitted the use of dummy prescriber IDs in 2006–2007; and (g) Defendants’ certifications of the accuracy of the data were filed during the period when CMS clearly knew of dummy prescriber usage.80
80 Spay, 2015 WL 5582553, at *26. 81 Spay and Sen. Grassley argue that the District Court incorrectly applied agency principles when relying on the statements of CMS employees who testified individually, but not on behalf of the government, to infer government knowledge. Appellant’s Br. at 28–39 (citing 2015 WL 5582553, at *26 n.17); Grassley Br. at 21–24. As Caremark correctly points out, circuit courts routinely rely on government employee testimony as evidence of what relevant government officials knew about the alleged conduct in FCA cases, and do not require that the employee testify on behalf of the government. See, e.g., Huston v. Proctor & Gamble Paper Prods. Co., 568 F.3d 100 (3d Cir. 2009).
82 2015 WL 5582553, at *43. 83 31 U.S.C. § 3729(b)(1)(B).
agree that there was no evidence of an intent to deceive the government here, Spay was not required to prove there was. In sum, the government knowledge inference is not applicable here because Caremark failed to establish the second prong of the two-prong test.84
84 The evidence in this case demonstrates that Caremark was stuck between a rock and a hard place at the inception of the Part D Program. Caremark hoped its approach of using dummy Prescriber IDs when they did not have the Prescriber’s actual ID—an approach which fit into the Prescriber ID validation algorithm—was a valid, nonfraudulent PDE submission given the circumstances at that time that allowed it to be paid for prescriptions needed by Medicare clients. Thus, Caremark did not act with the scienter necessary for liability to attach under the FCA. 85 136 S. Ct. 1989 (2016). 86 Id. at 2002 (citations omitted). 87 Id. at 1998 n.1. 88 The Court of Appeals for the D.C. Circuit, when similarly evaluating pre-2009 conduct, “assume[d]—as the parties have done—that Universal Health’s materiality standard applies to the instant dispute.” U.S. ex re. McBride v. Halliburton Co., 848 F.3d 1027, 1031 n.5 (D.C. Cir. 2017). Here, Spay contends that Universal Health’s materiality standard does not apply to pre-2009 conduct, and we therefore address this question directly.
The impact of the 2009 amendments and the decision in Universal Health on the materiality element can best be understood by focusing on the three sections of the FCA at issue here: Sections 3729(a)(1), (a)(2), and (a)(7). As we noted above in summarizing Spay’s arguments, those three sections create liability for any person who: (a)(1) knowingly presents, or causes to be presented, to an officer or employee of the United States Government . . . a false or fraudulent claim for payment or approval;
89 31 U.S.C. §§ 3729(a)(1), (2), (7) (1994). In 2009, Congress renumbered these sections, so that Section 3729(a)(1) became Section 3729(a)(1)(A), Section 3729(a)(2) became Section 3729(a)(1)(B), and Section 3729(a)(7) became Section 3729(a)(1)(G). Pub. L. No. 111-21, § 4. For clarity, we refer to these Sections in the text by their pre-2009 labels. 90 31 U.S.C. § 3729(a)(1)(B) (emphasis added).
money or property to the Government . . . .”91 The 2009 FERA amendments did not, however, add an explicit materiality requirement to Section 3729(a)(1).92 As we discuss below, Universal Health dealt with an alleged violation of that section.93 The 2009 FERA amendments also added a provision defining “material” as “having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property.”94 As the history of the materiality requirement demonstrates, these changes did not inject a new materiality standard into the FCA. Rather, the changes merely made explicit and consistent that which had previously been a judicially-imposed, and oftentimes conflicting, standard.
91 31 U.S.C. §3729(a)(1)(G) (emphasis added). 92 Compare 31 U.S.C. § 3729(a)(1) (1994) (“knowingly presents, or causes to be presented, to [the Government] a false or fraudulent claim for payment or approval”), with 31 U.S.C. § 3729(a)(1)(A) (2009) (“knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval”). 93 136 S. Ct. at 2001, 2002, 2004 (discussing 31 U.S.C. § 3729(a)(1)(A) as relevant provision). 94 31 U.S.C. § 3729(b)(4). 95 U.S. ex rel. Loughren v. Unum Grp., 613 F.3d 300, 307 (1st Cir. 2010) (“We have long held that the FCA is subject to a judicially-imposed requirement that the allegedly false claim or statement be material.”); U.S. ex rel. Berge v. Bd. of Trustees of the Univ. of Al., 104 F.3d 1453, 1459 (4th Cir. 1997) (“[W]e now make explicit that the current civil False Claims Act imposes a materiality requirement.”); U.S. ex rel. Longhi v. U.S., 575 F.3d 458, 468–70 (5th Cir. 2009) (discussing “proper standard for assessing the materiality of a false statement under the FCA’s civil-liability” provisions); United States v. Bourseau, 531 F.3d 1159, 1170–71 (9th Cir. 2008) (holding “that the FCA includes a materiality requirement”); A+ Homecare, Inc., 400 F.3d at 442 (concluding “that false statements or conduct must be material to the false or fraudulent claim to hold a person
requirement to the two sections amended in 2009. Indeed, the Court of Appeals for the First Circuit noted that the 2009 FERA amendments had not changed the FCA’s general requirement that a relator “prove falsity, materiality, and scienter.”96 Although prior to Universal Health, we had never decided whether the FCA contained a materiality requirement, the Supreme Court’s analysis in Universal Health resolves any hesitation we may have otherwise had.97 In United States ex rel. Cantekin v. University of Pittsburgh, we declined to decide whether materiality was an element of the pre-2009 FCA.98 We there expressed doubt that the FCA included a materiality requirement based on a footnote in Neder v. United States, a Supreme Court case holding that there is a materiality requirement in the federal mail, wire, and bank fraud statutes.99 We explained that the Neder Court noted that “the term ‘false statement,’ unlike ‘fraudulent statement,’ does not imply a materiality requirement.”100 Although we expressly refrained from deciding the issue, we did observe that “[g]iven that the False Claims Act prohibits merely making a knowingly false
civilly liable under the FCA”); U.S. ex rel. Costner v. U.S., 317 F.3d 883, 887 (8th Cir. 2003) (acknowledging that a materiality requirement exists but refraining from deciding “the precise contours of the materiality requirement”); Lamers, 168 F.3d at 1019; U.S. v. TDC Mgmt. Corp., Inc., 24 F.3d 292, 298 (D.C. Cir. 1994) (“To prevail under the False Claims Act, the government must prove either that [the defendant] actually knew it had omitted material information from its monthly progress reports or that it recklessly disregarded or deliberately ignored that possibility.”). 96 Loughren, 613 F.3d at 306–07 n.7–8 (“We need not decide whether the FERA applies retroactively here because under either the former or amended version of Section 3729(a)(2), our analysis of Relator’s claims . . . will be the same.”). 97 But see U.S. ex rel. Petratos v. Genentech Inc., 855 F.3d 481, 492 (3d Cir. 2017) (joining “the many other federal courts that have recognized the heightened materiality standard after Universal Health Services.”). 98 Cantekin, 192 F.3d at 415. 99 527 U.S. 1, 25 (1999). 100 Cantekin, 192 F.3d at 415.
claim and does not require a specific intent to defraud, perhaps Neder argues against a materiality requirement.”101 But the subsequent Supreme Court decision in Universal Health, and its reliance on Neder’s definition of materiality in interpreting how the FCA’s materiality requirement should be enforced, resolves the doubts that we previously entertained in Cantekin.102 Thus, contrary to the concerns expressed there, Universal Health clarified that Neder’s footnote did not suggest the absence of a materiality requirement in the FCA.
101 Id. 102 See Universal Health, 136 S. Ct. at 2002 (explaining that the FCA’s post-2009 statutory definition of materiality uses “language that we have employed to define materiality in other federal fraud statutes,” like the language in Neder). 103 See Longhi, 575 F.3d at 470 (noting the circuit split between the Fourth, Fifth, Sixth, and Ninth Circuits, which used the “natural tendency test” for materiality, and the Eighth Circuit, which used the “more restrictive ‘outcome materiality test’”). 104 See id. (explaining that, with the 2009 FERA amendments, “Congress embraced the [materiality] test as stated by the Supreme Court and several courts of appeals”). 105 The legislative history of the 2009 FERA also indicates that the original FCA included a materiality requirement, and that Congress enacted the amendments contained in the FERA to restore that original requirement. Indeed, the title of the FCA section of the FERA was “Clarifications to the False Claims Act to Reflect the Original Intent of the Law.” FERA, Pub. L. No. 111-21, § 4. The Senate Report on the FERA explains that the 2009 amendments were enacted in response to certain Supreme Court decisions that “r[an] contrary to the
clear language and congressional intent of the FCA.” S. Rep. No. 111-10, at 10. Accordingly, the revised text contained in Sections 3729(a)(1)(A) and (a)(1)(G) scaled back the more strenuous intent requirement created by the Supreme Court in Allison Engine, 553 U.S. 662 (2008). See S. Rep. No. 111-10, at 12 (“To correct the Allison Engine decision, [the FERA] contains three specific changes to existing section 3729(a)(2) and (a)(3). In section 3729(a)(2) the words ‘to get’ were removed striking the language the Supreme Court found created an intent requirement for false claims liability under that section. In place of this language, the Committee inserted the words ‘material to’ a false or fraudulent claim.”). The Senate Report further explained that the newly-added definition of “material” was “consistent with the Supreme Court definition, as well as other courts interpreting the term as applied to the FCA.” Id. (emphasis added). In other words, the legislative history explains that courts had previously been applying a materiality requirement to FCA claims, and these amendments simply (1) made the formerly implicit materiality requirement explicit, and (2) provided a standard definition of “material.” 106 Compare 31 U.S.C. § 3729(a)(1) (1994) (creating liability for anyone who “knowingly presents, or causes to be presented, to an officer or employee of the United States Government or a member of the Armed Forces of the United States a false or fraudulent claim for payment or approval”), with 31 U.S.C. § 3729(a)(1)(A) (2009) (creating liability for anyone who “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval”). 107 Universal Health, 136 S. Ct. at 2002 (discussing “§ 3729(a)(1)(A)’s materiality requirement”).
the 2009 amendments did include a definition of “material,” Universal Health held that it “need not decide whether § 3729(a)(1)(A)’s materiality requirement is governed by § 3729(b)(4) or derived directly from the common law” because both employ the same standard.108 The unavoidable conclusion based on the Court’s analysis is that: (1) Section (a)(1) has a materiality requirement, even though that requirement has never been expressed in the statute, and (2) the standard used to measure materiality did not change in 2009 when Congress amended the FCA to include a definition of “material.” Accordingly, we conclude that the FCA has always included a materiality element (and that the 2009 provisions merely made this element explicit). We also conclude that the definition of “material,” which is derived from the common law and was enshrined in the statute itself in 2009, has not changed.109
The Supreme Court has explained that “if the Government regularly pays a particular type of claim in full despite actual knowledge that certain requirements were violated, and has signaled no change in position, that is strong evidence that the requirements are not material.”110 That is precisely the situation here. As the District Court succinctly concluded: The crucial facts underlying the false claims here are that (1) CMS was well aware of the difficulty many pharmacies and PBMs were having
108 Id. 109 Furthermore, in support of its statement that “[m]ateriality . . . cannot be found where noncompliance is minor or insubstantial,” the Supreme Court cites to two cases: a Supreme Court case from 1943 and a New York Court of Appeals case from 1931. 136 S. Ct. at 2003 (citing Marcus v. Hess, 317 U.S. at 543; Junius Const. Corp. v. Cohen, 257 N.Y. 393, 400 (N.Y. 1931)). The 1943 Supreme Court case, Marcus v. Hess, dealt specifically with the FCA. 317 U.S. at 539. This further supports the existence of a materiality element in the FCA long before 2009. 110 Universal Health, 136 S. Ct. at 2003-04.
obtaining a proper physician identifier; (2) CMS was concerned with filling valid prescriptions and did not want claims rejected at the point of service for absence of a valid identifier; (3) PDE records could not be submitted without some type of number that satisfied the requisite algorithm in the physician identifier field; (4) CMS knew that many PBMs were submitting PDEs with dummy numbers in the physician identifier field in the 2006 and 2007 time period; (5) CMS could easily recognize dummy prescriber identifier numbers; and (6) CMS took no action to deny payment on such claims during the 2006–2007 time period.111
Nevertheless, Spay claims that, because the government explicitly advised the parties that the individual CMS employees did not speak for CMS and that CMS did not endorse their testimony, the testimony of those CMS employees cannot be used at summary judgment to establish that CMS as an agency knew of and affirmatively authorized a general industry use of false prescriber identifiers on PDE claims. Although that argument may well preclude reliance on the government inference doctrine, it does not undermine our belief that the misstatements here were simply not material to the government’s decision to pay the claims substantiated by the challenged PDEs. The government did not pay for services that were not provided, and the Sponsors did not receive any compensation for prescriptions that were never given to Medicare recipients. CMS knew that dummy Prescriber IDs were being used by PBMs, that it routinely paid PBMs despite the use of these dummy Prescriber IDs, and that CMS only “signaled [a] change in position” well after 2007.112 Spay does not contest
111 Spay, 2015 WL 5582553, at *34. 112 See Spay, 2015 WL 5582553, at *37–*39 (discussing CMS’s post-2007 efforts to prohibit use of dummy identifiers and concluding that “[c]onsidered collectively, this evidence creates the sole reasonable inference that CMS did not previously have a clear prohibition on the use of dummy
that CMS employees knew that dummy identifiers were being used on PDEs or the reason for using them. Nevertheless, CMS paid for those prescriptions. Moreover, CMS can hardly be faulted for paying even though it knew the information identifying the prescribers was not accurate. CMS was concerned with making sure that the medications were dispensed to Medicare recipients and that pharmacies were paid for those prescriptions. Had the payments stopped, the prescriptions would not have been dispensed, and the pharmaceutical needs of Medicare recipients would not have been addressed. The misstatements that gave rise to this qui tam action allowed patients to get their medication, and they are precisely the type of “minor or insubstantial” misstatements where “[m]ateriality . . . cannot be found.”113 The Supreme Court has instructed that “[t]he False Claims Act is not ‘an all-purpose antifraud statute,’ or a vehicle for punishing garden-variety breaches of contract or regulatory violations.”114 It is difficult for us to disagree with the District Court’s conclusion that, “[a]t base, this case appears to be nothing more than an effort to convert an unprofitable private audit—performed at a time when Part D regulations were new and not as explicit in their instructions—into a successful recovery of funds under the guise of a qui tam action.”115 The dummy Prescriber IDs were intended as one thing, and one thing only: they were intended as a technical, formulaic way of preventing a computer program from denying legitimate claims for reimbursement and payment for prescriptions that were actually disbursed to Medicare recipients. Those recipients needed the prescriptions the claims were based on, and nothing here suggests that the prescriptions or the workaround that prevented legitimate claims for payment from being improperly rejected by a computer code served anything other than the practical purpose of facilitating that payment and disbursement of those prescriptions. The workaround could arguably be described as “creative,” or a “common sense
identifiers. By first ‘clarifying’ its policies [in 2010], then ‘revising’ its prior policy and regulation text [in 2011 and 2012], CMS effectively indicated that, prior to these efforts, dummy identifiers were permissible”). 113 Universal Health, 136 S. Ct. at 2003. 114 Id. (quoting Allison Engine, 553 U.S. at 672). 115 Spay, 2015 WL 5582553, at *65.