Opinion ID: 781574
Heading Depth: 1
Heading Rank: 2

Heading: What About the Apples?

Text: 27 In addition to challenging the district court's subject matter jurisdiction, SFHS and Hoffman appeal the adverse judgment on the apples claim, raising both liability and penalty issues. 28 A. Defendants level a three-pronged attack on the jury verdict that SFHS and Hoffman violated the FCA by claiming employee gift apples as a reimbursable Medicaid expense. First, although the DHS audit reports established that improper apple claims were made, 4 defendants argue that Hays failed to prove that any person knowingly submitted false claims. A person acts knowingly for purposes of the FCA if he has actual knowledge of the false information, or acts in deliberate ignorance or reckless disregard of the information's truth or falsity. 31 U.S.C. § 3729(b). But merely erroneous or negligent claims are not actionable under the FCA. See United States ex rel. Quirk v. Madonna Towers, Inc., 278 F.3d 765, 767 (8th Cir.2002). 29 After careful review of the trial record, we conclude there was sufficient evidence on this issue. Viewed most favorably to the jury's verdict, the evidence established that (i) Hoffman and the SFHS internal accountants knew employee gifts were not reimbursable under the applicable Medicaid rules; (ii) gift apple invoices for a number of years were entered on SFHS general ledger accounts as resident food; and (iii) Hays and at least one other employee asked whether these purchases should instead be entered as employee gifts and were told by Hoffman to continue entering them as food. Defendants countered this showing with evidence that employees who prepared the Medicaid cost reports submitted to DHS were expected to exclude any non-reimbursable items entered in multi-purpose general ledger accounts such as the food account. But there was also evidence this was a haphazard, unsupervised process, permitting the jury to infer that, when Hoffman told employees to enter gift apples in the general ledger as resident food, he knew this would result in Medicaid cost reports that improperly included this item as a reimbursable food expense. 5 30 Second, defendants argue the district court erred in refusing to instruct that materiality is an element of an FCA violation. We recently confirmed that a showing of materiality is implicit in the FCA, though we did not define the precise contours of this requirement. United States ex rel. Costner v. United States, 317 F.3d 883, 887 (8th Cir.2003). In their reply brief, defendants concede that the false claims were material if they were capable of influencing the government's payment decision. The district court's instructions included that concept in a definition of materiality. Moreover, the record is clear that the reporting of employee gift apples as a reimbursable food expense was capable of influencing, and did in fact influence, the government's Medicaid reimbursement decisions. Thus, the instructions taken as a whole and viewed in light of the evidence and the applicable law, fairly and adequately submitted the issues in the case to the jury. Gray v. Bicknell, 86 F.3d 1472, 1485 (8th Cir.1996). 31 Third, defendants argue they were prejudiced by a number of the district court's evidentiary rulings. After carefully reviewing the record, we find no clear and prejudicial abuse of discretion. See Anheuser-Busch, Inc. v. John Labatt, Ltd., 89 F.3d 1339, 1345 (8th Cir.1996) (standard of review), cert. denied, 519 U.S. 1109, 117 S.Ct. 944, 136 L.Ed.2d 833 (1997). Limited to the apples claim, the evidentiary contentions are without merit. 32 B. Turning to more difficult issues, defendants argue that Hays failed to introduce evidence supporting the district court's conclusion that 336 false claims were submitted, and that the $1,680,000 penalty violates the Excessive Fines Clause of the Eighth Amendment. We agree with the first contention. Therefore, we need not decide the second, though we agree with the Ninth Circuit that FCA penalties are punitive in nature and therefore fall within the reach of the Excessive Fines Clause. See United States v. Mackby, 261 F.3d 821, 829-31 (9th Cir.2001). 33 The FCA provides that any person who knowingly makes a false claim (or causes one to be made) is liable to the United States Government for a civil penalty of not less than $5,000 and not more than $10,000. 31 U.S.C. § 3729(a). In determining the number of false claims for which this statutory penalty should be assessed in a particular case, the Supreme Court has cautioned that we are actually construing the provisions of a criminal statute. Such provisions must be carefully restricted, not only to their literal terms but to the evident purpose of Congress in using those terms. United States v. Bornstein, 423 U.S. 303, 313 n. 8, 96 S.Ct. 523, 46 L.Ed.2d 514 (1976) (quotation omitted). In Bornstein, a subcontractor made three shipments of falsely marked electron tubes to a general contractor who incorporated the tubes into radio kits billed to the government in thirty-five invoices. Rejecting the government's claim that the subcontractor committed thirty-five FCA violations, the Court held that the focus in each case [must] be upon the specific conduct of the person from whom the Government seeks to collect the statutory forfeitures and concluded that the subcontractor's three shipments constituted three violations. 423 U.S. at 312-13, 96 S.Ct. 523. 34 In this case, though the inquiry is fact-intensive, the district court treated the number of false claims as a question of law, which means we review its conclusion de novo. The court made its determination based upon the trial record, which was focused on other issues and is woefully inadequate for this purpose. Hays relied primarily on the testimony of Robert Rau, a former DHS auditor who had no first-hand knowledge of how SFHS facilities prepared and submitted requests for Medicaid reimbursement. Based upon his review of the DHS audit reports, Rau opined that the treatment of employee gift apples as a reimbursable food expense resulted in two hundred false claims for FCA purposes. He arrived at that number by concluding that the apples expense impacted twenty-seven annual Medicaid cost reports, and by assuming that each SFHS facility submitted monthly requests for payment to DHS using residential service invoice (RSI) forms. But the trial record contained no SFHS cost reports or RSI forms. Rau admitted that the RSI form is prepared on a per-resident basis, not a per-facility basis. No witness explained the manner and frequency in which SFHS facilities submitted payment requests to DHS in the years in question. And Hays failed to include in the record on appeal the exhibit showing Rau's calculations. On this record, Rau's opinion as to the number of false claims was simply an unsubstantiated guess. 35 In addition, we have a more fundamental problem with the district court's decision to accept Rau's opinion as to the number of false claims. Bornstein instructs us to focus on the specific conduct of the person from whom the Government seeks to collect the statutory forfeiture. 423 U.S. at 313, 96 S.Ct. 523. Here, the misconduct was to purchase approximately $6,000 worth of apples, give them to employees during the holiday season, and then falsely claim Medicaid reimbursement for this expense. Medicaid reimbursement is a rate-based regime. A facility's historical costs are recorded on an annual cost report. DHS then uses that report to calculate a payment rate or rates which are applied to all covered services over the following year (disregarding necessary time lags in the complex system). See 42 U.S.C. § 1396a(a)(13)(A); MINN. RULES chs. 9549 (nursing facilities), 9553 (intermediate care facilities). Under this system, a one-time expense for a multi-facility provider may be reimbursed over hundreds or many thousands of claims for reimbursement of services provided to individual residents. Under Rau's analysis, this protracted method of government reimbursement produces a $1,000,000 penalty (200 claims times $5,000 per claim) that bears no rational relationship to the false claim misconduct — seeking improper reimbursement for spending $6,000 to purchase apples. Thus, we reject layman Rau's approach to deciding a legal question laced with Excessive Fines Clause implications. It is [the] conduct of the medical practitioner, not the disposition of the claims by the government, that creates FCA liability. United States v. Krizek, 111 F.3d 934, 940 (D.C.Cir.1997) (rejecting a government number-of-claims theory that produced an astronomical $81 million worth of [penalties] for alleged actual damages of $245,392). 36 There remains the question of how we should dispose of the number-of-claims issue. The district court's determination of 336 false claims obviously cannot be upheld because ten of the eleven categories of claims were beyond its jurisdiction. As we have explained, Rau's opinion that there were two hundred false claims relating to apples is unsupportable as a matter of law. In reviewing the documentary portion of the record on appeal, 6 we noted DHS audit reports showing that employee gift apples were claimed by eight SFHS facilities and subsequently disallowed by DHS. The decision to falsely and knowingly claim those apples as a reimbursable expense for each facility was clearly eight false claims for FCA purposes. Therefore, taking into account the district court's judgment that defendants engaged in serious misconduct, we will impose the maximum $10,000 penalty per violation and reduce the total FCA penalty to $80,000. 37 The judgment of the district court is reversed in part, and the case is remanded with directions to enter a modified final judgment in which (i) the penalty set forth in paragraph 1 of the court's order for judgment dated August 20, 2001, is changed from $1,680,000 to $80,000, and (ii) plaintiff's claims against defendant Kay Knock are dismissed with prejudice. Appellants' motion to strike is denied as moot.