The Fifth Circuit held February 24, 2011 that Caremark Inc. could be liable under the False Claims Act (FCA), specifically 31 U.S.C. § 3729(a)(7), for causing state Medicaid agencies to make false statements to the government.
Relator Janaki Ramados, a former Caremark employee, initiated the qui tam action against the pharmacy benefit manager (PBM), alleging it violated the FCA by unlawfully denying requests for reimbursement made by state Medicaid agencies for dual-eligible individuals. Several states and the federal government subsequently intervened in the action.
Reverse False Claims
Reversing the lower court’s grant of summary judgment in Caremark’s favor, the appeals court revived the federal government’s allegations that Caremark made false statements to state Medicaid agencies, which receive funding from the federal government, that allowed the company to fraudulently avoid making payments to the state Medicaid agencies.
Section 3729(a)(7) imposes FCA liability on a defendant that “knowingly makes, uses, or causes to be made or used, a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the Government.”
A Texas federal district court concluded that Caremark did not have any obligation to the government for denials of reimbursement requests that Caremark submitted to state Medicaid agencies.
But the government argued, and the Fifth Circuit agreed, that even if Caremark did not owe a direct “obligation” to the government, it could still be liable for causing the states to impair their obligations to the government.
Under federal law, states have a legal duty to return federal funds if they are able to recover from third parties and to seek reimbursement from a third party for dual eligible individuals.
“If Caremark made false statements that an individual is not covered by a plan, these false statements would cause the state Medicaid agencies to pay for the prescription and seek reimbursement from the Government rather than from Caremark,” the appeals court observed.
“This, in turn, would cause the States to receive and to keep federal funds to which they would not otherwise be entitled. Caremark’s actions therefore could have impaired the States’ obligation to the Government,” the appeals court explained.
Plan Restrictions
Plaintiffs also argued the district court erred in its interpretation of the Sixth Circuit’s decision in Caremark, Inc. v. Goetz, 480 F.3d 779 (2007), which held that third- party claims by TennCare, Tennessee's Medicaid program, were not subject to certain “card presentation” and “timely filing” restrictions contained in the PBMs Caremark administered.
In Goetz, the Sixth Circuit distinguished between “procedural” restrictions, which “deal only with the manner or mode of requesting coverage,” and “substantive” restrictions, which deal with the “type or quantum of benefits available to a beneficiary under the plan.”
While substantive restrictions could be applied to a state Medicaid agency, procedural restrictions that discriminated against Medicaid could not.
The appeals court here agreed with the district court that Caremark did not make “false” statements under the FCA when it denied reimbursement requests based on certain plan restrictions.
Citing Goetz, the government and the states countered that a factually true statement can still be false if it is “legally impermissible.”
The district court found that preauthorization was a substantive restriction and therefore granted summary judgment to Caremark on this issue. But the government contended that because Medicaid could not comply with a preauthorization requirement (i.e., it has no control over whether a dual eligible complies), “Caremark cannot lawfully apply the restriction to deny reimbursement requests.”
The Fifth Circuit said further factual development on this issue was necessary to determine whether the preauthorization requirement functions as a “‘procedural’ roadblock[] to reimbursement,” or a substantive limitation on coverage.
Thus, the appeals court affirmed summary judgment in Caremark’s favor on claims that it made false statements when it cited restrictions contained in a client’s plan as the reason for rejecting reimbursement requests. The appeals court reversed, however, the district court’s conclusions that the government could not bring a claim under Section
3729(a)(7). Finally, the appeals court remanded the action for further consistent proceedings.
United States v. Caremark, Inc., No. 09-50727 (5th Cir. Feb. 24, 2011).
U.S. Court In New York Says General Counsel Could Not Bring
Whistleblower Action Against Former Client
A federal trial court in New York dismissed April 5, 2011 a whistleblower action against Quest Diagnostics Inc. brought by several former executives, including one who served as general counsel, of its wholly owned subsidiary Unilab Corp.
The U.S. District Court for the Southern District of New York found the general counsel and the two other executives, who formed the litigation partnership Fair Laboratory Practices Associates (FLPA), were disqualified from the qui tam lawsuit and any subsequent action based on the same facts.
According to the redacted opinion, the general counsel violated New York ethics rules in bringing the FCA action against his former client because he relied on confidential information that he was privy to while working there as their attorney.
Andrew Barker, Richard Michaelson, and Mark Bibi, three former senior Unilab executives, formed FLPA to prosecute a qui tam action alleging defendants Quest and related entities violated the Anti-Kickback Statute (AKS) by offering medical testing services for manage care patients at a substantial discount or below cost in exchange for Medicare and Medicaid referrals.
Baker served as Chairman and Chief Executive Officer of Unilab from 1993 to 1996; Michaelson served as Chief Financial Officer from 1993 until about 1997, and then as Director until 1999, while Bibi served as General Counsel from 1993 through spring of 2000 and was solely responsible for all of the company’s legal affairs. Quest acquired Unilab in 2003.
The second amended complaint alleged defendants violated the AKS from at least January 1, 1996 through the present by operating an ongoing “pull through” scheme where they charged independent physician associations and managed care organizations below cost rates for laboratory tests to induce Medicare and Medicaid referrals.
Defendants moved to dismiss, arguing Bibi, as Unilab’s former general counsel, breached his duty of loyalty to his former client to its disadvantage and for his own personal benefit.
While FPLA did not contest that some of the information at issue was confidential, plaintiff asserted that Bibi’s disclosure fit within the “future crime” exception to the duty of
confidentiality.
The court first determined that the FCA did not trump New York’s ethics rules, which applied here, after balancing the federal government’s interests in encouraging qui tam actions versus its interest in preserving the attorney-client privilege.
The court found Bibi, in disclosing the confidential information to his FLPA partners for purposes of the litigation, violated New York ethics rules DR 5-108 and DR 4-101.
DR 5-108 prohibits an attorney from representing another person in the “same or a substantially related matter in which that person’s interests are materially adverse to the interests of the former client.”
Plaintiff argued that DR 5-108 was inapplicable here because Bibi was not “representing” the relator (i.e. FPLA) as counsel.
But the court disagreed, noting first that a qui tam plaintiff “represents” the United States within the meaning of DR 5-108.
“Here, Bibi, as a member of FLPA, is representing another person, the United States, in a matter substantially related and materially adverse to his former representation of Unilab, without his client’s consent,” resulting in a direct violation of DR 5-108. Moreover, the court said, Bibi could not escape violating DR 5-108 by appearing as a party, rather than as counsel against Unilab, citing the legal maxim that “one cannot do directly that which he cannot do indirectly.”
To hold otherwise, “would allow counsel to skirt the protections afforded to clients under DR 5-108 by simply hiring counsel to represent them in any action substantially related and materially adverse to a former representation,” the court observed.
The court also found Bibi’s disclosures did not fit within the “future crime” exeption of DR 4-101.
DR 4-101 allows an attorney to reveal a client’s intention “to commit a crime and the information necessary to prevent the crime.”
“While Bibi may have reasonably believed that Defendants had the intention to commit a crime in 2005, his disclosure went beyond the scope authorized by DR 4-101 such that his actions were in violation of his ethical obligation under that rule,” the court said. Plaintiff argued that Bibi’s participation in the qui tam action was justified because the information he possessed supported the belief that defendants intended to violate the AKS.
But the court noted that the strictly construed DR 4-101 “is limited to information necessary to prevent the continuation or commission, of a crime,” it does not allow former counsel “to disclose client confidences regarding completed conduct which satisfies all elements of a crime.”
Here, Bibi’s disclosure of confidential information dated back to 1996, which was “beyond the scope of information that Bibi could have reasonably believed was necessary to prevent a crime in 2005.”
Finally, the court held that dismissing Bibi alone from the qui tam action was an insufficient remedy.
“This approach fails to consider that Bibi has violated his ethical obligations and would allow Baker and Michaelson to profit from Bibi’s breaches of Unilab confidences,” the court said.
Moreover, because the scope of Bibi’s disclosures to his FPLA partners was unknown, allowing Baker and Michaelson to go forward with the lawsuit “would allow that taint to proceed into trial.”
The court’s added that nothing in its opinion prevented the federal government from intervening in this action and from bringing an action against the defendants.
United States ex rel. Fair Lab. Practices Assocs. v. Quest Diagnostics Inc., No. 1:05-cv- 05393-RPP (S.D.N.Y. Apr. 5, 2011).