The U.S. District Court for the Eastern District of California December 20, 2010 denied a motion to dismiss a qui tam lawsuit brought under the False Claims Act (FCA) against a California healthcare company and two of its executive officers (collectively, defendants),
finding the complaint adequately pled violations of the FCA in alleging the defendants fraudulently conspired to obtain two grants from the Department of Health and Human Services' Health Resources and Services Administration (HRSA).
The defendant healthcare company, Family Healthcare Network (FHCN), is a private healthcare center that provides primary care services at clinical facilities located throughout Tulare County, CA.
At the time that the two grant applications at issue were submitted, defendants Harry L. Foster and Tony M. Weber were FHCN's President/Chief Executive Officer (CEO) and Chief Financial Officer (CFO), respectively.
Foster and Weber submitted in 2003 two grant applications to HRSA seeking funds to increase the level of services at two separate FHCN clinics. The first application,
submitted in February 2003, requested funds for expanding the staff and extending the operating hours at FHCN's clinic in Ivanhoe, CA. The second application, submitted in April 2003, requested funds for the purpose of hiring additional staff needed to establish a new FHCN clinic in Goshen, CA.
For both grant applications, Foster and Weber prepared and attached proposed staffing and budget figures, representing that additional staff was needed, that recruitment for the positions proposed in the applications was underway, and that all proposed positions would be filled within 90 days of the grant award.
In 2003, HRSA ultimately awarded FCHN a grant of $1.98 million for the Ivanhoe facility (Ivanhoe grant), and a grant of over $4.2 million for the new Goshen facility (Goshen grant).
Plaintiff Sharman Wood, whose relationship with the defendants is never disclosed in the court's decision, alleged in his complaint that, at the time FHCN submitted the Ivanhoe and Goshen grant applications, Foster and Weber did not intend to hire the staff proposed and knew that such staff would not be hired. In addition, Wood alleged that, after the grants had been awarded, FHCN submitted progress reports prepared by Foster and Weber that the defendants knew contained fraudulent data showing an inflated number of "new users" serviced at the Ivanhoe and Goshen facilities.
Wood alleged in his complaint that, in submitting the fraudulent grant applications, the defendants submitted, and conspired to submit, false claims in violation of 31 U.S.C. S3729(a)(1)&(a)(3). In addition, the complaint alleged that the filing of progress reports constituted the submission of reverse false claims under 31 U.S.C. § 3729(a)(7).
After the federal government declined to intervene in Wood's lawsuit in May 2010, the defendants moved to dismiss the claims, asserting that Wood had not alleged sufficient facts to support his FCA claims and that the complaint failed to allege fraud "with particularity" as required by Fed. R. Civ. P. 9(b).
In denying that motion, the district court found Wood's complaint contained sufficient allegations to state claims for violations of 31 U.S.C. S3729(a)(1). The complaint stated that "Foster certified the grant applications for the Ivanhoe and Goshen grants on behalf of FHCN with knowledge that both applications falsely proposed to create new staff positions that Foster never intended to fill," the court noted. In addition, the complaint alleged that Webber provided proposed staffing and budget figures for the grant applications with knowledge that the proposed staff positions would not be filled.
"The complaint's allegations that Foster and Weber did not intend to hire the additional staff proposed in the grant applications are supported by inference drawn from [other] facts alleged in the complaint," the court concluded.
The court highlighted the complaint's allegations that the staff proposed in the grant application for the Ivanhoe facility were never hired, that recruitment efforts were never undertaken to fill the proposed positions, and that the hours of operation at the facility were never increased as proposed in the grant application.
With respect to the Goshen facility, the court noted that, despite representations in the related grant application that staff recruitment was underway and ongoing, the number of full-time employees at the facility eight months after the grant award had decreased. The complaint also contained sufficient allegations to state a claim of conspiracy to submit false claims in violation of 31 U.S.C. § 3729(a)(3), the court found. "Here, the complaint alleges an agreement between Foster and Weber to submit misleading grant applications," the court said. "The complaint also identifies the false representations made in the applications, the reasons such representations were false, and the purpose of the false representations."
The court next found the complaint contained sufficient allegations to state a claim for violation of the FCA's reverse false claims provision, 31 U.S.C. § 3729(a)(7), which prohibits knowingly making, using, or causing the use of, a false record or statement to conceal or avoid an obligation to pay the federal government.
"The complaint alleges that Foster and Weber knowingly caused to be submitted progress reports and yearly uniform data system reports that contained false material information, and that the reports were submitted for the purpose of concealing, avoiding, or
decreasing an obligation to the government," the court found.
Finally, the court briefly addressed the issue of FHCN's potential liability for the alleged FCA violations. "The extent to which an entity is liable under the FCA for the acts of its employees presents an unsettled question in the Ninth Circuit," the court said. However, under an analysis allowing for every reasonable inference in favor of the plaintiff, "the allegations in the complaint are sufficient to hold FHCN liable for the fraudulent acts of Foster, whether under a intent-to-benefit, apparent-authority, or managerial-capacity theory," the court concluded.
United States ex rel. Wood v. Family Healthcare Network, No. 1:07-cv-700 (E.D. Cal. Dec. 20, 2010).