that the defendant “directed its staff to bill for non-therapeutic activities” and detailed instances where management pressured staff to prioritize billing over actual patient needs. Likewise, in U.S. ex rel. Mbabazi v. Walgreen Co. , the district court found that the relator sufficiently pleaded scienter where the complaint alleged that Walgreen falsely certified that beneficiaries did not have other insurance “without undertaking any effort to identify or use other coverage before billing Pennsylvania Medicaid.” 128 Another issue courts addressed was the requirement to prove a defendant’s knowledge of materiality. In Escobar , the Supreme Court held that FCA liability turns on “whether the defendant knowingly violated a requirement that the defendant knows is material to the Government’s payment decision.” The first part of this formulation – that plaintiffs must prove that the defendant knew about the alleged violation – is well-recognized and uncontroversial. But, does Escobar mean that plaintiffs must also prove that the defendant knew the alleged violation was material to the government? And what would that proof look like? These often overlooked questions from the Escobar decision have recently received more attention from the lower courts. In U.S. ex rel. Prose v. Molina Healthcare of Illinois, Inc. , the Seventh Circuit grappled with these issues at the pleading stage. 129 The relator alleged that Molina defrauded the government by continuing to accept capitated payments for providing a nursing facility services package, even after it ceased offering SNF services that had previously been part of that package. The district court granted Molina’s motion to dismiss, reasoning that although the complaint sufficiently alleged that Molina knew it had violated a contractual requirement to provide SNF services, there were only conclusory allegations that Molina knew this requirement was material to payment. On appeal, however, the Seventh Circuit reversed, finding that the complaint plausibly alleged that “as a sophisticated player in the medical-services industry, Molina was aware that these kinds of services play a material role in the delivery of Medicaid benefits.” In U.S. ex rel. Martino-Fleming v. S. Bay Mental Health Ctr. , the district court similarly acknowledged that the FCA “requires an additional showing of scienter” as to the materiality element. 130 And the district court denied the defendants’ motion for summary judgment where it found that testimony from the defendant’s corporate officers could show that the defendant knew the alleged violations were material. Finally, in one noteworthy decision in a criminal matter, United States v. Nora , the Fifth Circuit vacated a defendant’s conviction for criminal healthcare fraud after finding there was insufficient proof that he knew his company’s kickback scheme was illegal. 131 Interestingly, the Fifth Circuit agreed with the prosecution that the defendant knew his home health agency was paying physicians to refer new patients. But, the Fifth Circuit overturned the 128 2021 WL 4453600 (E.D. Pa. Sept. 28, 2021); see also United States v. Wavefront, LLC , 2021 WL 37539 (D.N.J. Jan. 5, 2021) (explaining that pleading scienter “generally at this stage” is sufficient because “[w] ithout the benefit of discovery,” the government “cannot be expected to cite extensive facts demonstrating [defendants’] knowledge of the falsity and materiality of each alleged misrepresentation” in their proposals for government contracts). 129 17 F.4th 732 (7th Cir. 2021). 130 2021 WL 2003016 (D. Mass. May 19, 2021); see also United States v. Wavefront, LLC , 2021 WL 37539 (D.N.J. Jan. 5, 2021) (finding that the complaint sufficiently alleged that the defendants acted with knowledge of the materiality of the falsehoods). 131 988 F.3d 823 (5th Cir. 2021).
Beyond the objective scienter standard, the Supreme Court has said that the scienter requirement is “rigorous” and must be “strictly enforced.” But Rule 9(b) says that plaintiffs may allege knowledge “generally.” Courts continued to reach varying results in trying to square these requirements when evaluating the sufficiency of the allegations in FCA complaints.
In several cases, courts found the allegations of scienter to be insufficient and therefore subject to dismissal on a motion to dismiss. Recognizing that FCA plaintiffs may allege scienter, generally these courts nonetheless reasoned that to satisfy Rule 8(a), plaintiffs must still allege facts that show the defendant acted with the requisite scienter – merely alleging that the defendant acted “knowingly,” without more, is not enough. In U.S. ex rel. Sheoran , for example, the relator alleged that the defendant “knowingly” submitted false claims for opiates that had been improperly prescribed. 125 Explaining that the scienter requirement imposes a “high bar,” the Sixth Circuit upheld the dismissal of the complaint because it did not describe how the defendant “could have concluded the prescriptions were false or fraudulent in some way.” The district court reached a similar conclusion in U.S. ex rel. Scollick v. Narula , holding that the complaint should be dismissed where the relator alleged that the defendant “knowingly” abetted fraudulent conduct but “provided no further factual allegations to support this naked assertion.” 126 Yet, other courts found allegations of scienter to be sufficient to survive a motion to dismiss. In U.S. ex rel. Integra Med Analytics LLC v. Mariner Health Care, Inc. , the relator alleged that the operator of a SNF submitted claims for medically unnecessary services. 127 The district court held that the allegations of scienter passed muster where the complaint stated 125 858 F. App’x 876 (6th Cir. June 4, 2021). 126 2021 WL 737077 (D.D.C. Feb. 25, 2021); see also U.S. ex rel. Jones v. Sutter Health , 2021 WL 3665939 (N.D. Cal. Aug. 18, 2021) (granting dismissal where relator alleged that defendant made “conclusory allegations that Defendants knowingly submitted false claims” but did “not set out allegations that support her assertion that Defendants had knowledge of fraud”); United States v. DaVita, Inc. , 2021 WL 1087769 (C.D. Cal. Feb. 1, 2021) (granting dismissal where relator’s scienter allegations “necessarily depended on” the “conclusiveness” of a medical research study that the court found “inconclusive” and where relator’s allegations demonstrated that the underlying timing issue of dialysis treatment was a “challenging and discretionary decision”). 127 2021 WL 4259907 (N.D. Cal. Aug. 5, 2021).
FALSE CLAIMS ACT UPDATE BASS, BERRY & SIMS | 21
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