“It was the best of times, it was the worst of times . . . .” Charles Dickens was not thinking of the False Claims Act when he wrote “A Tale of Two Cities,” but the First Circuit Court of Appeals was when it decided United States ex rel. McGuire v. Millenium Laboratories, Inc. earlier this week. With the decision, a three judge panel of that Court moved over $34 million in relator fees from one whistleblower to another, highlighting the risks—for both whistleblowers and government contractors—inherent in False Claims Act cases.
The False Claims Act (“FCA”) is a punitive statute that imposes liability on any person who “knowingly presents . . . a false or fraudulent claim for payment or approval” to the Government. FCA claims can be brought by either the Government or a whistleblower (referred to as a "relator"), who can bring a lawsuit in the name of the Government. Often, these relators are current or former employees, directors, contractors, or affiliates of the company subject to the claim. A relator may rely on insider knowledge or documents gained during their employment or affiliation to assert that the company has defrauded the Government. Or, a relator claim may come from a competitor or employee of a competitor.
Relators who bring FCA cases can receive hefty awards for their efforts. If the Government steps in to litigate the FCA case, a relator can earn a pay day of approximately 15%-25% of the amount recovered by the Government. If the Government does not take over the case from the relator, and the relator ultimately prevails in the litigation, he or she may recover approximately 30% of the amount recovered. For large-scale fraud claims, the relator’s recovery could be massive, creating a significant incentive for individuals to whistleblow.
Such was the case for Robert Cunningham. Cunningham was an attorney and compliance officer who worked for a competitor of Millenium Laboratories, Inc. and brought a relator lawsuit (called a qui tam action) alleging that Millenium had submitted claims for payment to the Government related to excessive and medically unnecessary drug tests. Specifically, Cunningham alleged that Millenium induced physicians into billing for numerous different tests through a single, inexpensive, multi-functional test kit.
More than two years later, Mark McGuire filed a similar qui tam action alleging fraud by Millenium. McGuire’s suit focused not on Millenium’s multiple billing for the use of a single test kit but on physicians ordering subsequent, unnecessary, confirmatory drug testing after initial tests showed the presence (or lack of a presence) of specific drugs, without performing an individualized assessment of patient need. McGuire also alleged that Millenium provided physicians with free test kits to induce them into ordering the confirmatory tests.
The Government intervened in McGuire’s case (along with the cases of three other relators, none of which were Cunningham). The crux of the Government’s claim was encompassed by two alleged fraudulent schemes:
(1) Millennium’s submission of claims for excessive and unnecessary urine drug testing ordered by physicians through standing orders without an individualized assessment of patient need; and
(2) urine drug testing referred by physicians who received free . . . testing supplies, in violation of the Stark Act and the Anti-Kickback Statute.
Millenium eventually settled with the Government for $227 million, plus interest, setting aside 15% of the recovery as a fee for the relator who was “first-to-file.”
In FCA actions, only the first-to-file relator may share in the recovery in order to prevent many potential plaintiffs from filing subsequent lawsuits in an effort to split the relator award. Thus, McGuire filed a cross-claim seeking a declaration that he was the “first-to-file” and therefore entitled to the over-$34 million relator’s award. Cunningham moved to dismiss the declaratory judgment matter, claiming that it was he—not McGuire—who was first-to file. The trial court found in Cunningham’s favor, ruling that “Cunningham’s materials provided the government with ‘sufficient notice to initiate an investigation into [Millenium’s] alleged fraudulent practices.’”
On McGuire’s appeal in the First Circuit, the Court first addressed a procedural question: whether the district court had jurisdiction, i.e., the threshold authority, to determine who was first-to-file. In a first for that circuit, the Court determined that it did, based on a number of recent cases from the U.S. Supreme Court, the D.C. Circuit Court of Appeals, and the Second Circuit Court of Appeals.
Turning to the merits of the first-to-file question, the Court explained that, in a qui tam action, a first-to-file relator is entitled to share in the proceeds of the Government’s recovery where the relator can establish that “there exists [an] overlap between [a] [r]elator’s allegations and the conduct discussed in the settlement agreement” between the Government and the FCA defendant. There could be no real dispute as to whether the allegations in McGuire’s complaint overlapped with the settlement agreement; the Government had intervened in his qui tam suit—not Cunningham’s. Thus, to resolve the question of who was first-to-file between Cunningham and McGuire, the Court compared Cunningham’s and McGuire’s operative complaints to determine whether Cunningham’s suit “contained ‘all the essential facts’” of the fraud McGuire alleged, essentially beating McGuire to the punch.
Ultimately, the Court found that Cunningham’s complaint did not allege the same mechanism of fraud (i.e., the “essential facts”) as was alleged in McGuire’s complaint and which ultimately became the subject of the Government’s settlement with Millenium. The Court announced: “we must ask not merely whether the first-filed complaint provides some evidence from which an astute government official could arguably have been put on notice, but also whether the first complaint contained all the essential facts of the fraud it alleges.” Cunningham’s complaint did not, and the Court stripped him of a $34 million pay day.
The size of the settlement payment alone in McGuire serves as a reminder to government contractors everywhere of the risks involved in False Claims Act litigation. And, with False Claims Act claim frequency rising to an all-time high over the last decade, government contractors should pay particular attention to applicable industry regulations and best practices when invoicing the Government. For advice on the False Claims Act, including how to put your business in the best position to avoid a False Claims Act case, the attorneys in PilieroMazza’s False Claims Act practice group are available to assist you. Please contact Matthew Feinberg at email@example.com.