In an important development under False Claims Act (“FCA”) case law, the U.S. Court of Appeals for the Ninth Circuit has expressly abrogated former precedent limiting the ability of whistleblowers to recover funds reimbursed to the Federal Government under the FCA to a greater degree than in many other circuits. The case is United States ex rel. Hartpence v. Kinetic Concepts, Inc., No. 12-55386 (9th Cir. July 7, 2015).

Generally, the FCA prohibits the knowing submission to the Federal Government of a false or fraudulent claim for payment. A private party, known as a relator, may bring civil suits, known as qui tam actions, under the FCA on behalf of the Federal Government against entities that have allegedly submitted fraudulent claims for payment to the government. If the government declines to intervene in the suit, the relator could receive between 25 and 30 percent of any recovery.

However, the FCA deprives federal courts of jurisdiction over certain qui tam actions under the “public disclosure” bar to recovery. Specifically, when there has been a public disclosure of the fraud, the federal court lacks subject matter jurisdiction over an FCA claim regarding the fraud unless the relator is an “original source” of the “information.” Whether an action is barred under the public disclosure rule turns on how one defines the term “original source” and, secondarily, the term “information.”

Formerly, under Wang ex rel. United States v. FMC Corp., 972 F.2d 1412, 1417-18 (9th Cir. 1992), the Ninth Circuit applied a three-part test to determine the question as to whether a relator was an “original source.” The three-part test was whether the relator (a) had direct and independent knowledge of the information on which his allegations are based; (b) voluntarily provided that information to the government before filing his lawsuit; and (c) “had a hand in the public disclosure of allegations that are a part of [his] suit.”  Id. The first two prongs of the test came from the statutory language of the public disclosure bar, but the Ninth Circuit inferred the existence of the third prong of the test from the FCA’s legislative history suggesting that the term “information” referred to the information underlying the publicly-disclosed allegations rather than the information underlying the complaint.

In this case, the relators, Hartpence and Godecke, allegedly discovered that their employer, Kinetic Concepts, Inc. (“KCI”), committed fraud in submitting Medicare claims by knowingly misusing a billing code named a KX modifier which is used to certify to Medicare that KCI had records which showed that a claim for a certain wound therapy met all of the reimbursement criteria and that Medicare did not need to look for additional data. Godecke also alleged a similar fraud in which KCI allegedly ignored requirements to receive correct and completed Detailed Written Orders before delivering supplies and beginning therapy and retained overpayments from Medicare as a result of the two schemes.

However, before the complaints were filed, there had been public disclosures of the fraud by KCI through a 2007 federal audit report and a decision by an administrative law judge. Thus, the district court held that the relators were not original sources because they had not shown that they had a hand in the public disclosures.

On appeal, the relators contended that the district court erred when it found that they did not have a hand in the public disclosure, arguing that many other circuits have declined to adopt the hand-in-the-public disclosure requirement because that requirement was not found in the statute, including the Fourth and Eighth Circuits. Ultimately in its decision, the Ninth Circuit recognized the validity of this argument finding that eliminating the hand-in-the-public disclosure requirement was consistent with the goal of the FCA to incentivize persons with first-hand knowledge of fraud to report it to the Government and then to prosecute cases against offending entities as private Attorneys General.

By overruling Wang, the Ninth Circuit is providing relators with a greater ability to recover funds reimbursed to the Government in the western states than in the past, as well as a stronger incentive to share their knowledge with the government of wrongdoing by vendors, contractors, and others receiving government funds.

About the Author: Patrick Rothwell is an associate with PilieroMazza in the Government Contracts Group. He may be reached at [email protected].