Maryland judge quashes Civil Investigative Demand served on hospital in dismissed False Claims Act case

by Ben Vernia | November 26th, 2012

On November 20, in U.S. v. Kernan Hosp., Maryland District Judge Richard D. Bennett granted a hospital’s motion to set aside a Civil Investigative Demand served on it by the U.S. Attorney’s Office in Baltimore. Judge Bennett had dismissed the government’s suit in July, finding that it failed to plead fraud with particularity as required by Fed. R. Civ. P. 9(b), but did so without prejudice; a month later, DOJ served the Civil Investigative Demand (CID) in question.

The U.S. had brought the case against the hospital (alleging upcoding of malnutrition procedures) after a three-year investigation that included a subpoena issued by the Office of Inspector General of HHS and a CID for deposition testimony of the hospital’s director of health information management.

After receiving the second CID, the hospital moved to quash it, arguing that the text of the False Claims Act’s CID provision (which empowers the Attorney General or a designee to issue a CID “before commencing a civil proceeding under § 3730(a) or other false claims law,” 31 USC § 3733) prevents the use of CID after any suit has been filed.

Judge Bennett first clarified the procedural posture of the case, which the parties disputed, agreeing with the U.S. that he had, in fact, closed the case but did so without prejudice (rather than granting the U.S. leave to amend the complaint and keeping the case open). He then addressed the Government’s two key arguments: that the text of the statute permitted a CID’s use as long as no case is pending, and that the policy behind the provision supported that same interpretation.

Noting that no prior case was truly on point, Judge Bennett first rejected the Government’s interpretation of the text. He found it ambiguous as to the issue before him, and looking to its legislative history, he concluded that Congress intended to limit CID use to the prefiling stage, and did not intend to extend it to periods when no suit is pending. He noted that the Government had conducted a three-year investigation of the hospital, and concluded on this basis that it was worthwhile to bring a suit against it. Because the purpose Congress intended the CID provision to serve no longer existed, the U.S. could no longer use that investigative tool.

He likewise rejected the Government’s policy argument: that the CID was necessary to cure its pleading deficiency, and that the hospital could not “have it both ways,” claiming that the complaint lacked particularity while denying the Government the means to cure that problem. Judge Bennett rejected the Government’s characterization of itself being stuck between a rock and a hard place, noting that it had conducted a lengthy investigation that yielded 100 patient records, a total of 19,000 pages of documents, and the deposition testimony of a hospital officer. If the Government is unable to bring a fraud case, the Court reasoned, it could still bring claims based on other causes of action. Finally, Judge Bennett noted the “potential damage” the investigation may have caused the hospital’s goodwill and reputation, and he found that limiting CID use was consistent with the policies of both § 3733 and Rule 9(b).

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