3rd, 2nd Circuits affirm dismissals of qui tam cases based on public disclosures

by Ben Vernia | September 5th, 2013

A day apart, on August 26 and 27, the Courts of Appeals for the Third and Second Circuits affirmed district court’s dismissals of qui tam cases because facts alleged in them had been publicly disclosed in prior litigation.

In the Third Circuit’s case, U.S. ex rel. Zizic v Q2Administrators, LLC the relator was the former president of a bankrupt medical device company, whose company’s products had been routinely denied as medically unnecessary by the defendants, Medicare “qualified independent contractors.” The agency hired the defendants to perform initial reviews of denial of benefits, and required them to be adequately staffed. Instead, the QICs had inadequate physician staff, and instead of reviewing claims for the company’s medical devices, they sent boilerplate denials.

After the device company filed for bankruptcy, the trustee brought suit against HHS for the wrongful denial of the claims, and enlisted the former president to assist in the review. The former president brought a qui tam case (in which the government declined to intervene), and obtained an affidavit from a former employee of one of the QICs. The defendants moved to dismiss, alleging that the facts of the alleged fraud were publicly disclosed in the trustee’s case.

The Third Circuit (and the district court) agreed, quickly finding met the requirements that there be a public disclosure in a civil hearing, and concluded that the elements of the fraud allegations – i.e., the requirement of adequate staffing, and the failure to provide that level of service – were publicly disclosed in the trustee’s case. The court likewise found that the relator’s allegations were based on those public disclosures, using a test of whether the allegations were “supported by” or “substantially similar” to the public disclosures, and rejected the relator’s argument that he had supplemented those facts, on the grounds that the public disclosure bar is not limited to cases solely based upon the public disclosures.

The Court of Appeals also agreed with the district court that the relator was not an original source, because his knowledge of the disclosed facts was not “direct,” even though he had participated in the underlying Medicare appeals. The Court also found that his knowledge was not “independent.”

Finally, the Court upheld the district court’s denial of leave to amend, because the relator had failed to reference Rule 12(b)(1) in his opposition to the motion to dismiss, and had failed to provide a draft amended complaint.

In the Second Circuit case, U.S. ex rel. Monaghan v. Henry Phipps Plaza West, Inc., the relator was a tenant of a formerly rent-controlled building who alleged that the building’s owner converted the property in violation of a land disposition agreement, and accepted Section 8 housing vouchers fraudulently. In the unpublished decision, the court noted that some of the building’s tenants had previously sued the building’s owner in state court for the violation of the agreement, and that this disclosure was sufficient to trigger the public disclosure bar. Because the complaint and other documents in the other case had disclosed that the building had withdrawn from rent control in violation of the land disposition agreement, and that the building’s owners accepted Section 8 vouchers, the relator’s allegations of fraud in connection with the vouchers was based entirely on an inference drawn from the disclosed facts. In addition, the Court concluded, the relator had failed to offer evidence that the district court’s finding that he was not an original source was clearly erroneous.

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