7th Circuit decision on first-to-file qui tam rule affirms dismissal of whistleblower's suit, but without prejudice to file a new complaint

by Ben Vernia | May 21st, 2010

In U.S. ex rel. Chovanec v. Apria Healthcare Group, Inc., No. 06-1619 (7th Cir. May 19, 2010), the Court of Appeals ruled that a third relator’s suit was appropriately dismissed under the False Claims Act’s first-to-file rule, 31 U.S.C. § 3730(b)(5), but it concluded that the relator deserved an opportunity to attempt to file a new complaint, and so it remanded to the district court for an order dismissing her suit without prejudice.

The relator alleged that at a single office of Apria, between 2002 and 2004, the company billed Medicare for unnecessary services or using more expensive reimbursement codes than were appropriate (called “upcoding”). When she filed her suit, two other suits were pending in other states, dating from 1998 and 1999; both alleged upcoding. The district court dismissed her case with prejudice on the grounds that it was “related” to those cases; the Department of Justice settled both suits four days later.

The Seventh Circuit rejected the relator’s argument that the statute merely required that her suit be stayed while the others were pending, and agreed with other circuits that a subsequent action must be dismissed, and that it cannot be refiled if, in the terms of the Act, it “is related to and based on the facts underlying the pending action.” Applying a materiality standard, the court reasoned that because the relator’s case raised upcoding allegations, it was sufficiently related to the earlier cases to trigger the first-to-file rule. Even though the time period of the relator’s allegations commenced after the filing of the earlier suits, Judge Easterbrook wrote, because those complaints “allege an ongoing fraud orchestrated by Apria’s national staff, the decision of any given office to participate in the scheme is related to those allegations.”

The court nevertheless found that the dismissal with prejudice was erroneous:

As we explained above, however, §3730(b)(5) applies only while the initial complaint is “pending.” Costa and Wickern are no longer pending (and weren’t pending when the district court denied Chovanec’s motion for reconsideration), so she is entitled to file a new qui tam complaint—entitled, that is, as far as §3730(b)(5) goes. Perhaps the allegations in Costa and Wickern (or other sources) count as public disclosures that prevent follow-on litigation by anyone other than an original source. 31 U.S.C. §3730(e)(4)(A). See Graham County Soil & Water Conservation District v. United States ex rel. Wilson, 130 S. Ct. 1396 (2010). Or perhaps the disposition of Costa and Wickern, coupled with the doctrines of claim and issue preclusion, blocks anyone (including the United States) from filing additional suits dealing with any upcoding scheme that Apria orchestrated nationally. To avoid preclusion, Chovanec might have to establish that events in Illinois were entirely unrelated to the national scheme of the 1990s, perhaps representing a recurrence (at the behest of local managers) after the national fraud had ended. If Chovanec could show that, the allegations would avoid even §3730(b)(5).

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