1st Circuit switches big false claims award from one whistleblower to another

The First Circuit has issued an opinion on a significant False Claims Act whistleblower case and one of the claimants had a good day.  Millennium Health, a medical device company, reached a settlement of $227 million with the Government for fraudulently over-billing the use of  Millennium’s multi-drug testing kit to run repeated and far too many follow-up tests. After this False Claims Act (“FCA”) case settled, 15% of this recovery went to the realtor, the whistleblower who first brought the lawsuit. However, on appeal, the First Circuit had to determine who the first-to-file relator was and how that was determined. This week, the First Circuit rejected the lower court’s view of how the first-to-file rule was enacted and overturned the 15% realtor share of $34 million award from one whistleblower to another. 

Under the FCA, “liability is imposed on any person who knowingly presents a false or fraudulent claim for payment or approval to an officer, employee, or agent of the united States.” 31 U.S.C.  § 3729(a)(1)(A). 31 U.S.C. § 3729(b)(2)(A)(i). “A relator, the individual who brings the fraudulent conduct forward, can initiate a FCA by bringing a civil qui tam action in the name of the government.” 31 U.S.C. 3730(b). When a relator brings suit, the FCA allows the relator to recover at least 15% but no more than 25% of the recovery won, if any. Id. 

In Millennium, Robert Cunningham filed a qui tam action in early 2010 against five competitors of his employer, Calloway Laboratories, with Millennium being one of the competitors. United States ex rel. Estate of Cunningham v. Millennium Labs. of Calif., Inc., 713 F.3d 662, 665-66 (1st Cir. 2013). In his First Amended Complaint, which was filed on February 24, 2011 against Millennium, Mr. Cunningham explained the fraud scheme for Millennium’s Physician Billing Model, a test kit for urine collection that had embedded test strips already in the cup. Id. Mr. Cunningham alleged that the test kits induced physicians into excessive billing, excessive testing and excessive confirmatory testing. Id. In relation to the first-to-file rule, only the excessive confirmatory testing was an issue on appeal. Mr. Cunningham alleged that when the initial test uncovered any of the tested drugs, that test had to be followed up with a quantitative screen, or confirmatory test, which ultimately increased Millennium’s market share and revenues. Id. 

On the other hand, Mark McGuire filed an original qui tam complaint against Millennium on January 26, 2012 alleging that after a test kit disclosed an unexpected drug, a physician could order another confirmatory test. United States ex rel. McGuire v. Millennium Laboratories, Inc., et al, No. 17-1106 (1st Cir. 2019). Mr. McGuire further alleged that Millennium physicians created custom profiles, which were standing orders for confirmatory tests on every urine sample regardless of whether the test showed a need or not. Id. Essentially, Millennium could run ten confirmatory tests per kit, which were then billed to the government. The physicians were also given free test kits to induce them to send confirmation testing orders to Millennium, which ultimately gave Millennium a market share advantage. Id. 

The Government decided to intervene in Mr. McGuire’s action alleging a series of fraudulent schemes as well as an illegal kickback scheme. Millennium would distribute $5 million worth of test cups for free to physicians in exchange for referrals to Millennium. Id. “A physician refers a test by sending in a sample for confirmatory testing.” Id. The government said this scheme violated the Stark Law and the Anti-Kickback statute because the test cups had to be sold at fair market value.  Id. As a result, the $227 million settlement was reached. 

However, Mr. McGuire brought a cross claim for declaratory judgment asserting that he was the first to file relator against Millennium and entitled to the 15% share. Robert Cunningham moved to have the crossclaim dismissed arguing that he, not Mr. McGuire, was the first-to-file and thus entitled to the 15% share. The district court agreed with Mr. Cunningham “relying on this circuit’s precedent that the first-to-file rule is jurisdictional and that Mr. Cunningham’s motion to dismiss was a factual challenge to the court’s jurisdiction,” so Mr. McGuire’s crossclaims were dismissed for lack of subject matter jurisdiction. However, the Court of Appeals reversed and said that the first-to-file rule is not jurisdictional asserting that there was jurisdiction over Mr. McGuire’s crossclaims. Id. Accordingly, Mr. McGuire was the first-to-file relator.

The Court then had to determine whether McGuire was entitled to the relator’s share of 15%. The First Circuit said “the first-to-file bar operates on the recognition that, because relators can bring suit without having suffered an injury, countless plaintiffs in theory could file a qui tam action based on the same fraud and then share in the proceeds.” United States ex rel. Shea v. Cellco P’ship, 863 F.3d 923, 927 (D.C. Cir. 2017). Because Mr. Cunningham’s complaint lacked essential elements of the government’s claims, his claims did not cover the full extent of the fraud that Mr. McGuire had alleged in his complaint. United States ex rel. McGuire v. Millennium Laboratories, Inc., et al, No. 17-1106 (1st Cir. 2019). The First Circuit held that  Mr. McGuire had established that he was the first-to-file a claim that alleged the essential facts and, as such, is entitled to the 15% recovery of $34 million. Id. 

This case is one which turns away from First Circuit precedent, as this circuit has, several times, characterized the first-to-file rule as jurisdictional. See United States ex rel. Wilson v. Bristol-Myers Squibb, Inc., 750 F.3d 111, 117 (1st Cir. 2014); United States ex rel. Heineman-Guta v. Guidant Corp., 718 F.3d 28, 34 (1st Cir. 2013); United States ex rel. Duxbury v. Ortho Biotech Prods., L.P., 579 F.3d 13, 16, 33 (1st Cir. 2009); United States ex rel. Heath v. AT & T, Inc., 791 F.3d 112, 121 n.4 (D.C. Cir. 2015) (The D.C. Circuit recognized two things: (1) the way section  “§ 3730 is read, the language does not speak in jurisdictional terms or refer in any way to the jurisdiction of the district courts; (2) ‘When Congress wanted limitations on FCA suits to operate with jurisdictional force, it said so explicitly.’”). 

While the facts of this case are unusual, it illustrates the importance of accurately and specifically pleading a False Claims Act claim, and of moving quickly to do so before another whistleblower makes a similar claim.  If you believe you have a FCA action, consider speaking with an experienced whistleblower attorney today to learn your rights. Josh Borsellino is a licensed attorney that works with relators to file whistleblower claims alleging fraud against the government. He works on a contingency basis so you owe him nothing unless there is a recovery. He can reached at 817.908.9861 or 432.242.7118. 

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