Each week for the next four weeks, we will provide a summary of a notable recent decision under the False Claims Act. The first in this series is United States v. Kernan Hospital, 2012 WL 5879133 (D.Md., Nov. 20, 2012). Read the decision here: United States v. Kernan Hospital Memorandum Opinion.pdf
This case involves a motion to set aside a civil investigative demand ("CID") issued by the United States Attorney's Office for the District of Maryland, seeking documents from Kernan Hospital. The Government had already filed a False Claims Act suit against Kernan Hospital but the District Court dismissed it without prejudice pursuant to F.R.C.P. 9(b). After dismissal, the Government issued its CID. The District Court set aside the CID, holding that the False Claims Act expressly limits the Government's use of CID's to the period "before commencing a civil proceeding."
The Government alleged that Kernan devised a scheme to increase its Medicare, Medicaid, and Tri-Care reimbursement by systematically "upcoding" secondary diagnoses concerning malnutrition. Before filing its complaint against Kernan, the Government investigated the matter for three years. Specifically, pre-complaint proceedings included the issuance of an Office of Inspector General subpoena, the production by Kernan of 100 specifically identified medical records (15,686 pages of materials), the production by Kernan of the coding summary sheets corresponding to the 100 medical records, Kernan's production of an additional 3,000 pages of documents, the issuance of a September 7, 2011 CID seeking deposition testimony from Kernan's Director of Health Information Management, followed by her testimony two weeks later. The Government filed its FCA complaint in October 2011. The District Court dismissed the complaint under Rule 9(b) and, on August 23, 2012, the Government issued yet another CID on Kernan seeking many of the same documents that it had already sought and obtained.
Kernan sought to set aside the CID, arguing that the FCA empowers the Attorney General to issue a CID only "before commencing a civil proceeding" under the FCA. Since the Government had already commenced such an action, a CID was no longer available. The Government first argued that the FCA deprives the Attorney General the right to issue a CID only while an FCA action is pending. Since its dismissed FCA complaint was no longer pending, the Government argued that it had the power to issue yet another CID. The District Court disagreed, noting: "[A]n examination of the plain words of the statute does not invite an interpretation of 'before commencing of a civil proceeding' to include the period after commencement of a civil proceeding when no suit is pending, and the Government does not propose how Section 3733 could be read in such a way." The legislative history makes clear, moreover, that CIDs give the Government the ability "to determine whether enough evidence existed to warrant the expense of filing suit." Since the Government had already filed such a suit, the CID served no ongoing purpose.
The Government also argued that "Kernan Hospital cannot have it both ways," benefitting from the dismissal under Rule 9(b) while simultaneously keeping the Government from further pre-complaint discovery. The District Court disagreed, noting that "the Government is not, as it seems to suggest, stuck between a rock and a hard place." Either the Government could glean sufficient facts to make out an FCA claim from the 19,000 documents that was produced to it, or it could try to plead breach of contract or payment by mistake causes of action.
Finally, the District Court stated that "It is important to consider the potential damage this False Claims Act suit has caused to Kernan's goodwill and reputation. Both the Civil Investigative Demand provision and Rule 9(b) of the Federal Rules are intended to encourage careful behavior when alleging fraudulent conduct....Thus, this Court finds that construing section 3733 to prevent the Government from filing a civil investigative demand at this stage is in keeping with the policy goals underlying both section 3733 and Rule 9(b)."