Earlier this month, a panel of three judges in the Fourth Circuit handed down the latest chapter in United States ex rel. Drakeford v. Tuomey Healthcare Sys., Inc., a False Claims Act case based on Stark Law violations that was filed in 2005. The decision touched on a number of important issues, including when an interpretation of a statute that is disputed can be “false” under the False Claims Act.
This is an issue that has been a source of confusion.
The Fourth Circuit’s opinion in Tuomey, issued July 2, clarifies that evaluating whether representation of compliance with a statute is false is an objective inquiry — answerable by yes or no — whereas the defendant’s subjective belief about compliance is a question of scienter. The court’s treatment of falsity and scienter as two discrete inquiries resists previous constructions espoused by defendants both in Tuomey and other cases, which sought to collapse the two requirements into one subjective inquiry.
To recap, in 2000 Tuomey Hospital began searching for a way to boost declining revenue that had been lost as gastroenterologists began performing more outpatient surgeries in their own offices instead of at Tuomey. To counteract this, Tuomey proposed part-time employment arrangements with the doctors in exchange for the doctors performing outpatient procedures at Tuomey.
When the relator, Dr. Drakeford, expressed concern that these arrangements violated the Stark Law, Tuomey and Drakeford jointly sought the advice of an attorney. The attorney warned Tuomey that the contracts raised “red flags” and presented a risk for prosecution under Stark. Unsatisfied with this advice, Tuomey sought other legal advice, eventually obtaining several more favorable opinions. The case eventually went to trial, and after an initial jury verdict was vacated and a second trial held, the jury found that Tuomey had submitted 21,730 false claims to Medicare, resulting in a judgment of $237,454,195.
On appeal Tuomey claimed that disputed legal questions — such as whether the contracts violated Stark — cannot meet the falsity element of the False Claims Act. In support, Tuomey cited United States ex rel. Wilson v. Kellogg Brown & Root, Inc., in which the Fourth Circuit had held that “[t]o satisfy [the falsity] element of an FCA claim, the statement or conduct alleged must represent an objective falsehood.” Tuomey argued that “imprecise statements or differences in interpretation growing out of a disputed legal question,” could not be considered objectively false.
The Fourth Circuit rejected Tuomey’s argument. While the Fourth Circuit did not reject its prior reasoning in Wilson, it distinguished Wilson on the grounds that the falsehood in Wilson —whether the defendant had fulfilled the terms of an imprecise contract — was a subjective inquiry, whereas the falsehood at issue in Tuomey — whether Tuomey had, as it certified it had, complied with Stark — was objective. The question of falsity in Tuomey represented an “either/or proposition” — the defendant’s certifications of Stark Law compliance was either true or false. And, as the jury had found, Tuomey violated the Stark Law and therefore “Tuomey’s certification that it had complied with the Stark Law was false.”
The Tuomey Court’s decision on falsity is notable because it makes clear that disputes about interpretation of a statute is a question of scienter, not falsity. In previous decisions, such as United States ex rel. Lamers v. City of Green Bay, some courts interpreting the falsity requirement have conflated it with the scienter requirement. In Tuomey, however, the Court clearly differentiated between the two, stating that Tuomey’s awareness of whether the claims violated Stark “is covered under the knowledge element.”
For disputed legal questions, like whether the doctors’ contracts were permissible under Stark, the defendant’s uncertainty about legality did not bear on whether the arrangements actually violated the law or not, only on whether the defendant acted knowingly. A reasonable interpretation of a regulation may mean that a defendant did not know he violated the statute, but this does not change the fact that the statute was violated.
In demonstrating a greater willingness to separate falsity and scienter, the Fourth Circuit helped illuminate the comments in Wilson that the False Claims Act requires an “objective falsehood.” False Claims Act defendants have often attempted to capitalize on the commingling of the falsity and scienter elements by arguing that because they lacked knowledge of whether their actions violated the law, their claims could not be “objectively” false. By arguing ignorance, defendants hoped to foreclose further inquiry into falsity. The Fourth Circuit’s decision in Tuomey represents an unwillingness to accept defendants’ purported lack of knowledge that their actions violated the law means that their certifications of compliance with the law cannot be false.