7th Circuit Clarifies FCA Fraud Standard

In an opinion openly skeptical of a relator’s knowledge, the 7th Circuit Court of Appeals recently affirmed the dismissal of False Claims Act claims against a Chicago pharmacy brought by a former employee of the pharmacy.  The principal claims in the case, Grenadyor v. Ukrainian Village Pharmacy, Inc., were that the pharmacy’s practice of soliciting and keeping its base of mostly Ukrainian customers by providing gifts of caviar and Russian language TV Guides, as well as waiving co-pays, amounted to kickbacks in violation of the federal (and several state) anti-kickback statutes.

Judge Richard A. Posner, the author of the court’s opinion, revealed his distaste for the relator early in the opinion by describing him as a “bounty hunter”.  The court rejected most of the relator’s claims because he had failed to identify a single patient who received gift bags worth more than the de minimis $50, even though the relator had amended his complaint ostensibly to correct this deficiency, and had not alleged that the pharmacy intended to offer kickbacks when it certified to the government that it would abide by Medicare and other federal laws.

The court also addressed an alternative false-claim theory, called “implied certification.”  This theory treats the bill submitted to the government as an implicit assurance that the bill is a lawful claim for payment, which is a false assurance if the firm submitting the bill knows that it is not entitled to payment.  Thus, under this theory, if the government had known that the drugs the defendant pharmacy had billed for were sold because the customers had received kickbacks, it would not have reimbursed the pharmacy for the cost of those sales.  Even under this theory, however, the relator’s factual allegations were held to be insufficient.

The implied certification theory is capable of being dangerously expanded and pulling into the False Claims Act all manner of tangential violations, potentially making almost any regulatory infraction into a false claim.  The court, recognizing this impermissible potential, stated categorically that “[v]iolating a regulation is not synonymous with filing a false claim.”  Rather, the court required specific instances where the pharmacy had submitted a claim to Medicare on behalf of a patient who had received a kickback, a standard the relator was unable to meet.

Defendants in False Claims Act cases faced with the implied certification theory would do well to focus on the purpose of the False Claims Act and insist on dismissal absent specific allegations of instances in which a false claim was knowingly submitted.