1. Recent False Claims Developments Robert J. Sherry K&L Gates May 2009

2. 2 Overview  Prologue: Federal Civil False Claims Act Developments  The Impact of the Federal DRA on State/Local FCA Activity  State of Play: Existing State/Local FCAs  Recent State FCA Cases  Predictions

3. 3 Federal FCA Developments  FCA cases/recoveries multiplying  FY 2008 recoveries: $1.34B  1986-08 recoveries: $21B  2006-08 recoveries: $6+B  Yet Congress dissatisfied with scope of FCA/enforcement trends  Pending legislation would amend FCA

4. 4 Federal FCA Developments  HR 1788, False Claims Correction Act (reported out of committee April 28):  Eliminates “presentment” requirement  Claim need only be for government money/property -- need not be presented to government official  Reaches funds held in trust or administered by government, money provided to a recipient, or money which the government will reimburse  “Public disclosure” bar may be raised only by United States  Cripples defendant’s and court’s ability to limit qui tam cases to those where relator provides new information  New contractor “mandatory disclosures” could become basis of qui tam action  Eliminates “particularity” obligation for relators’ FCA complaints  General rule: complaint must allege “who, what, where, when, and how”  Bill: need not identify “specific claims” if allegations provide “reasonable indication” that FCA violated and “adequate notice” of “specific misconduct” to allow defense

5. 5 Federal FCA Developments  S. 386, Fraud Enforcement and Recovery Act (approved by Senate April 28):  Similar provisions regarding presentment  S. 458, False Claims Clarification Act  Still before Judiciary Committee  Similar to legislation introduced last term in Senate

6. 6 Impact of the Federal DRA on State/Local FCA Activity  DRA provides enhanced FCA recoveries for states with qualifying FCAs  State FCAs must meet certain standards and receive HHS OIG approval:  Establish FCA liability for false/fraudulent claims related to state Medicaid plans  Provisions “at least as effective” concerning qui tam claims as those in federal FCA  Sealed qui tam filing provision with state AG review  Civil penalties at least equal to those in federal FCA

7. 7 Impact of the Federal DRA on State/Local FCA Activity  Status:  20 states have submitted FCAs for review  13 approved (including TX, CA, NY)  7 rejected (including FL, MI, NJ, NM, OK)  Reasons include:  Relaxed standards for awards of fees to defendants  Limitations on relators (right to proceed, size of recovery share)  Intent standard stricter than federal FCA

8. 8 State of Play: Existing State/Local FCAs  Existing FCAs: 25 states  22 with qui tam provisions  3 with relator recovery provisions up to 50%  15 are “general” FCA statutes  6 are limited to health care/Medicaid fraud  2 have separate general and health care provisions  Pending FCAs: 9 states  2 states with pending amendment legislation

9. 9 Recent State FCA Cases  Armenta (Cal. App. 2006): Unique “passive beneficiary” in CFCA  Third party (parent) which becomes aware of inadvertent provision or intentionally submitted false claim and does not disclose may be liable  Subsidiary falsely represented that its products complied with code  Parent later learned through testing that representations were false  Court found that parent could be liable even if claims were submitted inadvertently by subsidiary

10. 10 Recent State FCA Cases  Fassberg (Cal. App. 2007):  CFCA authorizes treble damages for knowingly presenting false claim or false record  CFCA authorizes civil penalties only (of up to $10,000) for each false claim, not false record  Only progress payment requests were false claims  Federal FCA precedent not employed – difference in construction  Demonstrates risks of possible “counterattack” by government when claiming breach of contract

11. 11 Recent State FCA Cases  Kennedy (N.D.Ill. 2008): Both federal and Illinois FCA claims  Relators allege Aventis marketed a drug for numerous off-label uses  Caused medical providers to submit fraudulent Medicare claims  Court dismissed federal and “parallel” Illinois FCA claims  Payments not based on drugs prescribed/used  Payment based on diagnosis-related group codes (“DRGs”)  DRGs based on diagnosis/age, not on drugs prescribed  Individual patient charges for drug not material to decision to pay

12. 12 Recent State FCA Cases  Abbott Labs (TX 2008): Settlement under Texas Medicaid Fraud Prevention Act  Latest of drug pricing settlements with several pharmaceutical companies  Three-way settlement involving relator and Texas AG  Alleged false reporting of pricing to the Texas Vendor Drug Program  Result: Inflated reimbursement by Medicaid to providers  $28M settlement  Shares to state, relators, United States  Includes fees to state, relators

13. 13 Predictions  Federal FCA amendments will enhance prospects for liability  State/local FCA enactments/amendments will continue; issues for non-health care contractors  Will states be required to amend FCAs to comport with any federal FCA amendments?  Impact of December 2008 federal ethics/disclosure rule and DRA: creating new “whistleblowers”