The Most Significant Recent Qui Tam Whistleblower Cases Under the False Claims Act

This is the final section of my article. It discusses the most significant recent qui tam cases under the False Claims Act (as of December 2006).

B. Recent Significant Recoveries Under the False Claims Act:

1. Health Care Industry

a. Tenet Healthcare Corporation: $900 million

In June 2006, Justice Department announced that Tenet Healthcare Corporation, operator of the Nation’s second largest hospital chain, had agreed to pay the United States more than $900 million for alleged unlawful billing practices.

According to the government, the settlement amount, which was based on the company’s “ability to pay” (a phrase that suggests the government’s calculation of damages was higher), included more than $788 million to resolve claims arising from Tenet’s receipt of excessive “outlier” payments (payments that are intended to be limited to situations involving extraordinarily costly episodes of care, resulting from the hospitals’ inflating their charges substantially in excess of any increase in the costs associated with patient care and billing for services and supplies not provided to patients); more than $47 million to resolve claims that Tenet paid kickbacks to physicians to have Medicare patients referred to its facilities; and that Tenet billed Medicare for services that were ordered or referred by physicians with whom Tenet had an improper financial relationship; and more than $46 million to resolve claims that Tenet engaged in “upcoding.” The Justice Department acknowledged that “several” of the issues arose from lawsuits filed by whistleblowers under the qui tam provisions of the Act.

b. Serona, S.A: $704 million

The Swiss corporation, Serona, S.A., with its U.S. subsidiaries and related entities, agreed to pay $704 million to resolve criminal and civil allegations in October 2005. According to the Justice Department’s announcement, these allegations were in connection with illegal schemes to promote, market, and sell Serostim, an AIDS drug. The civil portion of the settlement was $567 million, and Serona also agreed to pay a $136.9 million criminal fine. This was the third largest health care fraud recovery by the government at the time.

According to the government, Serona knowingly submitted false and fraudulent claims for Serostim that were not eligible for reimbursement because they were for unnecessary and/or for off-label use of Serostim, and because the claims were for prescriptions induced by kickbacks. The investigation began in 2000 because a former Serona Lab’s employee filed a qui tam action, which was followed by other whistleblower suits in other states. This Serona settlement was reportedly the largest civil drug settlement to date.

c. Schering-Plough Corporation: $435 million

In August 2006, Schering-Plough Corporation and a subsidiary agreed to pay a total of $435 million to resolve criminal charges and civil liabilities in connection with what the government described as illegal sales in marketing programs for its drugs Temodar (for treatment of brain tumors and metastasis), and Intron A (for use in treatment of superficial bladder cancer and Hepatis C); and pertaining to Medicaid fraud involving Schering-Plough’s drugs Claritin RediTabs (a non-sedating antihistamine) and K-Dur (used in treating stomach conditions).

According to the government, Schering-Plough agreed to settle its False Claims Act liabilities and those under the Food Drug and Cosmetic Act for a total of $255 million; Schering also agreed to pay $91 million to settle civil liabilities to the fifty states for losses that state Medicaid programs. Schering also agreed to an amendment to its existing Corporate Integrity Agreement.

The government contended that Schering misreported its best price to HCFA on Claritin RediTabs to evade Medicaid rebate liability; misreported its best price on private-label K Dur; overcharged Public Health Service entities because of misreporting its best price to HCFA; induced physicians to start patients on Intron A for Hepatis C by paying them remuneration through three marketing programs; induced physicians to use Temodar for certain patients with brain tumors and brain metastasis and to use Intron A for certain patients with superficial bladder cancer through improper means; and knowingly promoted off-label uses of Temodar and Intron A despite not having FDA approval.

d. Saint Barnabas Corporation: $265 million

In June 2006, the largest healthcare system in New Jersey, Saint Barnabas Corporation, agreed to pay the government $265 million to settle allegations that it defrauded the federal Medicare program. According to the government’s announcement, Saint Barnabas and nine hospitals it operated fraudulently increased charges to Medicare patients for inpatient and outpatient care to make the cases appear more costly than they actually were and, therefore, to obtain outlier payments for Medicare that they were not entitled to receive. In addition to paying $265 million, Saint Barnabas entered into a Corporate Integrity Agreement. The settlement resulted from the filing of two quit tam lawsuits by three whistleblowers.

e. King Pharmaceuticals, Inc.: $124 million

In November 2005, King Pharmaceuticals, Inc. agreed to pay $124 million to resolve claims that it underpaid rebates owed under the Medicaid program and overcharged various federal and state government entities for its drug products. The government alleged that, from 1994 through 2002, the company failed to make accurate reports of the average manufacturer price (AMP) and best price (BP) for its Medicaid-reimbursed drugs. By doing so, King allegedly misled the government about the amount owed in quarterly rebate payments to each state Medicaid program, as well as the ceiling price for drugs purchased by federal and state entities.

This investigation reportedly resulted from a qui tam filing by a former King employee, the company’s Director of Contracts and National Accounts.

2. Non-Health Care Industries

a. Mario Gabelli and affiliates: $130 million

In the largest non-health care settlement of fiscal year 2006, Wall Street money manager Mario Gabelli and affiliated entities and individuals agreed to pay $130 million to resolve civil allegations of fraud in connection with the wireless spectrum license auctions conducted by the Federal Communications Commission (FCC).

Under the FCC rules, certain auctions for the licenses were limited to “small” or “very small” businesses. The government alleged that Gabelli and his affiliated companies used “bogus” businesses that existed only on paper, solely to qualify for eligibility for the FCC licenses, but that all times these businesses were controlled by Gabelli and his affiliated companies. On at least several occasions, the licenses were later transferred to third parties at substantial profit.

b. ABN Amro Mortgage Company: $41 million

As a result of a False Claims Act case concerning more than 28,000 federally insured mortgages, in January 2006 ABN Amro Mortgage Group, Inc. agreed to a settlement with the government of more than $41 million. The government alleged that ABN had made false certifications to U.S. Department of Housing and Urban Development (HUD) in connection with more than 28,000 mortgages, when ABN employees certified loans that had not completed the underwriting process.

c. Balfour Beatty Construction: $24 million

In October 2005, a joint venture of engineering construction companies agreed to pay $24.75 million to settle False Claims Act liability. The government alleged that the companies submitted inflated claims on an Amtrak project to electrify the rail corridor between New Haven and Boston. According to the government, the overcharges were paid with federal grant funds. The case was originally filed by a qui tam relator, a former employee of Balfour Beatty.

d. Custer Battles: $10 million verdict (but set aside)
In March 2006, a federal jury in Alexandria, Virginia returned a $10 million verdict against Iraq contractor Custer Battles and its owners, Scott Custer and Michael Battles, in a case that alleged fraudulent billing on Iraq reconstruction contracts. The contracts in question concerned the “Iraqi Currency Exchange” project, which was to exchange new Iraqi “dinars” for the old currency used under the Hussein regime. The government had declined to intervene in the case in a controversial decision that some speculated had a political basis. The two relators nonetheless pursued the case through discovery, motions for summary judgment, and a lengthy trial, in what was the first False Claims Act fraud case involving defense procurement in Iraq.

The district court granted the defendants’ post-trial motion for judgment as a matter of law. The trial court decided that the Iraq Coalition Provisional Authority was not a United States government entity, and that the relators had failed to introduce evidence of the “presentment” of a false or fraudulent claim to employees or officers of the U.S. government. The Custer Battles decision is currently on appeal.

e. Staples: $7.4 million

In October 2005, a division of the office products supplier Staples, Inc. agreed to pay $7.4 million to settle allegations that it submitted false claims when it sold office supply products to the government that were manufactured in countries not permitted by the Trade Agreements Act. The government alleged that the company sold products from countries that do not have reciprocal trade agreements with the United States, such as China and Taiwan, when it was required by its contract with the General Services Administration to prevent such items from being offered for sale to U.S. government agencies. The case was filed under the qui tam provisions by Safina Office Products and two of its executives.

Earlier in 2005, the Justice Department reached similar settlements of $9.8 million with Office Max, Inc., and $4.75 million settlement with Office Depot, Inc., based on the same allegations.

V. Conclusion.

The False Claims Act has become even more important as the government’s primary weapon on the civil side to redress fraud against the government. The explosion in recoveries under the False Claims Act over the past twenty years; the increasingly creative uses of the Act by relators and the government to reach conduct that arguably violates some provision of a law, regulation, rule, or government contract; and the expanding number of states with their own versions of the False Claims Act, will continue to create increasing challenges for businesses and individuals in health care or other industries that receive federal or state dollars.

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48 31 U.S.C. § 3730(c)(3).

49 Even “non-intervened” cases sometimes result in substantial liabilities to defendants. For example, in United States ex rel. Franklin v. Parke Davis, Division of Warren Lambert, a relator pursued an action over the off-label marketing of Neurontin, and the government elected not to intervene. Ultimately, the defendant entered into a global settlement of $430 million, of which $152 million was to settle False Claims Act liability, and $38 million was to settle civil liabilities to the fifty states.

50 The “public disclosure” provision is as follows:

No court shall have jurisdiction over an action under this section based upon the public disclosure of allegations or transactions in a criminal, civil, or administrative hearing, in a congressional, administrative, or Government Accounting Office Report, hearing, audit, or investigation, or from the news media, unless the action is brought by the Attorney General or the person bringing the action is an original source of the information.

31 U.S.C. § 3730(e)(4)(A)

51 See Appendix 2.

52 C. Sylvia, supra, § 2:13, at 63.

53 Id. § 2:14, at 64; see Appendix 2.

54 C. Sylvia, supra,