fraud needs 21 to be pled with particularity to allow defendant to defend 22 against charge
How later courts described this case
- fraud needs 21 to be pled with particularity to allow defendant to defend 22 against charge
Written by the judges who cited it.
The opinion
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8 UNITED STATES DISTRICT COURT
9 EASTERN DISTRICT OF CALIFORNIA
10 ----oo0oo----
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12 UNITED STATES OF AMERICA AND THE No. 1:17-cv-01757 WBS SAB
STATE OF CALIFORNIA ex rel.
13 THOMAS TURNER,
14 Plaintiffs, MEMORANDUM AND ORDER RE:
DEFENDANTS’ MOTION TO DISMISS
15 v.
16 DYNAMIC MEDICAL SYSTEMS, LLC;
JOERNS HEALTHCARE LLC; COVENANT
17 CARE CALIFORNIA LLC; MARINER
HEALTH CARE MANAGEMENT COMPANY;
18 PLUM HEALTHCARE GROUP LLC; and
CAMBRIDGE HEALTHCARE SERVICES,
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Defendants.
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Relator Thomas Turner brings this qui tam action
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against Covenant Care California, LLC (“Covenant”), Mariner
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Health Care Management Company (“Mariner”), Plum Healthcare Group
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LLC (“Plum”), and Cambridge Healthcare Services (“Cambridge”),
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who manage skilled nursing facilities (collectively the “SNFs”);
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and Dynamic Medical Systems LLC and Joerns Healthcare LLC, who
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1 lease mattresses and bed frames to companies that manage skilled
2 nursing facilities (collectively “Dynamic”1). (See generally
3 Second Am. Compl. (Docket No. 141) (“SAC”).) Relator asserts
4 various claims under the federal and California False Claims Acts
5 (“FCA” and “CFCA,” respectively). The court now considers
6 defendants’ motions to dismiss relator’s Second Amended
7 Complaint.2 (Mots. (Docket Nos. 142, 144-46).)
8 I. Procedural Background
9 Due to the long history of this case and its recent
10 assignment to the undersigned, the court briefly recites the
11 procedural background in relevant part. Relator filed his First
12 Amended Complaint (“FAC”) in March 2018. (Docket No. 7.) The
13 FAC asserted four violations of the FCA (presenting false claims;
14 making or using false records or statements; retaining proceeds
15 not entitled to keep; and conspiracy) (Claims 1-4, respectively),
16 and four violations of the CFCA (presenting false claims; making
17 or using false records or statements; (in the alternative)
18 inadvertently submitting false claims; and conspiracy) (Claims 5-
19 8, respectively). (See generally FAC.)
20 Defendants then filed parallel motions to dismiss the
21 FAC. (Docket Nos. 59, 60, 64, 67.) In January 2022, an order by
22 Judge Drozd dismissed Claims 1, 2, 4, 5, 6, and 8 of the FAC,
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24 1 Joerns, like Dynamic, is in the business of leasing
mattresses to skilled nursing facilities. Joerns acquired
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Dynamic in 2015. (SAC ¶ 10-11.) For the purpose of this motion,
they will be treated in common.
26
27 2 Relator incorrectly labels his Second Amended Complaint
“First Amended Complaint.”
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1 which are based on false certification, Anti-Kickback Statute,
2 and conspiracy theories, with leave to amend for failure to plead
3 with particularity a false or fraudulent claim under Federal Rule
4 of Civil Procedure 9(b) (“Rule 9(b)”). (Order (Docket No. 135).)
5 The order also dismissed Claims 3 and 7 without further leave to
6 amend on the ground that they are based on an untenable reverse
7 false claim theory. (Id.)
8 Relator then filed his Second Amended Complaint, which
9 re-pleads the six claims based on false certification, Anti-
10 Kickback Statute, and conspiracy theories that were previously
11 dismissed with leave to amend. (SAC Claims 1-5, 7.) The SAC
12 also re-pleads the CFCA inadvertent submissions claim (i.e.,
13 Claim 7, which is now re-numbered Claim 6 in the SAC).
14 Defendants then filed their second set of motions to
15 dismiss. (Mots.) Thereafter, the case was transferred to the
16 undersigned. (Docket No. 174.)
17 II. Discussion3
18 The court previously dismissed the FAC because relator
19 failed to plead with particularity a false statement or
20 fraudulent course of conduct -- specifically, who made a false
21 claim or certification, when, and how. (Order.) Dismissal of
22 the FAC was pursuant to the “reliable indicia” pleading standard
23 that the Ninth Circuit adopted in Ebeid ex rel. United States v.
24 Lungwitz, 616 F.3d 993, 998-99 (2010) (Rule 9(b) satisfied with
25 “particular details of a scheme to submit false claims paired
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3 Except where further discussion is merited, the court
27 does not revisit the applicable legal standards already set forth
in the previous Order.
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1 with reliable indicia that lead to a strong inference that claims
2 were actually submitted”). The court now examines, under this
3 standard, only whether relator’s new allegations cure this defect
4 by pleading the who, when, and how of a false claim with the
5 particularity required by Rule 9(b).4
6 A. Who Submitted a False Claim (Claims 1, 2, 4, 5)
7 The SAC pleads several new names of various officers
8 and employees associated with defendants, along with their job
9 descriptions. (See, e.g., SAC ¶¶ 59-72.) It further alleges
10 that various of these now-identified individuals, among other
11 things, “spearheaded the discriminatory billing practices,”
12 “implemented [the fraudulent program],” “carried out the scheme,”
13 were “instructed to search-out all SOC and Medi-Cal business in
14 order to increase profits,” were “one of the drivers of
15 differential billing,” or were “tasked with invoicing as many SOC
16 patients as possible to increase profits.” (Id.) However, these
17 new allegations still fail to allege the “who” with requisite
18 particularity.
19 In the FAC, relator alleged that Robert Husband and
20 Laura Bailey, employees at Dynamic, corresponded about engaging
21 in a fraudulent scheme to get “rid of competition” and push “the
22 share of cost program.” (Order at 35.) This failed to allege
23 that Husband and Bailey “were engaging in discriminatory billing
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4 Dynamic also requests that the court take judicial
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notice of seven state and federal administrative documents in
support of their motion to dismiss the SAC. (Docket No. 143.)
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The court need not rely on these documents in order to address
27 the issues presented in defendants’ motions to dismiss.
Accordingly, the court will deny Dynamic’s request to take
28 judicial notice of the documents. (Docket No. 143.)
1 on any comparable ‘service or article’ in violation of Medi-Cal’s
2 low-price rules, nor d[id] any of relator’s allegations show that
3 Husband and Bailey falsely certified or caused to be certified a
4 claim for payment to the government.” (Id. at 36).
5 The new allegations against the newly identified
6 individuals are deficient for the same reasons. While the
7 allegations implicate these individuals in the supposed
8 underlying fraudulent scheme, they too fail to address the
9 relevant question pursuant to an FCA claim: Who made false
10 statements or omissions? See United States ex rel. Cafasso v.
11 Gen. Dynamics C4 Sys., Inc., 637 F.3d 1047, 1055 (9th Cir. 2011)
12 (FCA attaches liability only “to the claim for payment,” not the
13 “underlying fraudulent activity”). The closest thing to an
14 answer that relator offers is an allegation that “[b]ills were
15 submitted by Dynamic [] by various personnel in their billing
16 departments,” SAC ¶ 42, but this still fails to “at a minimum
17 identify [who] by title and/or job responsibility” submitted
18 false claims or certifications. See United States ex rel.
19 Modglin v. DJO Glob. Inc., 114 F. Supp. 3d 993, 1016 (C.D. Cal.
20 2015), aff’d 678 F. App’x 594 (9th Cir. 2017). Accordingly, the
21 court will dismiss Claims 1, 2, 4, and 5 on this basis.
22 B. When a False Claim was Submitted (Claims 1, 2, 4, 5)
23 The SAC’s new allegations on when a false claim was
24 submitted still establish only general stretches of time, despite
25 the court’s prior admonition that Rule 9(b) requires more.
26 (Order at 38-39.) See, e.g., SAC ¶ 57 (quid pro quo in contract
27 provisions “[u]ntil at least 2018”); id. ¶ 59 (“Dynamic has
28 carried out this scheme since at least 2006”); id. ¶ 60 (data
1 showing that “in 2011 Dynamic/Invacare was clearly continuing to
2 charge different rates for SOC patients . . . .”). Cf. Ryan v.
3 Microsoft Corp., 147 F. Supp. 3d 868, 888 (N.D. Cal. 2015)
4 (allegations that fraudulent conduct occurred “in 2011 and 2012”
5 and “in approximately 2008” were insufficient under Rule 9(b)).
6 Relator attempts to cure this defect by alleging that
7 false claims and certifications were submitted “every month”
8 during the relevant time periods, thereby “taint[ing] every
9 single one of their claims to Medicare and Medi-Cal.” (SAC ¶ 5.)
10 However, this still is not enough to allege “when” with
11 sufficient precision. For one, the supposed timeframe of the
12 “business relationship” between the SNFs and Dynamic, during
13 which false claims and certifications were allegedly submitted
14 every month, remains unspecified. (Id.)
15 But even assuming a precise stretch of time for the
16 alleged scheme, averments of “each” or “every” alleged
17 occurrence, without more, fail to provide defendants sufficient
18 notice about specific alleged misconduct to investigate and
19 against which to prepare a defense. See Godecke v. Kinetic
20 Concepts, Inc., 937 F.3d 1201, 1208 (9th Cir. 2019) (fraud needs
21 to be pled with particularity to allow defendant to defend
22 against charge). In Knudsen v. Sprint Commc'ns Co., the relator
23 similarly alleged a fraudulent scheme where the defendants
24 submitted false claims every month during a 105-month contractual
25 period. No. C13-04476 CRB, 2016 WL 4548924, at *9 (N.D. Cal.
26 Sept. 1, 2016). The Knudsen court found that the basis of that
27 allegation, which was an audit that the relator conducted on 3
28 months’ worth of services postdating the contractual period at
1 issue, failed to provide any specific details about any of the
2 105 allegedly false claims. Id. Here, relator fails to plead
3 any particular basis at all for his allegation that the entire
4 set of claims, submitted monthly over a course of years, was
5 fraudulent. Relator is not required to present a representative
6 example of a false claim, but he still must allege “particular
7 details of a fraudulent scheme to submit false claims” that
8 credit allegations of routinized fraud. Ebeid ex rel. U.S. v.
9 Lungwitz, 616 F.3d 993, 998-99 (9th Cir. 2010) (emphasis added).
10 As another attempted remedy, relator attaches provider
11 agreements between Dynamic and various skilled nursing
12 facilities. (SAC Exs. A-C.) While these contracts contain
13 specific execution dates, they fail to further identify when the
14 allegedly fraudulent rates and terms contained within the
15 contracts were actually charged, or when such charges were
16 allegedly submitted to the government as a false claim or
17 certification. See Eferton DMCC v. Asia-Glob. Renewable Energy
18 Corp., No. CV 15-9295-R, 2016 WL 5886900, at *1 (C.D. Cal. Apr.
19 22, 2016) (“Mere general allegations of a multi-month period of
20 various contracts and agreements does not suffice for Rule
21 9(b).”). Accordingly, the court will dismiss Claims 1, 2, 4, and
22 5 on this basis.
23 C. How a False Claim was Submitted (Claims 1, 2, 4, 5)
24 1. Dynamic
25 The SAC also fails to sufficiently establish how
26 Dynamic submitted false claims and certifications to the
27 government. Dynamic uses Form CMS-1500 to bill Medi-Cal directly
28 for “qualifying wound” or “direct bill” patients. (SAC ¶ 41.)
1 This form requires Dynamic to certify that the submission
2 complies with all applicable federal and state laws, including
3 (1) Medi-Cal’s low-price rules, and (2) the Anti-Kickback
4 Statute. (Id. ¶ 41.) The SAC alleges that all of Dynamic’s CMS-
5 1500 submissions violate both. (Id. ¶ 42.)
6 (a) Violation of Medi-Cal Low-Price Rules
7 Medi-Cal’s low-price rules prohibit a provider from
8 submitting a reimbursement request for a service that costs more
9 than the “usual fee” charged to the “general public” for that
10 service. (Id. ¶ 77.) Construing the SAC in the light most
11 favorable to relator, Dynamic charges Medi-Cal the “usual fee,”
12 which is $18.76 per day per patient, for specialty mattresses.
13 (Id. ¶ 41; see also Order at 33 n.41.) At the same time, Dynamic
14 allegedly charges skilled nursing facilities “a massively
15 discounted price of between $3 and $6 per day” for “facility”
16 patients whose entire cost of care is covered by the state. (Id.
17 ¶ 43.) These discounts for the facility segment allegedly render
18 every submission of Form CMS-1500 false because the discounted
19 price falls far below the “usual fee” of $18.76. (Id. ¶ 78.)
20 However, relator fails to further allege any reliable
21 indicia supporting the inference that the “massively discounted”
22 fees charged to the facility segment are the right comparator for
23 the “usual fees” charged to Medi-Cal. Put another way, the SAC
24 fails to answer three questions: (1) For what product or service
25 does Dynamic charge Medi-Cal $18.76 per day? (2) For what product
26 or service does Dynamic charge the skilled nursing facilities $3
27
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1 to $6 per day? and (3) Are these products or services the same?5
2 See United States v. Chang, No. CV-13-3772-DMG-MRWx, 2017 WL
3 10544289, at *14-15 (C.D. Cal. July 25, 2017) (failure to specify
4 whether “usual fee” charged to “general public” prevented
5 doctor’s office from charging uninsured population less pursuant
6 to Medi-Cal low-price rules); Physicians and Surgeons Labs., Inc.
7 v. Dep’t of Health Servs., 6 Cal. App. 4th 968, 990 (2d Dist.
8 1992) (finding laboratory’s negotiated contract with discounted
9 fees were not part of the “usual” fees charged to the “general
10 public” and rejecting idea that “any time [a service provider]
11 charged a lower fee, it would be required to charge Medi-Cal that
12 same lower fee”); People v. Duz-Mor Diagnostic Lab., Inc., 68
13 Cal. App. 4th 654, 665-66 (2d Dist. 1998) (clinical laboratory
14 provider discounts to private-pay patients, negotiated by
15 physicians and HMOs, were not “charge to the general public” and
16 thus did not violate low-price rules).
17 Relator’s own allegations suggest that he requires the
18 assistance of discovery to provide them: “[Dynamic is] in
19 possession of detailed billing and reimbursement records that
20 will easily identify each and every claim they submitted to Medi-
21 Cal for ‘qualifying wound’ patients, including the identity of
22 the patient, the date of service, the date the bill was
23 submitted, the amount of the charge, and the amount reimbursed.”
24 SAC ¶ 42. But this puts the cart before the horse. The FCA and
25
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5 The provider contracts that relator attaches to the SAC
further muddies this issue. Each contract contains a price list,
27 which sets forth a grid of different prices based on the specific
type and feature set of mattress and duration of the rental
28 period. (SAC Exs. A-C.)
1 Rule 9(b) “encourage insiders to disclose information necessary
2 to prevent fraud on the government.” Ebeid, 616 F.3d at 999.
3 They further require relators to “come to court with a claim in
4 hand or with sufficiently detailed circumstantial evidence to
5 establish that the defendant actually submitted a false claim.”
6 United States ex rel. Aflatooni v. Kitsap Physicians Serv., 314
7 F.3d 995, 1002 (9th Cir. 2002).
8 Because relator fails to bring this information to
9 court at the pleading stage, he fails to sufficiently allege a
10 violation of Medi-Cal’s low-price rules.
11 (b) Violation of Anti-Kickback Statute
12 Relator also alleges a direct link between the
13 purported differential pricing scheme between Dynamic and SNFs,
14 on the one hand, and SNFs’ referral of qualifying wound patients
15 to Dynamic, on the other hand. In support, the SAC alleges that
16 “the quid pro quo is reflected and memorialized in the
17 contractual agreements between [SNFs] and [Dynamic].” (SAC ¶
18 53.) Relator points in particular to certain preferred vendor or
19 exclusivity contract terms within that require SNFs to source all
20 or most of their supplies from Dynamic. (Id. ¶¶ 53-56.) These
21 contract terms allegedly form the kickback to Dynamic in exchange
22 for Dynamic’s participation in SNFs’ discriminatory billing
23 scheme. (Id.)
24 However, the contract terms do not suggest a quid pro
25 quo even viewed in a light most favorable to relator. First, the
26 one “exclusivity” agreement that relator identifies (id. Ex. A
27 (Dynamic-Plum contract)) acknowledges the skilled nursing
28 facilities’ right to choose alternative providers as provided by
1 law. (Id. ¶ 54.) Second, simply offering lower prices or
2 bulk/loyalty discounts in exchange for volume of business is not
3 enough to support an Anti-Kickback Statute violation.6 See
4 United States ex rel. Dan Abrams Co. v. Medtronic, Inc., No. LA
5 CV15-01212 JAK ASX, 2018 WL 5266863, at *8 (C.D. Cal. June 7,
6 2018) (dismissing Anti-Kickback Statute claims after finding
7 allegations that defendants provided rebates to hospitals that
8 purchased certain devices and that defendants knowingly caused
9 claims to be submitted as a result were conclusory and “failed to
10 allege a clear link between any alleged inducements and the false
11 claims, any specific inducement, which products physicians were
12 allegedly induced to purchase, or when and where any device was
13 used as a result of a kick-back”). The SAC fails to allege any
14 reliable indicia of a fraudulent scheme that Dynamic’s alleged
15 participation in a discriminatory billing scheme was
16 consideration for or inducement of these agreements.
17 Without more, the SAC fails to allege how defendants’
18 agreements amounted to an illegal kickback scheme that, in turn,
19 caused Dynamic’s Form CMS-1500 submissions to become false
20 certifications. Accordingly, the court will dismiss Claims 1, 2,
21 4, and 5 against Dynamic on this basis.
22 2. Skilled Nursing Facilities
23 SNFs bill Medicare Part A and Medi-Cal using Forms CMS-
24 1450 and 1500. (SAC ¶¶ 29-30.) Relator alleges that SNFs submit
25 a consolidated bill, meaning that other entities also treating
26
27 6 Lowered prices may generally help support alleged
violations of Medi-Cal’s low-price rules, but not in this case as
28 discussed above. See supra.
1 patients bill their services to SNFs. SNFs then include those
2 charges along with their own charges in a unified bill that they
3 then submit to the government. (Id.)
4 The SAC alleges no additional details on what goes on
5 the forms, how that information is organized on the forms so that
6 any mistakes or fraud relating to specialty mattress prices can
7 be detected, or what further conditions and certifications that
8 the forms require. It also fails to allege that any information
9 that SNFs transmitted to the government was in fact fraudulent,
10 either intrinsically (i.e., submitting false dollar amounts) or
11 by failing to comply with certain requirements as provided by the
12 forms. As a result, the SAC fails to allege, either directly or
13 circumstantially, how any Form CMS-1450 or 1500 submitted by SNFs
14 was a false claim, either by falsely certifying to the government
15 that specialty mattresses were being charged for in a manner
16 consistent with all applicable laws and regulations, or by
17 directly submitting false information. Accordingly, the court
18 will dismiss Claims 1, 2, 4, and 5 against SNFs on this basis.
19 D. Conspiracy (Claims 3, 7)
20 Allegations about the contracts between Dynamic and the
21 SNFs form the core of relator’s renewed attempt to plead
22 conspiracy. (Id. ¶¶ 52-57, 104, 122.) However, combined with
23 the failure to plead a false claim as outlined above, nothing
24 about these contracts plausibly demonstrate any “meeting of the
25 minds in an unlawful arrangement” required to establish a civil
26 conspiracy. Gilbrook v. City of Westminster, 177 F.3d 839, 856
27 (9th Cir. 1999). The contracts in fact tend to do the opposite.
28 Accordingly, the court will dismiss Claims 3 and 7.
1 E. Motion to Strike (Claim 6)
2 Defendants move to strike Claim 6 on the ground that
3 the court’s previous order dismissed an identically-worded claim
4 with prejudice. (Mots.) Relator argues that this was in error
5 because the order mistakenly characterized Claim 6 as advancing a
6 reverse false claim theory, a theory that the order found to be
7 untenable even with amendment. (Docket Nos. 151-54.)
8 Whether or not the court grants this request is
9 irrelevant, as the SAC pleads Claim 6 with the same lack of
10 particularity that afflicts all its other claims. Claim 6
11 invokes Cal. Gov. Code § 12651(a)(8), which provides that “a
12 beneficiary of a claim who subsequently discovers the falsity of
13 the claim, and fails to disclose the false claim to the state or
14 the political subdivision within a reasonable time after
15 discovery of the false claim[,] is liable under the California
16 FCA.” United States v. Safran Grp., S.A., No. 15-cv-746-LHK,
17 2017 WL 235197, at *5 (N.D. Cal. Jan. 19, 2017) (internal
18 quotation omitted). “[W]ith the exception of scienter and the
19 timing of a defendant's discovery of the false claim,” which are
20 not at issue here, “the elements of a claim under § 12651 (a)(8)
21 are identical to the other federal and California FCA
22 provisions.” United States v. Sutter Health, No. 14-CV-04100-
23 KAW, 2021 WL 9182522, at *22 (N.D. Cal. Mar. 17, 2021).
24 The analysis disposing of relator’s other claims
25 applies with equal force to Claim 6. Relator fails to allege
26 with the required particularity who discovered the falsity of any
27 claim or statement, how he discovered and then subsequently
28 failed to disclose it, and when. Claim 6 is therefore
1 insufficient for the same reasons. Accordingly, the court will
2 deny the motion to strike and dismiss Claim 6.
3 F. Leave to Amend
4 Leave to amend a pleading is generally freely granted
5 and is within the discretion of the court. See Fed. R. Civ. P.
6 15(a); Foman v. Davis, 371 U.S. 178, 182 (1962); DCD Programs,
7 Ltd. v. Leighton, 833 F.2d 183, 186 (9th Cir. 1987). However,
8 this “liberality does not apply when amendment would be futile.”
9 Ebner v. Fresh, Inc., 838 F.3d 958, 968 (9th Cir. 2016).
10 The SAC is relator’s third attempt to sufficiently
11 plead claims under the FCA and CFCA. Relator has failed to
12 remedy any of the FAC’s defects identified in the court’s
13 previous order. For example, relator has been afforded countless
14 opportunities to answer the basic question of whether the
15 government and skilled nursing facilities were charged different
16 prices for the same product. Relator’s repeated inability to
17 answer that question with any specific examples, either in his
18 pleadings or at oral argument, is telling. In addition,
19 relator’s suggestion that billing and reimbursement records in
20 Dynamic’s possession would salvage his claims, SAC ¶ 42, and his
21 attachment of assorted provider agreements but no other documents
22 which might indicate the submission of any false claim, compel
23 the conclusion that a fourth attempt would be futile. The court
24 will therefore dismiss relator’s SAC in its entirety without
25 leave to amend.
26 IT IS THEREFORE ORDERED that the Second Amended
27 Complaint (Docket No. 141) be, and hereby is, DISMISSED WITH
28
ee enn en en nnn nn nn enn nn nn nn EE OS OSE ED
1 PREJUDICE.? . «
2 Dated: October 17, 2023 ob tle Ah fh bee
WILLIAM B. SHUBB
3 UNITED STATES DISTRICT JUDGE
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27 |.
7 Dynamic’s request for judicial notice (Docket No. 143) is
28 | DENIED as moot.
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