Petition for Writ of Certiorari — UPMC, et al., Petitioners v. United States, ex rel. J. William Bookwalter, III, et al.
Supreme Court briefMar 19, 2020
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No. 19-__
IN THE
Supreme Court of the United States
_________
UPMC; UNIVERSITY OF PITTSBURGH PHYSICIANS,
D/B/A UPP DEPARTMENT OF NEUROSURGERY,
Petitioners,
v.
UNITED STATES OF AMERICA EX REL.
J. WILLIAM BOOKWALTER, III, M.D.; ROBERT J.
SCLABASSI, M.D.; ANNA MITINA,
Respondents.
_________
On Petition for a Writ of Certiorari
to the United States Court of Appeals
for the Third Circuit
_________
PETITION FOR A WRIT OF CERTIORARI
_________
JONATHAN L. DIESENHAUS
MITCHELL J. LAZRIS
JESSICA L. ELLSWORTH
Counsel of Record
KIRTI DATLA
MATTHEW J. HIGGINS
HARRISON G. KILGORE
HOGAN LOVELLS US LLP
555 Thirteenth Street, N.W.
Washington, D.C. 20004
(202) 637-5886
jessica.ellsworth@hoganlovells.com
Counsel for Petitioners
QUESTION PRESENTED
The False Claims Act, 31 U.S.C. § 3729(a)(1)(A),
imposes treble damages and a per-claim civil penalty
on any person who “knowingly presents, or causes to
be presented, a false or fraudulent claim” seeking
payment from the United States.
The question presented is:
Whether a plaintiff plausibly alleges scienter—that
a defendant knowingly submitted false claims—when
the plaintiff does not allege any facts to suggest the
defendant had knowledge that it was in violation of
an ambiguous regulatory provision.
(i)
ii
PARTIES TO THE PROCEEDING
The caption contains the names of all the parties to
the proceeding below.
iii
RULE 29.6 DISCLOSURE STATEMENT
The University of Pittsburgh Medical Center
(“UPMC”) has no parent. UPMC is the sole parent of
University of Pittsburgh Physicians.
iv
RELATED PROCEEDINGS
The following proceedings are directly related to
this petition:
United States ex rel. Bookwalter v. UPMC, No.
2:12-cv-00145-CB (W.D. Pa. Mar. 27, 2018) (available
at 2018 WL 1509064), rev’d, No. 18-1693 (3d Cir.
Sept. 17, 2019) (reported at 938 F.3d 397), reh’g
granted in part & reh’g en banc denied (Dec. 20,
2019) (reported at 944 F.3d 965), as amended (Dec.
20, 2019) (reported at 946 F.3d 162).
v
TABLE OF CONTENTS
Page
QUESTION PRESENTED........................................... i
PARTIES TO THE PROCEEDING ............................ii
RULE 29.6 DISCLOSURE STATEMENT ............... iii
RELATED PROCEEDINGS ...................................... iv
TABLE OF AUTHORITIES .....................................viii
OPINIONS BELOW .................................................... 1
JURISDICTION .......................................................... 2
STATUTORY PROVISION INVOLVED .................... 2
INTRODUCTION ........................................................ 2
STATEMENT .............................................................. 5
A.
Statutory and Regulatory Background ....................................................... 5
B.
Procedural Background ............................ 9
REASONS TO GRANT THE PETITION ................. 17
I.
The Third Circuit’s Lax Pleading
Standard For Scienter Conflicts With
This Court’s Precedents And Other
Circuits’ Standards ......................................... 17
II.
The Question Presented Is Important
And Recurring................................................. 25
III. This Case Is An Ideal Vehicle To Resolve The Question Presented ........................ 31
CONCLUSION .......................................................... 35
APPENDIX
APPENDIX A—Third Circuit’s Revised
Opinion (Dec. 20, 2019) ..................................... 1a
vi
TABLE OF CONTENTS—Continued
Page
APPENDIX B—Third Circuit’s Order
Granting Panel Rehearing and
Denying Rehearing En Banc (Dec.
20, 2019) .......................................................... 33a
APPENDIX C—Third Circuit’s Opinion
(Sept. 17, 2019) ................................................ 35a
APPENDIX D—District Court’s Order
Granting Defendants’ Motion to
Dismiss Second Amended Complaint
(Mar. 27, 2018) ................................................ 89a
APPENDIX E—District Court’s Order
Granting Defendants’ Motion to
Dismiss Amended Complaint (June
21, 2017) .......................................................... 93a
APPENDIX F—Reply in Support of
Defendants’ Motion to Dismiss Relator’s Second Amended Complaint
(Sept. 27, 2017) .............................................. 101a
APPENDIX G—Memorandum in Support of Defendants’ Motion to Dismiss (Aug. 15, 2017) ...................................... 113a
viii
TABLE OF AUTHORITIES
Page(s)
CASES:
City of Arlington v. FCC,
569 U.S. 290 (2013) .................................... 4, 27, 28
Commercial Contractors, Inc. v. United
States,
154 F.3d 1357 (Fed. Cir. 1998) ............................ 20
Cook County v. United States ex rel.
Chandler,
538 U.S. 119 (2003) .............................................. 18
Decker v. Nw. Envtl. Def. Ctr.,
568 U.S. 597 (2013) .............................................. 27
FCC v. Fox Television Stations, Inc.,
567 U.S. 239 (2012) .............................................. 18
Mack v. Augusta-Richmond County,
148 F. App’x 894 (11th Cir. 2005) ....................... 27
Mikes v. Straus,
274 F.3d 687 (2d Cir. 2001) ................................ 34
Minnesota Ass’n of Nurse Anesthetists v.
Allina Health Sys. Corp.,
276 F.3d 1032 (8th Cir. 2002) .............................. 32
Olson v. Fairview Health Servs. of Minnesota,
831 F.3d 1063 (8th Cir. 2016) .............................. 22
Pack v. Hickey,
776 F. App’x 549 (10th Cir. 2019) ....................... 24
Safeco Ins. Co. of Am. v. Burr,
551 U.S. 47 (2007) .......................................... 19, 20
Siebert v. Gene Sec. Network, Inc.,
75 F. Supp. 3d 1108 (N.D. Cal. 2014) .................. 26
ix
TABLE OF AUTHORITIES—Continued
Page(s)
Texas Dep’t of Hous. & Cmty. Affairs v.
Inclusive Cmtys. Project, Inc.,
135 S. Ct. 2507 (2015) .......................................... 28
Thornton v. Nat’l Compounding Co.,
No. 8:15-cv-2647-T-36JSS, 2019 WL
2744623 (M.D. Fla. July 1, 2019) ........................ 25
United States v. Corinthian Colls.,
655 F.3d 984 (9th Cir. 2011) .......................... 24, 34
United States v. McNinch,
356 U.S. 595 (1958) .............................................. 19
United States v. Sanford-Brown, Ltd.,
788 F.3d 696 (7th Cir. 2015), reinstated
in part and superseded in part, 840 F.3d
445 (2016) ....................................................... 26, 34
United States ex rel. Davis v. District of
Columbia,
793 F.3d 120 (D.C. Cir. 2015) ........................ 20, 34
United States ex rel. Druding v. Care Alternatives,
No. 18-3298, 2020 WL 1038083 (3d Cir.
Mar. 4, 2020) ........................................................ 30
United States ex. rel. Fallon v. Accudyne
Corp.,
880 F. Supp. 636 (W.D. Wis. 1995)...................... 26
United States ex rel. Harper v. Muskingum Watershed Conservancy Dist.,
842 F.3d 430 (6th Cir. 2016) .......................... 20, 23
x
TABLE OF AUTHORITIES—Continued
Page(s)
United States ex rel. Harper v. Muskingum Watershed Conservancy Dist.,
739 F. App’x 330 (6th Cir. 2018), cert.
denied 139 S. Ct. 798 (2019) ................................ 23
United States ex rel. Harrison v. Westinghouse Savannah River Co.,
352 F.3d 908 (4th Cir. 2003) ................................ 33
United States ex rel. Hendow v. Univ. of
Phoenix,
461 F.3d 1166 (9th Cir. 2006) .............................. 33
United States ex rel. Hixson v. Health
Mgmt. Sys., Inc.,
613 F.3d 1186 (8th Cir. 2010) ........................ 21, 22
United States ex rel. Hochman v. Nackman,
145 F.3d 1069 (9th Cir. 1998) .............................. 21
United States ex rel. Hopper v. Anton,
91 F.3d 1261 (9th Cir. 1996) ................................ 34
United States ex rel. K & R Ltd. P’ship v.
Massachusetts Hous. Fin. Agency,
530 F.3d 980 (D.C. Cir. 2008) .............................. 20
United States ex rel. Ketroser v. Mayo
Found.,
729 F.3d 825 (8th Cir. 2013) ................................ 22
United States ex rel. Oliver v. Parsons Co.,
195 F.3d 457 (9th Cir. 1999) .......................... 23, 24
United States ex rel. Phalp v. Lincare
Holdings, Inc., 857 F.3d 1148 (11th Cir.
2017) ......................................................... 20, 24, 25
xi
TABLE OF AUTHORITIES—Continued
Page(s)
United States ex rel. Purcell v. MWI Corp.,
807 F.3d 281 (D.C. Cir. 2015) .................. 18, 22, 34
United States ex rel. Simpson v. Leprino
Foods Dairy Prods. Co.,
No. 16-cv-00268-CMA-NYW, 2018 WL
1375792 (D. Colo. Mar. 19, 2018) ........................ 24
United States ex rel. Smith v. Boeing Co.,
825 F.3d 1138 (10th Cir. 2016) ...................... 24, 26
United States ex rel. Steury v. Cardinal
Health, Inc.,
625 F.3d 262 (5th Cir. 2010) ................................ 34
United States ex rel. Tran v. Computer
Scis. Corp.,
53 F. Supp. 3d 104 (D.D.C. 2014) ........................ 29
United States ex rel. Vosika v. Starkey
Labs., Inc.,
No. 01-cv-709(DWF/SRN), 2004 WL
2065127 (D. Minn. Sept. 8, 2004) ........................ 29
United States ex rel. Williams v. Renal
Care Grp., Inc.,
696 F.3d 518 (6th Cir. 2012) ................................ 25
Universal Health Servs., Inc. v. United
States ex rel. Escobar,
136 S. Ct. 1989 (2016) .................................. passim
Vermont Agency of Nat. Res. v. United
States ex rel. Stevens,
529 U.S. 765 (2000) .............................................. 29
STATUTES:
28 U.S.C. § 1254(1) ................................................... 2
xii
TABLE OF AUTHORITIES—Continued
Page(s)
Ethics in Patient Referrals Act of 1989
(Stark Act)
42 U.S.C. § 1395nn(a)(1) ........................................ 7
42 U.S.C. § 1395nn(a)(2)(B) ................................... 7
42 U.S.C. § 1395nn(e)(2) ........................................ 8
42 U.S.C. § 1395nn(h)(1)(A)................................... 7
42 U.S.C. § 1395nn(h)(1)(B)................................... 7
Fair Credit Reporting Act
15 U.S.C. § 1681n(a) ............................................ 19
False Claims Act
31 U.S.C. § 3729 ................................................... 30
31 U.S.C. § 3729(a)(1) .......................................... 17
31 U.S.C. § 3729(a)(1)(A) ................................... 2, 5
31 U.S.C. § 3729(a)(1)(D) ..................................... 22
31 U.S.C. § 3729(a)(1)(G) ..................................... 22
31 U.S.C. § 3729(b)(1)(A) ............................. 5, 6, 32
31 U.S.C. § 3730(b) ................................................ 6
31 U.S.C. § 3730(c)(3) ............................................ 6
31 U.S.C. § 3730(d)(1) ...................................... 6, 30
31 U.S.C. § 3730(d)(2) ............................................ 6
31 U.S.C. § 3732(a) .............................................. 30
REGULATIONS:
42 C.F.R. § 411.351 ................................................... 7
42 C.F.R. § 411.354(c) ............................................... 7
42 C.F.R. § 411.354(c)(2) .................................. 15, 32
42 C.F.R. § 411.354(c)(2)(i) ....................................... 8
42 C.F.R. § 411.354(c)(2)(ii) ................................ 8, 12
42 C.F.R. § 411.354(c)(2)(iii) ..................................... 8
42 C.F.R. § 411.357(l) ............................................... 8
xiii
TABLE OF AUTHORITIES—Continued
Page(s)
Civil Monetary Penalties Inflation Adjustment, 83 Fed. Reg. 3944 (Jan. 29,
2018) ....................................................................... 6
Medicare and Medicaid Programs; Physicians’ Referrals to Health Care Entities
With Which They Have Financial Relationships, 66 Fed. Reg. 856 (Jan. 4,
2001) ....................................................................... 7
Medicare Program; Modernizing and Clarifying the Physician Self-Referral Regulations, 84 Fed. Reg. 55,766 (proposed
Oct. 17, 2019) ............................................... passim
Medicare Program; Physicians’ Referrals
to Health Care Entities With Which
They Have Financial Relationships
(Phase II), 69 Fed. Reg. 16,054 (Mar. 26,
2004) ............................................................. 8, 9, 13
OTHER AUTHORITIES:
Mathew Andrews, Note, The Growth of
Litigation Finance in DOJ Whistleblower
Suits: Implications and Recommendations, 123 Yale L.J. 2422 (2014) .......................... 28
Brookings Inst., Vital Statistics on Congress, at tbl. 6-5 (updated Mar. 2019),
https://brook.gs/38QHJg0 .................................... 27
xiv
TABLE OF AUTHORITIES—Continued
Page(s)
Todd J. Canni, Who’s Making False
Claims, the Qui Tam Plaintiff or the
Government Contractor? A Proposal to
Amend the FCA to Require That All Qui
Tam Plaintiffs Possess Direct
Knowledge, 37 Pub. Cont. L.J. 1 (2007) ........ 28, 29
Civil Div., U.S. Dep’t of Justice, Fraud
Statistics – Overview, October 1, 1986 –
September 30, 2019, http://bit.ly/
2019quitam (last visited Mar. 19, 2020) ............. 30
Fed. Register, Code of Federal Regulations: Total Pages 1938-1949, and Total
Volumes and Pages 1950-2017,
http://bit.ly/2017fedreg (last visited Mar.
19, 2020) ........................................................... 4, 28
John F. Manning, Constitutional Structure and Judicial Deference to Agency
Interpretation of Agency Rules, 96 Colum. L. Rev. 612 (1996) ......................................... 27
Merrit Hawkins, 2017 Review of Physician and Advanced Practitioner Recruiting Incentives (2017), available at
https://tinyurl.com/MerritHawkins17 ................. 10
Charles B. Oppenheim et al., The Stark
Law: Comprehensive Analysis + Practical Guide (AHLA 6th ed. 2019) ........................... 31
Robert Salcido, DOJ Must Reevaluate Use
of False Claims Act in Medicare Disputes, Wash. Legal Found. Legal Backgrounder (Jan. 7, 2000) ........................................ 29
xv
TABLE OF AUTHORITIES—Continued
Page(s)
Kevin M. Stack, Interpreting Regulations,
111 Mich. L. Rev. 355 (2012) ............................... 27
UPMC, UPMC Fast Facts,
https://upmc.me/2Uf6sFt (Mar. 2020) ................... 9
UPMC Presbyterian Shadyside, U.S. News
& World Report,
https://tinyurl.com/usnewsupmc (last
visited Mar. 19, 2020) ...................................... 9, 10
IN THE
Supreme Court of the United States
_________
No. 19-__
_________
UPMC; UNIVERSITY OF PITTSBURGH PHYSICIANS,
D/B/A UPP DEPARTMENT OF NEUROSURGERY,
Petitioners,
v.
UNITED STATES OF AMERICA EX REL.
J. WILLIAM BOOKWALTER, III, M.D.; ROBERT J.
SCLABASSI, M.D.; ANNA MITINA,
Respondents.
_________
On Petition for a Writ of Certiorari
to the United States Court of Appeals
for the Third Circuit
_________
PETITION FOR A WRIT OF CERTIORARI
_________
The University of Pittsburgh Medical Center and
University of Pittsburgh Physicians d/b/a UPP
Department of Neurosurgery respectfully petition for
a writ of certiorari to review the judgment of the
United States Court of Appeals for the Third Circuit
in this case.
OPINIONS BELOW
The District Court’s order dismissing the Amended
Complaint is not reported but is available at 2017
WL 2672288. Pet. App. 93a–100a. The District
Court’s order dismissing the Second Amended Complaint is not reported but is available at 2018 WL
(1)
2
1509064. Pet. App. 89a–92a. The Third Circuit’s
initial opinion reversing and remanding the dismissal is reported at 938 F.3d 397. Pet. App. 35a–88a.
The Third Circuit’s order granting in part Petitioners’ petition for rehearing is reported at 944 F.3d
965. Pet. App. 33a–34a. The Third Circuit’s revised
opinion reversing and remanding the dismissal is
reported at 946 F.3d 162. Pet. App. 1a–32a.
JURISDICTION
The Third Circuit entered judgment on September
17, 2019. Petitioners filed a timely petition for
rehearing, which was granted in part on December
20, 2019. On that date, the Third Circuit entered an
amended judgment. This Court’s jurisdiction is
invoked under 28 U.S.C. § 1254(1).
STATUTORY PROVISION INVOLVED
Under the False
§ 3729(a)(1)(A):
Claims
Act,
31
U.S.C.
[A]ny person who * * * knowingly presents, or
causes to be presented, a false or fraudulent
claim for payment or approval * * * is liable to
the United States Government for a civil penalty * * *, plus 3 times the amount of damages
which the Government sustains because of the
act of that person.
INTRODUCTION
Relators’ central thesis in this eight-year-old False
Claims Act (FCA) case is that Petitioners’ decision to
compensate physicians the same way Medicare
does—for their time and effort—knowingly violated
the Ethics in Patient Referrals Act of 1989 (known as
the Stark Act). As a result, Relators say, every claim
3
Petitioners submitted to Medicare and Medicaid
seeking reimbursement for hospital services tied to
these physicians’ work was a false claim that opens
them up to FCA liability. If this seems counterintuitive, it is.
The Third Circuit recognized as much, stating that
this novel interpretation of the Stark Act “may not be
obvious on the face of the statute and regulations.”
Pet. App. 17a. Yet it adopted that interpretation,
held that Relators sufficiently pled FCA scienter,
that is, that Petitioners knowingly submitted false
claims, and sent this case into discovery. The Third
Circuit did so even though Relators did not allege
that Petitioners (or anyone else) were aware of its
non-obvious interpretation of the Stark Act. And it
did so even though the Centers for Medicare &
Medicaid Services (CMS) had just issued a proposed
rule to clarify the relevant provisions of the Stark
Act, under which the Third Circuit’s interpretation is
incorrect.
Just four years ago, this Court promised that its
decision interpreting the FCA to encompass a false
certification theory of falsity—the theory Relators
raise here—should not trouble entities that submit
claims to the government. The Court recognized that
this falsity theory raised “concerns about fair notice
and open-ended liability.” Universal Health Servs.,
Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989,
2002 (2016). But “strict enforcement of the [FCA]’s
materiality and scienter requirements,” which this
Court stressed were “rigorous,” would “allay” any
such concerns. Id. (internal quotation marks omitted).
4
The Third Circuit’s scienter holding betrayed that
promise, and this Court should correct it. Under its
decision, all a relator needs to do is convince a court
to adopt one interpretation of an ambiguous provision, and allege that a defendant knew certain facts
that, under the newly-adopted interpretation, violated the provision. That is enough, according to the
Third Circuit, to plausibly allege that the defendant
submitted a claim knowing of the violation. But
alleging that a defendant knew those facts does not
show that the defendant knew (or had fair notice)—
at the time it submitted a claim to the government—
that it was acting improperly and submitting false
claims.
For this reason, every other circuit to address this
issue has held that something more is required to
allege FCA scienter when there is clear regulatory
ambiguity. Any other interpretation of the FCA’s
scienter requirement gives relators free rein to wield
the threat of FCA liability and its “essentially punitive” penalties. Id. at 1996 (internal quotation
marks omitted). The 51 titles of the U.S. Code and
186,374 pages of the Code of Federal Regulations1
are filled with ambiguous provisions. Members of
this Court have already described regulatory ambiguity as providing “a powerful weapon in an agency’s
regulatory arsenal.” City of Arlington v. FCC, 569
U.S. 290, 314 (2013) (Roberts, C.J., dissenting). The
1
The number is likely higher. See Fed. Register, Code of
Federal Regulations: Total Pages 1938-1949, and Total Volumes and Pages 1950-2017, http://bit.ly/2017fedreg (last visited
Mar. 19, 2020) (“C.F.R. Total Pages and Volumes”) (noting 2017
data).
5
Third Circuit’s decision makes these provisions
powerful weapons in relators’ arsenals too. Federal
contractors, suppliers, and grantees are subject to a
host of regulatory requirements, many of them
ambiguous. They routinely submit claims to the
government that, after Escobar, may be treated as
impliedly certifying compliance with these provisions. And the FCA contains a broad venue provision that allows relators to pick and choose where to
sue. Unless this Court steps in, these weapons can
be trained on the 74 Fortune 100 companies—and
countless others—that are headquartered or incorporated within the Third Circuit.
STATEMENT
This FCA case rests on Relators’ allegations that
Petitioners’ standard compensation agreement for
physicians violates the Stark Act. 2 The standard
agreement entitles a physician to a base salary and a
bonus of $45 per wRVU above a minimum number of
wRVUs. Pet. App. 6a. A wRVU (work relative value
unit) is “the basic unit[ ] that Medicare uses to measure how much a medical procedure is worth.” Id.
Medicare assigns each medical service a number of
wRVUs: “[t]he longer and more complex the service,
the more [wRVUs] it is worth.” Id.
A. Statutory and Regulatory Background
1. The FCA imposes civil liability on any person
who “knowingly presents, or causes to be presented,
a false or fraudulent claim for payment or approval.”
31 U.S.C. § 3729(a)(1)(A). It thus requires: (1) pre2
This Statement is based on Relators’ allegations because this
petition arises out of Petitioners’ motion to dismiss.
6
sentment, (2) of a false or fraudulent claim, (3) with
knowledge of its falsity. See Escobar, 136 S. Ct. at
1996. “The Act’s scienter requirement defines * * *
‘knowingly’ to mean that a person has ‘actual
knowledge of the information,’ ‘acts in deliberate
ignorance of the truth or falsity of the information,’
or ‘acts in reckless disregard of the truth or falsity of
the information.’ ”
Id. (quoting 31 U.S.C.
§ 3729(b)(1)(A)). If these requirements are met, the
FCA’s penalties are “essentially punitive in nature.”
Id. (internal quotation marks omitted). It provides
for treble damages and civil penalties per false claim.
See id; see also Civil Monetary Penalties Inflation
Adjustment, 83 Fed. Reg. 3944, 3945 (Jan. 29, 2018)
(setting the current inflation-adjusted penalty range
as $11,181 to $22,363 per claim).
The FCA is enforced directly by the United States
or indirectly by a private party (relator) on its behalf.
When a relator sues, the FCA allows the government
to investigate and decide whether to intervene. See
31 U.S.C. § 3730(b). If the government decides a
relator’s claim does not warrant intervention, the
relator can continue with the suit.
See id.
§ 3730(c)(3). This is not an act of altruism—a relator
receives a sizeable percentage of any recovery. See
id. § 3730(d)(1)-(2).
2. The FCA has become the primary vehicle for
enforcement of the Stark Act, which does not contain
its own cause of action. Pet. App. 12a.
The Stark Act was enacted to address the risk that
physicians might make patient referrals for their
own financial gain, rather than as medically necessary and appropriate. It prohibits a physician from
making a referral for designated health services
7
payable by Medicare to an entity he has a financial
relationship with, unless an exception applies, and it
prohibits that entity from billing Medicare for the
services. See 42 U.S.C. § 1395nn(a)(1). The Act is
aimed at referrals based on a physician’s financial
interest in third-party providers and suppliers. See
Medicare and Medicaid Programs; Physicians’ Referrals to Health Care Entities With Which They Have
Financial Relationships, 66 Fed. Reg. 856, 871 (Jan.
4, 2001). A physician thus does not make a prohibited referral when he performs a service on his own
patient. See 42 C.F.R. § 411.351 (services “personally performed or provided by the referring physician”).
A two-step process governs whether these prohibitions apply. The Stark Act first defines “financial
relationship” and then sets out a series of exceptions
to that definition. Pet. App. 11a. CMS describes its
“intent in interpreting and implementing * * * the
Act” as “to interpret the referral and billing prohibitions narrowly and the exceptions broadly,” a position from which it has “not vacillated.” See Medicare
Program; Modernizing and Clarifying the Physician
Self-Referral Regulations (“Proposed Rule”), 84 Fed.
Reg. 55,766, 55,771 (proposed Oct. 17, 2019) (internal quotation marks and brackets omitted).
A “financial relationship” includes a “compensation
arrangement,” which is exactly what it sounds like.
42 U.S.C. § 1395nn(a)(2)(B), (h)(1)(A)-(B). As relevant here, a financial relationship can be “indirect.”
42 C.F.R. § 411.354(c). That is, a physician can have
a “financial relationship” that triggers the Stark Act
with an entity that bills Medicare, even if he is
compensated by another entity. See id.
8
By regulation, an “indirect compensation arrangement” has three elements. There must be “an unbroken chain of * * * financial relationships” between
the physician and the entity providing, and billing
for, the referred services. Id. § 411.354(c)(2)(i). The
physician must receive “aggregate compensation
* * * that varies with, or takes into account, the
volume or value of referrals.” Id. § 411.354(c)(2)(ii).
And the entity must know, recklessly disregard, or
deliberately ignore that the physician’s compensation
“varies with, or takes into account, the volume or
value of referrals.” Id. § 411.354(c)(2)(iii).
The exceptions to what counts as a Stark Act financial relationship are in the Act and also in CMS’s
regulations. See, e.g., id. § 411.357(l); 42 U.S.C.
§ 1395nn(e)(2). Four exceptions are relevant here.
Pet. App. 11a, 31a. Each requires “that * * * compensation not exceed fair market value and not take
into account the volume or value of referrals.” Id. at
31a.
Despite their importance, neither the Stark Act nor
the regulations define these key terms—“takes into
account the volume or value of referrals” and “fair
market value.” CMS has long acknowledged that
entities like Petitioners face uncertainty when trying
to comply with the Act. When it defined an “indirect
compensation arrangement,” it recognized that
applying it would “require * * * education and experience.” Medicare Program; Physicians’ Referrals to
Health Care Entities With Which They Have Financial Relationships (Phase II) (“Phase II Regulations”), 69 Fed. Reg. 16,054, 16,058 (Mar. 26, 2004).
And recently, CMS stated that “[o]ver the years,” it
received “requests for clarification * * * with respect
9
to * * * under what circumstances compensation is
considered to take into account the volume or value
of referrals * * * and how to determine the fair
market value of compensation.” Proposed Rule, 84
Fed. Reg. at 55,789.
Despite this ambiguity, CMS signaled that performance-based employment compensation did not
trigger the Act’s prohibitions. It said that “a productivity bonus based on personally performed work
would not be based on the volume or value of ‘referrals.’ ” Phase II Regulations, 69 Fed. Reg. at 16,067.
And it stated that the mere fact that a physician who
works at a hospital will generate referrals for hospital services related to his own work—if a surgeon
performs a surgery, for example, the hospital will
provide his patient with necessary associated services—“would not invalidate an employed physician’s
personally performed work, for which the physician
may be paid a productivity bonus.” Id. at 16,089.
B. Procedural Background
1. The University of Pittsburgh Medical Center
(UPMC) is a world-renowned nonprofit healthcare
system. It contains 20 academic, community, and
regional hospitals, with more than 2,700 physicians.
Pet. App. 5a.3 Its flagship teaching hospital, UPMC
Presbyterian Shadyside, houses one of this country’s
top neurosurgery departments. See UPMC Presby3
The UPMC system has grown since this case began. See
UPMC, UPMC Fast Facts, https://upmc.me/2Uf6sFt (Mar.
2020) (“UPMC operates 40 academic, community and specialty
hospitals, 700 doctors’ offices and outpatient sites, employs
4,900 physicians, and offers an array of rehabilitation, retirement, and long-term care facilities.”).
10
terian Shadyside, U.S. News & World Report,
https://tinyurl.com/usnewsupmc (last visited Mar. 19,
2020).
This case involves thirteen neurosurgeons, most of
whom practice at UPMC Presbyterian Shadyside, all
of whom are compensated by UPMC-affiliated entities. See Pet. App. 5a–6a. Relators alleged that
these neurosurgeons were compensated under a
standard form contract with a base salary and, for
every wRVU above a set minimum, an additional $45
per wRVU. Id. at 6a. Each had to complete a minimum number of wRVUs, or risk his base salary
being reduced the next year. Id.
Performance-based compensation is the industry
standard. A recent study found that 72% of national
physician postings offered a salary and productivity
bonus. See Merrit Hawkins, 2017 Review of Physician and Advanced Practitioner Recruiting Incentives, at 5, 12 (2017) (2016/2017 period), available at
https://tinyurl.com/MerritHawkins17 (study of more
than 3,287 physician postings, 2,301 of which were in
hospitals or physician groups). It concluded that
“volume-based incentives, particularly Relative
Value Units (RVUs), continue to be the most frequently utilized physician productivity metric.” Id.
at 4. In fact, 52% of postings that offered a productivity bonus did so based on wRVUs. See id. at 13.
2. Relators, who had worked in the UPMC system,
brought this FCA suit in 2012. At first, they alleged
that certain neurosurgeons had billed for procedures
that were not performed, or billed for more complex
procedures than were actually performed. Pet. App.
6a–8a. The United States investigated these claims,
and Petitioners settled certain claims related to
11
physician services, without admitting liability. Id. at
8a.4 The United States declined to intervene with
respect to the claims for hospital services. Id.
Relators amended their complaint to allege a new
theory. They alleged that the neurosurgeons’ contracts created a Stark Act “indirect financial relationship” that prohibited the physicians from referring any Medicare patient for hospital services at
any UPMC hospital. C.A. J.A. 61–62 (Am. Compl.
¶¶ 152–155). Relators alleged that, as a result,
every claim submitted to Medicare for those hospital
services was a false claim under the FCA. Id. at 53–
56.
2. The District Court dismissed the Amended Complaint. It agreed with Petitioners that Relators had
not pled a Stark Act violation and that, even if they
had, Relators had not alleged that Petitioners knowingly violated the Stark Act. Pet. App. 94a–95a,
97a–98a. The District Court gave Relators the
chance to amend their complaint again. Id. at 95a,
99a–100a.
The District Court dismissed the Second Amended
Complaint. It explained that although Relators had
added a few allegations, deleted some, and moved
others, the third complaint essentially mirrored the
second one. See id. at 92a n.3; 114a–115a. The
District Court agreed with Petitioners that it should
be dismissed for essentially the same reasons, this
4
The settled claims included some that UPMC voluntarily
disclosed to the U.S. Attorney’s Office beyond the scope of
Relators’ original complaint. See C.A. J.A. 202 (Settlement
Agreement ¶ C).
12
time with prejudice. Id. at 89a–92a. Relators appealed.
3. The Third Circuit initially reversed in a divided
opinion. Id. at 35a–88a. The panel majority focused
on the second requirement of an indirect compensation arrangement: whether “aggregate compensation
* * * varies with, or takes into account, the volume or
value of referrals.” 42 C.F.R. § 411.354(c)(2)(ii). It
defined its task as “to tease out the difference between varies with and takes into account.” Pet. App.
50a.
As to “varies with,” the panel majority adopted a
“natural reading,” relying on statistics textbooks,
judicial opinions, and a Truth In Lending Act regulation. Id. at 51a–53a. Under that reading, any time a
physician’s compensation correlates with referrals, it
“varies with” referrals. Id. Because UPMC paid the
neurosurgeons based on effort—i.e., they were paid
more for performing more procedures—and because
Relators alleged that hospital-based procedures
involve associated referrals for hospital services, “the
surgeons’ salaries rose and fell with their referrals.”
Id. at 56a.
As to “takes into account,” the panel concluded that
the phrase was satisfied if a “causal” relationship
existed between referrals and compensation. Id. at
50a. It concluded that “aggregate compensation that
exceeds fair market value” was “smoke” that “suggests” that “compensation takes referrals into account.” Id. at 59a. That was just “common sense.”
Id. at 58a–59a. Even so, the panel acknowledged
that its interpretation “may not be obvious on the
face of the statute and regulations,” which “often
treats fair market value as a concept distinct from
13
taking into account the volume or value of referrals.”
Id. at 58a.
The panel identified five allegations that “viewed
together” provided more smoke; this smoke indicated
that “the surgeons’ pay exceeded their fair market
value.” Id. at 59a–60a. Those were that: (1) “some”
neurosurgeons’ “pay exceeded their collections”; (2)
“many” neurosurgeons’ “pay exceeded the 90th
percentile of neurosurgeons nationwide”; (3) “many”
neurosurgeons “generated [wRVUs] far above industry norms”; (4) the $45/wRVU bonus “exceeded what”
Petitioners received for “most” of the services; and (5)
“the government’s choice to intervene after years of
investigation and its allegations in the settlement
[we]re cause for suspicion.” Id. at 59a–60a, 64a–65a.
That was “plenty of smoke” for the panel and “suggest[ed] that * * * pay took their referrals into account.” Id. at 64a–65a.
The panel’s discussion of scienter was considerably
shorter. 5 It found that Relators had alleged that
Petitioners shared “common control,” had taken
“part in forming, approving, and implementing the
surgeons’ pay packages,” and “had a central coding
and billing department.” Id. at 65a–66a. Because
they “had all the data right in front of them,” the
panel could “plausibly infer” that Petitioners “knew
the surgeons’ compensation varied with or took into
account their referrals,” that is, formed an indirect
5
The Stark Act’s definition of “indirect compensation arrangement” includes a scienter requirement that mirrors the FCA’s.
See Phase II Regulations, 69 Fed. Reg. at 16,061–62. The Third
Circuit opinions include sections on Stark Act scienter and FCA
scienter. For simplicity, this Petition refers to both together.
14
compensation arrangement that the Stark Act prohibited. Id. at 66a.
In the panel’s view, the Stark Act’s many exceptions had no role to play at the pleading stage. “[I]f
an exception * * * applies, then the claim is not false.
And if the defendant thinks that an exception applies, then the defendant does not know that the
claim is false.” Id. at 71a. Petitioners argued that,
as a result, a relator must allege facts to show that a
defendant could not have believed (or did not believe)
that it fell outside an exception. See id. Although
this logic had “force,” the panel rejected it. Id. Even
though the FCA contains a scienter element, the
panel held that the exceptions were affirmative
defenses that could come into play only on summary
judgment. Id. at 38a–39a, 45a–46a, 71a; see id. at
86a (Ambro, J., concurring in the judgment). And it
found that because the relevant exceptions required
that “compensation not exceed fair market value”
and “not take into account the volume or value of
referrals,” its falsity analysis “already explained”
why Relators had pleaded that the contracts here did
not meet those requirements. Id. at 71a–72a.
Judge Ambro concurred in the judgment. He disagreed with the panel majority’s interpretation of the
Stark Act regulations’ “varies with” language. Id. at
78a–88a & n.1. On his reading, the term required
“an actual causal relationship.” Id. at 88a. The
majority’s contrary interpretation could make “most
of the top hospitals in the country, many of whom
likely employ similar compensation schemes to
UPMC’s * * * vulnerable to a * * * lawsuit that could
survive a motion to dismiss and proceed to discovery.” Id. at 86a. He agreed, however, with the
15
majority’s analysis of the “takes into account” language, though he saw it as a “close question.” Id. at
76a; see id. at 80a n.1. “[M]any of the factors the
majority” identified as smoke “would likely be present in many cases where nothing untoward has
occurred.” Id. at 76a–77a.
4. After Petitioners sought rehearing, supported by
the American Hospital Association and others as
amici, the panel issued a new opinion, and Judge
Ambro withdrew his concurrence. Id. at 34a.
Just before the rehearing petition was filed, CMS
released a proposed rule to clarify its regulations
defining an indirect compensation arrangement. The
rehearing petition identified three aspects of the
proposed rule as most relevant. First, CMS proposed
removing the phrase “varies with” from the definition. See Proposed Rule, 84 Fed. Reg. at 55,841–42
(to be codified at 42 C.F.R. § 411.354(c)(2)). Second,
CMS explained that “takes into account the value or
volume of referrals” is an objective test: “[O]nly
when the mathematical formula used to calculate the
amount of the compensation includes as a variable
referrals * * *, and the amount of the compensation
correlates with the number or value of the physician’s referrals * * *, is the compensation considered
to take into account the volume or value of referrals
* * * .” Id. at 55,793. And CMS noted that it was
“not the case” that it considered compensation above
market value as compensation that necessarily took
into account referrals. Id. at 55,789. CMS made
clear that the “takes into account” and “fair market
value” requirements are “separate and distinct”
standards. Id. at 55,789, 55,797.
16
The new panel opinion was slightly more modest
than the original. The panel declined to interpret
the “varies with” language in the definition of an
indirect compensation arrangement, deleting nearly
seven pages of its opinion. Compare Pet. App. at
16a–17a, with id. at 51a–58a. But it left in place its
holding that Relators adequately pled falsity, based
on its view that Relators had pled facts that were
“smoke” suggesting compensation above fair market
value, which in turn was “smoke” that suggested
that the neurosurgeons’ compensation “takes into
account” their referrals. Compare id. at 18a–19a,
23a, with id. at 59a–60a, 64a–65a. It also left in
place its recognition that this interpretation of the
Stark Act “may not be obvious on the face of the
statute and regulations.” Id. at 17a. The panel did
not modify its discussion of scienter. Compare id. at
23a–25a, with id. at 65a–67a.
It did not
acknowledge CMS’s proposed rule.
The panel ended, as it did before, by making clear
that it was holding only that Relators had satisfied
their pleading standard. Because of the “smoke” it
identified, “fire is plausible,” and the “case deserve[d]
to go to discovery.” Id. at 32a. “[I]t may turn out
that there is no fire.” Id. But, in its view, this was
“exactly the kind of situation on which the Stark and
False Claims Acts seek to shed light.” Id.
This petition followed.
17
REASONS TO GRANT THE PETITION
I.
The Third Circuit’s Lax Pleading Standard
For Scienter Conflicts With This Court’s
Precedents And Other Circuits’ Standards.
1. The Third Circuit’s permissive view of the FCA’s
scienter requirement at the pleading stage cannot be
reconciled with this Court’s precedents.
This Court stated clearly in Escobar that the FCA’s
scienter requirement is a “rigorous” one. 136 S. Ct.
at 2002. There, it rejected “a circumscribed view of
what it means for a claim to be false or fraudulent”
and accepted an implied false certification theory of
falsity. Id. (internal quotation marks omitted). That
reading of falsity, it knew, raised “concerns about
fair notice and open-ended liability.” Id. But this
Court assured potential FCA defendants that “other
parts of the False Claims Act allay” those concerns.
Id. Those concerns could “be effectively addressed
through strict enforcement of the Act’s materiality
and scienter requirements,” which “are rigorous.” Id.
(internal quotation marks omitted).
The Third Circuit’s analysis of whether Relators
pled scienter instead treats scienter as a de minimis
pleading requirement. Under that holding, a relator
plausibly alleges that a defendant knowingly violated a statute or regulation merely by alleging that it
knew facts that a court—after the fact—decides add
up to a violation of an ambiguous provision. This
does not just make it easier for a relator to plead
scienter, it raises the precise concerns that Escobar
said scienter should protect against. Under the
Third Circuit’s holding, UPMC is subject to discovery, the attendant pressures to settle, and potential
18
FCA liability, based only on allegations that it violated an interpretation of the Stark Act that did not
exist until the panel created it.
This raises serious due-process concerns. “A fundamental principle in our legal system is that laws
* * * must give fair notice of conduct that is forbidden or required.” FCC v. Fox Television Stations,
Inc., 567 U.S. 239, 253 (2012). A defendant certainly
does not have the kind of notice that might allow it
to avoid a violation if the violation is not laid out
until years after it has acted. See United States ex
rel. Purcell v. MWI Corp., 807 F.3d 281, 287 (D.C.
Cir. 2015) (“[A] knowledge requirement can play an
essential role as it may mitigate a law’s vagueness,
especially with respect to the adequacy of notice to
the complainant that his conduct is proscribed.”
(internal quotation marks omitted)); see also Br. for
the United States as Amicus Curiae Supporting
Respondents at 26, Escobar, 136 S. Ct. 1989 (No. 157) (“But when the complexity of particular government funding programs gives rise to legitimate
uncertainty as to a claimant’s legal obligations, the
FCA accommodates that concern by imposing liability only if the claimant acts ‘knowingly.’ ” (quoting 31
U.S.C. § 3729(a)(1))).
The need for fair notice and to avoid open-ended
liability extends beyond the FCA’s civil penalty
scheme. The FCA includes a parallel criminal provision. See Cook County v. United States ex rel. Chandler, 538 U.S. 119, 128 n.8 (2003) (“The FCA’s civil
and criminal provisions were bifurcated in 1878, and
the latter provisions have since been recodified at 18
U.S.C. § 287.” (internal citation omitted)). When a
court interprets the FCA’s basic elements—including
19
scienter—it is thus “actually construing the provisions of a criminal statute.”
United States v.
McNinch, 356 U.S. 595, 598 (1958). This calls for
interpreting these requirements narrowly, not broadly. See id. (“Such provisions must be carefully restricted * * *.”).
This Court has already laid out the kind of careful
approach to scienter that is required when the relevant regulatory scheme is ambiguous. In Safeco, this
Court addressed the analogous scienter requirement
in the Fair Credit Reporting Act (FCRA). See Safeco
Ins. Co. of Am. v. Burr, 551 U.S. 47, 52 (2007). The
FCRA authorizes a consumer to sue “[a]ny person
who willfully fails to comply with” the Act for greater
relief, including punitive damages.
15 U.S.C.
§ 1681n(a) (emphasis added). This Court first held
that the term willfully “covers both knowing and
reckless disregard of the law.” Safeco, 551 U.S. at
59. It then interpreted the provision of FCRA that
the plaintiffs claimed had been violated. See id. at
60–67.
Finally, this Court turned to scienter—
willfulness—and held that a FCRA defendant “does
not act in reckless disregard of it unless” there “is
not only a violation” but a showing “that the company ran a risk of violating the law substantially
greater than the risk associated with a reading [of
FCRA] that was merely careless.” Id. at 69. Safeco’s
reading of FCRA “ha[d] a foundation in the statutory
text,” even though this Court disagreed with it, and
was “sufficiently convincing * * * to have persuaded
the District Court.” Id. at 69–70. And Safeco did not
have “the benefit of guidance from the courts of
appeals or the Federal Trade Commission * * * that
20
might have warned it away from the view it took.”
Id. at 70. “Given this dearth of guidance and the
less-than-pellucid statutory text, Safeco’s reading
was not objectively unreasonable” and thus not
reckless. Id.
2. Understanding this, every other circuit to address the issue—six in all—has rigorously enforced
the scienter requirement when statutory ambiguity
is involved. These courts hold that when a relator’s
claim rests on one interpretation of an ambiguous
regulatory provision, a relator must allege more than
mere knowledge of facts that, after the defendant has
acted, are deemed to be a violation of that provision.6
This interpretation follows directly from the plain
text of the FCA, which requires the knowing submission of a false claim; that is, a defendant must have
knowledge of the falsity. See, e.g., United States ex
rel. Phalp v. Lincare Holdings, Inc., 857 F.3d 1148,
1156 (11th Cir. 2017) (allegations must show that
defendants “believed or had reason to believe they
were violating Medicare regulations”); United States
ex rel. Harper v. Muskingum Watershed Conservancy
Dist., 842 F.3d 430, 437–438 (6th Cir. 2016) (allegations must show more than the “theoretical possibility” that defendant knew its actions were illegal);
United States ex rel. Davis v. District of Columbia,
793 F.3d 120, 125 (D.C. Cir. 2015) (“Davis has not
met his burden to show that the District was in
6
Courts have also reached this conclusion in the context of
contractual ambiguity. See, e.g., United States ex rel. K & R
Ltd. P’ship v. Massachusetts Hous. Fin. Agency, 530 F.3d 980,
983 (D.C. Cir. 2008); Commercial Contractors, Inc. v. United
States, 154 F.3d 1357, 1366 (Fed. Cir. 1998).
21
knowing violation of these regulations when DCPS
submitted the FY 1998 Transportation Cost Report.”); United States ex rel. Hochman v. Nackman,
145 F.3d 1069, 1074 (9th Cir. 1998) (“Absent evidence that the defendants knew that the VHA
Guidelines on which they relied did not apply, or
that the defendants were deliberately indifferent to
or recklessly disregardful of the alleged inapplicability of those provisions, no False Claims Act liability
can be found.”).
In the Eighth Circuit and D.C. Circuit, a defendant
who acts in line with a reasonable interpretation of
an ambiguous regulatory provision does not have the
requisite FCA scienter, unless some authoritative
interpretation of the provision warned it away from
its actions.
The Eighth Circuit reached this holding in Hixson.
There, the relators alleged that the defendants
submitted false claims to Medicare by seeking reimbursement without first seeking reimbursement for
those expenses caused by medical negligence. See
United States ex rel. Hixson v. Health Mgmt. Sys.,
Inc., 613 F.3d 1186, 1189 (8th Cir. 2010). The defendants moved to dismiss, arguing the relators had
not alleged scienter. They pointed to a state statute
that, they argued, prevented them from seeking
reimbursement. See id. at 1190. The Eighth Circuit
agreed that the relators had not pled scienter. The
falsity allegation rested “on a legal conclusion,” but
“there [wa]s a reasonable interpretation of the law
that d[id] not” require “the defendants to seek reimbursement.” Id. at 1190–91. The Eighth Circuit
held that a claim submitted “based on a reasonable
interpretation of a statute cannot support a claim
22
under the FCA if there is no authoritative contrary
interpretation of that statute * * * because the
defendant in such a case could not have acted with
the knowledge that the FCA requires.” Id. at 1190.
It thus affirmed the dismissal of the complaint. See
id. at 1191; see also Olson v. Fairview Health Servs.
of Minnesota, 831 F.3d 1063, 1070–71 (8th Cir. 2016)
(applying Hixson to affirm the dismissal of a relator's
complaint); United States ex rel. Ketroser v. Mayo
Found., 729 F.3d 825, 832 (8th Cir. 2013) (same).
In Purcell, the D.C. Circuit reached the same conclusion as the Eighth Circuit. The United States
alleged that the defendant falsely certified that the
only payments to its sales agents were “regular
commissions” when it secured loans from the ExportImport Bank. Purcell, 807 F.3d at 283. The parties
disagreed over whether “regular” referred to an
industry standard, or to a defendant’s own past
payments. See id. at 288–289. “Absent evidence
that” a “government entity[ ] had officially warned
[the defendant] away from its otherwise facially
reasonable interpretation of that undefined and
ambiguous term, the FCA’s objective knowledge
standard” was not met. Id. at 284. As a result, the
D.C. Circuit reversed the verdict “with instructions
to enter judgment” in the defendant’s favor. See id.
at 291.
The Sixth, Ninth, Tenth, and Eleventh Circuits
treat additional allegations as relevant to scienter,
but in these jurisdictions there must still be some
allegation that suggests a defendant was knowingly
violating an ambiguous regulatory provision.
In Harper, the Sixth Circuit considered allegations
that a defendant improperly retained government
23
property—in violation of FCA provisions that require
a defendant to have acted “knowingly.” 842 F.3d at
433 (discussing 31 U.S.C. § 3729(a)(1)(G), (a)(1)(D)).
It held that to plead scienter, a relator must allege
that the defendant had knowledge of “the fact that
he is involved in conduct that violates a legal obligation to the United States.” Id. at 437. The relators
argued—mirroring the Third Circuit’s holding—that
all they had to allege was that the defendant “ha[d]
notice of a legal obligation.” Id. The Sixth Circuit
disagreed. The relators’ argument collapsed the
falsity and scienter requirements, making the FCA’s
punitive remedies “interchangeable” with those for
ordinary breach of contract. Id. (internal quotation
marks omitted). Because the relators merely recounted restrictions in a deed and the defendant’s
actions but did not allege that the defendant “knew
about the deed restrictions when it signed the leases,” they had not alleged scienter. Id. at 438. The
allegations showed only “a possibility that [the
defendant] acted unlawfully.” Id. The Sixth Circuit
thus affirmed the district court’s dismissal of the
complaint. See Harper, 842 F.3d at 438; see also
United States ex rel. Harper v. Muskingum Watershed Conservancy Dist., 739 F. App’x 330, 334 (6th
Cir. 2018) (reaching same conclusion after relator
amended), cert. denied 139 S. Ct. 798 (2019).
The Ninth Circuit similarly requires additional
allegations when a relator’s falsity claim is based on
a violation of an ambiguous regulatory provision. In
Oliver, it held that “[a] contractor relying on a good
faith interpretation of a regulation is not subject to
liability * * * because the good faith nature of his or
her action forecloses the possibility that the scienter
requirement is met.” United States ex rel. Oliver v.
24
Parsons Co., 195 F.3d 457, 464 (9th Cir. 1999). And
it later relied on Oliver to affirm the dismissal of a
relator’s complaint where the relators did not “clearly allege sufficient facts to support an inference or
render plausible that [the defendant] acted while
knowing that its Compensation Program fell outside
of the Safe Harbor Provision on which it was entitled
to rely.” United States v. Corinthian Colls., 655 F.3d
984, 997 (9th Cir. 2011).
In Boeing, the Tenth Circuit considered a claim
that Boeing had falsely impliedly certified compliance with Federal Aviation Administration regulations. See United States ex rel. Smith v. Boeing Co.,
825 F.3d 1138, 1148 (10th Cir. 2016). But relators
offered “no evidence that anyone at Boeing knew the
* * * parts didn’t comply with FAA regulations * * *
yet submitted a claim to the government for payment
anyway.” Id. at 1149. “Even if” Boeing had violated
the regulations, nothing suggested it “knew about the
nonconformities.” Id. (first emphasis added). That
was not enough to support scienter. See id. at 1151
(affirming the grant of summary judgment); see also
Pack v. Hickey, 776 F. App’x 549, 557 (10th Cir.
2019) (applying Boeing); United States ex rel. Simpson v. Leprino Foods Dairy Prods. Co., No. 16-cv00268-CMA-NYW, 2018 WL 1375792, at *5 (D. Colo.
Mar. 19, 2018) (applying this standard at the motionto-dismiss stage).
And in Lincare Holdings, the Eleventh Circuit held
that the FCA requires courts to ask if “the defendant
actually knew or should have known that its conduct
violated a regulation in light of any ambiguity at the
time of the alleged violation.” 857 F.3d at 1155. It
reasoned that “[a]lthough ambiguity may be relevant
25
to the scienter analysis, it does not foreclose a finding of scienter.” Id. Applying that standard, the
relators had not shown scienter because their “best
evidence” was two emails, one of which dealt with a
different compliance issue and the other of which
post-dated the actions at issue. Id. at 1156. And
there was “nothing in the plain language of [the
relevant regulations] that would put Defendants on
notice” that they were in violation. Id. The Eleventh
Circuit thus affirmed summary judgment in the
defendants’ favor. See id.; see also Thornton v. Nat’l
Compounding Co., No. 8:15-cv-2647-T-36JSS, 2019
WL 2744623, at *22 (M.D. Fla. July 1, 2019) (denying a motion to dismiss where United States alleged,
among other things, that a pharmacy’s statements
had put the defendant “on notice that its commission
structure ran afoul of the Anti-Kickback Statute”).
In any of these jurisdictions, Relators’ complaint
would have been dismissed because there is no
dispute that the Stark Act provisions at issue here
are deeply ambiguous, and Relators did not allege
any facts that spoke to Petitioners’ knowledge of a
Stark Act violation. See United States ex rel. Williams v. Renal Care Grp., Inc., 696 F.3d 518, 531 (6th
Cir. 2012) (holding United States failed to prove the
defendant knowingly violated Medicare regulations
where the defendant had “sought legal counsel,”
counsel had sought CMS’s guidance, “industry publications openly encouraged” the defendant’s actions,
and CMS was aware of the defendant’s actions).
II.
The Question Presented Is Important And
Recurring.
1. The issue of how to enforce the FCA’s scienter
requirement when a relator claims that a defendant
26
violated an ambiguous obligation and thus submitted
false claims is not going away.
The issue of regulatory ambiguity is particularly
important to hospital systems, which are highly
regulated. As the Stark Act itself shows, hospital
systems face an ever-shifting sea of regulations.
CMS has added to and amended these regulations
numerous times. See Proposed Rule, 84 Fed. Reg. at
55,767 (discussing nine prior rulemakings under the
Stark Act). But the question this petition presents is
relevant to every potential FCA defendant.
Federal contractors, suppliers, and grantees are
subject to a host of regulatory requirements. Science
and research grant recipients often must “certify
compliance with the accounting regulations found at
45 C.F.R. Part 74.” Siebert v. Gene Sec. Network,
Inc., 75 F. Supp. 3d 1108, 1120 (N.D. Cal. 2014).
Companies that “contract[ ] with the federal government for the manufacture and sale or lease of” aircraft must certify compliance with the FAA’s “design
type” regulations, among others. Boeing Co., 825
F.3d at 1141 n.1, 1142. Higher education institutions that receive federal funding similarly enter
agreements that “incorporate[ ] by reference thousands of pages” of federal regulations, including civil
rights and disability rights laws. United States v.
Sanford-Brown, Ltd., 788 F.3d 696, 707 (7th Cir.
2015), reinstated in part and superseded in part, 840
F.3d 445 (2016). Defense contractors often agree to
comply with “environmental laws and regulations
including the Clean Water Act, the Clean Air Act
and the Resource Conservation and Recovery Act.”
United States ex. rel. Fallon v. Accudyne Corp., 880
F. Supp. 636, 638 (W.D. Wis. 1995). And developers
27
that receive block grants must follow “HUD regulations and guidelines” about, among other things, the
“bidding process.”
Mack v. Augusta-Richmond
County, 148 F. App’x 894, 895 (11th Cir. 2005) (per
curiam). The list goes on. And after Escobar, even
impliedly certifying compliance with regulatory
requirements can lead to FCA liability.
These statutory and regulatory obligations are
often ambiguous. “[R]egulations (like any legal text)
will inevitably contain ambiguities.” John F. Manning, Constitutional Structure and Judicial Deference to Agency Interpretation of Agency Rules, 96
Colum. L. Rev. 612, 687 (1996). The problem of
regulatory ambiguity can be exacerbated if agency
deference “encourages agencies to be vague in framing regulations.” Decker v. Nw. Envtl. Def. Ctr., 568
U.S. 597, 620 (2013) (Scalia, J., concurring in part
and dissenting in part) (internal quotation marks
omitted). And even if an agency strives to promulgate clear rules, “[c]hanged and unforeseen circumstances” can generate ambiguity. Kevin M. Stack,
Interpreting Regulations, 111 Mich. L. Rev. 355, 366
(2012).
The problem is getting bigger, not smaller. The
number of regulations potentially applicable to any
given claim is enormous. In 2017 alone, federal
agencies promulgated 61,950 pages of federal rules
in the Federal Register. See Brookings Inst., Vital
Statistics on Congress, at tbl. 6-5 (updated Mar.
2019), https://brook.gs/38QHJg0. That number is
growing—and has been. City of Arlington, 569 U.S.
at 313 (Roberts, C.J., dissenting) (“And the federal
bureaucracy continues to grow.”). Between 1950 and
2017, the total pages of the C.F.R. grew 1,812 per-
28
cent. See C.F.R. Total Pages and Volumes, supra
note 1 (from 9,745 pages in 1950 to 186,374 pages in
2017). Regulatory accumulation is, to put it mildly,
“a central feature of modern American government.”
City of Arlington, 569 U.S. at 313 (Roberts, C.J.,
dissenting).
2. A relaxed approach to what it takes to plausibly
plead FCA scienter imposes real burdens on persons
and entities that interact with the government. The
government relies on contractors and other claimants for national defense, software development,
telecommunications, education, disaster relief, and
administration of housing and mortgage lending
programs—to just name a few. Under the Third
Circuit’s scienter holding, these providers face discovery, the pressure to settle, and potential FCA
liability, based only on allegations that they violated
ambiguous regulations, without allegations that they
knew about that interpretation, or that they were
violating it. Even the threat of that type of liability
will disrupt broad sectors of the economy and touch
upon every facet of the federal government.
“[T]he costs of litigation, including the expense of
discovery and experts, may push cost-conscious
defendants to settle even anemic cases.” Texas Dep’t
of Hous. & Cmty. Affairs v. Inclusive Cmtys. Project,
Inc., 135 S. Ct. 2507, 2550 (2015) (internal quotation
marks omitted). That general truth applies to FCA
actions, where discovery burdens are “particularly
vitriolic.” Mathew Andrews, Note, The Growth of
Litigation Finance in DOJ Whistleblower Suits:
Implications and Recommendations, 123 Yale L.J.
2422, 2434 (2014); Todd J. Canni, Who’s Making
False Claims, the Qui Tam Plaintiff or the Govern-
29
ment Contractor? A Proposal to Amend the FCA to
Require That All Qui Tam Plaintiffs Possess Direct
Knowledge, 37 Pub. Cont. L.J. 1, 11 & n.66 (2007)
(Discovery and litigation expenses require FCA
defendants to spend “hundreds of thousands of
dollars, if not millions,” to defend themselves.).
Defendants are even more likely to settle frivolous
FCA claims because the remedies are “punitive in
nature,” imposing “treble damages and a civil penalty of up to [$22,363] per claim.” Vermont Agency of
Nat. Res. v. United States ex rel. Stevens, 529 U.S.
765, 784–785 (2000); see supra p. 6 (statutory penalties adjusted for inflation). Relators often seek to
maximize these already-punitive penalties, seeking
damages as the entire amount billed or the full value
of a contract and arguing that every invoice a contractor submits is “false.” See, e.g., United States ex
rel. Vosika v. Starkey Labs., Inc., No. 01-cv709(DWF/SRN), 2004 WL 2065127, at *1 (D. Minn.
Sept. 8, 2004); United States ex rel. Tran v. Computer
Scis. Corp., 53 F. Supp. 3d 104, 122 (D.D.C. 2014).
This exerts overwhelming pressure on defendants to
settle even meritless suits. See Robert Salcido, DOJ
Must Reevaluate Use of False Claims Act in Medicare
Disputes, Wash. Legal Found. Legal Backgrounder 4
(Jan. 7, 2000) (The “dirty little secret” of FCA litigation is that “given the civil penalty provision and the
costs and risks associated with litigation, the rational move * * * is to settle the action even if the [plaintiff’s] likelihood of success is incredibly small.”).
And Relators have every incentive to litigate even
meritless suits, given the share of the penalties that
awaits if they succeed. See 31 U.S.C. § 3730(d)(1).
Unsurprisingly, the number of suits has exploded.
30
In 1987, 30 relators filed suit. See Civil Div., U.S.
Dep’t of Justice, Fraud Statistics – Overview, October
1,
1986
–
September
30,
2019,
http://bit.ly/2019quitam (last visited Mar. 19, 2020).
By 2000, the number of suits had increased tenfold,
to 363, and in 2018, the number nearly doubled
again, to 646. See id. Recoveries in relator-led FCA
litigation have increased too, from $33,750 in 1988 to
$293,170,997 in 2019. See id. (qui tam recoveries
where the United States declined to intervene).
*
*
*
This Court should step in now to correct the Third
Circuit’s dangerous scienter holding.
The FCA
contains a broad venue provision that permits a
realtor to sue where a defendant “can be found,
resides, transacts business, or in which any act
proscribed by [31 U.S.C. §] 3729 occurred.” 31 U.S.C.
§ 3732(a). Seventy-four Fortune 100 companies—
many of which submit claims to the United States—
are headquartered or incorporated in the Third
Circuit. Countless other smaller companies that
submit claims are too.7
7
This is not the first time the Third Circuit has split with other
circuits in order to adopt an expansive view of FCA liability.
See, e.g., United States ex rel. Druding v. Care Alternatives, No.
18-3298, 2020 WL 1038083, at *7 (3d Cir. Mar. 4, 2020) (holding that “medical opinions may be ‘false’ and an expert’s
testimony challenging a physician’s medical opinion can be
appropriate evidence for the jury to consider on the question of
falsity”); Petition for Writ of Certiorari i-ii, PharMerica Corp. v.
United States ex rel. Silver, 140 S. Ct. 202 (2019) (No. 18-1044)
(cert. denied) (seeking review of “the Third Circuit’s new,
heightened standard” for the FCA’s public-disclosure bar);
Petition for Writ of Certiorari i, Victaulic Co. v. United States ex
31
III. This Case Is An Ideal Vehicle To Resolve
The Question Presented.
1. The relevant statutory and regulatory terms are
undeniably ambiguous. The Stark Act “is infamous
* * * for being complicated, confusing, and counterintuitive.” Charles B. Oppenheim et al., The Stark
Law: Comprehensive Analysis + Practical Guide 1
(AHLA 6th ed. 2019). The panel acknowledged that
the provisions underlying Relators’ claims are just
that. The panel stated that its interpretation “may
not be obvious on the face of the statute and regulations.” Pet. App. 17a. The relevant agency has said
so as well. See Proposed Rule, 84 Fed. Reg. at 55,789
(“Over the years, stakeholders have approached CMS
with requests for clarification * * * under what
circumstances compensation is considered to take
into account the volume or value of referrals * * *
and how to determine the fair market value of compensation”); see also id. at 55,792–93 (stating that
“commenters shared their concerns that * * * parties
can never be sure that their determination of the
compensation to be paid under an arrangement with
a referring physician will be insulated from scrutiny”). And CMS has proposed rules to clarify that the
Stark Act means the opposite of what the panel
majority held it does. See id. at 55,793 (explaining
that compensation takes into account referrals “only
when the mathematical formula used to calculate the
rel. Customs Fraud Investigations, LLC, 138 S. Ct. 107 (2017)
(No. 16-1398) (cert. denied) (seeking review of “[w]hether a qui
tam relator’s complaint under the False Claims Act satisfies
Rule 9(b) by alleging nothing more than the opportunity for
fraud, as held by the Third Circuit”).
32
amount of the compensation includes as a variable
referrals * * * and the amount of the compensation
correlates with the number or value of the physician’s referrals”); id. at 55,797 (“[A] careful reading
of the statute shows that the fair market value
requirement is separate and distinct from the volume or value standard * * * .”). If regulatory ambiguity is ever to be a relevant consideration for FCA
scienter, it must be here.
2. The scope of the dispute is narrow, and the question presented is dispositive. The case arises on a
motion to dismiss, so there are no factual disputes.
Relators’ scienter allegations are bare-bones and
conclusory. They alleged only that Petitioners knew
“of the compensation arrangements” and “had actual
knowledge of, or acted in reckless disregard or deliberate ignorance of,”—paraphrasing 31 U.S.C.
§ 3729(b)(1)(A)—“the fact that the Physicians received aggregate compensation that varied with, or
took into account, the volume or value of referrals or
other business generated by the Physicians for the
hospitals”—paraphrasing 42 C.F.R. § 411.354(c)(2).
C.A. J.A. 193 (Second Am. Compl. ¶ 232). The Third
Circuit found that sufficient. Pet. App. 25a (“They
had all the data right in front of them.”).
Relators did not allege, nor did the panel identify,
any of the traditional facts that could suggest scienter. They did not allege that UPMC was on notice of
a potential violation. Compare Minnesota Ass’n of
Nurse Anesthetists v. Allina Health Sys. Corp., 276
F.3d 1032, 1053–54 (8th Cir. 2002) (agency had sent
memo to providers discussing criteria for proper
billing). They did not allege that UPMC communicated internally about a potential Stark Act viola-
33
tion. Compare United States ex rel. Harrison v.
Westinghouse Savannah River Co., 352 F.3d 908, 919
(4th Cir. 2003) (employee had warned defendant of a
potential conflict of interest). They did not allege
that UPMC concealed the compensation contract.
Compare United States ex rel. Hendow v. Univ. of
Phoenix, 461 F.3d 1166, 1175 (9th Cir. 2006) (defendant changed its policies to avoid detection).
They did not, in short, offer any factual basis to infer
UPMC knew that the standard contracts were suspect under the Stark Act, much less in violation.
Petitioners raised this scienter argument at every
turn. Before the District Court, Petitioners argued
that wRVU-based compensation was an accepted
method for rewarding “physician productivity,” and
that Relators failed to “ple[ad] facts” that Petitioners
should have known their contracts violated the Stark
Act. Pet. App. 140a; see also id. at 110a (scienter “is
particular[ly] pertinent when, in a case like this, the
law is ambiguous and the relator’s view of it is
unprecedented”). Before the Third Circuit, Petitioners explained that in light of the regulatory “ambiguity,” Relators’ allegations do “not permit an inference
that [Petitioners] knew” their compensation contracts violated the Stark Act. C.A. Response Br. 50.
And on rehearing, Petitioners emphasized that
“before this case was filed, no hospital system was on
notice that the industry standard compensation
structure used here even raised a Stark Act concern,
much less triggered the FCA.” C.A. Rehearing Pet.
15.
3. The Third Circuit’s decision was incorrect. The
FCA’s scienter requirement requires more than mere
knowledge of facts that a court concludes—after the
34
fact—add up to a violation of an ambiguous statute
or regulation. The FCA applies to “fraud.” Escobar,
136 S. Ct. at 2004. And fraud involves more than
“regulatory or contractual violations,” it requires a
knowing violation. Id.; accord Sanford-Brown, Ltd.,
788 F.3d at 712 (“The FCA is simply not the proper
mechanism for government to enforce violations of”
those regulations.); United States ex rel. Steury v.
Cardinal Health, Inc., 625 F.3d 262, 268 (5th Cir.
2010) (“The FCA is not a general enforcement device
for federal statutes, regulations, and contracts.”
(internal quotation marks omitted)); Mikes v. Straus,
274 F.3d 687, 699 (2d Cir. 2001) (The FCA is “not
designed for use as a blunt instrument to enforce
compliance.”); United States ex rel. Hopper v. Anton,
91 F.3d 1261, 1267 (9th Cir. 1996) (“Mere regulatory
violations do not give rise to a viable FCA action.”).
“[D]ifferences in interpretations,” the most that
Relators alleged here, do not demonstrate that a
defendant knew its submissions were false. Corinthian Colls., 655 F.3d at 996 (internal quotation
marks omitted). Relators must instead plead that
the defendant knew its claims were false. Purcell,
807 F.3d at 286–287 (government or relator must
prove “that the claim was false” and “that the defendant knew that the claim was false” (quoting
Davis, 793 F.3d at 124); see also Corinthian Colls.,
655 F.3d at 997. They did not do that. The Third
Circuit should not have revived their third complaint.
35
CONCLUSION
The petition for a writ of certiorari should be
granted.
Respectfully submitted,
JONATHAN L. DIESENHAUS
MITCHELL J. LAZRIS
JESSICA L. ELLSWORTH
Counsel of Record
KIRTI DATLA
MATTHEW J. HIGGINS
HARRISON G. KILGORE
HOGAN LOVELLS US LLP
555 Thirteenth Street, N.W.
Washington, D.C. 20004
(202) 637-5886
jessica.ellsworth@hoganlovells.com
Counsel for Petitioners
MARCH 2020
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