U.S. ex rel. Paranich v. Sorgnard

• Decision Date: 28 January 2005
• Docket Number: No. 03-4163.,03-4163.
• Citation: 396 F.3d 326
• Parties: UNITED STATES of America, ex. rel. Stephen Paranich, D.C.; Stephen Paranich, Appellants v. Deborah SORGNARD; Matrix Biokinetics, Inc.; Richard Sorgnard, Ph.D.; Clinical Electromedical Research Academy, Chtd.; Cera International Inc., and others to be determined, jointly and severally; Irwin Leasing Corporation f/k/a Allied Capital Corporation.
• Court: U.S. Court of Appeals — Third Circuit

396 F.3d 326

UNITED STATES of America, ex. rel. Stephen Paranich, D.C.; Stephen Paranich, Appellants v. Deborah SORGNARD; Matrix Biokinetics, Inc.; Richard Sorgnard, Ph.D.; Clinical Electromedical Research Academy, Chtd.; Cera International Inc., and others to be determined, jointly and severally; Irwin Leasing Corporation f/k/a Allied Capital Corporation.

No. 03-4163.

United States Court of Appeals, Third Circuit.

Argued September 27, 2004.

Decided January 28, 2005.

COPYRIGHT MATERIAL OMITTED

Ian Stuart (Argued), Philadelphia, PA, for Appellants.

Cheryl H. Picker, West Orange, NJ, William R. Keller, Latona and Keller, Wilkes-Barre, PA, for Appellant Stephen R. Paranich.

Andrew J. Giorgione, Harrisburg, PA, Marianne C. Koepf, Stephen Kaus (Argued), Cooper, White & Cooper, LLP, San Francisco, CA, for Appellee.

Before: RENDELL, FUENTES and SMITH, Circuit Judges.

OPINION OF THE COURT

RENDELL, Circuit Judge.

Doctor Stephen Paranich brought this qui tam action against Irwin Leasing Corporation, formerly Affiliated Capital Corporation, a company that finances the purchase of equipment, under the False Claims Act ("FCA" or "Act"), 31 U.S.C. § 3729 et seq. Paranich alleges that Irwin fraudulently induced him to file false Medicare reimbursement claims for chiropractic treatments in which he used a medical device called the Matrix. Irwin has consistently denied liability for any false Medicare claims and further contends that Paranich is not a proper relator in a qui tam action because the allegations he now asserts had been publicly disclosed before his suit and because he is not an original source as defined by the FCA.¹ On Irwin's motion for summary judgment, the District Court agreed with Irwin on both points and dismissed the complaint for lack of subject matter jurisdiction. Although our reasoning differs somewhat from that of the District Court, we will affirm its dismissal because we conclude that Paranich is not a proper relator under the FCA because his allegations were based on public disclosures and he does not qualify as an "original source."

I. Factual Background

Matrix Biokinetics, Inc. is a Nevada corporation that sold medical devices throughout the United States. On or about January 1, 1994, Matrix began marketing and selling electrical nerve stimulation devices known as the Matrix Pro Elec DT and the Matrix Pro Elec DT2 (referred to collectively and severally as the "Matrix device"). CERA International, Inc. is a research and technical organization that conducted sales conferences for the Matrix device. After attending a sales conference in late 1996, Paranich decided to acquire a Matrix device for the treatment of patients at his medical clinic, Comprehensive Medical Network ("CMN"). CMN subsequently arranged with an independent sales representative to finance the purchase of the device through leases with Irwin. On December 19, 1996, and March 12, April 4, and June 10, 1997, CMN and Irwin entered into four separate written agreements to lease four Matrix devices.

The Matrix device works by pulsating electricity to the nerves of a patient at various frequencies through electrodes attached to the patient's body. According to materials published by CERA, when the Matrix device is used at high frequencies, it operates as a neuron blockade, or "nerve block." This electric nerve block functionality has been viewed as an alternative to a traditional chemical injection nerve block.

By June 1994, the U.S. Food and Drug Administration had approved both models of the Matrix device for marketing and sale in the United States. Ultimately, the FDA granted clearance for sale of the devices under Section 510(k) of the Food, Drug, and Cosmetic Act ("FDCA"), 21 U.S.C. § 360(k), however, the devices were never approved for sale as nerve block devices.

In January 1997, Paranich began submitting claims to Medicare for reimbursement for procedures involving the Matrix device. Under the Medicare system, claims for reimbursement are submitted under standard uniform codes set by the American Medical Association's Current Procedural Terminology ("CPT") manual. Paranich was submitting claims for treatments involving the Matrix device under the CPT code for "nerve block injections," which Medicare reimbursed at rates of $150 to $350 per procedure.² Although reimbursement for procedures submitted under the codes for "electronic stimulation" was at rates of $35 to $80 per procedure, Paranich alleged that he was advised by Matrix and CERA to submit claims for nerve block injections to maximize the reimbursement. Medicare purportedly reimbursed Paranich at the rates for nerve block injections.

In June 1997, Dr. Deborah McMenamin, a former employee of CMN, contacted Special Agent Charles Hydock of the U.S. Federal Bureau of Investigation to report that Paranich was overbilling Medicare for Matrix device procedures. Hydock then began an investigation of Paranich and CMN. On October 22, 1997, Paranich was served with a grand jury subpoena requiring CMN to produce, inter alia, all documents relating to the Matrix devices, specifically including billing documents. Paranich stopped billing under the nerve block codes in February 1998.

After being served with the subpoena, Paranich's lawyer, Kenneth Haber, began investigating the Matrix device. During an extensive investigation, which Haber conducted with limited participation from Paranich, Haber discovered that Transamerica Occidental Life Insurance Company, the carrier and administrator for the Medicare program in Southern California, had published a bulletin advising its providers not to bill Matrix device procedures under the CPT codes for nerve block injections.³ He also learned that in mid-1998 Transamerica held hearings to determine the proper billing code and attendant reimbursement rates for electrical nerve blocks. Haber learned about the bulletin and hearings by October 1998, and, shortly thereafter, he requested a report of the Transamerica hearings from the government under the Freedom of Information Act ("FOIA").

Throughout the investigation, Haber was notably cooperative with the government. He communicated with the FBI and U.S. Attorneys' offices, writing letters to each to provide updates on the progress of the response to the subpoena. In a letter to the U.S. Attorneys' office dated April 3, 1998, he outlined the alleged fraud perpetrated by Matrix and affiliated companies as his investigation began to disclose this information. The response to the subpoena included seventy (70) boxes of billing records and other materials that were turned over to the FBI.

On May 20, 1998, during the time Haber was conducting his investigation and preparing a response to the subpoena, a group of doctors in Southern California filed a suit against Matrix alleging fraud with respect to billing codes that Matrix had allegedly recommended to those doctors. This state court fraud action, Heifets v. Matrix Electromedical, No. BC-191317 (Ca.Super.1998), named Irwin as a defendant; however, summary judgment was eventually entered in Irwin's favor after the Court concluded that Irwin was not responsible for Matrix's activities. Irwin was also named as a defendant in a similar suit, Rubanenko v. Matrix Biokinetics, Inc., No. BC-196145 (Ca.Super.1998). Rubanenko was voluntarily dismissed in August 1998.

II. Procedural History

On December 21, 1998, Paranich filed the original complaint in this action. See United States ex rel. Paranich v. Sorgnard, 286 F.Supp.2d 445 (M.D.Pa.2003). In October 2000, Paranich amended the complaint to include Irwin as a defendant, asserting that Irwin had induced him to file false Medicare reimbursement claims for treatments involving the Matrix device. Irwin moved for summary judgment with respect to the FCA claim, denying liability and arguing that Paranich was not a proper relator under the Act.⁴

The District Court analyzed whether it had subject matter jurisdiction under the jurisdictional constraints of the FCA. See United States ex rel. Fine v. MK-Ferguson Co., 99 F.3d 1538, 1543 (10th Cir.1996) ("When a court's subject matter jurisdiction depends upon the same statute that creates the substantive claims, the jurisdictional inquiry is necessarily intertwined with the merits."). Adopting Irwin's statement of facts for the most part,⁵ the District Court ultimately determined that the action did not meet the jurisdictional requirements of the FCA because although his complaint was based on prior public disclosures, Paranich did not qualify as an original source because it was his attorney's investigation that disclosed the alleged fraud, and the information uncovered during the investigation was not "independent" of the public disclosures. With the dismissal of the FCA claim, the Court dismissed Irwin's remaining state law counterclaim for indemnity as lacking independent subject matter jurisdiction. See 28 U.S.C. § 1367(c)(3) ("[A] district court[] may decline to exercise supplemental jurisdiction over a claim ... if ... the district court has dismissed all claims over which it has original jurisdiction....").

III. Jurisdiction and Standard of Review

Paranich now appeals the District Court's decision, complaining that the Court erred in its finding that he was not an "original source" of the information regarding the alleged fraud under the FCA. We have jurisdiction to review this final decision of the District Court under 28 U.S.C. § 1291. We exercise plenary review of a dismissal for lack of subject matter jurisdiction. See United States ex rel. Stinson, Lyons, Gerlin & Bustamante, P.A. v. Prudential Ins. Co., 944 F.2d 1149, 1152 (3d Cir.1991) (citing York Bank & Trust Co. v. Fed. Sav. & Loan Ins. Corp., 851 F.2d 637, 638 (3d Cir.1988)).

IV. Discussion

A. Introduction

We have, on several prior occasions, engaged in extensive reviews of the history and background of the False Claims Act. See, e.g., United States ex rel. Dunleavy v....