United States ex rel. Hartpence v. Kinetic Concepts, Inc.

• Citation: 792 F.3d 1121
• Decision Date: 07 July 2015
• Docket Number: 12–56117.,Nos. 12–55396,s. 12–55396
• Parties: UNITED STATES ex rel. Steven J. HARTPENCE, Plaintiff–Appellant, v. KINETIC CONCEPTS, INC.; KCI–USA, Inc., Defendants–Appellees. United States ex rel. Geraldine Godecke, Plaintiff–Appellant, v. Kinetic Concepts, Inc.; KCI–USA, Inc., Defendants–Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

792 F.3d 1121

UNITED STATES ex rel. Steven J. HARTPENCE, Plaintiff–Appellant

v.KINETIC CONCEPTS, INC.;

KCI–USA, Inc., Defendants–Appellees.

United States ex rel. Geraldine Godecke, Plaintiff–Appellant

v.Kinetic Concepts, Inc.;

KCI–USA, Inc., Defendants–Appellees.

Nos. 12–55396

12–56117.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted En Banc March 17, 2015.

Filed July 7, 2015.

Mark Irving Labaton (argued) and Oren Rosenthal, Isaacs Friedberg & Labaton, Los Angeles, CA; Michael A. Hirst, Hirst Law Group, P.C., Davis, CA; Patrick J. O'Connell, Andrea Dawn Rose, and Jan Soifer, O'Connell & Soifer LLP, Austin, TX, for Plaintiffs–Appellants.

Gregory M. Luce (argued), Maya P. Florence, and Colin V. Ram, Skadden, Arps, Slate, Meagher & Flom LLP, Washington, D.C.; Matthew E. Sloan, Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles, CA, for Defendants–Appellees.

Appeal from the United States District Court for the Central District of California, George H. King, Chief District Judge, Presiding. D.C. Nos. 2:08–cv–01885–GHK–AGR, 2:08–cv–06403–GHK–AGR.

Before: SIDNEY R. THOMAS, Chief Judge and STEPHEN REINHARDT, ALEX KOZINSKI, KIM McLANE WARDLAW, WILLIAM A. FLETCHER, RONALD M. GOULD, MARSHA S. BERZON, CONSUELO M. CALLAHAN, CARLOS T. BEA, SANDRA S. IKUTA and N. RANDY SMITH, Circuit Judges.

OPINION

BEA, Circuit Judge:

If a whistleblower informs the government that it has been bilked by a provider of goods and services, and that scheme is unmasked to the public, under what conditions can that same whistleblower recover part of what the guilty provider is forced to reimburse the government? We hold today that there are two, and only two, requirements in order for a whistleblower to be an “original source” who may recover under the False Claims Act: (1) Before filing his action, the whistleblower must voluntarily inform the government of the facts which underlie the allegations of his complaint; and (2) he must have direct and independent knowledge of the allegations underlying his complaint. Abrogating our earlier precedent, we conclude that it does not matter whether he also played a role in the public disclosure of the allegations that are part of his suit. We also hold that the district court erred in its application of the rule that a whistleblower must be the first to file an action seeking reimbursement on behalf of the government based on the fraudulent scheme.

OVERVIEW

The False Claims Act (“FCA”), 31 U.S.C. §§ 3729 –3733, prohibits knowingly submitting to the federal government a false or fraudulent claim for payment.¹ As one enforcement mechanism, the FCA authorizes private parties, known as “relators,” to bring civil qui tam suits on the government's behalf against entities who have allegedly defrauded the government. 31 U.S.C. § 3730(b)(1). In these suits, the relators seek reimbursement of the defrauded amounts on the government's behalf. Where, as here, the government declines to intervene in the suit, the relator stands to receive between 25% and 30% of any recovery. Id. § 3730(d)(2).

However, the FCA also includes several provisions that deprive federal courts of subject-matter jurisdiction over certain qui tam actions. These cases concern two such provisions, the “public disclosure” bar and the “first-to-file” bar. The public disclosure bar precludes qui tam suits where there has been a public disclosure of the fraud, unless the relator qualifies as an “original source” of the information. Id. § 3730(e)(4). The first-to-file bar precludes civil actions based on complaints which allege the same material facts as an earlier-filed civil complaint. Id. § 3730(b)(5) ; United States ex rel. Lujan v. Hughes Aircraft Co., 243 F.3d 1181, 1188–90 (9th Cir.2001).

In these consolidated qui tam cases, Steven Hartpence and Geraldine Godecke (“Relators”) allege their former employer fraudulently claimed reimbursements from Medicare. After these allegations of Medicare fraud were publicly disclosed, Relators each informed the government of the alleged fraud and then filed separate complaints in district court. Under the public disclosure bar, the district court lacked jurisdiction over these actions unless Relators qualified as “original sources” under the FCA. 31 U.S.C. § 3730(e)(4). Relying on our existing precedent, the district court held that neither Relator qualified as an original source, because neither had a “hand in the public disclosure” of the fraud, a requirement we announced in Wang ex rel. United States v. FMC Corp., 975 F.2d 1412, 1418 (9th Cir.1992). The district court further held that Godecke's complaint was also barred by the first-to-file bar, because her complaint alleged the same material elements of fraud as the complaint Hartpence had filed six months earlier. After a careful review of the statutory text, we overrule Wang as wrongly decided, and we remand for the district court to consider whether Relators qualify as original sources under the two-part test we announce today. Second, we hold that the district court erred in finding Godecke's action barred by the first-to-file bar, because some of Godecke's claims are materially distinct from Hartpence's claims.

I. The FCA

The FCA authorizes whistleblowing private citizens to file suit after discovering that the federal government has been defrauded. Schindler Elevator Corp. v. United States ex rel. Kirk, 563 U.S. 401, 131 S.Ct. 1885, 1889, 179 L.Ed.2d 825 (2011). As originally enacted, the FCA allowed a relator to bring a qui tam action even if he discovered the fraud merely by reading information already in the public domain. See Wilson, 559 U.S. at 293–94, 130 S.Ct. 1396. In 1943, Congress amended the FCA to bar such “parasitic” lawsuits by precluding actions based on information already in the government's possession. Id. at 294, 130 S.Ct. 1396.

The 1943 amendments had the curious effect of barring a plaintiff from bringing a qui tam action based on information already in the government's possession even where the plaintiff himself was the source of the government's knowledge. See, e.g., United States ex rel. Wis. Dept. of Health & Soc. Servs. v. Dean, 729 F.2d 1100 (7th Cir.1984). In 1986, Congress overhauled the FCA with a series of key amendments. See Wilson, 559 U.S. at 294, 130 S.Ct. 1396. Among other things, Congress jettisoned the “government knowledge” bar to suit in favor of a new condition, the “public disclosure” bar. This was an effort to strike the proper “balance between encouraging private persons to root out fraud and stifling parasitic lawsuits.” Id. at 295, 130 S.Ct. 1396. The public disclosure bar deprives district courts of jurisdiction over any action “based upon the public disclosure of allegations or transactions” concerning the alleged fraud, “unless ... the person bringing the action is an original source of the information.” 31 U.S.C. § 3730(e)(4)(A). The FCA provides that, to be an “original source,” a relator must (1) have “direct and independent knowledge” of information supporting his claims, and (2) “provide [ ] the information to the Government before filing an action.” Id. § 3730(e)(4)(B). In Wang, persuaded by the Second Circuit's interpretation and our own review of the legislative history of the 1986 amendments, we held that a relator must meet a third requirement to qualify as an original source: he must have “had a hand in the public disclosure of allegations that are a part of [his] suit.” 975 F.2d at 1418.

The 1986 amendments implemented another jurisdictional bar, the first-to-file bar, which prohibits anyone other than the government from intervening or bringing “a related action based on the facts underlying [a] pending action.” 31 U.S.C. § 3730(b)(5). The first-to-file bar prohibits later-filed actions “ ‘based on’ the same material facts” as an earlier action. Lujan, 243 F.3d at 1190. Unlike the public disclosure bar, the first-to-file bar is “exception-free.” Id. at 1187.

II. The Complaints

Kinetic Concepts, Inc. and KCI USA, Inc. (collectively, “Defendants” or “KCI”) manufacture medical devices to speed the healing of wounds, using various technological innovations. One such innovation is Vacuum Assisted Closure (“V.A.C.”) Therapy. V.A.C. devices perform negative-pressure wound therapy (“NPWT”), which promotes healing by applying sub-atmospheric pressure to the site of a wound. Since 2000, the Medicare program has covered NPWT devices as “durable medical equipment.” As the district court explained:

The coverage criteria for NPWT devices are found in Local Coverage Determinations (“LCDs”), which are issued by private claims processing contractors known as Durable Medical Equipment Medicare Administrative Contractors (“DME MACs”). There are four separate DME MACs that serve the United States. Because the DME MACs are organized regionally, each DME MAC issues its own LCD for its respective region of the country. In the case of NPWT, the four regional DME MACs have issued separate, but nearly identical, LCDs.

When a supplier of NPWT therapy, such as KCI, submits a claim for reimbursement to Medicare, the claim is initially reviewed by one of the DME MACs in a process known as “initial determination.” If the DME MAC concludes that a particular claim satisfies its payment criteria, the DME MAC may reimburse the claim. If the DME MAC denies reimbursement of a claim the supplier may appeal that denial through a statutorily authorized administrative appeals process administered by the Secretary of the U.S. Department of Health and Human Services.

United States ex rel. Hartpence v. Kinetic Concepts, Inc., No. CV 08–1885–GHK, 2012 WL 11977661, at *1 (C.D.Cal. Jan. 30, 2012) (citations omitted).

During the course of their employment by Defendants, Hartpence and Godecke allegedly discovered that KCI engaged in fraudulent conduct by submitting claims to Medicare that did not comply with the DME MACs' local coverage determinations. The substance of the fraud they claim KCI perpetrated was laid out in their...