Hagerty ex rel. United States v. Cyberonics, Inc.
| Decision Date | 16 December 2016 |
| Docket Number | No. 16-1304,16-1304 |
| Citation | 844 F.3d 26 |
| Parties | Andrew Hagerty, ex rel. United States; Relator, Appellant, State of California; State of Colorado; State of Connecticut; State of Delaware; State of Florida; State of Georgia; State of Hawaii; State of Illinois; State of Indiana; State of Iowa; State of Louisiana; State of Maryland; Commonwealth of Massachusetts; State of Michigan; State of Minnesota; State of Montana; State of Nevada; State of New Jersey; State of New Mexico; State of New York; State of North Carolina; State of Oklahoma; State of Rhode Island; State of Tennessee; State of Texas; Commonwealth of Virginia; State of Washington; State of Wisconsin; District of Columbia Plaintiffs, v. Cyberonics, Inc., Defendant, Appellee. |
| Court | U.S. Court of Appeals — First Circuit |
Joseph S. Hall , with whom Silvija A. Strikis , Katherine C. Cooper , Rachel Proctor May , Kellogg, Huber, Hanson, Todd, Evans & Figel, P.L.L.C. , Washington, DC, Suzanne E. Durrell , Durrell Law Office , Boston, MA, Robert M. Thomas, Jr. , and Thomas & Associates were on brief, for appellant.
William M. Katz, Jr. , with whom Melissa Michelle Davis , J. Patrict Bredehoft , Richard B. Phillips , Thompson & Knight LLP , Timothy H. Madden , and Donnelly, Conroy & Gelhaar LLP , Boston, MA, were on brief, for appellee.
Before Barron, Selya, and Stahl, Circuit Judges.
Relator–Appellant Andrew Hagerty ("Hagerty") brought a qui tam action against Appellee Cyberonics, Inc. ("Cyberonics") alleging, among other things, that Cyberonics violated the False Claims Act ("FCA"), 31 U.S.C. § 3729 et seq., and related state statutes. Specifically, Hagerty alleged that Cyberonics promoted medically unnecessary replacements of batteries in nerve stimulator devices used to treat epilepsy
patients, which in turn resulted in patients and medical providers filing false claims for reimbursement from government health care programs.
The district court dismissed all but two of Hagerty's claims under Federal Rule of Civil Procedure 12(b)(6), including the FCA allegations, holding that Hagerty's First Amended Complaint was not pled with the particularity required by Federal Rule of Civil Procedure 9(b).1 Following this dismissal, the district court also denied Hagerty's request for leave to file a Second Amended Complaint on the basis of undue delay. Hagerty now challenges the district court's ruling on both fronts, maintaining that his First Amended Complaint satisfies Rule 9(b) and asserting that the district court abused its discretion when denying his motion for leave to file a Second Amended Complaint. After careful consideration, we affirm.
We recite the relevant facts as they appear in Hagerty's First Amended Complaint. SeeHochendoner v. Genzyme Corp., 823 F.3d 724, 730 (1st Cir. 2016). The Vagus Nerve Stimulator (VNS) is a medical device that is implanted in patients with refractory epilepsy
, a severe form of the disease in which a patient's seizures seriously interfere with their quality of life and do not respond to other medications or treatment. The VNS works by delivering short electrical pulses to the vagus nerve through a wire. Each VNS system contains a battery, and the entire VNS system must be surgically replaced when the battery nears the end of its life.
Patients with refractory epilepsy often qualify for coverage under government healthcare programs like Medicare and Medicaid. Some treatments for refractory epilepsy, including placement of the VNS, are reimbursed by those programs. These programs impose certain requirements on healthcare providers, such as signing a Provider Agreement with the Centers for Medicare and Medicaid Services ("CMS"). In these agreements, providers certify, among other things, that their claims for reimbursement relate to a reasonable and medically necessary treatment. 42 U.S.C. § 1395y(a)(1)(A).
On February 4, 2013, Hagerty filed a qui tam complaint under seal against Cyberonics, alleging that it engaged in a fraudulent scheme to encourage doctors and patients to prematurely and unnecessarily replace batteries in VNS systems. Hagerty, having gained knowledge of the scheme firsthand as a former sales representative of Cyberonics, further alleged that this scheme caused significant monetary damages to government healthcare programs by inducing patients and medical providers to file false claims for reimbursement in violation of 31 U.S.C. § 3729(a). On October 29, 2013, the government filed a notice declining to intervene in the case, and on December 5, 2013 the complaint was unsealed and served on Cyberonics. Cyberonics then moved to dismiss the complaint on April 28, 2014 on several grounds, including under Rule 12(b)(6) for failure to state a claim and Rule 9(b) for failure to allege instances of fraud with particularity.
Hagerty amended his pleadings and filed his First Amended Complaint on May 19, 2014. The First Amended Complaint alleged that in 2005, the FDA approved the VNS as a treatment for depression, and, anticipating that much of its future growth would come from this market, Cyberonics hired 300 new salespersons. Cyberonics then allegedly began lobbying CMS to approve Medicare reimbursement for VNS therapy in depressive patients, which CMS ultimately declined to grant. Facing a dire financial situation2 , Cyberonics reportedly decided to refocus its sales efforts on epilepsy patients, with a particular interest in re-sales to already existing VNS patients.
The First Amended Complaint emphasized that this new sales plan was driven by a "carrot and stick" approach, where sales representatives were rewarded for meeting "aggressive sales quotas," were placed in a Performance Improvement Program if they did not achieve 75% of their revenue goals in a given quarter, and were terminated the following quarter if their performance did not improve. Hagerty alleged that, under such conditions, Cyberonics' sales representatives resorted to fraudulent sales tactics, such as refusing to provide doctors and patients with accurate VNS battery life calculations and encouraging doctors and patients to replace these batteries prematurely.3
The First Amended Complaint further alleged that approximately 50% of Cyberonics' revenue came from Medicare and Medicaid, with additional revenues coming from TRICARE, the Department of Defense, the Department of Veterans Affairs, and the Federal Employee Health Benefits Program. Hagerty went on to list sixteen hospitals which he claimed had performed and billed for VNS therapy implants in epileptic patients, and specifically named the Southbury Training School, Monson Development Center, and Wrentham Development Center as "long-term care facilities ... in which vulnerable patients were subjected to unnecessary surgeries to implant replacement devices." The First Amended Complaint further identified a Dr. Pena, who had three patients undergo battery replacement procedures between September 30, 2010 and November 18, 2010. It also identified a Dr. Thompson, who allegedly told Hagerty that a Cyberonics sales representative falsely told physicians to replace VNS batteries prematurely. Moreover, the First Amended Complaint alleged that Hagerty reviewed an internal patient list and saw that several of Dr. Thompson's patients had received VNS device replacements in 2010.
By way of conclusion, the First Amended Complaint projected that at least 10,000 medically unnecessary VNS device replacements had occurred at these hospitals and centers since 2007. Coupled with an estimated cost of $20,000 per procedure and an assumption that government healthcare programs covered approximately 50-60% of these procedures, Hagerty reasoned that government healthcare programs lost at least $100 million as a result of Cyberonics' scheme.
Cyberonics again moved to dismiss the case. On March 31, 2015, the district court granted the motion, finding that Hagerty had not pled his allegations with the requisite particularity required by Rule 9(b). On August 14, 2015, Hagerty moved for leave to file a Second Amended Complaint. Three months later, the district court denied Hagerty's motion on the basis of undue delay.4 This appeal followed.
Hagerty insists that his First Amended Complaint satisfied Rule 9(b)' s particularity requirement and, regardless of the district court's view on that matter, that he should have been given leave to file a Second Amended Complaint. We review the granting of a motion to dismiss de novo, United States ex rel. Gagne v. City of Worcester, 565 F.3d 40, 45 (1st Cir. 2009), and the denial of a motion to amend for abuse of discretion, United States ex rel. Kelly v. Novartis Pharms. Corp., 827 F.3d 5, 10 (1st Cir. 2016) (citing United States ex rel. Poteet v. Bahler Med., Inc., 619 F.3d 104, 116 (1st Cir. 2010) ).
The FCA penalizes those who present, or cause to be presented, "false or fraudulent claim[s] for payment or approval" to the federal government. 31 U.S.C. § 3729(a)(1). Thus, fraud under the FCA has two components: the defendant must submit or cause the submission of a claim for payment to the government, and the claim for payment must itself be false or fraudulent. United States ex rel. Ge v. Takeda Pharm. Co., 737 F.3d 116, 124 (1st Cir. 2013) ( ) (internal citations omitted).
Federal Rule of Civil Procedure 9(b), meanwhile, requires that a complaint state these components with "particularity," meaning relators like Hagerty must allege the "who, what, when, where, and how of the alleged fraud." Id. at 123 (internal citation and quotation marks omitted). Still, we have repeatedly emphasized that there is no "checklist...
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