United States ex rel. Grenadyor v. Ukrainian Vill. Pharmacy, Inc.

• Decision Date: 03 December 2014
• Docket Number: No. 13–3383.,13–3383.
• Citation: 772 F.3d 1102
• Court: U.S. Court of Appeals — Seventh Circuit
• Parties: UNITED STATES, et al., ex rel. Yury GRENADYOR, Plaintiffs/Relator–Appellants, v. UKRAINIAN VILLAGE PHARMACY, INC., et al., Defendants–Appellees.

772 F.3d 1102

UNITED STATES, et al., ex rel. Yury GRENADYOR, Plaintiffs/Relator–Appellants

v.UKRAINIAN VILLAGE PHARMACY, INC., et al., Defendants–Appellees.

No. 13–3383.

United States Court of Appeals, Seventh Circuit.

Argued Oct. 3, 2014.

Decided Dec. 3, 2014.

Timothy Cornell, Attorney, Gardner Cornell, P.C., Boston, MA, Mark Irving Labaton, Attorney, Isaacs Friedberg & Labaton, Los Angeles, CA, for Plaintiffs/Relator–Appellants.

Yevgeny Meltser, Attorney, Birg & Meltser, Northbrook, IL, Mason N. Floyd, Attorney, Daniel T. Hartnett, Attorney, Martin, Brown, Sullivan, Roadman & Hartnett, Nazar Kashuba, Attorney, Demchenko Kashuba LLC, Leigh D. Roadman, Attorney, Thomas K. McQueen, Attorney, Chicago, IL, for Defendants–Appellees.

Vasily Shevchuk, Naperville, IL, pro se.

Before POSNER, ROVNER, and TINDER, Circuit Judges.

Opinion

POSNER, Circuit Judge.

This appeal is from the dismissal with prejudice of a complaint filed under the False Claims Act, 31 U.S.C. § 3729 et seq., by Yury Grenadyor. He seeks a bounty for exposing fraudulent claims submitted by the defendants both to the federal government, id., § 3730, and to several state governments on whose behalf he has filed pendent state law claims. The complaint also alleges retaliation against him by his employer in violation of the Act. The judge dismissed the pendent and retaliation claims along with the fraud claim.

Our bounty hunter (in False Claims Act cases called the “relator”) is a pharmacist formerly employed by defendant Ukrainian Village Pharmacy. The pharmacy primarily serves Chicago's Ukrainian community. There are believed to be about 46,000 persons of Ukrainian descent living in Chicago. See “Ukrainian American,” Wikipedia, http://en.wikipedia.org/wiki/Ukrainian_American (visited Dec. 1, 2014, as were the other websites cited in this opinion). Together with pharmacies that serve similar communities in other states and are joined as additional defendants in this suit, Ukrainian Village Pharmacy is alleged to be controlled by a handful of individuals of Ukrainian origin, mainly members of a family named Bogacheck. To simplify the opinion we'll generally pretend that Ukrainian Village Pharmacy is the only defendant.

Grenadyor claims that the pharmacy defrauded the government by making gifts to customers (such as tins of caviar), or forgiving their copays (even if they were not entitled under the law to such forgiveness), in order to induce them to have their prescriptions filled by it rather than by competing pharmacies. (The “copay” is the part of a medical bill that is not reimbursed by the government or an insurer.) The complaint also alleges that the pharmacy sought government reimbursement for drugs that were not delivered to the buyers.

The fraudulent character of claiming reimbursement for drugs that customers never received is obvious. The fraudulent character of giving discounts or refunds to the pharmacy's customers is less obvious—what is wrong with offering an inducement that reduces a product's cost to the consumer? The answer is that a discount or refund can become a “kickback” (a derogatory term meaning approximately “bribe”) in a case such as this because it artificially inflates the price that the government pays pharmacies for prescription drugs for Medicare or Medicaid beneficiaries. (The government reimburses the pharmacy for the entire price charged the consumer, but places a ceiling on what the pharmacy can charge.) So for example the maximum that a pharmacy would be permitted to bill the government for a drug that the pharmacy sells for $10 would be, assuming a $1 copay, $9. But if the pharmacy waived the copay without telling the government, thus charging $9 rather than $10 to its customer but billing the government for the full $9 to which it would have been entitled had it not refunded the copay, it would be transferring $1 from the government to the patient. For it should have charged the government only $8, since all the customer paid was $9, of which $1 was supposed to be the copay, for which the government is not liable.

The $1 refund to the customer would thus have been a “kickback” in an appropriately pejorative sense because it would have increased the pharmacy's sales (and presumably its profits, as otherwise it wouldn't provide refunds) at the government's expense. It would have had done so either by diverting customers from other pharmacies or by inducing customers to purchase drugs that they would not have been willing to purchase had they been responsible for the copay. See Office of the Inspector General, “Special Fraud Alert,” 59 FR 65372 (Dec. 19, 1994), https://oig.hhs.gov/fraud/docs/alertsand bulletins/121994.html; Bruce Stuart & Christopher Zacker, “Who Bears the Burden of Medicaid Drug Copayment Policies?,” 18 Health Affairs no. 2, pp. 201–12 (1999), http://content.healthaffairs.org/content/18/2/201. There are additional concerns with such kickbacks, but we needn't get into them.

A person violates the False Claims Act if he “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval” by the government. 31 U.S.C. § 3729(a)(1)(A). He must know the claim is false. United States ex rel. Gross v. AIDS Research Alliance–Chicago, 415 F.3d 601, 604 (7th Cir.2005). Grenadyor alleges a knowingly false promise that the pharmacy made on a form that it had to submit to the government in order to be permitted to enroll in the Medicare program and thus receive reimbursement for the drugs it sells to Medicare participants. The form, which the pharmacy signed before making any kickbacks, states: “I agree to abide by the Medicare laws, regulations and program instructions that apply to this supplier.... I understand that payment of a claim by Medicare is conditioned upon the claim and the underlying transaction complying with such laws, regulations, and program instructions (including, but not limited to, the Federal anti-kickback statute ...).” Department of Health & Human Services, Centers for Medicare & Medicaid Services, Medicare Enrollment Application: Clinics/Groups Practices and Certain Other Suppliers, CMS–855B, § 15A, ¶ 3.

The district court ruled that this was not a false claim but merely a promise that the pharmacy failed to keep. The ruling was incorrect. If you say “I agree” when you don't agree, you're making a false statement, which in this case, Grenadyor alleges, induced the government to honor improper claims for reimbursement made by the pharmacy ($9 instead of $8, in our example). Making a false promise in order to obtain something of value is fraud, The Wharf (Holdings) Ltd. v. United International Holdings, Inc., 532 U.S. 588, 596, 121 S.Ct. 1776, 149 L.Ed.2d 845 (2001), and can be the basis of a claim under the False Claims Act. United States ex rel. Main v. Oakland City University, 426 F.3d 914, 917 (7th Cir.2005).

The problem with this part of Grenadyor's complaint lies elsewhere: in an insufficient showing that the “I agree” statement was false when the pharmacy made it. It may have been an honest statement of intentions at the time, followed by a change of heart, motivated perhaps by greed, that caused the pharmacy to renege—and in that case the pharmacy would not have made any false statements, but simply have billed Medicare when it shouldn't have. The complaint alleges that the pharmacy knew when it made the statement that other pharmacies in the Bogacheck network had been giving kickbacks, and knew that as a member of the network it would do so as well. In other words Grenadyor is alleging a two-step false claim: first the falsity (which would have to be deliberate in order for the False Claims Act to apply), which lay in the pharmacy's promise not to give kickbacks, and then the claim for reimbursement by the Medicare or Medicaid program for drugs provided to customers who received kickbacks.

Because a public accusation of fraud can do great damage to a firm before the firm is (if the accusation proves baseless) exonerated in litigation, Rule 9(b) of the Federal Rules of Civil Procedurerequires that “in alleging fraud ... a party must state with particularity the circumstances constituting fraud.” Missing from the complaint in this case are non-conclusory allegations that the pharmacy had decided to pay kickbacks at the time it promised otherwise by signing the “I agree” statement. It may have believed that sooner or later the Bogacheks would exert pressure to which it might have to yield, but that would be different from what is alleged in the complaint—that it “never had any intention of keeping that agreement” (emphasis added). Anyway how could Grenadyor know? He didn't start working at the pharmacy until 2006—two years after the signing of the form.

The requirement of pleading fraud with particularity includes pleading facts that make the allegation of fraud plausible. Windy City Metal Fabricators & Supply, Inc. v. CIT Technology Financing Services, Inc., 536 F.3d 663, 668–69 (7th Cir.2008) ; Vicom, Inc. v. Harbridge Merchant Services, Inc., 20 F.3d 771, 777–78 (7th Cir.1994). The complaint must state “ ‘the identity of the person making the misrepresentation, the time, place, and content of the misrepresentation, and the method by which the misrepresentation was communicated to the plaintiff.’ ” Bankers Trust Co. v. Old Republic Ins. Co., 959 F.2d 677, 683 (7th Cir.1992), quoting Sears v. Likens, 912 F.2d 889, 893 (7th Cir.1990). Grenadyor failed to satisfy this pleading requirement.

He has, however, an alternative false-claim theory, called “implied certification,” see Michael Holt & Gregory Klass, “Implied Certification Under the False Claims Act,” 41 Public Contract L.J. 1, 1–4 (2011), and recognized in such cases as United States ex rel. Wilkins v. United Health Group, Inc., 659 F.3d 295, 306 (3d Cir.2011), though treated as unsettled by our court in United States ex rel. Absher v. Momence Meadows Nursing Center, Inc., 764 F.3d 699, 711 and n. 13 (7th Cir.2...