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U.S. ex rel. Emanuele v. Medicor Associates

United States District Court, W.D. Pennsylvania

October 26, 2017

U.S. ex rel. Tullio Emanuele, Plaintiff/Relator,
Medicor Associates, et al., Defendants.


          Joy Flowers Conti Chief United States District Judge

          Pending before the court are the Motion in Limine to Preclude Evidence or Bifurcate Trial (ECF No. 377) (“Motion to Preclude Evidence”) filed by defendants The Hamot Medical Center of the City of Erie (“Hamot”) and Medicor Associates, Inc. (“Medicor”, and together with Hamot, “Defendants”); the Motion in Limine to Preclude Reference to Any Burden of Proof Other than a Preponderance of the Evidence (ECF No. 398) (“Burden of Proof Motion”) filed by the United States ex rel. Tullio Emanuele (“Relator”); and Relator's Motion in Limine Regarding the Measure of Damages under the False Claims Act (ECF No. 408) (“Damages Motion”). At a hearing held on October 12, 2017, the court ordered supplemental briefing on each of the three motions. Defendants filed a supplemental brief with respect to the Motion to Preclude Evidence (ECF No. 446) and the Burden of Proof Motion (ECF No. 448), but did not file a supplemental brief regarding the Damages Motion.[1] Relator responded to each filing (ECF Nos. 450, 451, 453), and the United States filed a Statement of Interest (ECF No. 455). These motions are now ripe for review.

         I. Defendants' Motion to Preclude Evidence

         Relator initiated this action pursuant to the False Claims Act, 31 U.S.C. § 3729(a)(1)(A)-(C) (the “FCA”), which imposes liability on any person or entity who “knowingly presents, or causes to be presented, to an officer or employee of the United States Government . . . a false or fraudulent claim for payment or approval.” 31 U.S.C. § 3729(a)(1). In his amended complaint, Relator alleged that Defendants submitted claims to Medicare that violated the Stark Law, 42 U.S.C. § 1395nn, and the Anti-Kickback Act, 42 U.S.C. § 1320a-7b.[2] Both the Stark Law and the Anti-Kickback Act prohibit a health care entity from submitting claims to Medicare based upon referrals from physicians who have a “financial relationship” with the health care entity, unless a statutory or regulatory exception or safe harbor applies. 42 U.S.C. §§ 1395nn(a)(1); 1320a-7b(b). In the amended complaint, Relator alleged that there were financial relationships between Defendants and referrals from physicians as a result of those relationships which violated the Stark Law and Anti-Kickback Act. The amended complaint also pled that: (1) Defendants performed unnecessary medical procedures, often with fatal results; and (2) certain financial arrangements between Hamot and Medicor violated those statutes because they served no purpose but to facilitate the exchange of illegal referrals and kickbacks between Hamot and Medicor. Relator alleged that these violations occurred “[f]rom at least June 1, 2001 through at least May 31, 2005, and beyond.” (Id. ¶ 2.)

         Following discovery, Relator withdrew his allegations of unnecessary medical procedures. Relator continued to maintain that Defendants cannot meet their burden to show that the medical directorship arrangements satisfied any of the statutory exceptions (or safe harbors) set forth in the Stark Law and Anti-Kickback Act. He abandoned his argument that the medical directorships were “shams, ” but argued that Defendants still could not satisfy any Stark Law or Anti-Kickback exceptions because some of their agreements were never reduced to writing or were permitted to lapse without written renewal.

         In their Motion to Preclude Evidence, Defendants contend that the “allegations” that form the current basis for this litigation - to wit, that the contracts in issue governing the medical directorships were not in writing at all times as required by the Stark Law and Anti-Kickback Act - were never pleaded in either the original or amended complaint. Defendants seek to preclude Relator from offering any evidence to support these “unpleaded” claims and contends that this court lacks subject matter jurisdiction over them.[3]

         To sustain a claim pursuant to § 3729(a)(1) of the FCA, a relator (or the government) must prove that (1) the defendant presented or caused to be presented to an agent of the United States a claim for payment; (2) the claim was false or fraudulent; and (3) the defendant knew the claim was false or fraudulent. United States ex rel. Wilkins v. United Health Grp., Inc., 659 F.3d 295, 304-05 (3d Cir. 2011); United States ex rel. Schmidt v. Zimmer, Inc., 386 F.3d 235, 242 (3d Cir. 2004). The relator must also establish that the alleged misrepresentation to the government was “material to the Government's payment decision in order to be actionable under the False Claims Act.” Universal Health Services, Inc. v. U.S. ex rel. Escobar, 136 S.Ct. 1989, 2002 (2016). Where the allegedly false claims are based on violations of the Stark Law and the Anti-Kicback Act, the relator must prove that: (1) the defendants had a “financial relationship” of the type prohibited by the statute; (2) one of the defendants referred patients to the other for “designated health services”; and (3) claims based on those referrals were submitted to Medicare for payment. 42 U.S.C. § 1395nn(a)(1). Once the relator has established a prima facie violation of the Stark Law or the Anti-Kickback Act, the burden shifts to the defendants to demonstrate that the financial arrangement fits within a statutory exception or safe harbor. See United States ex rel. Kosenske v. Carlisle HMA, Inc., 554 F.3d 88, 95 (3d Cir. 2009) (“Once the plaintiff or the government has established proof of each element of a violation under the [Stark] Act, the burden shifts to the defendant to establish that the conduct was protected by an exception.”); United States v. Rogan, 459 F.Supp.2d 692, 717 (N.D. Ill. 2006) (noting that, once the plaintiff or government has established a violation of the Stark Act, the defendant bears the burden of establishing that the conduct was protected by an exception); United States ex rel. Baklid-Kunz v. Halifax Hosp. Med. Ctr., No. 09-1002, 2012 WL 921147, at *5 (M.D. Fla. Mar. 19, 2012) (because Stark Act exceptions are “affirmative defense rather than elements of a cause of action . . . it is the Defendants' obligation to plead that they apply rather than the [relator's] obligation to plead that they do not apply.”).

         In his amended complaint, Relator alleged that Hamot and Medicor established a financial relationship by entering into “a series of contracts . . . to pay kickbacks . . . and to engage in unlawful relationships with physicians to induce patient referrals. (Amended Complaint (ECF No. 64) ¶ 95.) Specifically, Relator alleged that Hamot and Medicor entered into “a series of sham contracts . . . for ‘medical directorships' or other similar personal service arrangements.” (Id. ¶ 97.) Relator identified six medical directorships by name and averred that he had been personally assigned to provide services pursuant to one of them throughout his employment at Medicor. (Id. ¶¶ 98, 104.) Relator identified many of the critical terms of the arrangements, such as the timeframe, expectations for performance, compensation, and terms of renewal. (Id. ¶¶ 99-100.) Despite the existence of these financial arrangements, Relator averred that Medicor “referred thousands of patients covered by federal health insurance programs to Hamot on an exclusive basis.” (Id. ¶ 106.)

         In addition to alleging the prima facie elements of his claim, Relator also alleged - although it was not his burden to do so - that the medical directorships did not satisfy the requirements of several of the Stark Law and Anti-Kickback Act exceptions that Defendants would most likely attempt to invoke. Relator alleged that these exceptions were not applicable because the directorship arrangements were “shams” that did not require Medicor physicians to perform any actual work, rendering the arrangements commercially unreasonable. (Amended Complaint (ECF No. 64) ¶¶ 116, 119-21.)

         During discovery, evidence was adduced suggesting that the directorship arrangements may not always have been set forth “in writing, ” as required by several Stark Law and Anti-Kickback Act exceptions. See 42 C.F.R. §411.357(1) (the “fair market value exception”); 42 C.F.R. § 411.357(d)(1) (“the personal services arrangements exception”). Realtor moved for partial summary judgment on this basis. The court agreed with Relator that at least two medical directorships - the Women's Heart Health directorship and the CV Chair arrangement - were never set forth in writing. (Summary Judgment Opinion (ECF No. 345) at 19-23.) The court held that there were disputed issues of material fact about whether the remaining directorship agreements satisfied the writing requirement. (Id. at 19.) Significantly, the parties did not dispute the prima facie elements of Relator's Stark Law claims. (Id. at 12-13) (“The parties do not appear to dispute that a financial relationship existed among Hamot, Medicor, and the individual physician defendants. As such, the sole issue presented in Plaintiff's motion is whether the compensation arrangements satisfied one of the Stark Act exceptions during the relevant time periods.”)

         Defendants now contend that Relator should be precluded from offering any evidence to the jury regarding the writing requirement in certain exceptions contained in the Stark Law and Anti-Kickback Act because he never pled the absence of a written agreement in his amended complaint and that he was not the original source for that claim. Because the burden of establishing an applicable Stark Law or Anti-Kickback Act exception rests squarely with the defense, Defendants are essentially asking the Court to preclude Relator from offering evidence to refute the existence of a potential affirmative defense and to require the Relator to be an original source for the inapplicability of an affirmative defense.

         In support of this proposition, Defendants rely heavily on Rockwell International Corp. v. United States, 549 U.S. 457 (2007), wherein a qui tam relator brought a False Claims Act (“FCA”) action against a government contractor based on the contractor's operation of a nuclear weapons plant. Id. at 460. The relator, an engineer, had drafted a memorandum for the contractor, Rockwell International Corporation (“Rockwell”), explaining that a proposed method for disposing of toxic pond sludge would not work. Id. at 461. Rockwell intended to dispose of the sludge by mixing it with cement and turning it into solid “pondcrete” blocks. Id. The engineer explained that the proposed method of disposal relied on a piping system that would be inadequate to remove the sludge in a form that could be turned into a solid block. Id. Rockwell proceeded with the project despite his objections. Id. After being laid off, the engineer, Stone, contacted the Federal Bureau of Investigation to inform it that Rockwell was concealing environmental violations. Id. at 462.

         Based upon his “inadequate piping” theory, Stone initiated a FCA action alleging that Rockwell had falsely certified compliance with federal and state environmental regulations to induce the government to continue making payments on the contract. Id. at 463-64. The government later intervened and filed an amended complaint alleging that Rockwell had violated environmental laws by storing leaky pondcrete blocks. The government, however, did not allege that the pondcrete blocks were leaky for the same reason that Stone predicted (the inadequacy of the piping system). Id. at 465. Instead, the government alleged that the insolidity was due to an incorrect ratio of sludge to concrete, poor quality control, and inadequate inspections. Id.

         Following a jury verdict in the government's favor, Rockwell filed an appeal arguing that the government's claims were based on publically disclosed allegations for which Stone was not an original source. Rockwell noted that federal courts lack jurisdiction over FCA allegations based on public disclosures “in a criminal, civil, or administrative hearing . . . or from the news media” unless the action is brought by the person who was the “original source of the information.” Id. at 467 (citing 31 U.S.C. 3730(e)(4)(A)). In order to be an original source, the relator must have “direct and independent knowledge of the information on which the allegations are based.” 31 U.S.C. § 3730(e)(4)(B). The Court ultimately determined that Stone's allegations fell short of this standard:

Stone's knowledge falls short. The only false claims ultimately found by the jury (and hence the only ones to which our jurisdictional inquiry is pertinent to the outcome) involved false statements with respect to environmental, safety, and health compliance over a 1 ½ year period between April 1, 1987, and September 30, 1998. As described by Stone and the Government in the final pretrial order, the only pertinent problem with respect to this period of time for which Stone claimed to have direct and independent knowledge was insolid pondcrete. Because Stone was no longer employed by Rockwell at the time, he did not know that the pondcrete was insolid; he did not know that pondcrete storage was even subject to RCRA; he did not know that Rockwell would fail to remedy the defect; he did not know that the insolid pondcrete leaked while being stored onsite; and, of course, he did not know that Rockwell made false statements to the Government regarding pondcrete storage.

Id. at 475. Because Stone did not have “direct and independent knowledge of the information upon which his allegations were based, ” the Court determined that the district court lacked jurisdiction over the claims arising from those allegations. Id. at 476.

         Critically, the Court emphasized that the problem was not that Stone had incorrectly identified the source of the flaw in the pondcrete; rather, the problem was that Stone never actually knew whether the ...

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