‘Public Disclosure’ Bar Can Limit False Claims Act’s Fraud Suits

The federal False Claims Act (FCA) imposes civil liability on anyone who “knowingly presents” a “fraudulent claim for payment” to the federal government. 31 U.S.C. § 3729(a)(1)(A). The FCA’s qui tam provisions allow private citizens, referred to as “relators,” to bring fraud claims on the government’s behalf against those who have violated the FCA’s prohibitions. See 31 U.S.C. § 3730(b)(1). If the government declines to intervene, the relator may prosecute the action and, if successful, may recover a percentage of the damages. See 31 U.S.C. §§ 3730(b)(4), (d)(2).

In 1986, the FCA was amended to add a “public disclosure” bar. See 31 U.S.C. § 3730(e)(4)(A). As the U.S. Court of Appeals for the Second Circuit has observed, the public disclosure bar was “designed to preclude qui tam suits based on information that would have been equally available to strangers to the fraud transaction had they chosen to look for it as it was to the relator.” U.S. ex rel. Doe v. John Doe Corp., 960 F.2d 318, 322 (2d Cir. 1992). Later, in Graham County Soil & Water Conservation Dist. v. United States ex rel. Wilson, 559 U.S. 280, 294 (2010), the U.S. Supreme Court explained that Congress’ purpose in amending the FCA in 1986 to add the public disclosure bar was to strike “the golden mean between adequate incentives for whistle-blowing insiders with genuinely valuable information and discouragement of opportunistic plaintiffs who have no significant information to contribute of their own.”

Congress amended the FCA’s public disclosure bar in 2010. The bar now provides that a qui tam action or claim shall be dismissed if “substantially the same allegations or transactions” as alleged in the action or claim were publicly disclosed (i) in a federal criminal, civil, or administrative hearing in which the government or its agent is a party; (ii) in a congressional, Government Accountability Office, or other federal report, hearing, audit, or investigation; or (iii) from the news media.

Importantly, there is an exception to the public disclosure bar where the person bringing the action “is an original source of the information.” The statute defines “original source” to mean an individual who either “(i) prior to a public disclosure under subsection (e)(4)(A), has voluntarily disclosed to the Government the information on which allegations or transactions in a claim are based, or (2) who has knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions, and who has voluntarily provided the information to the Government before filing an action under this section.”

The U.S. Supreme Court has adopted a broad view of the public disclosure bar. See Schindler Elevator Corp. v. United States ex rel. Kirk, 563 U.S. 401, 408 (2011) (“This broad ordinary meaning of ‘report’ is consistent with the generally broad scope of the FCA’s public disclosure bar. . . . The other sources of public disclosure in § 3730(e)(4)(A), especially ‘news media,’ suggest that the public disclosure bar provides a broa[d] sweep. . . . The phrase ‘allegations or transactions’ in § 3730(e)(4)(A) additionally suggests a wide-reaching public disclosure bar.”). In practice, for the bar to apply, courts in the Second Circuit require that earlier disclosures were “sufficient to set the government squarely upon the trail of the alleged fraud.” Ping Chen ex rel. U.S. v. EMSL Analytical, Inc., 966 F. Supp. 2d 282, 298 (S.D.N.Y. 2013).

Prior to the 2010 amendments, the public disclosure bar was jurisdictional and could be raised to disallow a qui tam claim at any time. Now, it serves only as a ground for dismissal, such as “an affirmative defense or in connection with [a] motion to dismiss.” U.S. ex rel. Chorches v. Am. Med. Response, Inc., 865 F.3d 71, 80 (2d Cir. 2017). Faced with such motions, a number of courts in the Second Circuit have recently considered whether “substantially the same allegations or transactions” were publicly disclosed via an enumerated source prior to the filing of a qui tam action and, if so, whether a fraud lawsuit under the FCA may nevertheless go forward because the relator is an “original source” of the information underlying the allegations. See, e.g., U.S. ex rel. Patriarca v. Siemens Healthcare Diagnostics, Inc., 295 F. Supp. 3d 186 (E.D.N.Y. 2018) (collecting cases).

Public Disclosure

The recent decision by the U.S. District Court for the Southern District of New York in Federal Deposit Ins. Corp. v. Fifth Third Bank, N.A., as successor-in-interest to MB Financial Bank, N.A., No. 14 Civ. 6003 (GBD) (S.D.N.Y. Jan. 18, 2023), appeal filed (Feb. 15, 2023), illustrates how courts analyze the public disclosure bar.

In this case, the plaintiff, on behalf of the Federal Deposit Insurance Corporation (FDIC), filed a qui tam action under the FCA asserting that MB Financial Bank, N.A., submitted false claims to the FDIC under a shared-loss agreement involving MB Financial’s acquisition of the assets of a failed bank.

Fifth Third Bank, N.A. (the Bank), which acquired MB Financial after the plaintiff filed his lawsuit, moved to dismiss. The Bank contended that the public disclosure bar precluded the plaintiff’s claims because “substantially the same allegations or transactions” had already been publicly disclosed.

The court granted the Bank’s motion.

In its decision, the court explained that there was “little doubt” that the documents and information forming the basis of the plaintiff’s action had been “publicly disclosed.” The court pointed out that the plaintiff began his investigation after MB Financial foreclosed on a loan for certain real property that the plaintiff owned in Manhattan. Then, the court continued, the plaintiff learned of various lawsuits regarding other loans that MB Financial acquired from the failed bank. The court noted that the plaintiff also used a public database to identify other loans and borrowers, whom he interviewed. The court decided that there was “no dispute” that litigation documents and information retrieved from a public database qualified as “public disclosures.”

The court also decided that the primary documents on which the plaintiff relied in his complaint had been publicly disclosed. For instance, the court noted that the shared-loss agreement and the purchase and assumption agreement between MB Financial and the FDIC both were publicly disclosed by the FDIC when it published them on its website. Moreover, the court said, the plaintiff’s complaint cited “specifically to public documents” or identified information as “having been derived from litigation.”

Accordingly, the court concluded that the information provided in several public disclosures, including in a lawsuit filed by the FDIC against the failed bank, were sufficient to put the government on notice to investigate the alleged fraud before the plaintiff filed his action.

The Original Source Exception

The U.S. District Court for the Eastern District of New York recently considered the original source exception to the public disclosure bar, illustrating how courts analyze this exception to the public disclosure bar.

The case, United States v. United States Oncology, Inc., No. 19-cv-5125 (NG) (LB) (E.D.N.Y. Sept. 8, 2023), appeal filed (Sept. 25, 2023), arose when Omni Healthcare Inc. (Omni) filed a qui tam action under the FCA against United States Oncology, Inc. (U.S. Oncology), among others, based on claims that U.S. Oncology unlawfully billed Medicare for cancer drugs “harvested” from the excess of single-use vials. U.S. Oncology moved to dismiss, arguing that the Omni action was barred by the public disclosure bar. The district court agreed and dismissed Omni’s original complaint.

Omni filed an amended compliant containing allegations that were largely the same as it alleged in its original complaint, but Omni added allegations that it intended would support an argument that it satisfied the public disclosure bar’s original source exception. U.S. Oncology moved to dismiss the amended complaint, arguing that Omni’s amended allegations did not establish that it met the original source exception.

The court granted the motion to dismiss.

In its decision, the court first examined whether Omni could rely on a “voluntary disclosure to the government” to demonstrate the “original source” exception. Toward that end, Omni sought to rely on the following allegation in its complaint:

[A]s required by 31 U.S.C. § 3730(b)(2), Relator voluntarily submitted prior to the filing of the initial complaint in this action a confidential written disclosure statement (subject to the attorney-client privilege) to the United States Government, containing materials, evidence, and information in its possession pertaining to the allegations contained in this Complaint.

U.S. Oncology contended that, because Omni alleged that its disclosure to the government was “required by 31 U.S.C. § 3730(b)(2),” Omni’s disclosure was not made voluntarily. The court agreed, finding that Omni’s allegation that its disclosure was made “as required by 31 U.S.C. § 3730(b)(2)” doomed Omni’s argument that it made a voluntary disclosure. A “mandatory disclosure is not a voluntary disclosure,” the court reasoned.

The court then analyzed whether Omni demonstrated that it was an “original source” because it materially added to the prior public disclosures. The court, citing to Vierczhalek v. MedImmune Inc., 803 F. App’x 522, 526 (2d Cir. 2020), explained that for new allegations to “materially add” to public disclosures, they had to “substantially” or “considerably” add to information that already was public. Omni contended that it met that standard, arguing that its amended complaint materially added to prior public disclosures because it named specific individuals who could attest to its allegations about U.S. Oncology and because it also named one physician who could attest to the fact that U.S. Oncology knew it was engaging in an illegal practice.

The court was not persuaded. It explained that, generally, the “materially adds” requirement focuses on the substance of the allegations, not the source. In the court’s view, Omni’s identification of individuals with knowledge of an “already publicly disclosed fraud” did not materially add to prior public disclosures. See, also, Ping Chen ex rel. United States v. EMSL Analytical, Inc., 966 F. Supp. 2d 282 (S.D.N.Y. 2013).

Omni further contended that, by identifying a physician, it alleged evidence of scienter, and that “[c]ourts have found that evidence of scienter ‘materially adds’” to the public disclosures.” The court rejected this argument, too, stating that except for the identification of the physician, the prior public disclosures “already alleged that U.S. Oncology knew that it was unlawful to bill Medicare for the overfill, so this allegation cannot materially add to them.”

In sum, the court concluded that Omni’s amended complaint did not qualify for the original source exception, and it dismissed Omni’s FCA claims.

Conclusion

Lawsuits under the FCA can help to reduce fraud, and can lower the costs of federal insurance and other federal programs. One of the first things that parties bringing such actions, as well as defendants who are sued, should consider is whether the public disclosure bar applies. That will help to determine whether a qui tam suit may proceed, or whether it may be dismissed.

Reprinted with permission from the November 2, 2023, issue of the New York Law Journal^©, ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.