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Second whistleblower deemed first-to-file in false claims suit

1st Circuit: rule nonjurisdictional

Reversing its own precedent on the issue, a three-judge panel of the 1st U.S. Circuit Court of Appeals has held that the federal False Claims Act’s first-to-file rule is nonjurisdictional, thereby limiting a court’s analysis of competing first-to-file claims to the four corners of the parties’ FCA complaints and excluding extrinsic evidence.

The first-to-file rule provides that when an action is brought alleging fraud against the government under the FCA, no person other than the government may intervene or bring a related action based on the same essential facts.

The issue is a critical one, as the first-to-file relator is entitled to share in any judgment or settlement that results.

“The first-to-file bar operates on the recognition that, because relators can bring suit without having suffered a personal injury, countless plaintiffs in theory could file a qui tam action based on the same fraud and then share in the proceeds,” Judge Sandra L. Lynch wrote for the panel.

But courts have split on whether that rule is “jurisdictional” — in other words, whether it limits the subject matter jurisdiction of the federal courts in a later-filed suit or simply affects whether that suit states a claim for relief on the merits.

The 1st Circuit panel joined the D.C. and 2nd circuits in deciding on the latter.

The fact that Congress did not “clearly state” that the rule is jurisdictional “leads to only one conclusion: the first-to-file rule in nonjurisdictional,” Lynch wrote. “Neither statutory text nor context nor legislative history suggests otherwise.”

She then proceeded with a side-by-side comparison of the qui tam complaints first filed by Robert Cunningham and later by Mark McGuire against a drug-testing company, Millennium Laboratories. She determined that McGuire was actually the first to allege the “essential facts” of the company’s fraudulent interactions with the government; thus, he was the relator entitled to the $34 million whistleblower’s share.

herman“As things exist now, there can certainly be forum-shopping in FCA cases, because a relator can file a qui tam action in any jurisdiction in which a defendant does business, which is particularly relevant with national corporations.”

— Louise A. Herman, East Providence

The 31-page decision is United States ex rel. McGuire, et al. v. Millennium Laboratories, Inc., et al.

Essential facts

Thomas M. Greene, the attorney for McGuire, explained that the first-to-file rule acts as an incentive for whistleblowers to come forward promptly with allegations of fraud, with the knowledge that their potential recovery from the government will not be reduced by repetitious claims of “Johnnies-come-lately.”

“But at the same time, it’s not enough to just be first; if you haven’t alleged a fraud sufficiently, the purpose of the statute hasn’t yet been served,” the Boston attorney said.

Greene acknowledged that Cunningham was the first to file a complaint against Millennium but noted that his client was alleging different frauds.

“The first relator to disclose the essential facts of the fraud that results in recovery is the one who shares in that recovery under the rule,” he said. “In the end, this case became very simple: McGuire pleaded the essential facts of the claims settled by the government, and Cunningham did not. Since McGuire was the first to so plead, he’s entitled to the statutory award.”

Another important aspect of the case, Greene said, was that the court confirmed that in determining the first to file in FCA suits, the court will look only to the complaints.

“That was true in the 1st Circuit before, but thanks to the court’s ruling that the first-to-file bar is not jurisdictional, it’s crystal clear now,” he said.

According to Greene, the exercise has to be an easy one for the District Court to conduct; otherwise, it would be too burdensome if a judge potentially had to sift through thousands of pages of discovery materials.

“If every needle in every haystack secured first-to-file privileges for whistleblowers, then we’d all have an incentive to provide the government with as many haystacks as possible. That doesn’t serve the purpose of the False Claims Act, which is to bring real, actionable frauds to the government’s attention,” he said.

The lawyer for Cunningham, Michael B. Bogdanow of Boston, declined to comment other than to say he would file a petition for an en banc review by the full 1st Circuit, or, in the alternative, a rehearing before the panel.

East Providence FCA lawyer Louise A. Herman, who was not involved in the case, said courts have often loosely interpreted what constitutes essential facts.

“Here the court narrows that by looking carefully at the complaints to see if all the essential facts of the fraud had been pleaded,” she said.

The decision encourages well-pleaded complaints and allows the government to obtain valuable information that it might not otherwise obtain if potential relators do not file a complaint because someone beat them to the courthouse, Herman said.

“From my perspective, this opinion furthers the purpose and intention of the FCA, which is to encourage whistleblowers who have valuable information to come forward and root out fraud,” she said. “Now lawyers won’t have to feel that if they don’t get to the courthouse first they will be automatically knocked out. Instead, the court will analyze the complaints.”

With the circuit split, Herman said the issue is ripe for an explicit resolution by the U.S. Supreme Court.

“As things exist now, there can certainly be forum-shopping in FCA cases, because a relator can file a qui tam action in any jurisdiction in which a defendant does business, which is particularly relevant with national corporations,” she said.

Qui tam complaints

Cunningham filed a qui tam action against Millennium Laboratories in February 2011. The complaint detailed fraud arising from billing mechanisms involved with the company’s drug-testing kits, which used a single specimen collected at the point of care to detect multiple drug classes.

Relevant to the instant case was Cunningham’s allegation that if the initial qualitative test showed the presence of drugs, that test “would need to be followed up by a quantitative screen” and then “confirmed by another method.”

Thus, Cunningham said, Millennium’s model led to significantly more testing that increased its revenues at the expense of government and private health insurance programs, which were billed for the kits.

Appellant McGuire filed his original qui tam complaint in January 2012. It focused not on point-of-care testing, the first stage of urinary drug testing that was central to Cunningham’s complaint, but on confirmatory testing, a later stage. Those tests, which require expensive equipment, determine how much of a certain substance is present. McGuire alleged that Millennium schemed to conduct unnecessary confirmatory tests that were billed to Medicare, Medicaid and other federal plans.

In March 2015, the government intervened in McGuire’s action and a few months later reached a settlement with Millennium under which the company agreed to pay $227 million plus interest to resolve the claims. Fifteen percent of that amount was set aside for the relator, but the settlement did not resolve which relator was entitled to the award.

McGuire thereafter filed a crossclaim for declaratory relief, asserting that he was the first to file a complaint that put forth the essential facts underlying the government’s settlement and was therefore entitled to the 15 percent relator’s share.

Cunningham moved to dismiss the crossclaim, arguing that he, not McGuire, was the first to file.

U.S. District Court Judge Nathaniel M. Gorton in Massachusetts sided with Cunningham. Relying on 1st Circuit precedent, he found that the first-to-file rule was jurisdictional and dismissed McGuire’s crossclaim for lack of subject matter jurisdiction.

Nonjurisdictional rule

The 1st Circuit reversed, holding that the first-to-file rule is nonjurisdictional and that the court could therefore entertain McGuire’s crossclaim.

“In considering this issue, we do not write on a clean slate,” Lynch wrote. “As the district court quite properly noted, this court has several times characterized the first-to-file rule as jurisdictional.”

But Lynch pointed to several “compelling” reasons to deviate from those prior decisions.

The panel was persuaded by the U.S. Supreme Court’s 2015 decision in Kellogg Brown & Root Services, Inc. v. United States ex rel. Carter, a qui tam case making a “clear implication” that the court “did not consider the first-to-file rule to be jurisdictional.”

Further, the 1st Circuit found that when Congress wanted limitations on FCA suits to operate with jurisdictional force, it said so explicitly.

In light of those facts, the panel in the present case held that the rule is not a ban on jurisdiction but bears only on whether a qui tam plaintiff has properly stated a claim.

And instead of remanding the remaining question of whether McGuire was the first-to-file relator, the panel proceeded to tackle that issue.

The linchpin of the analysis was a comparison of the relators’ complaints specifically, whether Cunningham’s first-filed complaint contained all the “essential elements” of the fraud McGuire alleged.

“First-to-file analysis is limited to the four corners of the relevant complaints,” Lynch wrote. “We conclude, based on those two complaints, that Cunningham and McGuire do not allege similar frauds, but allege different frauds with different mechanisms.”

While Cunningham asserted that he was the first to file a claim against Millennium for excessive and unnecessary drug testing, Lynch wrote that that was “too general an argument,” finding that McGuire was the first to file a claim including the essential elements of Millennium’s confirmatory testing fraud, which is what the government pursued.

“McGuire has established that he was the first to file a claim alleging the essential facts of Millennium’s [confirmatory testing] scheme,” Lynch wrote. “He has also adequately pleaded that the government’s recovery from Millennium constitutes the ‘proceeds of the … settlement of the claims’ he brought.”

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