Conclusory Allegations Won’t Cut It Under the False Claims Act
Health Law Update 08/29/13 Jennifer J. Hennessy
The Fifth Circuit dismissed a qui tam relator's claims under the False Claims Act ("FCA") regarding allegedly defective devices sold to the government for failing to "clearly state the substance of the fraud that has been committed." The court noted that "descriptive or conclusory allegations" are not sufficient. Further, the court stated that the relator's allegations that merchantability was a "standard condition" of the contracts between the government and the contractor and that the government would not have paid the contractor had the government been aware of the defect in the devices were merely "an implied certification of an implied contract provision that is an implied prerequisite to payment." Simply put, the court rejected the relator's argument that the contractor falsely certified compliance with the device's warranty of merchantability by asking the government to pay for the devices.
Leslie Steury marketed Cardinal's Signature pump to Department of Veterans Affairs ("VA") hospitals from 1996 until 2001, when she was terminated. The Signature pump is a device that regulates the rate at which intravenous fluids flow into patients. Ms. Steury alleged that she became aware of a design flaw in the Signature pump which could potentially result in the patient's death in late 2000 and notified management in early 2001. Cardinal suspended shipment of the Signature pumps for three months in mid-2001 while it reviewed the defect. Ms. Steury marketed the Signature pumps during this three-month review period and was scheduled to fill a order with a VA hospital at the end of the review period. However, Cardinal terminated Ms. Steury at the end of the review period.
Ms. Steury sued Cardinal in 2007 for alleged FCA violations. The district court dismissed Ms. Steury's complaint, and the Fifth Circuit affirmed the dismissal on appeal, but remanded to allow Ms. Steury to amend her complaint in 2010 (Steury I). Ms. Steury filed two more amended complaints, both of which the district court dismissed. Ms. Steury again appealed to the Fifth Circuit, and that appeal is the topic of this Health Law Update.
Implied False Certification
An FCA claim requires the plaintiff to proof the defendant knowingly presented a false claim to the government for payment. Further, such claims "must state with particularity the circumstances constituting fraud," meaning that, at a minimum, Ms. Steury needed to set forth "the who, what, when, where, and how of the alleged fraud."
In Steury I in 2010, the Fifth Circuit held that a claim under the FCA must assert that a contractor's (here, Cardinal's) certification of compliance with particular laws or contract terms "was a 'prerequisite' to the payment sought." The prerequisite requirement recognizes that unless the government conditions payment on a certification of compliance with federal statutes, regulations, or contract provisions, a contractor's request for payment does not imply certification of compliance with these laws or contract provisions. In that case, Ms. Steury alleged that Cardinal impliedly certified compliance with a warranty of merchantability because the government's standard contract included a warranty of merchantability. The court held that Ms. Steury's allegation did not meet the required standard, but stated that a knowing delivery of defective goods could be actionable under the FCA if either of the following were true:
- The contract specifically conditioned payment on a certification of compliance with the warranty of merchantability; or
- The party knowingly provided worthless goods to the government.
The court authorized a remand so that Ms. Steury could attempt to comply with the court's holding.
Ms. Steury's attempts to comply with this guidance from the court brought the case back to the Fifth Circuit, with Ms. Steury now alleging that merchantability was a "standard condition" of Cardinal's contracts with the VA, and that the VA would not have paid for the Signature pumps had the VA been aware of the defect. Specifically, Ms. Steury alleged that:
Cardinal "expressly warranted that the [Signature pumps] were 'merchantable,'" that Cardinal's "contract with the VA specifically required that the [Signature pumps] be merchantable," that Cardinal's "contract with the VA required it to implicitly certify that the [Signature pumps] were merchantable," and that "[t]he requirement that the [Signature pumps] be merchantable was a material contractual requirement."
The Fifth Circuit held these allegations deficient as they did not identify the specific contractual provisions regarding merchantability. The court stated that Ms. Steury must show how the Signature pumps deviated from the government's specifications. Further, the court noted that the standard government procurement regulations do not provide that merchantability is a standard contract condition because (i) the government can override the implied merchantability provisions with express warranties; and (ii) can accept and pay for noncompliant items, meaning payment is not conditioned on compliance with the warranty of merchantability. Ms. Steury also failed to allege that the government would not have paid Cardinal in the absence of the merchantability provision in the contract.
This case shows that relators bringing cases under the FCA must be able to describe the specifics of the allegation to be successful. Relators with only general, conclusory allegations will find it extremely difficult to prevail under the FCA.
For more information, please contact Jennifer Hennessy at (608) 283-2405 / firstname.lastname@example.org, or your Quarles & Brady attorney.