Government Contracts Monitor

Sixth Circuit Rejects FCA Liability for Technical Violations

October 25, 2012

The Sixth Circuit recently announced an important limitation on False Claims Act (“FCA”) liability by holding that “irrespective of whether the [defendant] in fact violated the regulations, [t]he False Claims Act is not a vehicle to police technical compliance with complex federal regulations.”  United States v. Renal Care Group, Inc., No. 11-5779 (6th Cir. Oct. 5, 2012).

The case involved the provision of medical equipment for home dialysis treatment by a subsidiary of a dialysis service provider.  The subsidiary was created specifically to take advantage of favorable Method II Medicare reimbursement rates for entities that provided only equipment and supplies, but not services.  Under the regulations, an entity that ran a dialysis service facility was not eligible to receive the higher reimbursement rates when it also supplied durable medical equipment.

The Government alleged that the company violated the FCA by knowingly using the subsidiary as a “billing conduit” when it knew that it was not in compliance with regulatory requirements for durable medical suppliers.  According to the regulations, these suppliers must certify that they meet various standards such as “honoring warranties, filling orders from its own inventory or via contract, and maintaining an appropriate place of business.”

Reversing the district court, the Sixth Circuit held that the regulations were “conditions of participation, the violation of which do[es] not lead to False Claims Act liability.”  The Court further
cautioned that the “False Claims Act is not a vehicle to police technical compliance with complex federal regulations.”

The Court also rejected the Government’s other argument that dialysis facilities may not separately incorporate wholly owned subsidiaries as “suppliers” in order to receive the higher reimbursement rates because they are simply “alter egos.”  Examining the relevant regulations, the court concluded that they did not prohibit a legally cognizable “entity” from acting as a “supplier” even though it was wholly owned by a facility provider.

Regardless, the Court held that the company lacked the requisite “knowledge” for FCA liability to apply.  The Court found that “they consistently sought clarification on the issue, followed industry practice in trying to sort through ambiguous regulations, and were forthright with government officials” regarding the subsidiary’s ownership.  According to the Court, “[t]o deem such behavior ‘reckless disregard’ of controlling statutes and regulations imposes a burden on government contractors far higher than what Congress intended” when it passed the False Claims Act.

Although this is a Medicare FCA case, the holding is also important to government contractors, who similarly work in a field full of complicated regulations.  It’s important to keep open communication with the Government and always seek clarification on ambiguous regulations, like the company in this case.  Taking these precautions may assist in preventing FCA liability for later-discovered technical violations.

 

Jeffry Cook is the attorney responsible for the content of this article.