United States ex rel. Hartpence v. Kinetic Concepts, Inc., No. 12-55396 (9th Cir. July 2015) is one of many recent decisions limiting a contractor’s ability to dismiss False Claims Act (“FCA”) lawsuits at an early stage of the litigation.  In Hartpence, the Ninth Circuit resurrected two FCA cases in one sweeping decision by interpreting the public disclosure and first-to-file bars in a relator-friendly manner that further erodes the protections contractors have against potentially parasitic FCA lawsuits filed after the government is aware of the alleged fraud.

The District Court Dismisses Consolidated FCA Suits Based on Public Disclosure and First-to-File Bars

In 2008, two former employees filed separate qui tam lawsuits against Kinetic Concepts, Inc. and KCI -USA, Inc. (collectively as “KCI” or the “defendants”) under the pre-2010 amendment version of the FCA.  The suits, which eventually were consolidated on appeal, alleged that KCI submitted claims for Medicare reimbursement using payment codes that allowed for automatic review, when KCI knew the claims were unusual and required individual review.

During the trial court proceedings, the defendants moved for dismissal on public disclosure grounds as both cases were filed after information about the fraud was revealed in a federal audit report and by an administrative law judge decision, and neither plaintiff qualified for the original source exception under Ninth Circuit precedent.  The public disclosure bar prevents a relator from filing a FCA suit based on information previously disclosed to the public, unless the relator qualified as an original source of the information.  31 U.S.C. § 3730(e)(4) (2006).  The defendants also sought dismissal for the second case based upon the existence of a pending case alleging the same fraud.  The first-to-file bar prevents filing a FCA lawsuit when there is a pending lawsuit based on the same underlying facts.  31 U.S.C. § 3730(b)(5).  The district court ultimately agreed with the defendants on both counts.

The Ninth Circuit Reverses the District Court

On appeal and after the original three-judge panel sua sponte called for the full circuit court to consider the case, the en banc Ninth Circuit unanimously reversed the trial court on each count.  The court ruled that the lower court erred in applying the three-part public disclosure bar test previously announced 23 years ago by the Ninth Circuit in Wang ex rel. United States v. FMC Corp., 975 F.2d 1412 (9th Cir. 1992).  Specifically, the Ninth Circuit determined that the “the hand-in-the-public-disclosure requirement” prong – requiring that the relator to play a role, in the public disclosure to qualify under the original source exception – lacked a statutory basis and therefore, deserved a “respectful burial.”  Consistent with other Circuits, the Ninth Circuit now took the position that the FCA statute’s public disclosure bar exception for original sources requires only two conditions to be met: the whistleblower must (1) notify the government before filing the suit and (2) have direct and independent knowledge of the allegations.

The Ninth Circuit also remanded the second case due to the lower court’s misapplication of the first-to-file bar.  The court determined that the underlying facts of the second case were sufficiently different from the underlying facts of the first because each case alleged violations of different regulations even though both cases related to the same ultimate claims and the same defendants.

Significance of the Decision

The impact of the Ninth Circuit’s decision to overrule itself and declare a two-part public disclosure bar test is somewhat limited because it only applies to cases filed prior to 2010.  The public disclosure bar at issue was based on the pre-2010 version of the FCA.  The 2010 amendments, which significantly revised the public disclosure bar and clarified the original source exception, were not retroactive.  Notwithstanding, this decision is rather significant for cases file before the 2010 amendments, as it expands the number of qualifying original sources than previously provided by the Ninth Circuit since 1992.

The court’s view of the first-to-file rule, however, is not limited to pre-amendment cases and is more troubling.  An approach which requires lower courts to dissect subsequent lawsuits and tease out the different material facts involved potentially could narrow the first-to-file rule to the detriment of defendants and open the door to additional FCA complaints.

Ultimately, this decision may signal to potential relators that the Ninth Circuit is a friendly venue for their claims.  Contractors, take heed.

One Silver Lining

Interestingly, although a recent D.C. Circuit decision found that such bars were not jurisdictional, the Ninth Circuit reiterated (in dicta) that the first-to-file bar was jurisdictional.  For contractors, this aside is as close to a silver lining as there is from Hartpence.