Defendant has moved for summary judgment (Docket # 301) and to strike and exclude certain declarations and arguments submitted by plaintiffs in opposition thereto (Docket # 317).
I. Factual Background
Defendant provides medical equipment to beneficiariеs of California's Medicare program (called "Medi-Cal") and then seeks reimbursement from that state and federally-funded initiative. This case centers on allegations that defendant's reimbursement claims overcharged the government
A. Medi-Cal's Upper Billing Limit Regulation
The California Department of Health Care Services (the "Department") administers Medi-Cal. In 2003, it filed an emergency regulation called the Upper Billing Limit ("UBL") to address "abusive billing conduct," including "the praсtice of obtaining steep discounts (whether legitimate or not) and then turning around and billing Medi-Cal at maximum reimbursement rates." See California Ass'n of Med. Prod. Suppliers v. Maxwell-Jolly,
"The [UBL] generatеd considerable public comment and opposition" when it was promulgated, "including comments by [defendant] and the trade association of which [defendant] is a member." Docket # 309 ¶ 3. How rebates and discounts should be treated for "net purchase price" calculations was among the topics discussed. For example, in response to an industry request that the UBL be amended to explicitly exclude "growth or volume discounts" from a product's net purchase price, the Department declined to change the rule and instead responded that the UBL "already excludes after the fact discounts." Docket # 309 ¶ 6. In response to оther comments, Medi-Cal also clarified that "net purchase price includes rebates, discounts, credits and other price-reducing adjustments known to the providers at the time they bill for the item."
B. The Shield-Coloplast Scheme
In 2010, defendant's supplier agreement with medical supply manufacturer Coloplast was expiring and the two companies negotiated a new contract. The agreement set forth the price of Coloplast's products in a series of tables attached to the contract. It also provided that, when Shield purchased enough products in a given three-month quarter, it would receive rebates to be paid by check no later than 60 days after the quarter's end. The rebates were structured into four tiers; the highest rebate ("Tier 4" for "Category A" products) equaled a 66% discount.
Plaintiff Herman, then President of U.S. Coloplast, and plaintiff Roseff, then Coloplast's Director of Distribution, were involved in the contract negotiation process. According to Roseff, the 2010 Shield-Coloplast agreement was "different" and "unusual." Docket # 311-4 at 6. The prices Coloplast was offering to Shield were "substantially higher than [for] any other customer,"
Like Roseff, plaintiff Herman, too, had concerns with the unusual contract and whether it was "compliant with what [she knew] about reimbursement [from Medi-Cal] and the way that it works." Docket # 311-5 at 11. She expressed these concerns during an in-person meeting with defendant and asked what it would do if Coloplast decided to abandon the agreement's structure. According to Herman, defendant told her it would not do business with Coloplast unless the agreement was set up in this fashion. Herman also remembers Shield telling her that the contract was arranged this way "because of issues related to how [defendant] bill[s] Medi-Cal."
Herman believed that Shield was "gaming the system" by insisting on this type of contract, which required "pretty high prices and very high rebates."
In the end, Coloplast relented and the high-price, high-rebate agreement went into effect in March 2010. From Deсember 2010 through February 2014, defendant achieved the highest or second-highest level of rebates for every quarter. When Shield sought reimbursement from Medi-Cal
Defendant admits that it "has never included off-invoice, after-the-fact rebates, such as those provided by Coloplast, to calculate the 'net purchase priсe,' " but denies that this practice transgresses the UBL or resulted in any false claims. See Docket # 302-2 ¶ 8. It maintains that the Coloplast rebates "are properly excluded from the 'net purchase price' calculation because these after-the-fact rebates are not known at the time of billing and do not reduce the invoiced amounts."
C. The Donath Litigation
That prior lawsuit is United States ex. rel. Donath v. Whitestone Corp., No. SACV 07-0995 (C.D. Cal. 2007). There, qui tam relator Terry Donath alleged that his employer Whitestone Corp., a supplier of defendant's, and defendant struck a deal that employed an off-invoice, after-the-fact rebate program similar to that alleged in this case. The Donath litigation also involved other allegations, including that defendant violated the UBL in a more straightforward manner by simply not factoring into net purchase price discounts that actually appeared on its invoices (so-called "on-invoice discounts"). In addition, on April 19, 2010, Donath filed an amended complaint which included allegations that, beyond Whitestone, "Shield also entered into sham volume rebate agreements with ... most or all of its other suppliers," including Coloplast. Docket # 302-4 ¶ 148. The amended complaint alleged that defendant's invoice scheme "continues ... to this day," i.e. April 19, 2010.
The United States Department of Justice and the California Attorney General investigated Donath's allegations. Defendant cooperated and produced documents in response to a March 2008 investigative subpoena from the Office of Inspector General of the Department of Health and Human Services. The California Bureau of Medi-Cal Fraud and Elder Abuse then conducted an audit examining defendant's claims for four types of medical supplies submitted between March 1, 2003 and December 1, 2007. In due course, defendant resolved the Donath litigation in November 2011 by a $5 million settlement with the United States, California, and the relator. Docket # 121-1 at 165.
Important details about the Donath settlement are in dispute. In defense of its billing practice, defendant contends that it "paid nothing ... for the off-invoicе rebates/phony invoices allegations made by Donath," Docket # 302-2 ¶ 5; that the government "expressly declined to base any damages" on the alleged off-invoice scheme, Docket # 307-1 at 3; and that "the parties agreed" that the settlement was repayment for the on-invoice rebate omissions only, Docket # 306-1 ¶ 11. Defendant further contends that the government gave
Plaintiffs offer a different view. According to the sworn affidavit of Siobhan Franklin, a Deputy Attorney General with the California Attorney General's Office who worked on the Donath investigation and the settlement, defendant's version of events is false. First, in response to defendant's claim that it "paid nothing" in the settlement relating to the phony invoicing allegation, Ms. Franklin states that "there was no such allocation of the settlement payment in the actual Settlement Agreement." Docket # 312 ¶ 12. She also notes that the "Covered Conduct" is specified as "Shield's overbilling the Medi-Cal program by charging more than twice the net purchase price of incontinence and other medical supplies in violation of [the UBL] during the period of March 1, 2003 through June 30, 2009."Id. Next, Ms. Franklin states that the "written assurances" described by Shield were merely unsigned, draft letters (one of which she herself wrote). She has no record of ever signing or sending a final version of such a letter and she points out that the draft letters did not give the assurances Shield claims. The letters "make[ ] no statement that Shield 'would not be sued again for the off-invoice allegations' " and instead both simply recite that the California DOJ and United States Attorney General's Office did not have a "present intention" to bring or recommend a civil or administrative action with respect to any Donath claim that might be dismissed without prejudice under the proposed settlement. Docket # 312 ¶ 11; see Docket ## 301-20, 301-21 (unsigned drаft letters). Finally, Ms. Franklin denies that Shield ever told her-during Donath or thereafter-that "in determining the net purchase price for medical supplies billed to Medi-Cal, Shield would [exclude] any large quarterly volume rebates paid by a manufacturer that may have been consistently achieved during the course of Shield's contract(s) with that manufacturer." Docket # 312 ¶ 13.
II. Legal Standards
A. Summary Judgment
Summary judgment is appropriate when the moving party "shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). "An issue is 'genuine' for purposes of summary judgment if 'the evidence is such that a reasonable jury could return a verdict for the nonmoving party,' and a 'material fact' is one which 'might affect the outcome of the suit under the governing law.' " Poulis-Minott v. Smith,
B. False Claims Act
Under the False Claims Act, liability attaches to any person who "knowingly presents ... a false or fraudulent claim for payment or approval" to the government or "knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim."
III. Discussion
Defendant argues that summary judgment should enter in its favor because plaintiffs will not be able to prove either the FCA's materiality or scienter requirements at trial. I examine each argument in turn.
A. Materiality
According to defendant, the conduct at issue here fails the materiality requirement because "while DOJ and the State AG are well aware of [Shield's billing practice] and have actually known about the allegations that this practice is fraudulent since 2007, Medi-Cal has continued to pay Shield's claims, including those for Coloplast items, for the past ten years." Docket # 301-3 at 14. Moreover, Shield argues, "if the State AG suspected fraud in 2007 or at any time thereafter, it would have requested a Medi-Cal payment suspension, sought the recovery of overpayments resulting from the alleged scheme under the сontrolling federal Medicaid regulations, and/or taken other steps to stop the alleged fraud."
According to plaintiffs, however, "Shield's argument rests in a disingenuous recitation of the Donath record." Docket # 310 at 11. Contrary to defendant's view of past events, plaintiffs contend that "the government did not have actual knowledge of Shield's UBL violations with Coloplast in 2007, nor did it have any reason to suspect that Shield would continue to submit false claims" after the settlement in Donath. Docket # 310 at 11-12. Plaintiffs argue that there is a genuine dispute of material fact as to whether defendant's omission of the Coloplast rebates from its net purchase price calculations was material to the government's decision to pay its reimbursement claims. In particular, they point to evidence supporting their interpretation of the UBL and argue that materiality becomes a jury question when a defendant has sought reimbursement from a government program in violation of important billing guidelines.
i. Escobar and the FCA's Materiality Standard
Under the Supreme Court's Escobar decision, the materiality vel non of
"[C]ourts are to conduct a holistic approach to determining materiality in connection with a payment decision ...." Escobar III,
ii. Materiality in This Case
Taking all reasonable inferences in favor of plaintiffs and viewing the disputed facts in the light most favorable to them, I am persuaded that a reasonable jury could find that defendant's omission of the Coloplast rebates from its net purchase price calculations was material to the government's decision to pay defendant's reimbursement claims. Summary judgment is therefore inappropriate.
Defendant argues that the government's failure to suspend reimbursement payments, seek recovery of overpayment, or "take[ ] other steps to stop the alleged fraud" means thаt the practice of excluding the Coloplast rebates was immaterial to payment. Docket # 301-1 at 14. But a jury could see things differently. First, a jury could find that the government did seek recovery and take steps to stop the alleged scheme when, in Donath, it obtained a $5 million settlement payment from defendant for "overbilling the Medi-Cal program by charging more than twice the net purchase price of incontinence and other medical supplies in violation of [the UBL]." Docket # 312 ¶ 12. Though defendant protests that the settlement was related to Donath's"on-invoice" allegations only and that it received "cold comfort" letters condoning the exclusion of "off-invoice" rebates like those it received from Coloplast, those assertions are hotly disputed.
Second, a jury could find that the government's continued payment of defendant's post-Donath reimbursement claims has no bearing on whether the practice of excluding the Coloplast rebates was material to payment. A jury could find that the government did not have "actual knowledge" of defendant's billing practices because it reasonably assumed defendant would not persist in excluding discounts like the Coloplast rebates after settling Donath. Moreover, the record includes evidence from Attorney Franklin that, contrary to defendant's assertion, Shield never informed her it would continue to exclude such rebates from net purchase price when submitting claims to Medi-Cal. Docket # 312 ¶ 13.
Were a jury to discredit Shield's view of these disputed facts, it could find materiality in this case. Noncompliance with the UBL is plainly material to the government's
B. Scienter
Defendant also challenges plaintiffs' ability to prove scienter at trial. To win summary judgment on this ground, defendant must show that no reasonable jury could find that defendant omitted the Coloplast rebates frоm its net purchase calculations with either "actual knowledge," "deliberate ignorance," or "reckless disregard" of any requirement to include them. See
Defendant contends that plaintiffs "fail to point to any evidence that Shield knew its practice of excluding future, off-invoice, after-the-fact rebates when calculating the net purchase price under the UBL was wrongful (false)." Docket # 318 at 2. It also argues that, under the framework of U.S. ex rel. Johnson v. Golden Gate Nat'l Senior Care, plaintiffs cannot establish scienter because (i) the UBL is "ambiguous" as to whether the Coloplast rebates should be included in net purchase price; (ii) defendant's interpretation that the rebates are properly excluded is "objectively reasonable"; and (iii) "no formal guidance" from the government warned defendant that this interpretation was wrong. See Docket # 301-1 at 15;
First, as detailed above, plaintiffs have proffered sufficient facts to support a jury finding that the 2010 Shield-Coloplast agreement was deliberately arranged to evade the UBL. On these facts, a jury could infer that defendant knew the regulation required rebates like those defendant received from Coloplast to be included when an item's "net purchase price" was calculated.
Second, the reasonableness of defendant's interpretation of the regulation and suggestions of government warnings away from that interpretation present mixed questions of fact and law best resolved by the jury when the material facts are in dispute. See U.S. ex rel. Westmoreland v. Amgen, Inc.,
To begin, even assuming that the regulation is indeed ambiguous, a jury could nevertheless find that defendant's interpretation of the UBL is not objectively reasonable. Defendant reads the UBL as permitting exclusion of the Coloplast rebates because (1) they are "off-invoice" (i.e. Coloplast did not list them on its bills to defendant); and (2) "after-the-fact" (i.e. the rebates were paid at the end of each quarter, presumably after defendant had submitted reimbursement claims to Medi-Cal). As support for its reading of "off-invoice," Shield points to the UBL's statement that "net purсhase price ... includ[es] any rebates ... that reduce the item's invoice amount." (emphasis added). As support for an "after-the-fact" exception, Shield notes that "net purchase price ... includ[es] any rebate ... known by the provider at the time of billing the Medi-Cal program for the item ...." (emphasis added). A jury could find that neither of these interpretations is objectively reasonable.
The UBL says, first and foremost, that "net purchase price" is "the actual cost to the provider to purchase the item from the seller ...." Cal. Code Regs., tit. 22, § 51008.1(a)(2)(A) (emphasis added). Given that the Coloplast rebates, once received, effectively reduced defendant's purchase costs by as much as 70 percent for a given produсt, a jury could determine that it was not objectively reasonable to interpret the phrase "reduce the item's invoice amount" as allowing omission of large discounts simply because they did not appear on a bill. That is especially true given the UBL's purpose of curbing "the practice of obtaining steep discounts (whether legitimate or not) and then turning around and billing Medi-Cal at maximum reimbursement rates." See California Ass'n. of Med. Prod. Suppliers,
Similarly, in the context of the Coloplast rebates at issue here, a jury could determine that it was not objectively reasonable to interpret the word "known" to mean that the rebates were excludable simply because they were paid later. Plaintiffs have adduced sufficient evidence that defendant did "know" it would receive the rebates even before they were actually paid. Specifically, there is evidence that
Furthermore, turning to the third prong of the Johnson framework, a reasonable jury could find that the government warned defendant away from its interpretation. Defendant was aware that California regulators drafting the UBL believed that " 'net purchase price' is understood by the regulated community to be the amount actually paid for an item after all discounts and rebates have been taken." Docket # 311-1 at 4. A jury could find that statement was sufficient warning that defendant's self-serving reading of the terms like "reduce the item's invoice amount" and "known" contravened the regulation. Furthermore, defendant was also aware that Medi-Cal rejected industry representatives' request to amend the UBL "to exclude 'after the fact discounts' dependent on ... aggregate volume of purchase from the seller from the net purchase price." Docket # 311-10 at 1. Rather than amending the UBL, Medi-Cal responded by clarifying that it "already excluded discounts not known to the provider at the time of billing." Id. (emphasis added). A jury could find that this statement warned defendants that structuring its contracts to pay high invoice prices up front and regulаrly receive large rebates each quarter was not license to omit those rebates from its net purchase price calculations where, as here, defendants consistently achieved those rebates and reaped large discounts they never passed on to Medi-Cal.
Stepping outside the Johnson framework, the foregoing discussion makes plain that a jury could find defendant submitted reimbursement claims to Medi-Cal with at least "reckless disregard" for whether the UBL required that the bills incorporate the Coloplast rebates. In addition to these facts is the fact that defendant paid $5 million to settle allegations of overcharging in Donath. See Docket # 312 ¶ 12. While the FCA's knowledge requirement is strictly enforced to avoid "penalizing a private party for violating a rule without first providing adequate notice of the substance of the rule," Satellite Broad. Co. v. FCC,
IV. Conclusion
Defendant's Motion for Summary Judgment (Docket # 301) is denied. Its Motion
Notes
The term "government" as used herein refers to the United States, the State of California, and their respective agencies and departments.
Based on "similar supply agreements" that Coloplast had with other companies like Shield (so-called "master dealers") during the 2009-2012 time period, plaintiffs assert that "a comparison of the list prices for certain Coloplast products contained in [both the Shield and other companies'] agreements shows that Shield was paying an invoice price approximately 1.5 times to 2.5 times the invoice price received by other master dealers." Docket # 309 at 24 (referencing Docket # 314 (Belisle Declaration) ). Similarly, "[a] comparison of the volume discounts ... shows that Shield was receiving after-the-fact volume discounts approximately ten times higher than the rebates received by other master dealers."
Defendant objects that this and other similar statements are merely hearsay. Summary judgment cannot be resisted by pointing to evidence that would ultimately be inadmissible at trial. Vazquez v. Lopez-Rosario,
California's False Claims Act contains identical liability provisions. See
In addition, plaintiffs rely upоn the sworn declarations of Pansy Watson, current Chief of the Medical Supplies & Entreal Nutrition Benefits Branch in the Pharmacy Benefits Division with the California Department of Health Care Services. See Docket ## 313, 326. Ms. Watson declares that defendant's billing practices would be material to the Department's decision to pay the claims. Defendant has asked the court to strike the declaration because plaintiffs never disclosed Ms. Watson during fact discovery. It also argues that the testimony lacks foundation.
The court agrees that the declaration is improper because plaintiffs' failure to disclose Ms. Watson during discovery was neither justified nor harmless. See Fed. R. Civ. P. 26(a), 37(c)(1). It did not, therefore, consider Ms. Watson's testimony in ruling on defendant's summary judgment motion.