There was significant activity in 2014 in matters involving the New York False Claims Act (NY FCA). This review summarizes the legislative activity, case law developments and noteworthy settlements in 2014.

I. Legislative Activity

In 2011, the Inspector General of the U.S. Department of Health and Human Services (HHS OIG) determined that that the NY FCA (among other state FCAs) was not as robust as the federal False Claims Act (FCA), and that New York would not qualify for an increased allocation of recoveries in cases involving the submission of false claims to Medicaid if it did not amend its FCA to bring it in line with the federal FCA. Section 1909 of the federal Social Security Act provides for an added ten percent allocation to states from any FCA recovery shared by the federal and state government in FCA cases involving Medicaid claims. Only states whose FCAs “are at least as effective in rewarding and facilitating qui tam actions for false and fraudulent claims” qualify for this additional ten percent recovery. In response to the HHS OIG’s findings, NY amended its FCA in 2013 and also proposed changes to procedural regulations implementing the NY FCA that have since been adopted. In February 2014, HHS OIG determined that both the New York FCA and the accompanying procedural regulations comply with Section 1909’s requirements.¹

II. Case Law Developments

A. Tax Fraud

New York amended its False Claims Act in 2010 to, among other things, reach tax fraud. N.Y. State Fin. Law § 189(4)(a). The biggest news of 2014 involved the New York Attorney General’s (AG) first lawsuit alleging tax fraud, People v. Sprint Nextel Corp., which has now survived a motion to dismiss and an appeal. In April 2012, the AG filed a complaint against Sprint, alleging that Sprint deliberately “under-collect[ed] and underpay[ed] millions of dollars in … taxes on flat-rate access charges for wireless calling plans.” Sprint moved to dismiss the complaint a few months later, arguing that it was not liable for violating the FCA and that, even if it were liable, an award of damages for conduct pre-dating the 2010 Amendments would violate the relevant Ex Post Facto clause of the federal constitution. Sprint appealed after a trial court denied its motion in June 2013.

In February 2014, the Appellate Division unanimously affirmed. It held that the complaint adequately alleged that Sprint violated the NY FCA, Executive Law Sec. 63 (12) and Article 28 of the Tax Law by knowingly making false statements material to an obligation to pay sales tax. The court further found that the applicable Tax Law provision is not preempted by the Federal Mobile Telecommunications Sourcing Act (4 USC 116 et seq.).

Finally, the court held that Sprint failed “to show that the Act’s sanction of civil penalties, including treble damages, is so punitive in nature and effect as to have its retroactive effect barred” by the constitution. 114 A.D.3d. at 623. A federal district court has since echoed that conclusion outside the tax-fraud context, permitting claims based on conduct that occurred before New York enacted its FCA.”² This issue will eventually lose significance because the NY FCA has a ten-year statute of limitations. See N.Y. State Fin. Law § 192(1). But NY taxpayers should be aware that they may be sued for conduct that pre-dates the 2010 amendments.

B. The Pleading Standard

Two decisions involving Novartis Pharmaceuticals Corp. underscored that FCA plaintiffs must allege fraud with the requisite particularity to survive a motion to dismiss.

In United States ex rel. Kester v. Novartis Pharm. Corp., No. 11 Civ. 8196 (S.D.N.Y.), the court considered allegations that Novartis paid kickbacks in exchange for the promotion of some of its drugs. In June 2014, the court denied part of a motion to dismiss state and federal FCA claims involving some—but not all—of those medications. The court acknowledged the sufficiency of drug-specific allegations “based on actual Medicare and Medicaid claims data and broken down by pharmacy.” But it dismissed claims involving other drugs because the allegations lacked “specifics (such as dollar amounts or the number of claims)” involved. (For more on the case, see our earlier post.)

Several months later, in United States ex rel. Bilotta v. Novartis Pharm. Corp., No. 11 Civ. 0071 (S.D.N.Y.), a different judge on the same court considered additional kickback allegations against Novartis. Although the court held that the government adequately detailed the alleged fraud, it applied a stricter pleading standard than the one urged by the government. The court rejected the approach set out by the 5th Circuit in Grubbs v. Kanneganti, 565 F.3d 180 (5th Cir. 2009), which requires only the “particular details of a scheme paired with reliable indicia that lead to a strong inference that claims were actually submitted.” Instead, the district court concluded that an FCA plaintiff must plead “the particulars of the false claims themselves.” The Bilotta court found that the complaint satisfied that standard because it included “hundreds of pages of spreadsheets listing particular false claims.”

III. Noteworthy Settlements

A. Tax Fraud

The Sprint decision likely induced two settlements involving tax fraud allegations. In May 2014, the AG announced a $6.2 million settlement with Lantheus Medical Imaging Inc. to resolve tax fraud allegations. Three months later, the AG announced a $1.56 million settlement with appliance retailer Topline Appliance Center to resolve allegations that it did not “collect and pay sales taxes and corporate franchise taxes to New York over an almost 10-year period.”

B. Health Care Fraud

Some of the year’s largest settlements concerned kickbacks and off-label marketing.

• Endo Pharmaceuticals agreed to pay $173 million—in addition to nearly $21 million in criminal penalties and forfeitures—to settle claims that it promoted the drug Lidoderm for off-label uses. (AG Press Release.) Although several states and the federal government participated in the settlement, more than $25 million was earmarked for the New York Medicaid program.
• CareFusion agreed to pay $40 million to settle claims with all fifty states, the federal government, and the District of Columbia, “resolving civil allegations of unlawful marketing practices and the payment of kickbacks aimed at promoting sales of CareFusion’s surgical preparation solution, Chloraprep.” (AG Press Release.) New York’s share totaled over $2 million. (Settlement at 5.)
• BioScrip, Inc. agreed to pay more than $15 million to resolve allegations that it participated in an alleged kickback scheme involving the drug Exjade.³ Of that $15 million, $895,000 will be paid to New York to resolve kickback claims relating to New York Medicaid recipients. (AG Press Release.)
• Sorkin’s Ltd. Rx. agreed to pay $846,244 to resolve allegations that it “had made false statements to obtain prior authorizations for certain prescription drugs, restocked and resold unused dosages of drugs for which it had already submitted claims and received payment, and submitted false claims to Medicaid and Medicare Part D.” (Akin Gump Coverage.) New York State will receive $465,423 of the settlement.
• Brooklyn Plaza Medical Center agreed to pay $600,000 “to resolve allegations that the diagnostic and treatment center ran a satellite facility … without an operating certificate” and “disguised the satellite facility’s Medicaid billings to make them appear as if the services were rendered at the Brooklyn Plaza Medical Center, not the satellite center.” (AG Press Release.)
• Two defendants entered into a $15.5 million settlement “to resolve allegations that [a] radiology practice … submitted [more than 40,000] false claims to the Medicaid and Medicare programs for diagnostic outpatient imaging services that were not specifically ordered by a treating physician[,] not medically necessary,” and in some cases, “not even performed.” (AG Press Release.) New York will receive approximately $3 million from the settlement.
• A foster-care services provider agreed to pay $250,000 to resolve allegations that the provider billed “Medicaid for the care of children while they were absent from [a foster care] program.” (AG Press Release.)
• A nursing home and its owner pledged $2.2 million to resolve claims that they submitted over 62,000 false claims from 2002 to 2006. According to the AG’s press release, the defendants “routinely stated that residents were receiving treatments, including for oxygen and suctioning, when such treatments where neither required nor given.” The defendants also falsified medical records to cover up the scheme—prompting two criminal convictions.

C. Government Contractors

• Office Depot agreed to pay $475,000 to “to resolve allegations that [it] overcharged New York state agencies for offices supplies.” (Akin Gump Coverage.)
• We expect more overpayment news in 2015 as the United States Attorney General intervened in a suit alleging that Symantec overcharged New York and other states for computer software.

¹ http://oig.hhs.gov/fraud/docs/falseclaimsact/NewYork.pdf

² U.S. ex rel. Bilotta v. Novartis Pharm. Corp., No. 11 Civ. 0071 (PGG) (S.D.N.Y.).

³ BioScrip was a co-defendant in the Kester case described above.