On July 2, the U.S. Court of Appeals for the Fourth Circuit affirmed a jury verdict of more than $237 million against Tuomey Healthcare System, a nonprofit hospital in South Carolina, based on Stark Law and False Claims Act violations. United States ex rel. Drakeford v. Tuomey Healthcare System, No. 13-2219 (4th Cir. July 2, 2015). The Government’s claims in the case were based on part-time employment contracts Tuomey signed with local physicians, which required the physicians to perform outpatient surgeries only at Tuomey’s facilities, and which, according to the Government, compensated the physicians above fair market value for their services. The jury found these contracts violated the Stark Law, 42 U.S.C. § 1395nn, which prohibits physicians from making referrals to entities where the referring physician receives compensation “that varies with, or takes into account, the volume or value of the referrals or other business generated by the referring physician,” and prohibits a hospital from submitting for payment a Medicare claim for services rendered as a result of a prohibited referral.
The Fourth Circuit’s decision is notable for its rejection of Tuomey’s advice-of-counsel defense. Tuomey argued that it lacked the requisite scienter for liability under the FCA because it reasonably relied on its counsel’s opinion that the challenged contracts were legal. The Fourth Circuit rejected that argument because it found the record “replete with evidence that Tuomey shopped for legal opinions approving of the employment contracts, while ignoring negative assessments.” The court emphasized the testimony of attorney Kevin McAnaney, whom Tuomey had consulted when Dr. Michael Drakeford—who would later become the relator in the case—refused to sign a contract with Tuomey because he believed the agreements may violate the Stark Law. McAnaney, a former HHS attorney and Stark Law expert, advised both Tuomey and Drakeford that the proposed employment contracts “raised significant ‘red flags’ under the Stark Law.” The Fourth Circuit approved the admission of McAnaney’s testimony, holding it was “a relevant, and indeed, essential, component of the government’s evidence” that Tuomey had “‘knowingly’ submitted false claims under the FCA,” and found the testimony showed that “Tuomey knew that there was a substantial risk that the contracts violated the Stark Law, and was nonetheless deliberately ignorant of, or recklessly disregarded that risk.”
The Drakeford decision stands as a caution to entities that rely on advice of counsel to comply with complex statutory and regulatory schemes like the Stark Law. While reasonable reliance on advice of counsel can be a viable defense to an FCA claim, the defendant asserting such a defense must show that counsel was provided all relevant information and that the defendant relied in good faith on counsel’s advice. Any entity facing potential FCA exposure should take care to avoid the potential perception of “shopping” for favorable legal opinions.
