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While many defendants in civil False Claims Act (FCA) cases contend they should not be held liable for punitive damages and penalties if they sought and followed the advice of legal counsel, this defense is almost never accepted by the court, according to FCA expert John Boese.
But in what he calls an "unusual and important recent decision," Boese, of Fried Frank in Washington, DC, reports a physician succeeded in having FCA claims dismissed with prejudice by asserting the "advice of counsel" defense.
In this case, U.S. v. ex rel. Bidani v. Lewis, 7the relator alleged the defendant received illegal kickbacks by referring dialysis patients to supply companies owned and controlled by the defendant. Evidence was presented in a motion for summary judgment showing the physician relied on the advice of counsel about the legality of the disputed arrangements.
"It would seem to develop a new defense of False Claims Act cases," asserts Houston health care attorney and former federal prosecutor Michael Clark. He says the one limitation is that the advice probably has to be measured against some type of standard to make sure it was reasonable.
While it can be viewed as a defense, Clark’s partner Lee Hamel says it is more accurately "evidence" on the issue of defense. "If there is no contrary evidence in a summary judgment situation, the court can accept it as correct if it meets all specified criteria and could grant a summary judgment," he explains. "I think it is very significant from that point of view because the summary judgment [is] based upon the issue of intent."
Boese says while the court never decided whether the applicable statutes and regulations have been violated, it also stated the relator has the burden to show that defendants knew their conduct violated applicable regulations in order to satisfy the FCA requirement.
According to Boese, client memoranda and other attorney-client communications regarding the ownership relationship were considered by the court, which held that the only reasonable inference that could be drawn from the evidence was that the defendants had no actual knowledge that the common ownership arrangement was improper.
Attorney/client memoranda have been an area of much concern for health care attorneys in recent years.
The issue drew significant attention in 1999, when two health care attorneys who represented Baptist Medical Center in Kansas City, MO, were charged with conspiracy as part of a kick-back and bribery investigation. However, the attorneys were acquitted, and the wave of attorney indictments anticipated by many at the time never materialized.
Hamel says the Kansas City case sounded a note of caution to those who advise their clients on anti-kickback and fraud and abuse issues. "They are now much more careful in my opinion," he reports. "You will never again see attorneys taking notes on their observations about their clients."
Gabe Imperato of Broad and Cassel in Fort Lauderdale agrees the most significant effect of the aforementioned case has been the sentinel effect rather than more direct enforcement actions against lawyers.
In fact, he says most counsel will no longer participate in arrangements between sources of referrals unless they can bless those arrangements with a bulletproof legal opinion.
Consultants also are seen as vulnerable. Clark points out in the qui tam suit against Columbia/HCA, the government alleged the accounting firm compilied a cost report that analyzed certain "soft spots," but filed a different one. "The government says that shows they intended to defraud," he explains. "But accounting firms always give analyses to their clients about gray areas."
In another case involving Columbia, the Sixth Circuit issued a decision last week that could increase the exposure of corporate directors who fail to give appropriate attention to potentially fraudulent activities. In McCall v. Scott, the Court of Appeals reversed the dismissal of certain claims against current and former directors of Columbia/HCA.
Boese says those claims were filed after Columbia’s stock price declined significantly in the wake of news that the health care company was under investigation for a variety of Medicare and Medicaid fraud allegations. The plaintiffs alleged some members of the Columbia Board intentionally or recklessly failed to stop allegedly fraudulent conduct in order to increase revenue and profits.
"I don’t take it to be a shocking decision," says Imperato. "But it underscores the need for corporate directors to be on top of allegations of fraudulent or abusive conduct detrimental to the shareholders of a company."
Boese contends the McCall decision is "incorrect and unduly harsh," and predicts that few other courts will act in a similar fashion. Nevertheless, he says whistle-blower actions and criminal investigations mean that inside and outside counsel must be certain the board becomes aware of and carefully monitors allegations of fraud or illegal conduct, no matter how valid or accurate.
"No board of directors can afford not to inform itself of the relevant facts when such allegations are made," asserts Boese.
That means the board as a whole or through a designated committee should meet regularly with corporate compliance officers and inside and outside counsel to keep appraised of the status of allegations of fraud.