Using Contract Law to Protect Against False Claims Liability

Given the recent proliferation of verdicts and large settlements against healthcare providers for violations of the False Claims Act, it is important for providers that participate in state and federal healthcare programs (i.e., Medicare, Medicaid, TRICARE) to understand the FCA and how other laws affect a provider’s exposure under the FCA. For example, in a recent case, U.S. ex rel. Wildhart v. AARS Forever, Inc, two healthcare providers were able to use common contract law and HIPAA to obtain some protection against employees that filed a qui tam action.

In U.S. ex rel. Wildhirt v. AARS Forever, Inc., two former employees, Cathy Wildhirt and Nancy McArdle (“Relators”), brought a qui tam action against their former employers, AARS Forever, Inc. and THH Acquisition LLC 1 (“Defendants”), claiming that the Defendants violated the FCA by falsely billing Medicare and Medicaid for patients in the Veterans Administration hospital system. The Defendants were business affiliates who had contractual agreements with the VA and private payors to provide home health services and equipment.

While the Relators were employed by the Defendants, the Relators signed and were bound by an Employee Confidentiality, Non-Compete, and HIPAA Agreement. Under the Agreement, the Relators agreed that they would not disclose, reproduce, or take any confidential information. The Relators also agreed that they would indemnify the Defendants from any loss, claim, or damages arising out of any unauthorized disclosure of confidential information. Additionally, the Relators agreed that they would not receive any monetary reimbursement for a qui tam action against the Defendants. The Agreement also stated that the Relators would be in violation of the Agreement if the Relators released information which revealed suspect practices or investigations. Under the Agreement, the Relators had to inform the Defendants of any suspect practices. The Relators also signed a HIPAA acknowledgment form stating that they would comply with HIPAA, and if any of the terms were violated, the Relators would be subject to disciplinary action as well as legal action. Finally, the Relators signed a “Confidential Acknowledgment of No Known Suspect Practices” statements, which required the Relators to complete a “Notification of Suspect Practices” form if the Relators became aware of any type of suspect practice. Neither Relators reported any suspect practices to the Defendants prior to filing a qui tam action.

Despite signing the Agreement, one of the Relators took home and kept the Defendants’ confidential documents (which contained protected health information) while employed by Defendants. The Relator indicated that she did not have a particular purpose in mind when she brought home the confidential documents and admitted that she never returned the documents once her employment ended. Although the Relator stated that she had no intention of filing a qui tam suit when she took and held on to those documents, she eventually disclosed those documents to her legal counsel and the Government.

In response to the Relators’ qui tam action, the Defendants each filed several counterclaims, only some of which are discussed herein: (1) alleging the Relators breached the Agreement by making unauthorized disclosures of confidential information (Counts I and II); (2) seeking indemnification under the Agreement for the damages the Defendants suffered due to the Relators’ disclosure of confidential information (Count III); (3) alleging the Relators breached the Agreement by not reporting suspect practices to the Defendants prior to filing the qui tam action (Count IV); and (4) seeking reimbursement under the Agreement for legal costs and expenses if the Defendants are successful with the lawsuit (Count VI).

The Court stated that only two categories of counterclaims could potentially be successful in this type of situation: (1) where the “conduct at issue is distinct from the conduct underlying the FCA case” and does not require as an essential element a finding that the FCA defendant is or is not liable; or (2) “where the defendant’s claim, though bound up in facts of the FCA case, can succeed if the defendant is not liable in the FCA case.”

The Court found that the Defendants’ counterclaims fell in at least one of the two categories. Specifically, the Court reasoned that Counts I and II (alleging that the Relators breached the Agreement by disclosing unauthorized confidential information outside of the company) are independent of the FCA claim because the “counterclaims’ success does not require as an essential element that the Defendants are liable (or not liable) under the FCA.” The Court noted that the Relators retained and disclosed an extremely broad scope of the documents which went beyond the scope of those necessary to pursue the qui tam action.

The Court dismissed Count III to the extent that the claim sought indemnification from the Relators for losses incurred by the Defendants due to the Relators’ breach of the Agreement. The Court, however, did allow Count III to proceed to the extent that the Defendants were allowed to seek damages that were not directly related with the FCA litigation. Therefore, if the Defendants successfully argue that the Relators brought a frivolous lawsuit, then the Defendants may seek attorney and legal fees from the Relators.

The Court also allowed the Defendants to proceed with Count VI (seeking reimbursement from the Relators under the Agreement if the Defendants win the qui tam action) if the Defendants prevail on the merits of the FCA suit and persuade the court that the Relators’ claims are frivolous.

Furthermore, the Court noted that if the Defendants are found liable under the FCA, then Count IV (alleging that the Relators breached the Agreement by failing to report suspect practices) will be dismissed. However, if the Defendants prevail on the qui tam action, and are able to show a causal relationship between the Relators’ failure to report and their filing of the qui tam action, Count IV will be permitted.

Edward L. Vishnevetsky, an associate at Munsch Hardt, focuses on health law and commercial litigation.

Posted in Expert Opinions.