7th Circuit Lays Obstacle For Litigation Funders With False Claims Act Suits

A federal appellate court dealt a blow against litigation funding companies by ruling that the U.S. Justice Department can dismiss any False Claims Act lawsuits that it deems meritless without first proving that dismissal is justified.

The 7th Circuit Court of Appeals reversed a decision by a federal judge in Illinois who found that the government had not shown a rational basis to dismiss a case titled United States of America ex rel. Cimznhca LLC v. UCB Inc.

The panel rejected Southern Illinois District Court Judge Staci M. Yandle’s finding that the Justice Department had shown a “personal animus” toward the litigation funding company that filed the action.

“This is not government irrationality,” the panel said in its opinion. “It oppresses no one and shocks no one’s conscience.”

The Cimznhca case is one of 11 filed against 38 health care providers in eight judicial districts by affiliates of the National Healthcare Analysis Group, according to an article by Crowell & Moring, an international law firm headquartered in Washington D.C. All of the suits make nearly identical allegations about violations of the federal anti-kickback statute.

NHCA was founded by a New Jersey attorney who analyzed Medicare claims data to find indications of fraud in billing patterns, the article said. He teamed up with Wall Street investors to create a holding company called Venari Partners, which in turn created separate companies that funded False Claims Act lawsuits against potential violators.

The False Claims Act, passed in 1863 to fight against corrupt vendors during the Civil War, is a favorite for litigation funding companies. It allows awards of treble damages to parties who prove their claims that the government was defrauded. Such actions are called qui tam lawsuits.

The U.S. Chamber of Commerce, in an amicus brief, said $59 billion has been awards under the False Claims Act since 1986, but less than $2.5 billion of that came from cases in which the government did not intervene.

“False Claims Act litigation is time-consuming, lengthy, and extremely costly,” the Chamber said. “Litigation under the Act touches nearly every sector of the American economy.

“Despite the fact that the overwhelming majority of nonintervened cases are meritless, defendants nonetheless face tremendous pressure to settle because the costs of defense are so high and the potential downside so great.”

Under the act, private parties who file lawsuits on behalf of the government are called relators. The law allows the Justice Department to take over prosecution of relators’ lawsuits, if it chooses, and share in any award of damages.

The statute also allows such lawsuits to proceed without any involvement by the government. But more importantly in this case, the law gives the Justice Department authority to file motions to dismiss claims that it finds lack merit.

The statute requires a district court to hold a hearing before granting such motions to dismiss, but gives no guidance on what standards should be used when deciding whether to grant dismissal motions. The district courts have disagreed on how much deference should be given to federal prosecutors.

The lack of guidance didn’t matter much because under previous administrations, the Justice Department rarely dismissed relator’s qui tam lawsuits. That changed in 2018 when Michael Granston, director of the department’s commercial fraud unit, issued a memorandum instructing U.S. attorneys to seek dismissal of any claims that lacked merit. The memo noted that 600 new matters had been filed annually and said the government needs to conserve its resources.

The Cimznhca lawsuit alleges that UCB and RXC schemed to provide free nursing services and reimbursement for support services to medical providers who prescribed a UCB drug called Cimzia to treat patients with Crohn’s disease. The government sought to dismiss the suit because government policy actually condones some of the practices that the litigation funding company labeled as “kickbacks.”

Judge Yandle cited a 1998 ruling by the California-based 9th Circuit Court of Appeals in Sequoia Orange v. Baird-Neece Packing Corp. in denying the government’s motion to dismiss. The 9th Circuit ruled that the hearing required by the False Claims Act must serve a purpose, so judges should not dismiss lawsuits unless the government shows a rational basis.

But the 7th Circuit panel noted that in 2003, the District of Columbia Circuit Court held inSwift v. United States that the government isn’t required to go through any hoops before dismissing a relator’s lawsuit. The law states only that a hearing must be heard.

The 7th Circuit said Swift comes closer to the right interpretation of the False Claims Act. The court said if the government can dismiss any lawsuits that it wishes as long as it follows due process rules. The panel said the government presented very good arguments for dismissing the Cimznhca lawsuit.

“The government proposed to terminate this suit in part because, across nine cited agency guidances, advisory opinions, and final rulemakings, it has consistently held that the conduct complained of is probably lawful,” the panel majority said. “Not only lawful, but beneficial to patients and the public.”

A dissenting judge agreed with the dismissal, but for narrower reasons.