Third Circuit Clarifies False Claims Act Pleading Requirements

Third Circuit Clarifies False Claims Act Pleading Requirements

There is a split among the circuits regarding what a whistleblower must plead to survive a motion to dismiss in False Claims Act (FCA) cases. The U.S. Court of Appeals for the Third Circuit has now spoken for the first time on the issue. In June, the Third Circuit decided Foglia v. Renal Ventures Management, 754 F.3d 153 (3d Cir. 2014). In its decision, the Third Circuit reversed a district court order granting a motion to dismiss for insufficient detail in the pleadings. In so ruling, the Third Circuit sided with those circuits adopting the less demanding of the competing FCA pleading standards.

The purpose underlying the FCA is to encourage “whistleblowing” by private citizens aware of fraudulent claims for payment being made upon the U.S. government. Private plaintiffs, who often are employees or former employees of the defendant, may commence the lawsuit on behalf of the government to recover damages resulting from someone presenting a false claim for reimbursement or payment. If, as frequently happens, the United States does not assert its statutory right to take over the case from the private plaintiff, the whistleblower plaintiff can recover between 25 and 30 percent of any money recovered by settlement or judgment, plus reasonable attorney fees and costs.

Because the FCA is a fraud-based statute, courts have agreed that Federal Rule of Civil Procedure 9(b)’s heightened pleading standards apply. In the recent Foglia case, the Third Circuit reviewed the district court’s decision to dismiss the complaint for failure to comply with Rule 9(b)’s particularity requirements. The plaintiff whistleblower, Thomas Foglia, was a nurse who worked for the defendant kidney dialysis company. Foglia alleged the defendant had falsely submitted claims for reimbursement. The district court dismissed the complaint, finding that Foglia failed to meet Rule 9(b)’s heightened standard for pleading the particulars of fraud. The district court found that Foglia had not alleged a representative example of a false claim being submitted by the defendant. Foglia appealed and alleged that he should not have to plead all of the particulars about a representative claim, so long as his complaint alleged sufficient details of a generalized scheme to submit false claims.

The Third Circuit began its analysis with a survey of other circuits that have dealt with the issue. It recognized a split among the circuits. Some circuits apply the more restrictive “representative sample” approach, requiring the plaintiff to plead all of the particulars of a specific false claim actually submitted to the government by the defendant. Other circuits apply a less demanding approach—one that does not require pleading the facts of a representative claim. The circuits that invoke the higher pleading standard believe that Rule 9(b) requires plaintiffs to describe the time, place and contents of the false representations, the identity of the person who made the representation, and what that person obtained. For example, the Fourth Circuit holds that plaintiffs cannot satisfy Rule 9(b)’s particularity requirement merely by describing a scheme and alleging in conclusory fashion the belief that claims requesting illegal payment were submitted to the government. Plaintiffs must also allege facts substantiating the belief that false claims were actually submitted. The Fourth Circuit also holds that plaintiffs must allege with particularity that specific false claims were presented to the government for payment. The Sixth Circuit allows FCA plaintiffs to proceed to discovery on a fraudulent scheme if they describe a specific false claim that exemplifies the broader class of claims allegedly submitted. Similarly, the Eighth and Eleventh circuits require FCA plaintiffs to allege the specifics of a representative false claim.

The First, Fifth and Ninth circuits have adopted a less demanding pleading standard. The Ninth Circuit has explicitly refused to adopt an approach requiring FCA plaintiffs to plead representative samples of false claims. The First Circuit applies a more flexible standard for FCA pleadings when a defendant allegedly induces a third party to file false claims as opposed to when a defendant files the false claim itself. The Fifth and Ninth circuits also do not require FCA plaintiffs to allege the details of particular false claims submitted to the government if they plead the specific details of a fraudulent scheme to submit false claims, along with “reliable indicia that lead to a strong inference that claims were actually submitted.” Those courts note that plaintiffs must still plead the fraud with enough specificity to give the defendant notice of the misconduct alleged to constitute the fraud.

In agreeing with the circuits that employ the less demanding pleading standard, the Third Circuit noted that it is difficult to reconcile the text of the FCA with the “representative sample” standard used by the Fourth, Sixth, Eighth and Eleventh circuits. The FCA’s plain language does not require pleading of a representative sample. Moreover, requiring a plaintiff to plead the contents of an actual, submitted false claim requires a level of detail greater than that contemplated by any federal pleading rule. That standard requires that a plaintiff virtually prove his or her case at the pleadings stage. Finally, as a practical matter, and as the court found in Foglia, the defendant often controls the records that the plaintiff needs to prove that level of detail.

As a result, the Third Circuit found that the more nuanced approach—adopted in the First, Fifth and Ninth circuits—furthers Rule 9(b)’s purpose of providing defendants with fair notice of the plaintiff’s claims, without imposing an unrealistic pleading burden on the plaintiff. The court also noted that this standard is compatible with prior Third Circuit cases discussing FCA issues.

The Foglia standard still requires the level of detail commanded by Rule 9(b) of the Federal Rules of Civil Procedure. For example, Foglia’s allegations were sufficient to show that the defendant could have committed fraud by using the same vial of medicine more than once, and the court had to accept as true the plaintiff’s allegations that the defendant failed to follow the procedures it should have followed for lawful reimbursement. Although these allegations could be challenged, the court found them sufficient to give the defendant notice of the claim against it. Thus, the Third Circuit held that the plaintiff pleaded sufficient facts to satisfy Rule 9(b), and it reversed the district court’s order dismissing the complaint.

After Foglia, parties involved in FCA actions in the Third Circuit now have insight into how a court will determine whether a complaint has alleged fraud with sufficient particularity under Rule 9(b). The Third Circuit has endorsed the approach followed by the First, Fifth and Ninth circuits and rejected the more demanding “representative sample” approach used by the Fourth, Sixth, Eighth and Eleventh circuits.

Although Foglia dealt specifically with pleading requirements for FCA plaintiffs, the disagreement among the various circuits occurs in the context of ongoing changes in federal pleading requirements that have raised the bar for plaintiffs in recent years. In a 2007 decision, Tellabs v. Makor Issues & Rights, 551 U.S. 308 (2007), the U.S. Supreme Court interpreted a congressional attempt to create a uniform heightened pleading standard for securities fraud actions and held that plaintiffs alleging securities fraud must plead facts that make an inference of scienter at least as likely as any plausible opposing inference. In 2007 and 2009, respectively, the Supreme Court issued decisions in Bell Atlantic v. Twombly, 550 U.S. 544 (2007), and Ashcroft v. Iqbal, 556 U.S. 662 (2009), that raised the pleading bar in non-fraud cases. In general, the trend in recent years has been to require more, not less, factual specificity at the pleadings stage—whether under Rule 8 or 9(b) of the Federal Rules.

That said, the Third Circuit’s Foglia opinion offers some modest pushback against this trend. It also underscores and widens the circuit split on FCA pleading. Given the increasing importance of the FCA, the Supreme Court may review the issue in the future. Further guidance from that court would resolve not only the FCA issues, but it would also provide further direction about general pleading requirements under the Federal Rules.

Jeffrey G. Weil is chair of the commercial litigation department at Cozen O’Connor and is experienced in class action litigation, including securities, products liability and antitrust. He can be reached at jweil@cozen.com.

Michael J. Melusky joined the firm in 2013 as an associate in the firm’s litigation section. Melusky graduated from Villanova University School of Law and Susquehanna University with a Bachelor of Arts in political science. •

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