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False Claims Act Statistics, News & Analysis

Too Little and Too Late: First Circuit Rejects Relator's Claims of Possible Fraud and Refuses Unduly Delayed Leave to Amend

Again reiterating that Rule 9(b) is a formidable hurdle for relators, the First Circuit rebuffed a relator’s attempt to allege FCA violations based on broad inferences of fraudulent activity, without any specific facts or statistical evidence tying that conduct to false claims to the government. In United States ex rel. Hagerty v. Cyberonics, Inc., No. 16-1304, 2016 WL 7321224 (1st Cir. Dec. 16, 2016), a former sales representative for defendant Cyberonics, Inc. turned relator alleged that employees of Cyberonics had used fraudulent sales tactics to encourage medical providers to prematurely and unnecessarily replace batteries in medical devices used to treat patients with epilepsy, giving rise to false claims based on his presumption that providers that performed the unnecessary replacements then submitted reimbursement claims to the government for the procedures.

The relator alleged that facing financial difficulties, Cyberonics implemented aggressive performance requirements for sales representatives to sell a nerve stimulator device, with a focus on re-sales to existing epilepsy patients. The device contains a battery, which requires surgical replacement when it nears the end of its life. Relator alleged that Cyberonics’ demands caused its sales representatives to engage in fraudulent sales tactics, such as refusing to provide doctors and patients with accurate information on battery life calculations and encouraging them to replace the batteries prematurely. He identified sixteen hospitals that he claimed had performed and billed for device implants in epileptic patients, one doctor who had three patients undergo battery replacement procedures, another doctor who allegedly told relator that a sales representative told physicians to replace batteries prematurely, and claimed that he himself had reviewed an internal patient list and saw that several patients of the second doctor had received device replacements. As a result, he concluded that at least 10,000 medically unnecessary device replacements had been performed since 2007. Combined with the $20,000 per procedure cost and his assumption that government healthcare programs covered approximately 50–60% of these procedures, relator alleged that government healthcare programs had suffered at least $100 million in damages.

After the government declined to intervene, the district court dismissed the case for failing to meet Rule 9(b). The First Circuit affirmed the dismissal, finding that relator failed to connect his facts and allegations with the submission of any false claims to government programs. Despite listing healthcare providers who performed and billed for device replacement surgeries, the complaint did not allege whether any of the providers submitted reimbursement claims to the government for unreasonable and medically unnecessary procedures, let alone how many false claims they allegedly submitted or how Cyberonics caused their submission. The court also found that identification of doctors and hospitals that treated patients who had replacement surgeries, without identifying whether any government healthcare program covered those patients or whether any medical provider actually submitted claims for government reimbursement on their behalf, was insufficiently specific. And finally, because the complaint did not identify any specific patients who actually were covered by a government program and received medically unnecessary replacement procedures, relator’s statistical allegations were insufficient to allege a “systematic” failure at Cyberonics that resulted in fraudulent claims.

After dismissing the complaint, the district court denied relator’s motion seeking leave to amend on the basis of undue delay. The First Circuit also affirmed this ruling by the district court. In so doing, the First Circuit reasoned that relator was on notice of deficiencies in his complaint as of the filing of Cyberonic’s motion to dismiss, and focused on the more than thirteen months between the filing of the motion and relator seeking leave to amend, rather than the just four months between the district court’s decision granting Cyberonic’s motion to dismiss and relator’s attempt to amend. Relator’s arguments that he could not have known or anticipated the deficiencies that would form the basis of the district court’s dismissal fell on deaf ears at the appellate court.

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Daniel T. Wallmuth

Daniel T. Wallmuth Associate