02/12/2016

Client Alert

Written by: Susan L. Swatski

In a case involving allegations that multiple insurance companies and self-insured trucking companies engaged in a nationwide scheme to deprive Medicare of payments to which it was entitled under the Medicare Secondary Payer Act, the United States District Court for the Western District of New York handed down its decision on February 8, 2016 in United States of America ex rel. J. Michael Hayes, v. Allstate Insurance Company, et al. District Court Judge William Skretny entered a Decision and Order affirming Magistrate Judge Jeremiah McCarthy’s Report and Recommendation dismissing with prejudice the Complaint as to Relator Hayes against all defendants as a sanction for Relator Hayes’ bad faith. Hill Wallack attorney Susan L. Swatski represented defendant CorePointe Insurance f/k/a Daimler Chrysler Insurance Company. Click here to read the District Court’s Opinion and here for the Magistrate Judge’s Report and Recommendation.

Attorney J. Michael Hayes brought a qui tam action on behalf of the United States pursuant to the False Claims Act (“FCA”), 31 U.S.C. § 3729 et seq. Relator Hayes claimed that whenever the defendants settled liability claims with Medicare beneficiary claimants, the defendants knowingly avoided and concealed their statutory obligations under the Medicare Secondary Payer Act to fully reimburse Medicare for the payments that the Medicare program had already made for those beneficiaries’ for health care. Relator Hayes repeatedly plead that he had “direct and independent knowledge of the information on which the allegations are based” against each defendant.

Relator Hayes sought expedited discovery against the defendants, but, in so doing, admitted “it very well may be that a few of the named defendants … [may] have no actual exposure. It is even possible that one or more of the Defendants actually did reimburse Medicare during the years at issue.”  In response to Relator Hayes’ admission that some defendants may not have been involved, the defendants filed a motion for sanctions arguing that Relator Hayes filed a pleading without first verifying that the allegations therein were likely to have evidentiary support after reasonable investigation. The defendants argued that Relator Hayes’ subsequent submissions to the court demonstrated that he did not know whether all defendants had participated in the alleged scheme despite repeatedly pleading that he had such knowledge and thereby forcing  - in at least some cases -  “innocent” defendants to retain counsel to respond to the complaint.

Federal Rule of Civil Procedure 11 provides, in pertinent part, that “by presenting to the court a pleading … an attorney … certifies that to the best of the person’s knowledge, information, and belief, formed after an inquiry reasonable under the circumstances … the factual contentions have evidentiary support …” 

Applying Rule 11, the District Court found that Relator Hayes’ claim of personal knowledge that all defendants defrauded Medicare, and that they did so whenever they settled claims involving Medicare beneficiaries, constituted bad faith, because Relator Hayes knew that he had no such knowledge as to all defendants or all settlements. As a result, the court dismissed the Complaint as to Relator Hayes and admonished him and his counsel for “overreaching” and “play[ing] fast and loose with the courts by freely taking inconsistent positions in a lawsuit.”  The decision is without prejudice to the government’s right to commence a separate action for the same relief. Thus far, the U.S. Attorney has declined to intervene in the action, reserving its right to intervene “for good cause, at a later date.” 

The ruling is significant in that the sanction of dismissing a relator’s complaint with prejudice is unusual based on what amounts to inconsistent pleading. A more likely result would have been to dismiss only those defendants from the action for which Relator Hayes had no specific knowledge of any wrongdoing to support his claims.  By dismissing Relator Hayes’ entire Complaint, the District Court sent a strong message to counsel for relators’ in qui tam actions that pleadings may be no broader than their evidentiary basis may support. Further, the court emphasized its intolerance for overreaching in pleadings instead of naming only those defendants for whom a relator has a proper factual basis. 

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