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Whistleblowers: SCOTUS Gives DOJ Wider Authority to Dismiss Meritless Qui Tam Cases

by Glenn S. Demby | Jul 31, 2023 | Essential, Legislation-nir, National Lab Reporter

Ruling could spell good news for labs and other healthcare providers targeted by whistleblowers in False Claims Act qui tam lawsuits.

A significant new US Supreme Court (SCOTUS) ruling could spell good news for labs and other healthcare providers targeted by whistleblowers in False Claims Act (FCA) qui tam lawsuits, particularly those in which the Department of Justice (DOJ) decides not to intervene. Although the ruling’s immediate effect is to broaden the DOJ’s authority to have cases it deems meritless thrown out of court, the case also signals that at least three of the court’s nine justices have serious misgivings about the constitutionality of FCA qui tam provisions as a whole. Here’s a look at U.S. ex rel. Polansky and its potential impact on your lab’s qui tam liability risks.¹

FCA Qui Tam Rules

The FCA was enacted during the Lincoln Administration to allow the federal government to crack down on unscrupulous contractors. Initially aimed at sellers of lame horses and other defective military equipment during the Civil War, the FCA has become the government’s primary weapon against Medicare fraud and abuse. It also empowers whistleblowers, known as relators, to file “qui tam” cases on the government’s behalf. If the case is successful, the relator gets a share of whatever the government recovers.

The dynamics of the qui tam process are extremely important. Relators file the case under seal and the government then has 60 days (a period that is frequently extended) to investigate the allegations and decide what to do. The options:

Intervene in the case, in which case the government becomes the primary plaintiff, or

Decline to intervene, in which case the relator must decide whether to proceed without the government knowing that, if the case is successful, the government will still receive most of the money recovered.

The Qui Tam Claims Dismissal Controversy

There’s a third, much rarer, option: under Section 3730(c)(2)(A) of the FCA, the government may seek to have a qui tam lawsuit dismissed if it believes the suit doesn’t serve its interests. Historically, the DOJ has been reluctant to exercise its dismissal powers. However, in January 2018, then DOJ Civil Fraud Section director Michael Granston issued an internal memorandum instructing US attorneys to be more aggressive in exercising their Section 3730(c)(2)(A) powers.² For a list of the seven kinds of qui tam cases targeted for dismissal, see the September 2020 G2 Intelligence article, “Granston Memo Whistleblower Dismissals May Be Tougher than DOJ Thought.”³

Courts have split on how much leeway the DOJ actually has to get cases dismissed. It’s to resolve this controversy that SCOTUS accepted the Polansky case.⁴

**The Polansky Case**

The case began when a physician working for a hospital billing firm filed a qui tam suit accusing his employer of enabling clients to falsely bill Medicare for outpatient services at higher-reimbursing inpatient rates. The case remained under seal for two years before the DOJ finally decided not to intervene; at that point, the physician went forward and served onerous demands for documents and deposition testimony on the DOJ and billing company. After five years of discovery, the DOJ decided that enough was enough and asked the court to dismiss the case.

The Pennsylvania federal district court, finding that the DOJ’s conclusion that the costs of the case outweighed the benefits was valid and based on investigation, granted dismissal. The Third Circuit affirmed the ruling. Given the conflict among the five other U.S. Courts of Appeals that had addressed the issue—the First, Sixth, Seventh, Tenth, and District of Columbia Circuits—SCOTUS decided it would be a good idea to resolve the Section 3730(c)(2)(A) questions once and for all.

**The Polansky Ruling**

There were two key issues in the Polansky case: whether the DOJ can seek to dismiss a qui tam suit after declining to intervene during the seal period and, if so, what standard the court should use in deciding whether to grant the DOJ’s motion.

In an 8-1 decision, SCOTUS held that the DOJ may seek dismissal of a qui tam suit at any stage in the litigation, even if it declined to intervene in the case during the seal period. As for the standard, SCOTUS rejected the D.C. Circuit’s ruling that the government has “an unfettered right” to dismiss (in Swift v. United States, 318 F.3d 250, 252 (D.C. Cir. 2003));⁵ it also rejected a rival standard known as the “rational relation” rule requiring the government to show that the dismissal accomplishes a “valid government purpose.”⁶

Instead, SCOTUS said that courts should follow the normal rules governing voluntary dismissal of lawsuits under Section 41(a) of the Federal Rules of Civil Procedure.⁷ The punchline is that Section 41(a) is a very easy standard for the government to meet. Setting the bar low will ensure that the government’s views on whether a qui tam case should be dismissed receive “substantial deference,” the court reasoned.¹

**How the Polansky Case Helps Labs**

The primary and direct significance of the Polansky case is to clear the way for the DOJ to implement the Granston memo policy of aggressively seeking to dismiss qui tam cases it deems without merit or value. That may indirectly benefit labs and other providers sued in qui tam lawsuits in which the government declines to intervene.

It typically takes a lot of time, effort, and expense for labs to persuade DOJ officials investigating a qui tam action that the case doesn’t warrant intervention. Having convinced the government not to intervene, the lab may still have to defend itself if the relator decides to proceed with the case. Polansky will make the relator’s decision to litigate without the government much riskier. Nobody understands that better than the actual physician relator in the Polansky case, who spent $20 million on the case only to see it dismissed after seven years of litigation.⁸

At the end of the day, the prospect of the government requesting that a bad qui tam case thrown out of court may give labs and other defendants new strategic options, such as seeking the DOJ’s intervention in the case, while enhancing their leverage in settlement negotiations.

The issue is the DOJ’s continued reluctance to use its dismissal powers under Section 3730(c)(2)(A). This hasn’t changed much even after the Granston memo, according to attorneys.⁹ It remains to be seen whether the new freedom Polansky offers results in a more aggressive pursuit of dismissals.

New Questions over the Constitutionality of Qui Tam Lawsuits

Polansky also includes noteworthy dicta, or nonbinding statements of law—namely, the suggestion by three justices that the actual qui tam provisions of the FCA might be unconstitutional. In his dissent, Justice Thomas suggested that there are “substantial arguments” that letting private relators sue on behalf of the government is “inconsistent” with Article II of the US Constitution establishing the executive branch. Although siding with the majority, Justices Kavanaugh and Barrett issued a concurring opinion stating their agreement with Thomas’ views and suggesting that the court take up “the Article II issue” in a future case.¹ Given the tremendous costs of defending qui tam litigation, it would be unsurprising if healthcare providers and other companies that contract with the federal government at least considered the possibility of bringing a test case to probe the qui tam constitutionality issue.