United States Ex Rel. Drakeford v. Tuomey
2015 WL 4036166, 792 F.3d 364, 2015 U.S. App. LEXIS 11460 (2015)
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Rule of Law:
A healthcare provider that proceeds with a compensation arrangement after receiving explicit warnings from a legal expert that the arrangement violates the Stark Law cannot successfully use an advice-of-counsel defense to defeat a claim that it 'knowingly' submitted false claims under the False Claims Act.
Facts:
- Tuomey Healthcare System, a nonprofit hospital, began losing significant revenue as physicians started performing outpatient surgeries in their own facilities.
- To recapture this revenue, Tuomey developed part-time employment contracts requiring local physicians to perform all outpatient surgical procedures exclusively at the hospital.
- The contracts paid physicians a base salary adjusted annually based on the prior year's collections, a productivity bonus equal to 80% of their collections, and other benefits, with a ten-year term and a non-compete clause.
- While Tuomey's longtime counsel and other consultants approved the contracts, Dr. Michael Drakeford refused to sign, believing the compensation structure constituted an illegal payment for referrals under the Stark Law.
- To resolve the impasse with Drakeford, both parties jointly retained Kevin McAnaney, a former government official and an undisputed expert on the Stark Law.
- McAnaney advised Tuomey that the contracts raised serious 'red flags,' would not pass the 'red face test' with regulators, and presented an 'easy case to prosecute' because the compensation took referrals into account and exceeded fair market value.
- Despite McAnaney's warnings, Tuomey terminated his engagement, prevented him from providing a written opinion, and entered into the contracts with nineteen other physicians.
Procedural Posture:
- Dr. Michael Drakeford filed a qui tam action under the False Claims Act (FCA) against Tuomey Healthcare System, Inc., in federal district court.
- The United States government intervened in the action.
- At the first trial, the jury returned a verdict finding Tuomey had violated the Stark Law but had not violated the FCA.
- The government moved for a new trial, which the district court granted based on its erroneous exclusion of deposition testimony.
- The district court then entered a $44.8 million judgment against Tuomey on the government's equitable claims, based on the first jury's Stark Law finding.
- On appeal by Tuomey, the U.S. Court of Appeals for the Fourth Circuit vacated the equitable judgment, holding it violated Tuomey's Seventh Amendment right to a jury trial, and remanded the case for a new trial on all claims.
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Issue:
Does a hospital knowingly submit false claims in violation of the False Claims Act when it enters into physician compensation agreements that violate the Stark Law, after receiving and disregarding explicit warnings from a legal expert that the agreements were highly problematic and likely illegal?
Opinions:
Majority - Judge Diaz
Yes. A hospital knowingly submits false claims under the False Claims Act by billing Medicare for services under physician compensation agreements that violate the Stark Law, especially after disregarding an expert's warnings about the agreements' illegality. The court affirmed the district court's grant of a new trial, finding that the exclusion of expert attorney Kevin McAnaney's testimony in the first trial was a prejudicial error. McAnaney's stark warnings were highly probative evidence of Tuomey's scienter—its reckless disregard for the truth or falsity of its Medicare claims. Furthermore, substantial evidence supported the second jury's verdict that the contracts violated the Stark Law because the physicians' compensation (via base salary adjustments and productivity bonuses) varied with the volume of referrals (facility fees generated for the hospital). Tuomey's advice-of-counsel defense failed because a reasonable jury could conclude that Tuomey did not act in good faith when it shopped for favorable legal opinions while actively ignoring and suppressing McAnaney's dire warnings. The court also upheld the full damages award, reasoning that under the Stark Law, any claim submitted pursuant to a prohibited financial relationship is legally unpayable, making the government's entire payment the measure of actual damages. The resulting $237 million penalty was deemed constitutional.
Concurring - Judge Wynn
Yes. The outcome is legally correct, though troubling. The district court correctly granted a new trial because by asserting an advice-of-counsel defense, Tuomey opened the door to the admission of all legal advice it received, including McAnaney's damaging assessment. A defendant cannot selectively present favorable legal advice to a jury while concealing unfavorable opinions on the same subject. While concurring in the judgment because a reasonable jury could have reached this verdict, this case presents a 'troubling picture' of an 'impenetrably complex' Stark Law that acts as a 'booby trap' and could result in a 'death sentence for a community hospital in an already medically underserved area.'
Analysis:
This case serves as a crucial precedent on the limits of the advice-of-counsel defense in False Claims Act litigation. It establishes that 'opinion shopping' or deliberately ignoring credible, expert warnings of illegality can satisfy the FCA's scienter requirement of 'knowing' submission of false claims. The decision solidifies a broad interpretation of damages, where a Stark Law violation taints the entire claim, making the government's full payment the basis for damages, rather than a 'net loss' calculation. This significantly raises the financial stakes for healthcare providers, reinforcing that compliance with the complex Stark Law is paramount and that attempts to circumvent it, even with some legal backing, carry the risk of ruinous FCA penalties.
