United States Ex Rel. Williams v. Renal Care Group, Inc.
2012 WL 4748104, 2012 U.S. App. LEXIS 20806, 696 F.3d 518 (2012)
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Rule of Law:
A government contractor does not act with 'reckless disregard' under the False Claims Act by structuring its business to maximize profits under an ambiguous regulatory scheme, provided the contractor seeks legal counsel, attempts to obtain clarification from the government, and discloses its corporate structure.
Facts:
- Medicare offered two reimbursement methods for home dialysis supplies: 'Method I' for facilities providing services and 'Method II' for entities supplying only equipment, with Method II eventually becoming more profitable.
- Renal Care Group, Inc. (RCG), a dialysis provider, discovered that Method II reimbursements were substantially higher than Method I.
- In 1998, RCG formed Renal Care Group Supply Company (RCGSC) as a wholly-owned subsidiary for the express purpose of billing for home dialysis supplies under the more lucrative Method II.
- RCG and RCGSC were highly integrated; they shared officers, office space, payroll, and other corporate services, and RCGSC's revenue was swept into RCG's corporate account nightly.
- An RCG executive, David Jones, sent an internal e-mail expressing concern that the plan was not in patients' best interests and might be illegal.
- Contemporaneously, RCG's outside counsel, Dawn Alexander, sought clarification from a Health Care Financing Administration official, Gene Richter, regarding the legality of a wholly-owned subsidiary billing under Method II.
- Alexander memorialized in a letter to Richter her understanding that he had verbally approved of the arrangement, although she received no written response.
- RCGSC repeatedly disclosed in Medicare applications and to officials that it was wholly-owned by RCG and shared personnel and contracts with its parent company.
Procedural Posture:
- Two former employees, Julie Williams and Dr. John Martinez, filed a qui tam action under the False Claims Act against RCG and RCGSC in the U.S. District Court for the Eastern District of Missouri.
- The United States intervened in the case, and the former employees' (relators') claim was voluntarily dismissed.
- On the defendants' motion, the case was transferred to the U.S. District Court for the Middle District of Tennessee.
- The United States moved for partial summary judgment on the elements of falsity and materiality in Count One, while the defendants moved for summary judgment on all counts.
- The district court granted summary judgment for the United States on all counts, including the element of 'knowledge,' even though the government had not moved for summary judgment on that issue.
- The district court entered a final judgment awarding the United States over $82 million in damages and penalties.
- The defendants (RCG, RCGSC, and successor Fresenius) appealed the district court's judgment to the U.S. Court of Appeals for the Sixth Circuit.
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Issue:
Does a dialysis provider that creates a wholly-owned subsidiary to take advantage of a more profitable Medicare reimbursement method act with the 'reckless disregard' required for liability under the False Claims Act when the governing regulations are ambiguous and the provider discloses the corporate structure to the government?
Opinions:
Majority - Cole, J.
No. The defendants' actions did not constitute 'reckless disregard' for the truth or falsity of their claims under the False Claims Act. The court reasoned that a business should not be punished solely for seeking to maximize profits, and the corporate form should be respected where no clear legislative purpose is violated. Here, the Medicare regulations regarding the 'separateness' of entities were ambiguous, and the court could not discern a clear congressional purpose that was thwarted by RCG's use of a subsidiary. Given this ambiguity, RCG's actions—seeking legal counsel, attempting to get clarification from a federal official, following industry practice, and being transparent with the government about RCGSC's ownership structure—precluded a finding of reckless disregard. The court characterized reckless disregard as a 'limited duty to inquire,' which RCG satisfied, rather than an onerous obligation. Furthermore, alleged violations of Medicare's 'conditions of participation,' such as supplier standards, do not automatically create False Claims Act liability, as the Act is not a vehicle to police mere technical regulatory non-compliance.
Concurring - Rosen, C.D.J.
No. The defendants' could not have acted with reckless disregard because the governing statutory and regulatory scheme was profoundly ambiguous and offered virtually no guidance on the key question of RCGSC's eligibility. The Medicare rules failed to define the degree of 'separateness' required for a supply company to be considered a distinct 'entity' from an affiliated dialysis facility. Faced with this unclear scheme, RCG took reasonable steps to ensure compliance, including engaging counsel, contacting federal officials, and openly divulging its corporate structure. While there were 'storm warnings,' such as an internal employee's concern, RCG investigated these issues rather than ignoring them. Because the legal landscape was so unclear, and the defendants made good-faith efforts to navigate it, their conduct cannot be characterized as a reckless disregard of the law.
Analysis:
This decision clarifies and narrows the 'reckless disregard' standard of knowledge under the False Claims Act, particularly in industries governed by complex and ambiguous regulations like healthcare. It establishes that structuring a business to maximize profits under such a scheme is not, by itself, fraudulent. The ruling provides a degree of safe harbor for companies that act transparently and make reasonable, good-faith efforts to interpret and comply with unclear rules, thereby raising the bar for the government to prove FCA liability based on debatable interpretations of law. This precedent reinforces the idea that the FCA targets genuine fraud, not good-faith disagreements over regulatory compliance or profit-seeking behavior conducted in the open.
