When Amendment is Futile: The Third Circuit Emphasizes Importance of Specific and Well-Detailed Pleadings

Relators trying to file FCA cases need specific and well-detailed pleadings. That was the Third Circuit’s lesson when it recently affirmed a district court’s decision to dismiss an FCA case involving allegations of a unlawful referral scheme, upon finding that all of the relator’s allegations were merely conclusory and not plausible. U.S. ex rel. O’Bier v. TidalHealth Nanticoke, Inc., et al., No. 21-2123, 2022 WL 264554 (3d Cir. Jan. 8, 2022).

The relator in O’Bier owned a durable medical equipment (DM) company that filled patients’ DME prescriptions upon referral from a medical prescriber. The lawsuit was originally filed against a hospital, two of its prescribers and two of the relator’s competitors. The complaint alleged that the defendants were engaged in a scheme where the prescribers “almost exclusively” referred patients to relator’s competitors and discouraged patients from using relator’s company. The relator argued that this alleged referral scheme (1) violated the Anti-Kickback Statute (AKS) and Stark Law; (2) violated Medicare’s “freedom of choice” rule by refusing to refer patients to the relator; and (3) resulted in medically unnecessary prescriptions for DME. The government declined to intervene and the defendants moved to dismiss. The district court dismissed with prejudice after finding the claims “implausible.” U.S. ex rel. O’Bier v. TidalHealth Nanticoke, Inc., No. 1:19-CV-687-SB, 2021 WL 1895049 (D. Del. May 11, 2021).

On appeal, the Third Circuit agreed that all of the relator’s claims were without merit. First, the court determined that the relator’s AKS claim failed because she did not plausibly allege remuneration, and her Stark Law claim failed because she alleged neither a direct nor an indirect compensation arrangement between the prescribers and competitors. Given this lack of specificity, the court noted the possibility of “many lawful reasons” other than illegal kickbacks that could explain why the prescribers preferred to send referrals to the competitors instead of the relator.

Second, the court found that the relator’s Medicare “freedom of choice” claim was deficient. The Third Circuit acknowledged that some courts have held that the freedom of choice rule applies only to the government, but did not rule definitively on the issue and conducted its analyses “assuming” that the rule applied to private parties as well. It accordingly rejected the claim because the relator failed to allege that (1) any of the patients identified in the complaint received Medicare; (2) the prescribers referred patients exclusively to the competitors—in fact, they had referred over half of the patients identified in the complaint to relator’s company; and (3) the prescribers required that patients exclusively use the competitors.

Finally, the court found that relator did not plausibly allege that the prescribers prescribed medically-unnecessary DME or that the defendants billed Medicare for it, stating that “[a]t best, [the relator] complains about the manner in which the prescribers prescribed it.” Because the relator did not plausibly allege any underlying federal violation, the Third Circuit held that she failed to state a claim under the FCA.

The court also held that the district court acted within its discretion to dismiss the complaint with prejudice, noting that relator did not request to leave to amend. In addition, the court stated that it would therefore be “futile” to give the relator a chance to replead, given her acknowledgement that she could not provide additional evidence of the alleged referral scheme.

The Third Circuit’s decision serves as a reminder to relators that a plausible claim of an alleged referral scheme must include more than conclusory allegations. For example, not only must the federal connection—i.e., specific patients receiving Medicare—be alleged specifically, but the chain of compensation between the actors in an alleged kickback scheme must be pled in detail. Mere allegations of an illegal scheme implied from a pattern of otherwise legal behavior are not sufficient. On a more procedural point, this decision is also a reminder for relators to request leave to amend when confronting a dismissal motion.

© Arnold & Porter Kaye Scholer LLP 2022 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.