Don’t You (Forget About the SEC): SEC Filings Can Trigger the Public Disclosure Bar

In a recent decision, US ex rel. CKD Project, LLC v. Fresenius Medical Care Holdings, No. 21-2117 (2d Cir. Dec. 20, 2022), the Second Circuit held that because defendant’s securities filings had previously revealed the same corporate transactions on which relator later based its qui tam suit, the False Claim Act’s public disclosure bar compelled dismissal of the suit. This decision sheds light on critical threshold issues for qui tam cases involving prior regulatory filings.

In November 2014, relator CKD Project (CKD) sued Fresenius Medical Care Holdings and other defendants under the FCA, accusing them of paying physicians for patient referrals by overpaying physician-owners for dialysis centers, in violation of the Anti-Kickback Statute. Defendants moved to dismiss based on the FCA’s public disclosure bar, arguing that its SEC filings had already disclosed the material elements of its dialysis center acquisitions that formed the basis for CKD’s claims. The district court granted the motion and denied leave to amend.

On appeal to the Second Circuit, the court considered closely both whether the defendants’ SEC filings were sufficient to trigger the FCA’s public disclosure bar and whether relator satisfied the “original source” exception to the bar. With respect to the public disclosure bar, the court explained that the bar applied as long as the “material elements” of the allegedly fraudulent transactions were disclosed, even if the “alleged fraud, itself” was not itself disclosed. In that connection, courts consider “whether the disclosed transaction creates an inference of impropriety” or whether the available disclosures were sufficient to “set the government squarely upon the trail of the alleged fraud.” The court made short work of CKD’s argument that the SEC filings failed to “disclose important information about the joint venture transactions” by calling CKD’s list of alleged omissions mere “additional details,” not “material elements.”

The court then turned to whether CKD qualified under the “original source” exception to the public disclosure bar, concluding that CKD failed to qualify under both the pre-amendment and post-amendment versions of the original source exception, which was amended in 2010. Because CKD was formed solely for the litigation and acquired its information from a third party, the court held that it did not have “direct knowledge of the information on which the allegations are based” (pre-amendment) or “independent knowledge that materially adds to the public disclosures” (post-amendment). For these reasons, the Second Circuit affirmed the dismissal based on the public disclosure bar. The Second Circuit also found that the district court did not abuse its discretion in denying leave to amend the complaint because, among other reasons, it would be prejudicial to defendants who had been litigating the case for over six years.

The Second Circuit’s Fresenius decision highlights the importance of the public disclosure bar as a critical threshold issue in qui tam cases. Litigants should assess whether prior regulatory filings contain adequate information to constitute the “material elements” of the fraud alleged in the qui tam suit, particularly in suits involving corporate transactions. Even if the specific alleged fraud itself was not disclosed, the regulatory filings might create an inference of impropriety or “set the government squarely upon the trail of the alleged fraud” sufficient to trigger the public disclosure bar.

* Alexis Archer contributed to this blog. Ms. Archer is a graduate of the Columbia University School of Law and is employed at Arnold & Porter's New York, NY office. Ms. Archer is not admitted to the practice of law in New York.

© Arnold & Porter Kaye Scholer LLP 2023 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.