U.S. and Virginia Get a Ticket to Discovery After Fourth Circuit Finds Materiality Plausibly Alleged

On the heels of the Fourth Circuit's novel ruling that misrepresentations of compliance with potentially illegal Medicaid eligibility requirements could be material, the district court found that the United States and Virginia had adequately pleaded claims under the FCA and Virginia Fraud Against Taxpayers Act (VFATA), as well as certain common law claims. As we previously blogged, the district court in United States v. Walgreen Co., No. 1:21-CV-00032 (W.D. Va. Dec. 2, 2021), initially dismissed the suit after concluding that falsified documents submitted by a Walgreens employee were not material to the Virginia Medicaid system’s payment decisions because the false information they contained went to state prescription eligibility requirements that violated federal law. The Fourth Circuit vacated the dismissal, reasoning that the lawfulness of the state’s eligibility requirements did not control the materiality issue and the plaintiffs had otherwise plausibly alleged materiality.

While materiality was a key issue in the district court’s initial decision, on remand, the district court followed the Fourth Circuit’s holding as to materiality and focused instead on Walgreens’ other challenges to the plaintiffs’ complaint. For example, Walgreens argued that it could not be liable under the FCA for the fraudulent conduct of its employee and her accomplice because respondeat superior does not apply to direct FCA claims. The district court rejected Walgreens’ argument, finding persuasive an opinion arising from the same facts in the Eastern District of Tennessee. There, the court held that the knowledge of an employee in an FCA case can be imputed to the employer when the employee acts for the employer’s benefit and within the scope of the employee’s employment.

Walgreens also claimed that it had good faith reasons to believe the store’s revenues had increased for proper reasons and as a result, the company lacked the requisite scienter. The district court rejected that argument, finding that several allegations demonstrate the plausibility of Walgreens’ scienter even without reliance on a vicarious liability theory. Specifically, the complaint alleged that the relevant Walgreens store had experienced a substantial increase in revenue and that Walgreens was aware that its bonus program created an incentive for employees to increase revenue numbers by any means necessary.

The district court found that the plaintiffs also had asserted a plausible reverse false claims theory under the FCA and VFATA based on Walgreens’ failure to repay the amounts it received from Medicaid in connection with the misrepresentations regarding compliance with eligibility requirements. Walgreens, with support from the Chamber of Commerce, argued that it had no obligation to repay the money because there was a good faith dispute over whether the state’s Medicaid requirements were lawful. The district court did not address this argument, but instead relied on its discussion of materiality and scienter to find that the plaintiffs had plausibly alleged the elements of a reverse false claims theory.

In light of its decision on the plaintiffs’ FCA and VFATA claims, the district court similarly declined to dismiss the plaintiffs’ claims under the Virginia Medicaid Fraud Statute and for unjust enrichment, payment by mistake, and common law fraud.

We at Qui Notes will continue to monitor this case as it goes through discovery and report back on any developments of note for our readers.

© Arnold & Porter Kaye Scholer LLP 2024 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.