Corporate Profits Don’t Amount To DOJ’s Gain Under FCA

Dealing a blow to the U.S. Department of Justice in what has otherwise been a record-setting year of False Claims Act recoveries (over $9 billion in FY 2012), the U.S. Court of Appeals for the Sixth Circuit recently rejected the notion that corporate profit-seeking is presumptively fraudulent under the FCA. As a result, the court rescinded the lower court's $82.6 million award of damages to the government and granted summary judgment to the defendants on the substantive FCA claims.

The defendants were a dialysis provider and its wholly owned subsidiary, which the dialysis provider had created in order to take advantage of a Medicare program that offered higher reimbursement rates to companies that only provided in-home dialysis equipment. See United States ex rel. Williams v. Renal Care Grp. Inc. (6th Cir. Oct. 5, 2012). The newly created subsidiary was dedicated to supplying in-home dialysis equipment, which would be reimbursed at a higher rate, while the parent company continued to provide dialysis services, which was reimbursed at a lower rate.

Much to the government's dismay, the defendants' sole objective in creating the wholly owned subsidiary was to maximize profits based upon the company's interpretation of admittedly ambiguous Medicare statutes and regulations. The parent company concluded that creation of the subsidiary was within the bounds of the law.

The government, on the other hand, contended that parent company had manipulated a loophole in the Medicare regulations by creating the subsidiary as an "alter ego" and violated the FCA by submitting claims "while knowing that [the subsidiary] was a sham corporation created for the sole purpose of increasing Medicare reimbursements." Id. at *4.

In its opinion, the Sixth Circuit made clear that profit maximization alone does not a fraud make, stating, "Why a business ought to be punished solely for seeking to maximize profits escapes us." Id. at *9. Without additional evidence that defendants' creation of the subsidiary violated the Medicare statute, the court rejected the government's contention that profit maximization was inherently improper. Id. at *11. The DOJ's failure to identify any "clear legislative purpose" of the regulations that defendants could have frustrated was "fatal for its assertion of the alter-ego doctrine" and the court was "similarly unable to divine any such purpose from the scheme transgressed by the defendants' acts." Id. at *9.

Finding no basis in the regulations to conclude that defendants' corporate structure was "obviously inconsistent with Congress's goals for the payment scheme," the court held that the government failed to establish the most essential element of a FCA action: the falsity of the claim. And without evidence that defendants acted with reckless disregard of the possible falsity of any claims for reimbursement, the government also failed to establish defendants' "knowledge" that the claims were potentially false.

In this era of widespread government success in the FCA arena, the Williams decision provides some comfort to FCA defendants that have begun to feel that they have little recourse as DOJ seeks to employ overly aggressive or unfounded theories of liability. The Sixth Circuit's rejection of DOJ's theory here could not have been clearer — legitimate attempts to maximize profits based upon a reasonable interpretation of government regulations does not give rise to FCA liability.

Originally published in Law360, New York (October 30, 2012, 12:40 PM ET)

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