Derek Ho of Kellogg Hansen (Photo: Courtesy Photo)

"A roller coaster."

That's how Kellogg, Hansen, Todd, Figel & Frederick partner Derek Ho describes litigating a record-breaking False Claims Act case—and his metaphor seems apt.

First came the high, when his colleagues led by James Webster III, Silvija Strikis and Joseph Hall in 2017 won an eye-popping $350 million verdict (after trebling) in U.S. District Court for the Middle District of Florida, convincing a jury that the owners and operators of 53 skilled nursing facilities in Florida defrauded the federal government.

It was followed in short order by a sickening low—when U.S. District Chief Judge Steven Merryday overruled the verdict in one of the rarest ways possible: judgment as a matter of law.

And now, in a sudden skyward lurch, the 11th Circuit reinstated $255 million of the award—which makes this (according to Kellogg Hansen) the largest-ever FCA jury verdict to be upheld on appeal. 

Feeling dizzy? Or perhaps in the case of defense counsel from Skadden, Arps, Slate, Meagher & Flom and Akin Gump Strauss Hauer & Feld, a little bit sick …

Litigation is not for the faint of heart.

The underlying case is about as un-sexy as they come—it's about inaccurate Medicare billing codes—and the 11th Circuit decision is a symphony of acronyms. ("CMS tied the amount of its payments to SNFs in part to RUG codes derived from MDS assessments.") Still, the court's decision is undeniably important.

Whistleblower Angela Ruckh, a registered nurse, accused Salus Rehabilitation Inc. and related entities of submitting fraudulent Medicare and Medicaid claims. For example, she alleged that the defendants overbilled the government for more therapy minutes and a higher level of nursing services than what was actually provided to the patients.  

The jury was persuaded this was unacceptable and found the defendants liable for the submission of 420 fraudulent Medicare claims and 26 fraudulent Medicaid claims.

In overruling the jury, Judge Merryday dismissed the erroneous billing claims as a "handful of paperwork defects" that were not material. Moreover, he stressed that both the federal government (which declined to intervene in the case) and the state of Florida "paid and continue to pay to this day despite the disputed practices, long ago known to all who cared to know."

In other words, if the government didn't care about the alleged overcharges, why should we?

Merryday also noted that the defendants barely make a profit and couldn't afford to cover anything close to the amount of the verdict. The judgment would likely trigger "a 'cascading default' that might force the closing of 183 skilled nursing facilities and might displace more than 17,000 vulnerable patients," he wrote.

But as Ho in an interview points out, "There's nothing in the statute that gives a free pass" to defendants that provide important services but don't have the money to pay a FCA judgment.  

The 11th Circuit on appeal focused on whether the alleged claims of "upcoding" Medicare bills could be considered a material violation—and found the jury got it right.

"At its core, the concept of upcoding is a simple and direct theory of fraud," wrote U.S. District Judge Ursula Ungaro of the Southern District of Florida sitting by designation for the unanimous panel. 

Nursing homes "receive money from Medicare based on the services they provide. In this case, the [nursing homes] indicated they had provided more services—in quantity and quality—than they, in fact, provided," she wrote. "Therefore, Medicare paid the [nursing homes] higher amounts than they were truly owed. This plain and obvious materiality went to the heart of the [nursing homes'] ability to obtain reimbursement from Medicare."

As for the defense's contention that these were just clerical errors—"the type of recordkeeping mistake the FCA does not punish" —the 11th Circuit was unimpressed.

"[T]he  jury was not required to believe the defendants' position," Ungaro wrote for the panel. "Rather, a jury could reasonably find mistake to be an implausible explanation for the defendants' upcoding."

However, the panel did agree Merryday was right to toss $90 million in Medicaid claims, ruling that no jury could have reasonably concluded that fraud occurred.

The appellate panel also rejected a novel argument by the defense—that because the whistleblower turned to a litigation funder for cash during the nine years that the case was pending, she lost her constitutional standing to pursue the appeal.

Ruckh sold a 4% share of her recovery to litigation funder ARUS, but retained sole authority over the litigation. (Kellogg Hansen did not use a litigation funder to bankroll its legal work, Ho confirmed.)

The defendants argued that by entering into a litigation funding agreement, the relator disqualified herself from serving as the government's assignee.

Nice try, but no.

While it's true that the False Claims Act does not affirmatively authorize such an assignment (had anyone even heard of litigation funding when the law was last amended in 1986?), that doesn't mean it's prohibited, the 11th Circuit held. 

"[A]lthough she has now entered into the litigation funding agreement, these facts remain essentially unchanged: the relator retains sufficient interest to meet the 'irreducible constitutional minimum' of standing under Article III," Ungaro wrote.

Ho said he's not aware of any prior court of appeals decisions addressing this question, calling it "of great interest to the litigation funding and False Claims Act whistleblower community."