Ninth Circuit’s Kinetic Concepts Case Overrules Long-Standing, Defendant-Friendly False Claims Act Precedent

An en banc panel of the Ninth Circuit, in U.S. ex rel. Hartpence v. Kinetic Concepts, Inc., Nos. 12-55396, 12-56117, 2015 WL 4080739, -- F.3d -- (9th Cir. July 7, 2015), held that a qui tam relator (i.e., whistleblower) meets the “original source” exception to the public-disclosure bar if he (1) has direct and independent knowledge of the information on which the allegations are based and (2) has voluntarily provided the information to the government before filing the action. The court abandoned its long-standing requirement that the relator also “had a hand in the public disclosure.”

Background

In Kinetic Concepts, two relators filed separate actions on behalf of the federal government under the FCA’s qui tam provisions, alleging that DME manufacturers Kinetic Concepts and KCI USA (KCI) defrauded Medicare by misusing the “KX modifier” on claim forms when the underlying treatment was medically unnecessary or lacked supporting documentation. The relators, who were corporate insiders at KCI, filed their complaints under seal in 2008.

KCI moved to dismiss the complaints under the FCA’s public-disclosure bar, 31 U.S.C. § 3730(e)(4), which precludes qui tam suits where there has been a public disclosure of the fraud, unless the relator qualifies as an “original source.” KCI’s alleged fraud was publicly disclosed in a federal audit report and in a decision by an Administrative Law Judge, KCI argued, and the relators were not original sources because they had no “hand in the public disclosure of allegations that are part of [the] suit,” a requirement established by the Ninth Circuit’s 1992 decision in U.S. ex rel. Wang v. FMC Corp. The district court agreed, and also dismissed the later of the two complaints under the FCA’s first-to-file bar, which prohibits later-filed qui tam complaints based on the same facts as a pending action.

Ninth Circuit Overrules 1992 Wang Decision

On appeal, a three-judge panel of the Ninth Circuit sua sponte called for the case to be heard en banc to reconsider the court’s precedent in Wang. The court overruled Wang, announcing, “Today, we join our sister circuits; after reviewing the statutory text, we conclude that Wang’s hand-in-the-public-disclosure requirement has no textual basis, and we give it a respectful burial.”

The court explained, “[W]here an FCA claim has been publicly disclosed before a relator filed his complaint, the relator may bring a qui tam suit if he can show that (1) he has direct and independent knowledge of the information on which the allegations in his court-filed complaint are based, and (2) he has voluntarily provided the information to the Government before filing his civil action. He need not have played a role in making the disclosure public.” The court reversed and remanded for further consideration (the court also reversed the lower court’s first-to-file decision, on separate grounds).

Kinetic Concepts’s Impact

The Kinetic Concepts decision lays to rest the Ninth Circuit’s stringent original-source test, and narrows the FCA’s public-disclosure bar by permitting whistleblower suits even when the allegations were publicly disclosed by others. The decision therefore decreases defendant protections from qui tam suits and adds to the growing body of relator-friendly case law.

The long-term impact of the decision is limited because the Affordable Care Act of 2010 amended the original-source exception at issue in Kinetic Concepts in a way that clarifies that a relator need not have a hand in the public disclosure. But because qui tam complaints often remain under seal for several years, and the ACA amendment is nonretroactive, the pre-ACA version of the bar and the Kinetic Concepts decision may still apply to newly unsealed complaints—especially if the relator filed the complaint before the ACA’s 2010 enactment. Defendants should therefore remain vigilant about which version of the public-disclosure bar should apply, and should be sure to address the Kinetic Concepts decision whenever the pre-ACA version applies.