Sixth Circuit Adopts Whistleblower–Friendly Objective Intent Standard for FCA Retaliation Claims Premised on Constructive Discharge

The decision makes it significantly easier for whistleblowers to assert a retaliation claim premised on constructive discharge, and makes it significantly more difficult for employers to quickly and efficiently dispose of litigation.

Factual Background

In Smith v. LHC Group, Inc., the Sixth Circuit addressed whether the plaintiff “adequately alleged that she suffered a discharge or adverse employment action when she felt it necessary to resign her job ... because her employer continued to defraud the government.” Smith was the Director of Nursing for LHC. As part of her job duties, Smith reviewed new patient referrals to determine whether LHC had the staffing capacity to provide the service ordered by the referring physician and adequately care for the patient. Smith had authority to admit new patients or recommend denial. Smith also completed necessary paperwork for submission of the patients’ claims for reimbursement to Medicaid, Medicare, or private insurance payment.

Once a patient was admitted, the clinical staff would enroll the patient and conduct an assessment of the patient’s medical needs. If modification of the prescribed services was necessary, the staff would seek approval from the referring physician regarding whether the change was appropriate. Smith alleged that she discovered that the clinical staff often bypassed this procedure and admitted patients without the clinical assessment. She also alleged that LHC would admit patients even when it could not accommodate the patient’s medical needs, and that the clinical staff would change the referring physician’s order to match the staffing capacity. Smith claimed that patients were admitted without the proper documentation from a referring physician. All of this, according to Smith, resulted in submission of falsified claims to Medicaid and Medicare for reimbursement.

Smith allegedly reported her concerns to senior management, but they ignored her complaints, tolerated the fraud, and welcomed its profitability. Smith did not directly participate in manipulating the enrollment process, but because her duties required her to submit payment paperwork for fraudulent activity, she felt she was facilitating the misconduct. As a result, Smith claimed that she had to choose between turning a blind eye to the fraud, or resign. Ultimately, Smith resigned and filed an FCA lawsuit against LHC and related entities.

District Court Decision

In her lawsuit, Smith alleged that she had been retaliated against in violation of Section 3730(h) on a theory of constructive discharge, claiming that she was forced to quit to avoid participating in fraudulent activity and to avoid suspicion in any future investigation by the government. “A constructive discharge occurs when the employer, rather than acting directly, deliberately makes an employee’s working conditions so intolerable that the employee is forced into an involuntary resignation.” Laster v. City of Kalamazoo, 756 F.3d 714, 727 (6th Cir. 2014). The district court held that Smith’s complaint failed to allege the elements of intolerable working conditions because she failed to allege facts to show that LHC did anything toward her to make her quit her job. The district court rejected Smith’s “expansive theory” that “the atmospheric conditions of her place of work were so toxic that anyone and everyone who knew and were bothered by Defendants’ alleged actions could quit and sue for compensation because Defendants’ scheme implicated everyone,” and explained that to recognize the theory would create a high bar without setting a limiting principle. Thus, finding no allegation of a specific intent to force Smith to quit, the district court dismissed the claim.

Sixth Circuit Reasoning

But the Sixth Circuit disagreed with the district court on both the intolerable working conditions element and whether the law requires specific, subjective intent for an employee to resign. On the first issue, the Sixth Circuit held that a reasonable jury could conclude that causing an employee to worry about whether she will be charged with fraud by the government or implicated in a government investigation was sufficient to create intolerable working conditions.

With respect to the question of subjective intent, the Sixth Circuit concluded that the district court’s interpretation was too narrow. It is well-settled in the Sixth Circuit that in constructive discharge cases, intent can be proven by demonstrating that quitting was a foreseeable consequence of the employer’s actions. Noting that a number of other circuits apply this objective test, the Sixth Circuit held that the objective standard applied, and that it was a foreseeable consequence that LHC’s failure to take action despite Smith’s repeated complaints would compel her to resign.

The Sixth Circuit also rejected LHC’s argument that the FCA requires the employer to have a subjective, retaliatory motive, because a subjective intent requirement would be inconsistent with the statute’s provision that a court should provide “all relief necessary to make the employee ... whole.”

Implications

Every circuit has addressed whether a subjective or objective intent standard applies in the context of a constructive discharge claim; however, few have addressed the standard that applies to an FCA retaliation claim based on a constructive discharge theory. The Sixth Circuit’s decision clarifies that — in the context of an FCA retaliation claim — intent is governed by an objective standard rather than a subjective standard. As a result, the court has set a relatively low bar for whistleblowers to survive a motion to dismiss. Employers should thus be mindful of employee complaints relating to potential FCA violations. Complaints should be treated with the utmost seriousness, and employers should consult outside counsel when determining how to address a meritorious employee complaint.