6th Circuit Court of Appeals Applies “Alter Ego” Doctrine and Interprets “Reckless Disregard” Standard

 

In United States ex rel. Williams v. Renal Care Group, et al., No. 11-5779, 2012 U.S. App. LEXIS 20806 (6th Cir. Oct. 5, 2012), the United States Court of Appeals for the Sixth Circuit issued important rulings concerning the application of the “alter ego” doctrine and the False Claims Act’s “reckless disregard” standard. The Court in an opinion authored by Judge R. Guy Cole, Jr. refused to disregard the corporate form without an indication that Congress intended for it to do so in interpreting the reach of a Medicare billing statute; the Court further ruled that the defendant, by disclosing relevant facts to government officials, together with making “consistent” efforts to confirm an agency’s interpretation of an ambiguous statute, met its duty to inquire into the truth or falsity of its claims.

Allegations and Procedural History: Upon intervening in an action filed by two qui tam plaintiffs, the United States alleged that Renal Care Group, Inc. (“RCG”), a provider of dialysis services, and its wholly-owned subsidiary, Renal Care Group Supply Company (“RCGSC”), a supplier of home dialysis equipment and supplies, had violated the False Claims Act. The United States alleged that RCGSC submitted false claims when it billed Medicare for home dialysis equipment and supplies because a Medicare rule prohibits providers of dialysis services from billing for home dialysis equipment and supplies. See 42 U.S.C. ‘ 1395rr(b). Although RCGSC at least nominally was a dialysis supplier, as opposed to a dialysis services provider, the Government argued that RCGSC could not bill Medicare for equipment and supplies because its corporate parent, RCG, was a provider, and RCGSC was little more than the “alter ego” of RCG. Id. at *24. The trial court granted summary judgment in favor of the United States, and the Court of Appeals reversed.

Ruling on “Alter Ego” Issue: In reversing the trial court, the Court of Appeals first ruled that the defendants’ claims were not false because RCGSC’s billings did not violate the literal language of the statute; RCGSC was not the same legal entity as RCG and consequently was not a provider of dialysis services covered by the statutory prohibition. Moreover, the United States had not identified any legislative history suggesting that Congress intended the prohibition to cover corporate affiliates of dialysis service providers: The corporate form need not be disregarded when its adoption was meant to “secure its advantages and where no violence to the legislative purpose is done by treating the corporate entity as a separate legal person.” Schenley Distillers Corp. v. United States, 326 U.S. 432, 437, 66 S. Ct. 247, 90 L. Ed. 181 (1946). The United States does not, however, identify any clear legislative purpose emanating from either the text of 42 U.S.C. § 1395rr or from the legislative materials predating its passage. Its failure to do so is fatal for its assertion of the alter-ego doctrine, for we are similarly unable to divine any such purpose from the scheme transgressed. Id. at *24-*25.

Ruling on “Reckless Disregard” Issue: The Court next ruled that, even if the claims were false, defendants could not be found to have “knowingly” submitted false claims where, as here, the defendants had made “consistent” efforts to obtain clarification of an “ambiguous” rule from government officials and had disclosed the relevant facts concerning their corporate structure to government officials. After citing legislative history and case law providing that the reckless disregard standard is intended to impose liability for more than mere negligence, and consequently requires only a limited inquiry into the nature of one’s legal duty, the Court held that a provider could not be deemed to have acted with “reckless disregard” of the truth or falsity of its claims where, as here, the defendants “consistently sought clarification on the issue, followed industry practice in trying to sort through ambiguous regulations, and were forthright with government officials over RCGSC’s structure.” Id. at *32. In particular, the Court noted that the defendants’ outside counsel had written a letter to a government official setting forth counsel’s understanding that, in a prior telephone conversation, the official had stated that the defendants’ conduct was permissible, and asking for confirmation that this understanding was correct, and that the outside counsel had received no response..