The United States of America, ex rel., Michael Scarff, et al. v. Camelot Counseling and Luke Nasta
Filing
52
MEMORANDUM AND ORDER. The defendant's motion to dismiss is GRANTED as to Count One and Count Two, but DENIED as to Count Three. The Clerk is directed to terminate the motion. (Docket #46.) SO ORDERED. Granting in part and denying in part 46 Motion to Dismiss. (Signed by Judge P. Kevin Castel on 9/28/2016) (rjm)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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THE UNITED STATES OF AMERICA, ex rel.,
MICHAEL SCHARFF,
Relator,
-against-
13-cv-3791 (PKC)
MEMORANDUM
AND ORDER
CAMELOT COUNSELING,
Defendant.
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CASTEL, U.S.D.J.
Michael Scharff, the qui tam relator, brings this action under the False Claims
Act, 31 U.S. § 3729, et seq. (the “FCA”), on behalf of the United States of America. Scharff
contends that defendant Camelot Counseling (“Camelot”), which operates substance-abuse
treatment centers, violated the FCA by submitting claims for Medicaid reimbursements that did
not comply with regulations adopted by an agency of the State of New York. Scharff alleges that
when he complained about these practices to supervisors, Camelot terminated his employment in
retaliation.
Camelot moves to dismiss the Amended Complaint (the “Complaint”) pursuant to
Rules 12(b)(6) and 9(b), Fed. R. Civ. P. Because the Complaint does not allege fraud with
particularity, the materiality of Camelot’s regulatory non-compliance, or the existence of any
false claims, Camelot’s motion to dismiss Counts One and Two is granted. Because the
Complaint plausibly alleges that Scharff was terminated in retaliation for conduct protected by
the FCA, Camelot’s motion to dismiss Count Three is denied.
BACKGROUND.
For the purposes of deciding this motion to dismiss, all non-conclusory factual
allegations are accepted as true, and all inferences are drawn in favor of Scharff. Ashcroft v.
Iqbal, 556 U.S. 662, 678 (2009).
Camelot operates ten substance abuse and rehabilitation centers in New York
City. (Compl’t ¶ 14.) It provides outpatient counseling and educational services to individuals
with substance abuse problems. (Compl’t ¶ 15.) Medicaid is a principal funding source for
Camelot, and its centers are regulated by the Office of Alcoholism and Substance Abuse
Services (“OASAS”), which is an agency of the State of New York. (Compl’t ¶¶ 16-17.)
Scharff worked as a clinical supervisor at Camelot from November 7, 2011 to
March 16, 2012. (Compl’t ¶ 12.) He was hired as a clinical supervisor for Camelot’s treatment
centers in Queens, the Bronx and Manhattan, and states that he was one of two Credentialed
Alcohol and Substance Abuse Counselors (“CASACs”) employed by Camelot. (Compl’t ¶¶ 5657.) His job responsibilities included completing psychosocial evaluations and initial treatment
plans for new patients, reviewing counselors’ clinical notes and cross-referencing clinical notes
for Medicaid compliance. (Compl’t ¶¶ 58-59.)
According to Scharff, when he began work at Camelot, he observed that
counselors failed to keep adequate notes about patients, billed time incorrectly and maintained
records that contained apparent discrepancies between patient signatures. These observations are
the principal bases of his FCA allegations.
Scharff claims that he observed specific instances of individual counselors
“falsifying” patient records. (Compl’t ¶ 62.) As an example, he alleges that at least three
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counselors had a practice of copying and pasting notes about counseling sessions, and that one
counselor’s notes “lacked complete progress notes and often contained incoherent descriptions.”
(Compl’t ¶¶ 62, 67-70.) Scharff states that one counselor “routinely” held counseling sessions
for less than the time required by Medicaid regulations, and would bill Medicaid for sessions at a
45-minute rate when a meeting actually lasted for just 25 minutes. (Compl’t ¶ 63.) He observed
that this counselor overbilled for approximately 45 sessions during a two-month period.
(Compl’t ¶ 64.)
Scharff also identified “missing or forged signatures” on patient sign-in sheets.
(Compl’t ¶¶ 71, 73.) He raised his concerns about patient signatures with Camelot’s compliance
officer, who began an investigation and “confronted” a counselor about the signature
discrepancies. (Compl’t ¶¶ 77-79.) The counselor “admitted that she often allowed patients to
sign in for each other.” (Compl’t ¶ 79.)
Around the same time, Scharff e-mailed two supervisors about his concerns that a
counselor was not actually writing her own patient notes. (Compl’t ¶ 80.) Scharff asked whether
the compliance officer should be copied on e-mails concerning billing discrepancies, and was
told that he should not be. (Compl’t ¶ 81.) On March 5, 2012, Scharff gave “a detailed report of
the ongoing fraud he uncovered” to the compliance officer.” (Compl’t ¶ 83.) Less than two
weeks later, Camelot terminated Scharff, and stated that although Scharff was doing a “good
job,” he was not working well with the other counselors. (Compl’t ¶ 84.)
Scharff is the original source of information in this action, and states that he has
direct and independent knowledge of the Complaint’s allegations. (Compl’t ¶¶ 6, 52.) This
action was originally filed under seal pursuant to the FCA’s qui tam provisions, 31 U.S.C. §
3729(b)(1), and the United States Attorney’s Office for this District commenced a formal
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investigation thereafter. (Nugent Dec. ¶¶ 3-4.) Scharff provided the United States Attorney’s
Office for this District with statements and documents relating to his claims. (Compl’t ¶ 55.)
The government issued a Civil Investigative Demand to Camelot, which produced more than
20,000 pages of documents relating to patient charts and billing records. (Nugent Dec. ¶¶ 5-6.)
On November 12, 2014, the United States filed a notice stating that it declined to intervene in
this action. (Docket # 9.)
MOTION TO DISMISS STANDARDS UNDER RULE 12(b)(6) AND RULE 9(b).
“In alleging fraud or mistake, a party must state with particularity the
circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of
a person’s mind may be alleged generally.” Rule 9(b). To plead a fraudulent misstatement, “the
plaintiff must (1) specify the statements that the plaintiff contends were fraudulent, (2) identify
the speaker, (3) state where and when the statements were made, and (4) explain why the
statements were fraudulent.” Anschutz Corp. v. Merrill Lynch & Co., Inc., 690 F.3d 98, 108 (2d
Cir. 2012) (internal quotation marks omitted).
Counts One and Two of the Complaint allege that Camelot violated the FCA by
submitting false claims for Medicaid reimbursement. Because the False Claims Act is an antifraud statute, “claims brought under the FCA fall within the express scope of Rule 9(b).” Gold
v. Morrison-Knudsen Co., 68 F.3d 1475, 1477 (2d Cir. 1995); accord United States ex rel. Ladas
v. Exelis, Inc., 824 F.3d 16, 26 (2d Cir. 2016) (“The Rule 9(b) principles apply to complaints
filed under the False Claims Act.”). While the text of the FCA expressly states that it does not
require “proof of specific intent to defraud,” 31 U.S.C. § 3729(b)(1)(B), “this does not conflict
with Rule 9(b),” since “[m]alice, intent, knowledge, and other condition of mind of a person may
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be averred generally.” Gold, 68 F.3d at 1477. Rather, to satisfy Rule 9(b), a complaint must
“state with particularity the specific statements or conduct giving rise to the fraud claim.” Id.
Count Three alleges that Scharff was terminated as retaliation for notifying
supervisors of alleged misconduct, and because this count does not implicate fraudulent
behavior, Camelot’s motion to dismiss is reviewed pursuant to Rule 12(b)(6) rather than Rule
9(b). To survive a motion to dismiss under Rule 12(b)(6), “a complaint must contain sufficient
factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Iqbal,
556 U.S. at 678 (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). Legal
conclusions are not entitled to the presumption of truth, and a court assessing the sufficiency of a
complaint disregards them. Id. Instead, the Court must examine only the well-pleaded factual
allegations, if any, “and then determine whether they plausibly give rise to an entitlement to
relief.” Id. at 679. “Dismissal is appropriate when ‘it is clear from the face of the complaint, and
matters of which the court may take judicial notice, that the plaintiff's claims are barred as a
matter of law.’” Parkcentral Global Hub Ltd. v. Porsche Auto. Holdings SE, 763 F.3d 198, 20809 (2d Cir. 2014) (quoting Conopco, Inc. v. Roll Int’l, 231 F.3d 82, 86 (2d Cir. 2000)).
DISCUSSION.
I.
Overview of the FCA.
The FCA provides that “any person who knowingly presents, or causes to be
presented, a false or fraudulent claim for payment or approval . . . is liable to the United States
Government . . . .” 31 U.S.C. § 3729(a)(1)(A). It also provides that “any person who . . .
knowingly makes, uses, or causes to be made or used, a false record or statement material to a
false or fraudulent claim . . . is liable to the United States Government . . . .” 31 U.S.C. §
3729(a)(1)(B). To state a claim for relief under the FCA, a relator must allege with particularity
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that a defendant “‘(1) made a claim, (2) to the United States government, (3) that is false or
fraudulent, (4) knowing of its falsity, and (5) seeking payment from the federal treasury.’”
Bishop v. Wells Fargo & Co., 823 F.3d 35, 43 (2d Cir. 2016) (quoting Mikes v. Straus, 274 F.3d
687, 695 (2d Cir. 2001), abrogated on other grounds by Universal Health Servs., Inc. v. United
States, 136 S. Ct. 1989 (2016)).
“The FCA was enacted in 1863 to combat fraud by defense contractors during the
Civil War. Consistent with its origin, the archetypal FCA claim involves a factually false request
for payment from the government, as when a contractor delivers a box of sawdust to the military
but bills for a shipment of guns.” Bishop, 823 F.3d at 43 (internal citation omitted). In addition
to express factual falsehoods, a defendant may be liable for “legally false” claims that falsely
certify compliance with a regulation or a statute containing a material condition for government
payment. Id.; United Health Servs., 136 S. Ct. at 1999.
However, “[t]he False Claims Act is not an all-purpose antifraud statute or a
vehicle for punishing garden-variety breaches of contract or regulatory violations.” Id. at 2003
(internal citation and quotation marks omitted); Bishop, 823 F.3d at 49 (“the FCA was not
designed to reach every kind of fraud practiced on the Government.”). A complaint must
“plausibly connect[ ]” the defendant’s alleged fraud to “claims submitted to the government for
payment . . . .” Id.
Scharff alleges that Camelot submitted false claims for Medicaid reimbursement.
The Medicaid Act, 42 U.S.C. § 1396, et seq., created “a cooperative federal-state program
designed to provide medical assistance to persons whose resources are insufficient to meet the
costs of their necessary medical care.” Davis v. Shah, 821 F.3d 231, 238 (2d Cir. 2016). New
York Mental Hygiene Law § 19.07 established the OASAS to oversee the state’s alcohol and
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substance-abuse treatment facilities. OASAS has adopted regulations setting standards for
Medicaid reimbursement. See 14 N.Y.C.R.R. § 839.1. OASAS requires that “[e]ach alcoholism
facility enrolled as a Medicaid provider shall comply with all applicable requirements of the
Department of Social Services.” 14 N.Y.C.R.R. § 839.8. It also requires that “[a]ll information
provided in relation to any claim for payment shall be true, accurate and complete.” 14
N.Y.C.R.R. § 839.7(e).
II.
The Complaint Fails to Allege Fraud with Particularity.
According to the Complaint, from 2007 through 2012, Camelot submitted false
records and certifications to the United States to secure the payment of Medicaid
reimbursements. (Compl’t ¶¶ 86, 91.) Scharff alleges that Camelot “made deliberate false
representations” of patient records and billed Medicaid for excessive and unnecessary services.
(Compl’t ¶ 3.)
The purported misconduct identified by Scharff does not plausibly amount to
fraud. At most, the Complaint describes a series of seemingly unrelated practices of individual
counselors that reflect an inattention to detail, accompanied by conclusory labels describing the
conduct as fraudulent. The Complaint makes no allegations that Camelot requested Medicaid
reimbursement for services that were not actually provided. Whether the acts of purported
misconduct are viewed in isolation or collectively, they do not allege with particularity that
Camelot fraudulently sought Medicaid reimbursement payments.
A. Counselor Notes and Patient Signatures.
Scharff contends that individual counselors were “falsifying records,” and, as
support, alleges that a counselor “copy-and-pasted the notes” for each individual patient who
attended a group session held on November 8, 2011, instead of drafting notes specific to each
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patient. (Compl’t ¶ 62.) The Complaint does not explain why a counselor’s notes for a group
session required individualized descriptions for each patient or why drafting a uniform account
for all patients at a group session was fraudulent. The allegation that this counselor copied-andpasted patient assessments from a group session does not fit within the label of “falsifying
records.” (Compl’t ¶ 62.) Further, there is no allegation that these sessions did not take place, or
that the counselor or Camelot fabricated records for non-existent patients.
Scharff makes several allegations concerning the recordkeeping practices of
another counselor, who he alleges “regularly copy-and-pasted notes from one counseling session
to another.” (Compl’t ¶ 70.) He reported to his supervisor that this counselor’s notes often had
“incoherent descriptions” and “lacked complete progress notes.” (Compl’t ¶ 70.) Scharff
informed his supervisors that he believed the counselor’s daughter, who also worked for
Camelot, was the actual author of these patient notes. (Compl’t ¶¶ 80, 83.)
He also observed that patient signatures submitted by this counselor “differed
significantly” from document to document, and continued to do so even after he reported the
issue. (Compl’t ¶¶ 73, 75.) This counselor later told Camelot’s compliance officer that she
permitted patients to sign in for each other. (Compl’t ¶ 79.)
The Complaint does not allege with particularity how this conduct rises to the
level of fraud. There is no allegation as to the level of detail required of patient notes or what is
meant by Scharff’s description of “incoherent” notes. Assuming that this counselor permitted
patients to sign in for one another, the Complaint does not allege that Camelot sought
reimbursement for services made to non-existent patients or that these patients were not, in fact,
attending counseling sessions. It also is unclear why Scharff concluded that this counselor was
not writing her own patient notes, and whether that conclusion is based solely on speculation or
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inference. Assuming the truth of these allegations, Scharff may have alleged that this counselor
did a poor job of documenting her interactions with patients, but he has not alleged how her
conduct amounted to fraud or facilitated false claims for Medicaid reimbursement.
The Complaint alleges that one counselor “regularly” billed Medicaid for sessions
at a 45-minute rate, when she only met with patients for 25 minutes. (Compl’t ¶¶ 63-64.) The
Complaint does not allege how Scharff reached this conclusion, and vaguely alleges that he
“learned” about the length of these sessions. The Complaint also notes that one counselor failed
to obtain approximately 450 required patient signatures for her treatment plans, and that another
counselor failed to obtain signatures in approximately sixty instances. (Compl’t ¶¶ 66, 68.) Yet
the Complaint again fails to allege with particularity why these practices were fraudulent, as
opposed to sloppy, and does not identify their consequences for Camelot’s Medicaid
reimbursement claims.
The Complaint does not allege that these counselors’ practices concerning patient
signatures and notes were the consequence of a Camelot policy. It also does not allege that
Camelot had an informal custom that encouraged this behavior. At most, the Complaint has
described unrelated, uncoordinated flaws in the recordkeeping of individual counselors. Scharff
has not alleged with particularity why their conduct amounts to fraud.
B. The Staff Meeting of October 2011.
Scharff alleges that he attended a meeting in October 2011, 1 where members of
Camelot’s “treatment plan review team” each “signed and back-dated” approximately eight-toten patient treatment plans. (Compl’t ¶ 61.) The Complaint contains no additional details as to
Apparently in error, the same paragraph of the Complaint also identifies the meeting as having taken place in
October 2012. (Compl’t ¶ 61.) The Complaint also alleges that Scharff did not begin his employment at Camelot
until November 7, 2011, which post-dates the October 2011 meeting described in the Complaint. (Compl’t ¶ 12.)
The Court nevertheless assumes the truth of Scharff’s allegation that he attended this October 2011 meeting.
1
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the purported back-dating or its consequences for Camelot’s claims for Medicaid reimbursement.
At that same meeting, the Complaint alleges that the team-members did not review or evaluate
the proposed plans, but signed them without analysis “in an effort to outwardly appear in
compliance with Medicaid regulations while blatantly ignoring their obligations.” (Compl’t ¶
61.) The Complaint does not explain what is meant by the allegation that the team members did
not evaluate the proposed plans. Moreover, there are no supporting allegations concerning the
employees’ supposed intent to “blatantly ignor[e] their obligations” to comply with Medicaid
regulations. While intent may be averred generally, and the FCA does not require proof of an
intent to defraud, see Gold, 68 F.3d at 1477, this allegation is a conclusory, unsupported label.
The Complaint’s vague and general allegations concerning the conduct at this October 2011
meeting lack the particularity required by Rule 9(b).
C. Camelot’s Staffing Obligations.
Scharff also claims that Camelot violated the FCA because Camelot “failed to
staff enough qualified health professionals (‘QHPs’) or CASAC trainees at each of their
treatment centers in violation of 14 NYCRR 822-5.9 . . . .” (Compl’t ¶ 5(d).) Elsewhere, the
Complaint alleges that at the time that he was hired, he “became one of only two CASACs
working for Defendant.” (Compl’t ¶ 57.) 14 N.Y.C.R.R. § 822-5.9(j) requires that “[a]t least 50
percent of all clinical staff must be Qualified Health Professionals or CASAC Trainees.”
Aside from the allegation of paragraph 5(d), the Complaint makes no allegations
as to the number of Qualified Health Professionals or CASAC trainees employed by Camelot. It
makes no allegation as to the number of such individuals employed at treatment centers, the
qualifications of the employees at Camelot’s treatment centers or Camelot policies concerning
the hiring or assignment of QHPs or CASAC trainees. Because the Complaint fails to make any
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supporting allegations about Camelot’s use of Qualified Health Professionals or CASAC
trainees, it does not allege that Camelot failed to comply with OASAS regulations.
In opposition to Camelot’s motion, Scharff advances a different theory of
liability. Scharff now argues that Camelot ran afoul of OASAS regulations because it did not
specifically assign a full-time CASAC to each of its outpatient centers. (Opp. Mem. at 9-10.)
Although “new facts and allegations, first raised in a Plaintiff’s opposition papers,
may not be considered in deciding a motion to dismiss,” Ward v. Andrews McMeel Pub., LLC,
963 F. Supp. 2d 222, 231 (S.D.N.Y. 2013) (quotation marks omitted), Scharff’s newly proposed
theory of liability would still fail to allege non-compliance. He cites to a regulation that requires
each program to have “a qualified health professional designated as the full-time on-site clinical
director . . . .” 14 N.Y.C.R.R. § 822.7(k)(1). Scharff argues that Camelot failed to comply with
this obligation because, at the time of his hiring, he was one of only two CASACs employed by
Camelot. (Compl’t ¶ 57.)
But “qualified health professional” is a defined term in OASAS regulations. See
14 N.Y.C.R.R. § 800.3(l). It lists twelve different professions that fall within the definition,
including not only CASACs but licensed physicians, physician’s assistants, certified nurse
practitioners, registered nurses, psychologists, occupational therapists and social workers, among
others. Id. § 800.3(l)(5). The Complaint alleges that Scharff was one of two CASACs employed
by Camelot, but it makes no allegations concerning these other categories of employees and
whether each facility had designated a qualified health professional as its on-site director. Thus,
even if the Complaint had proposed this theory of liability, it fails to include supporting
allegations that go toward Camelot’s non-compliance with OASAS staffing regulations.
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The Complaint therefore fails to allege with particularity that Camelot violated
OASAS staffing regulations.
D. Scharff’s Communications with Supervisors.
The Complaint alleges that when Scharff informed his supervisors and Camelot’s
compliance officer of his observations, they attempted to take some corrective measures.
Camelot’s compliance officer “commenced an investigation” into Scharff’s concerns, whereupon
one of the counselors acknowledged that she had been permitting patients to sign in for one
another. (Compl’t ¶¶ 78-79.) After Scharff informed the compliance officer of his observations,
a supervisor instructed Scharff to contact him directly with billing and compliance concerns.
(Compl’t ¶ 81.) While the Complaint alleges that signature discrepancies continued a week after
Scharff first raised the issue (Compl’t ¶ 74-75), the Complaint alleges that, when informed of
Scharff’s observations, Camelot’s management undertook an internal investigation and
confronted at least one counselor about her recordkeeping practices. The responsiveness of
Camelot’s managers, and particularly the actions of its compliance officer, is inconsistent with
Scharff’s conclusory allegations of fraudulent conduct.
Ultimately, Scharff’s FCA allegations are principally based on his observations
that some forms were either missing patient signatures or included signatures where patients
signed in for one another, and that counselors drafted inadequate summaries of their interactions
with patients. The Complaint has not alleged with particularity how these practices, though
imprecise, rise to the level of fraud. Because Count One and Count Two of the Complain fail to
allege fraud with particularity, they are dismissed.
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III.
The Complaint Fails to Allege the Submission of Any False Claim.
Counts One and Two are dismissed for the separate reason that the Complaint
fails to allege the submission of any false claim. In Ladas, the Second Circuit affirmed a district
court’s dismissal of a complaint that “did not contain plausible allegations of fact that showed, as
required for FCA purposes, that any claim for payment submitted by [defendants] was false . . .
.” 824 F.3d at 27; see also Wood ex rel. United States v. Applied Research Assocs., Inc., 328
Fed. Appx. 744 (2d Cir. 2009) (summary order) (affirming dismissal of complaint that “fail[ed]
to specify the time, place, speaker, and even the content of the alleged misrepresentations.”)
(quotation marks omitted).
Several opinions in this District have discussed in detail why the FCA requires a
complaint to allege with particularity the contents and circumstances of a purportedly false
claim. In United States ex rel. Kester v. Novartis Pharmaceuticals Corp., 23 F. Supp. 3d 242,
252-60 (S.D.N.Y. 2014), now-Chief Judge McMahon concluded that “[a] complaint’s
description of a fraudulent scheme paired with information about a defendant’s standard billing
practice is not enough ‘particular’ information to fulfill the purposes of Rule 9(b); the plaintiff
must provide a detailed factual basis to support his allegation that the defendant submitted a false
claim in this specific instance, not just that the defendant had a custom of submitting claims.” Id.
at 255 (emphasis in original). As Kester explained:
Given that submission of a false claim is an essential element of
subsections (a)(1)(A) and (a)(1)(B), requiring a plaintiff to provide
enough detail for a defendant to be able to reasonably identify
particular claims that are allegedly false better fulfills the central
purpose of Rule 9(b) – providing fair notice to the defendant. It also
weeds out FCA claims brought by plaintiffs who are merely
speculating that false claims might have been submitted to the
government. This serves the other purposes of Rule 9(b):
safeguarding defendants’ reputations from improvident charges of
wrongdoing, protecting defendants from strike suits, and
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discouraging the filing of suits as a pretext for the discovery of
unknown wrongs.
Id. at 256 (internal citations omitted). A relator may satisfy the pleading requirement by “(1)
providing sufficient identifying information about all the false claims, or (2) providing example
false claims.” Id. at 258.
This Court adopted Kester’s reasoning in Corporate Compliance Associates ex
rel. United States v. New York Society for the Relief of the Ruptured and Crippled, Maintaining
the Hospital for Special Surgery, 2014 WL 3905742 (S.D.N.Y. Aug. 7, 2014). The undersigned
noted that the complaint failed to cite a single example of a false claim, and observed: “Stating
that the [defendant] lied to the federal government more than 350,000 times about where services
were rendered makes for a useful club in a claimant’s hands, but it does not provide the
particularity that Rule 9(b) requires. Fraud is a serious allegation, and Rule 9(b) provides
meaningful protection against blunderbuss claims of fraud.” Id. at *16.
Other courts have adopted Kester’s reasoning as to the requirements of alleging
the existence of false claims. See, e.g., United States ex rel. NPT Assocs. v. Lab. Corp. of Am.
Holdings, 2015 WL 7292774, at *6 (Nov. 17, 2015) (Carter, J.) (complaint did not satisfy Rule
9(b) when it failed “to provide Defendant with notice of the claims at issue . . . .”); United States
ex rel. Ortiz v. Mount Sinai Hosp., 2015 WL 7076092, at *9-10 (Nov. 9, 2015) (Berman, J.)
(complaint’s allegations concerning the submission of specific claims satisfied Rule 9(b));
United States ex rel. Ramos v. Icahn Sch. of Med. at Mount Sinai, 2015 WL 5472933, at *5
(S.D.N.Y. Sept. 16, 2015) (Daniels, J.) (under reasoning of Kester, alleged creation of false
records was inadequate to allege that false claims were actually submitted); United States ex rel.
Bilotta v. Novartis Pharma. Corp., 50 F. Supp. 3d 497, 525-26 (S.D.N.Y. 2014) (Gardephe, J.)
(complaint’s inclusion of “specific false reimbursement claims” satisfied Rule 9(b)).
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Here, the Complaint makes no allegations that relate to the submission of any
false claim. It does not attach a sample of any false claim or describe the contents or format of
Camelot’s reimbursement claims. The Complaint does not even include “information about [the]
defendant’s standard billing practice” or describe “a custom of submitting claims,” both of which
Chief Judge McMahon deemed inadequate to allege the submission of false claims. Kester, 23
F. Supp. 3d at 255. For example, it is unclear whether the counselor notes that were allegedly
copied-and-pasted for patients’ group sessions were submitted as part of a reimbursement claim
or whether they were a matter of internal recordkeeping. It also is unclear whether Camelot
made any certification as to its practices for collecting patient signatures and whether forms
signed by patients were submitted as part of Medicaid reimbursement claims.
Because the Complaint fails to identify the submission of any false claim, or even
identify the contents that were required in a claim for Medicaid reimbursement, Count One and
Count Two are dismissed.
IV.
The Complaint Does Not Allege Materiality.
Counts One and Two are separately dismissed because the Complaint fails to
allege the materiality of Camelot’s purported non-compliance with OASAS regulations.
Under the FCA, a “misrepresentation must be material to the other party’s course
of action.” Universal Health Services, 136 S. Ct. at 2001. A person seeking payment from the
government is liable under the FCA only when a misrepresentation is material to the
government’s payment. See id. at 2001-02. The materiality of a statement does not need to be
an express condition set by statute or regulation. See id. For example, if the government does
not specify that the guns it purchases must actually shoot, and a seller knowingly sells the
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government non-functioning guns, the seller would be liable under the FCA, even if payment
was not expressly conditioned on the guns’ functionality. See id.
At the same time, mere non-compliance with a regulation is not enough to give
rise to FCA liability. See id. at 2002. As the Supreme Court described it: “[B]illing parties are
often subject to thousands of complex statutory and regulatory provisions. Facing False Claims
Act liability for violating any of them would hardly help would-be defendants anticipate and
prioritize compliance obligations.” Id. Regulatory non-compliance “must be material to the
Government’s payment decision in order to be actionable under the False Claims Act.” Id.
Proof of materiality may include an express, material condition of payment, or knowledge by the
defendant that the government routinely refuses to pay claims based on failure to comply with a
certain requirement. Id. at 2003. “The materiality standard is demanding” because the FCA is
not “a vehicle for punishing garden-variety breach of contract or regulatory violations.” Id. at
2003. Materiality “cannot be found where noncompliance is minor or insubstantial.” Id.
Like this case, Universal Health Care involved defendants’ alleged failure to
comply with Medicaid regulations. See id. at 1997-98. Universal Health Care stated that the
relators must sufficiently allege that the defendant “misrepresented its compliance with mental
health facility requirements that are so central to the provision of mental health counseling that
the Medicaid program would not have paid these claims had it known of these violations.” Id. at
2004. “We emphasize, however, that the False Claims Act is not a means for imposing treble
damages and other penalties for insignificant regulatory or contractual violations.” Id. at 2004.
The Complaint summarizes OASAS regulations concerning the general process of
paying Medicaid reimbursements, as well as the obligations of outpatient facilities that treat
chemical dependency to develop treatment plans and document patient therapy. (Compl’t ¶¶ 25-
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51.) However, aside from the conclusory assertion that Camelot “failed to comply with material
Medicaid regulations that served as conditions precedent for Camelot to receive reimbursement
through federal funds for the services that Camelot provided,” the Complaint makes no
allegation as to the materiality of Camelot’s alleged non-compliance. (Compl’t ¶ 3.) It does not
connect specific conduct by Camelot’s counselors to specific submissions for reimbursement, or
explain why the purportedly fraudulent conduct was material to the payment of reimbursements.
The Complaint does not cite any express condition for reimbursement applicable to Camelot, nor
does it allege whether the government has refused to reimburse clinics that have engaged in
conduct similar to Camelot’s. 2
Scharff has failed to satisfy the “demanding” requirement for alleging materiality
under the FCA. Universal Health Care, 136 S. Ct. at 2003. For this additional reason, Count
One and Count Two of the Complaint are dismissed.
V.
The Complaint Fails to Allege the Existence of a “Scheme” or
“Conspiracy”.
According to the Complaint, Camelot “and its agents conspired to engage in
fraudulent billing schemes.” (Compl’t ¶ 4(a).) It also alleges that Camelot, its employees and
agents knowingly presented false claims “individually and in concert . . . .” (Compl’t ¶¶ 86, 91.)
The FCA contains a provision making it unlawful to “conspire[ ] to commit a
violation” of the statute. 31 U.S.C. § 3729(a)(1)(C). While the Complaint cites this provision in
its initial paragraph and its prayer for relief, it brings no separate cause of action for conspiracy
to violate the FCA.
United Health Care expressly abrogated the Second Circuit’s previous standard for determining materiality, which
looked only to whether a statute, regulation or contract expressly required compliance in order to receive payment.
See 136 S. Ct. at 1999, abrogating Mikes, 274 F.3d at 700. The Court notes that the Complaint’s allegations would
fail to allege materiality under the Mikes standard, which was in effect at the time the Complaint was filed.
2
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Generously construing the Complaint as seeking relief for a “conspiracy” to
violate the FCA, the Court concludes that it falls far short of the pleading requirements of Rule
9(b). It “fails to identify a specific statement where [individuals] agreed to defraud the
government.” Ladas, 824 F.3d at 27; see also Kester, 23 F. Supp. 3d at 268 (to state a claim of
conspiracy under the FCA, the complaint must allege “(1) an unlawful agreement by the
defendant to violate the FCA, and (2) at least one overt act performed in furtherance of that
agreement.”).
The Complaint makes no allegations as to the existence of any agreement to
violate the FCA. To the extent that it purports to bring a claim for conspiracy, any such claim is
dismissed.
VI.
The Complaint Does Not Make Allegations Related to Conduct that PreDates Scharff’s Employment.
The Complaint alleges that Camelot’s purported misconduct occurred “on or
before 2007 through 2012 . . . .” (Compl’t ¶¶ 86, 91.) However, the Complaint contains no
allegations concerning Camelot’s practices or Medicaid reimbursement claims that pre-date the
commencement of Scharff’s employment in October 2011. To the extent that the Complaint
seeks relief for Camelot’s reimbursement claims prior to October 2011, those claims are
dismissed.
VII.
The Complaint Plausibly Alleges a Claim of Retaliation.
The FCA makes it unlawful to terminate any employee in retaliation for taking
protected actions under the FCA. As this Court has previously observed, “[t]he heightened
pleading requirements of Rule 9(b), Fed. R. Civ. P., do not apply to a retaliation claim under 31
U.S.C § 3730(h) because it does not require a showing of fraud.” Garcia v. Aspira of New York,
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Inc., 2011 WL 1458155, at *3 n.1 (S.D.N.Y. Apr. 13, 2011) (citing U.S. ex rel. Karvelas v.
Melrose-Wakefield Hosp., 360 F.3d 220, 238 n. 23 (1st Cir. 2004)).
The FCA states that “[a]ny employee . . . shall be entitled to all relief necessary to
make that employee . . . whole, if that employee . . . is discharged . . . because of lawful acts
done by the employee . . . in furtherance of an action under this section or other efforts to stop 1
or more violations of this subchapter.” 31 U.S.C. § 3730(h)(1). The Second Circuit “has yet to
articulate a test for deciding when a plaintiff has set forth a claim for retaliation under section
3730(h) . . . .” Weslowski v. Zugibe, 626 Fed. App’x 20, 22 (2d Cir. 2015) (summary order). It
has, however, observed that “[t]he failure” of a relator’s qui tam action “does not necessarily
preclude him from seeking protection from retaliation under § 3730(h).” ABC v. NYU Hosps.
Ctr., 629 Fed. App’x 46, 49 (2d Cir. 2015) (summary order).
“[A] claim for illegal retaliation under § 3730(h) requires a plaintiff to show (1)
the employee engaged in conduct protected under the FCA; (2) the employer knew that the
employee was engaged in such conduct; and (3) the employer discharged, discriminated against
or otherwise retaliated against the employee because of the protected conduct.” McAllan v. Von
Essen, 517 F. Supp. 2d 672, 685 (S.D.N.Y. 2007) (Holwell, J.).
“The inquiry as to whether an employee engaged in protected conduct involves
determining whether an employee’s actions sufficiently furthered an action filed or to be filed
under the FCA, and, thus, equated to ‘protected conduct.’” Id. “Protected activity” is interpreted
broadly, and “an employee’s activities may be protected even where an FCA suit has not been
filed.” Faldetta v. Lockheed Martin Corp., 2000 WL 1682759, at *12 (S.D.N.Y. Nov. 9, 2000)
(Casey, J.). “Simply put, the plaintiff must demonstrate that her investigation, inquiries, and/or
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testimony were directed at exposing a fraud upon the government.” Grant v. Abbott House,
2016 WL 796864, at *7 (S.D.N.Y. Feb. 22, 2016) (Roman, J.).
As to the second element, the Complaint must plausibly allege “that the employee
was discharged because of activities which gave the employer reason to believe that the
employee was contemplating a qui tam action against it.” Garcia, 2011 WL 1458155, at *5
(quotation marks omitted). It also must allege that the employer knew that the plaintiff “was
engaging in protected conduct.” Faldetta, 2000 WL 1682759, at *13. Weslowski affirmed the
dismissal of a retaliation claim because the plaintiff did not adequately allege that his employer
“was aware that” his actions were “in furtherance of efforts to prevent a violation of the FCA.”
626 Fed. Appx. at 22.
Here, the Complaint alleges that on or about March 5, 2012, Scharff informed his
supervisors and others that he “had discovered 358 examples of false information submitted to
Medicaid for reimbursement . . . .” (Compl’t ¶ 83.) Less than two weeks later, Camelot
terminated Scharff, and told him that although he “was doing a ‘good job,’ he was not working
out with the other counselors . . . .” (Compl’t ¶ 84.) The Complaint plausibly alleges that
Scharff told his supervisors of his belief that they had submitted false claims for Medicaid
reimbursement, and that he was terminated shortly thereafter. As discussed, Scharff had
previously raised his concerns with supervisors and with Camelot’s compliance officer, and
advised him that he believed Camelot was not complying with Medicaid regulations. (Compl’t
¶¶ 72-77, 81.) Scharff has plausibly alleged that he engaged in protected conduct under the
FCA, that his supervisors were aware of this conduct, and that he was terminated after raising his
concerns.
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The plausibility of Scharff’s retaliation claim is strengthened by the temporal
proximity between his communications to supervisors and his subsequent termination. See
United States ex rel. Lee v. Northern Adult Daily Health Care Center, 2016 WL 4703653, at *15
(E.D.N.Y. Sept. 7, 2016) (temporal proximity between plaintiff’s constructive discharge and
protected conduct supported plausibility of FCA retaliation claim). Putting aside the infirmities
of Scharff’s substantive FCA allegations, he has sufficiently alleged that he engaged in conduct
protected by the FCA, that Camelot was aware of this conduct, and that he was terminated as a
result. See generally McAllan, 517 F. Supp. 2d at 685.
Camelot’s motion to dismiss the retaliation claim in Count Three is therefore
denied. The claim, of course, may look much different at the summary judgment stage.
CONCLUSION.
The defendant’s motion to dismiss is GRANTED as to Count One and Count
Two, but DENIED as to Count Three. The Clerk is directed to terminate the motion. (Docket #
46.)
SO ORDERED.
Dated: New York, New York
September 28, 2016
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