On August 7, 2014, Judge Castel of the Southern District of New York dismissed a False Claims Act (“FCA”) complaint that was based primarily on allegations that the defendant Hospital improperly focused on referral revenue in its physician compensation decisions. The Court insisted that an FCA complaint must set forth specific facts supporting the allegations regarding the impropriety of the payments and at least representative actual claims submitted.

The action was commenced in 2007 and remained under seal for almost seven years while the United States and the State of New York investigated the allegations. The United States and State of New York declined to pursue the matter in June 2013. The whistleblower that commenced the action then elected to proceed with the litigation without the government’s assistance seeking over $2 billion in damages and penalties.

The Court held that an FCA complaint that merely describes a fraudulent scheme does not satisfy Federal Rule of Civil Procedure 9(b). Rather, an FCA complaint must set forth facts sufficient to raise a plausible inference that false claims were submitted and specifically identify at least examples of such false claims that were submitted for payment. (The Second Circuit Court of Appeals has not decided whether a FCA complaint must identify examples of allegedly false claims, and other Circuits are divided on the issue. District Courts in the Second Circuit have also reached conflicting results.)

Perhaps more significantly, the Court also held that the mere allegations that a hospital paid a physician more than the physician generated in revenue or that it took referral revenue into consideration is not sufficient to state a claim that the hospital’s payments to the physician violated the FCA through underlying violations of the Anti-Kickback Statute and the physician self-referral law (the “Stark Law”). Rather, the Court explained that a hospital may take into account a physician’s “overall worth to the hospital” in making compensation decisions.

In sum, the Court’s thoughtful and well-reasoned decision is an important development in this area of the law.

Edward S. Kornreich, Sigal P. Mandelker, and Roger A. Cohen of Proskauer represented the defendant Hospital with assistance from Proskauer lawyers Yafang Deng, Jessica Heimler, and Andrew Merten.