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14 November 2018
Evidence is mounting that the Department of Justice (DOJ) is willing to pursue private equity funds in False Claims Act cases, particularly ones based on alleged violations of healthcare fraud and abuse laws. Earlier in 2018, for the first time the DOJ intervened for the first time in one such False Claims Act case against a private equity sponsor, the fund's portfolio pharmacy and two pharmacy employees.(1)
In its complaint-in-intervention in Diabetic Care, the government alleged that:
The government further alleged the private equity fund had acted with the requisite "intent", alleging that
[a]s an investor in health care companies, [the fund] knew or should have known… that health care providers that bill federal health care programs are subject to laws and regulations designed to prevent fraud, including the [Anti-kickback Statute].
The private equity fund has filed a motion to be dismissed from that case, arguing that the absence of allegations that it knew of, or participated in the fraud, inoculates it from False Claims Act liability.
While awaiting a ruling from the Diabetic Care court on this issue, the DOJ recently filed a notice drawing the court's attention to a recent decision by another court on the precise issue which supported the government's position. In that case, in which the DOJ has declined to intervene, a private whistleblower and the Commonwealth of Massachusetts alleged that a mental health centre owned by private equity funds provided services that were not properly reimbursable because they were provided in violation of various state law and contractual requirements.(2) The private equity fund defendants filed a motion for dismissal from the case on the ground that there were no allegations that they had "directly" caused the mental health centre to submit any false claims or engage in improper conduct. They further argued that mere failure to stop the practices could not support False Claims Act liability. The South Bay court rejected those arguments, holding that a private equity fund can be liable "where the submission of false claims by another entity was the foreseeable result of a business practice". Moreover, the court found the complaint adequately alleged that the private equity funds had caused the submission of the false claims based on allegations that the private equity fund "members and principals formed a majority of the… South Bay Board, and were directly involved in the operations of South Bay".
These developments make explicit that which has long been implicit: active engagement in the management of portfolio companies potentially exposes private equity sponsors to draconian penalties under the False Claims Act.
For further information on this topic please contact Jaime LM Jones at Sidley Austin LLP by telephone (+1 202 736 8000) or email (firstname.lastname@example.org). The Sidley Austin LLP website can be accessed at www.sidley.com.
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