U.S. District Court Finds the Use of Extrapolation Evidence to Establish Liability Permissible in False Claims Act Litigation

by Paul L. Croce

The use of statistical sampling and extrapolation evidence has long been used to determine overpayment amounts in administrative agency decisions.  Such techniques have also been permitted to establish the quantum of damages in False Claims Act (“FCA”) cases once liability has been established.  However, courts have only permitted extrapolation evidence to prove liability in FCA cases under rare circumstances such as when a default judgment has been entered, U.S. v. Cabrera-Diaz, 106 F.Supp. 2d 234 (D. P.R. 2000) or where evidence presented to the jury provided a reasonable basis to find the defendants had a “policy and practice” of submitting false claims. U.S. ex. Rel. Loughren v. Unum Provident Corp., 604 F.Supp.2d 258 (D. Mass. 2009).

On September 29, 2014 the United States District Court for the Eastern District of Tennessee was asked to determine whether the Government could establish liability under the FCA based on extrapolation evidence.  The court answered in the affirmative.

In U.S. ex. Rel. Martin and Taylor v. Life Care Centers of America, Inc., Case No. 1:08-cv-251 a qui tam FCA claim was asserted against Life Care Centers of America (“Life Care”), a corporation headquartered in Cleveland, Tennessee which owns over 200 skilled nursing facilities. The allegations against Life Care were that (1) it pressured its therapists to target Ultra High Resource Utilization Groups (“RUG”) levels and longer average length of stay period for patients in order to maximize its Medicare revenue; (2) it billed Medicare for services that were “medically unreasonable, unnecessary, and unskilled”; and (3) it knew it was billing for medically unreasonable, unnecessary and unskilled services based on numerous complaints by its employees to Life Care’s compliance officer and corporate Rehabilitation Services offices which were either ignored, minimized or retaliated against.

When the Government indicated that it would not undertake a claim-by-claim review but rather use a random sample and extrapolate it to the universe of claims, Life Care moved for partial summary judgment claiming liability could not be determined in such a manner.  In a detailed decision, the court denied Life Care’s motion finding that such evidence could be presented by the Government but that the weight accorded to that evidence would be left to the fact finder.  The court believed that categorically “limiting FCA enforcement to individual claim-by-claim review would open the door to more fraudulent activity because the deterrent effect of the threat of prosecution would be circumscribed.”

The court reviewed each element of an FCA claim and determined that the Government would be able to rely on statistical sampling and extrapolation to establish each.  However, there was one notable exception.  As to the element of knowledge, the Government indicated that it would not be using statistical sampling as proof. Rather the Government would proffer “evidence of [Life Care’s] corporate practice and pressure, and that Life Care knew those practices likely caused the submission of false claims given the complaints it received nationwide from its employees.”  Because such evidence would establish that Life Care acted “in reckless disregard of the truth or falsity of the information” it could potentially establish the knowledge required under the statute. 31 U.S.C. 3729(b)(1).

Ultimately, the case falls within the same category as United States ex. rel. Loughren v. Unum Provident Corp., 604 F.Supp.2d 259 (D. Mass. 2009) which allows liability to be established through evidence that a defendant’s “policy and practice” was to submit false claims.  The court specifically held that based on the Government’s representation as to the type of evidence it would present (no evidence was actually presented to the trial court) it was not attempting to use the “collective knowledge” theory to establish scienter; a theory which has never been successfully applied to an FCA case before.

Nevertheless, the limited instances where extrapolation evidence has been permitted to be used to establish FCA liability makes this a significant development in FCA case law.  It will be interesting to see what weight the jury places on this evidence should the matter proceed to trial and what weight other courts will give to this decision.