Opinion
21-2117
12-20-2022
UNITED STATES OF AMERICA ex rel. CKD Project, LLC, Plaintiff-Appellant, v. FRESENIUS MEDICAL CARE HOLDINGS, INC., DBA FRESENIUS MEDICAL CARE NORTH AMERICA, NEW YORK DIALYSIS SERVICES, INC., FMS NEW YORK SERVICES LLC, BIO-MEDICAL APPLICATIONS MANAGEMENT COMPANY, INC., Defendants-Appellees, FRESENIUS MEDICAL CARE AG & CO. KGAA, Defendant. [*]
For Plaintiff-Appellant: DANIEL MILLER, Walden Macht & Haran LLP, Philadelphia, PA (Jonathan Z. DeSantis, Walden Macht & Haran LLP, Philadelphia, PA, and Geoffrey R. Kaiser, Rivkin Radler LLP, Uniondale, NY, on the brief). For Defendants-Appellees: JAMES F. BENNETT, Dowd Bennett LLP, St. Louis, MO (Megan S. Heinsz, Hannah F. Preston, Dowd Bennett LLP, St. Louis, MO, and Paul H. Schoeman, Kramer Levin Naftalis Frankel LLP, New York, NY, on the brief).
UNPUBLISHED OPINION
SUMMARY ORDER
RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT'S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE NOTATION "SUMMARY ORDER"). A PARTY CITING A SUMMARY ORDER MUST SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.
At a stated term of the United States Court of Appeals for the Second Circuit, held at the Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New York, on the 20th day of December, two thousand twenty-two.
Appeal from a judgment of the United States District Court for the Eastern District of New York (Cogan, J.).
For Plaintiff-Appellant: DANIEL MILLER, Walden Macht & Haran LLP, Philadelphia, PA (Jonathan Z. DeSantis, Walden Macht & Haran LLP, Philadelphia, PA, and Geoffrey R. Kaiser, Rivkin Radler LLP, Uniondale, NY, on the brief).
For Defendants-Appellees: JAMES F. BENNETT, Dowd Bennett LLP, St. Louis, MO (Megan S. Heinsz, Hannah F. Preston, Dowd Bennett LLP, St. Louis, MO, and Paul H. Schoeman, Kramer Levin Naftalis Frankel LLP, New York, NY, on the brief).
PRESENT: Denny Chin, Steven J. Menashi, Beth Robinson, Circuit Judges.
Upon due consideration, it is hereby ORDERED, ADJUDGED, and DECREED that the judgment of the district court is AFFIRMED.
Relator CKD Project, LLC, filed a qui tam action alleging that defendants Fresenius Medical Care Holdings, Inc., New York Dialysis Services, Inc., FMS New York Services LLC, and Bio-Medical Applications Management Company, Inc. (collectively, "Fresenius"), violated the Anti-Kickback Statute, 42 U.S.C. § 1320a-7b(b), by paying too much to acquire dialysis centers from physician-owners. The overpayments, CKD Project alleged, served to induce the physicians to refer patients to the newly acquired centers. The district court dismissed the action pursuant to the public disclosure bar of the False Claims Act. 31 U.S.C. § 3730(e)(4)(A). We assume the parties' familiarity with the facts and issues on appeal.
I
On November 12, 2014, CKD Project filed its action against Fresenius, asserting causes of action under the False Claims Act, 31 U.S.C. §§ 3729 et seq. CKD Project alleged that Fresenius employed schemes to pay physicians in exchange for patient referrals to its facilities in violation of the Anti-Kickback Statute, 42 U.S.C. § 1320a-7b(b). Specifically, Fresenius acquired controlling interests in dialysis clinics and the original physician-owners retained minority interests in the clinics. To purchase the clinics, Fresenius paid physicians "remuneration" that "grossly exceeded the fair market value of any tangible assets." J. App'x 714. According to CKD Project, this above-market price amounted to a payment to induce the doctors to refer patients back to the clinics in violation of the Anti-Kickback Statute.
As an illustration of the scheme, CKD Project described the "Apollo-Hauppauge" transaction, in which Fresenius acquired a 75 percent interest in a dialysis facility and the original owners retained a 25 percent interest. CKD Project alleged that the transaction agreements show that nearly 90 percent of the purchase price was allocated to intangible assets, primarily consisting of "goodwill," and the price could be explained only by considering the "revenue-generating value of the captive patient relationships." Id. at 739. Moreover, CKD Project noted that the transaction included non-compete agreements signed by physician-owners and seller representations and warranties regarding the target facilities. These contractual provisions allegedly served to "lock in the benefits" of existing "patient relationships." Id. at 736.
Fresenius filed a motion to dismiss pursuant to Rules 12(b)(1) and 12(b)(6) of the Federal Rules of Civil Procedure based on the public disclosure bar of the False Claims Act. The public disclosure bar directs a district court to dismiss an action under the False Claims Act when "substantially the same allegations or transactions" have previously been publicly disclosed. 31 U.S.C. § 3730(e)(4)(A). Fresenius argued that several of its SEC filings publicly disclosed the material elements of its dialysis center acquisitions. In its SEC filings, Fresenius stated that a "number of the dialysis centers and vascular access centers we operate are owned, or managed, by joint ventures in which we hold a controlling interest and one or more hospitals, physicians or physician practice groups hold a minority interest." J. App'x 350. While Fresenius had "structured [its] joint ventures to comply with many of the criteria for safe harbor protection under the U.S. Federal Anti-Kickback Statute, [Fresenius's] investments in these joint venture arrangements do not satisfy all elements of such safe harbor." Id. If these "joint ventures were found to be in violation of the Anti-Kickback Statute or the Stark Law, [Fresenius] could be required to restructure or terminate them [and face other penalties which] could have a material adverse effect on [Fresenius's] business, financial condition and results of operations." Id.
In September 2019, the district court referred Fresenius's motion to dismiss to a magistrate judge. On January 27, 2021, the magistrate judge issued a report and recommendation recommending dismissal of the amended complaint under the public disclosure bar and denial of leave to amend. On July 30, 2021, the district court overruled the objections, adopted in full the report and recommendation, and dismissed Relator's claims without leave to amend. United States ex rel. CKD Project, LLC v. Fresenius Med. Care Holdings, Inc., No. 14-CV-6646, 2021 WL 3240280 (E.D.N.Y. July 30, 2021).
II
We review de novo the district court's dismissal of CKD Project's claims. See, e.g., United States ex rel. Dhawan v. N.Y. Med. Coll., 252 F.3d 118, 120 (2d Cir. 2001).
Qui tam actions under the False Claims Act are subject to a public disclosure bar, which provides that the district court "shall dismiss an action or claim … if substantially the same allegations or transactions as alleged in the action or claim were publicly disclosed," unless the relator is an "original source of the information." 31 U.S.C. § 3730(e)(4)(A). The bar aims to discourage "opportunistic plaintiffs who have no significant information to contribute of their own." Graham Cnty. Soil & Water Conservation Dist. v. United States ex rel. Wilson, 559 U.S. 280, 294 (2010) (quoting United States ex rel. Springfield Terminal Ry. Co. v. Quinn, 14 F.3d 645, 649 (D.C. Cir. 1994)). It seeks to "strike a balance between encouraging private persons to root out fraud and stifling parasitic lawsuits." Id. at 295.
As discussed below, Congress amended the False Claims Act in 2010. Both versions of the statute use substantially similar language to describe the public disclosure bar; the primary difference is that the pre-2010 False Claims Act made the public disclosure bar explicitly jurisdictional. CKD Project alleges activity that occurred both before and after 2010. While both versions of the False Claims Act may apply, our analysis would be the same under either statute. See United States ex rel. Patriarca v. Siemens Healthcare Diagnostics, Inc., 295 F.Supp.3d 186, 196 (E.D.N.Y. 2018).
The public disclosure bar requires a two-step inquiry. First, "courts look to whether the substance of a relator's claim had been disclosed prior to the filing of his suit"; second, "courts look to whether, if such disclosures had been made, the relator can be considered an 'original source.'" United States ex rel. Patriarca v. Siemens Healthcare Diagnostics, Inc., 295 F.Supp.3d 186, 196 (E.D.N.Y. 2018).
A
The public disclosure bar applies when the previous public disclosures "exposed all the essential elements of the alleged fraud." United States ex rel. Vierczhalek v. MedImmune, Inc., 345 F.Supp.3d 456, 462 (S.D.N.Y. 2018) (internal quotation marks omitted), aff'd, 803 Fed.Appx. 522 (2d Cir. 2020); see United States ex rel. Kirk v. Schindler Elevator Corp., 437 Fed.Appx. 13, 17 (2d Cir. 2011) (explaining that the statutory term "transactions" refers "to the public exposure of all critical or material elements of the allegedly fraudulent transaction"). For the bar to apply, it is not necessary that the "alleged fraud, itself, have been disclosed" as long as the "material elements" have been disclosed. Patriarca, 295 F.Supp.3d at 197. In assessing whether the material elements have been disclosed, we may consider whether "the disclosed transaction creates an inference of impropriety," Kirk, 437 Fed.Appx. at 17 (internal quotation marks omitted), or whether the disclosure was "sufficient to set the government squarely upon the trail of the alleged fraud," Ping Chen ex rel. United States v. EMSL Analytical, Inc., 966 F.Supp.2d 282, 298 (S.D.N.Y. 2013) (quoting In re Natural Gas Royalties, 562 F.3d 1032, 1041 (10th Cir. 2009)).
CKD Project argues that although the SEC filings disclosed joint ventures with physicians and referenced the Anti-Kickback Statute, the filings did not disclose important information about the joint venture transactions. See Appellant's Br. 15. CKD Project contends that the filings did not disclose (1) the use of several shell entities in a complex transaction structure; (2) the use of contractual provisions such as non-compete agreements with physicians; (3) the use of contractual provisions such as seller representations and warranties about the state of the dialysis centers, including that there had been no material change to the number of patients, in transaction agreements; and (4) the fact that Fresenius disguised overpayment by allocating most of the purchase price to intangible assets such as "goodwill." CKD Project's complaint concludes that it is "impossible to review the details of this intricate series of transactions and come away with any other conclusion but that Fresenius paid for patients in violation of the [Anti-Kickback Statute]." J. App'x 744.
But the material elements of Fresenius's joint venture acquisitions were publicly disclosed in Fresenius's SEC filings. CKD Project has merely supplied additional details. The SEC filings disclosed (1) the New York regulatory regime that required complex joint venture transaction structures, in which certain assets were transferred only after specific entities received the necessary state approvals, see id. at 158-69, 177-78; (2) non-compete agreements with physicians when Fresenius acquired existing clinics, see id. at 170, 191-92, 211; (3) that Fresenius entered into transaction agreements when acquiring clinics, which customarily would contain representations and warranties regarding the target clinics from the sellers, see id. at 170; and (4) that "[t]he growth of our business through acquisitions has created a significant amount of intangible assets, including goodwill," and "a portion of the purchase price [in such acquisitions] was allocated to ... intangible assets," id. at 171.
Because the "critical or material elements" of the transactions were already publicly disclosed, CKD Project's claims fall within the public disclosure bar. Kirk, 437 Fed.Appx. at 17.
B
CKD Project does not qualify as an original source of the publicly disclosed information and therefore cannot avoid dismissal under the original source exception to the public disclosure bar. The False Claims Act provides that an "original source" is one who "has knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions." 31 U.S.C. § 3730(e)(4)(A) (emphasis added). The Act was amended in March 2010. See Patient Protection and Affordable Care Act, Pub. L. No. 111-148, § 10104(j)(2), 124 Stat. 901 (2010). Prior to the amendment, an original source was required to have "direct and independent knowledge of the information on which the allegations are based." 31 U.S.C. § 3730(e)(4)(B) (2006) (emphasis added). CKD Project asserts claims that arise both before and after the amendment. Because CKD Project is not an original source under either version of the False Claims Act, we need not consider CKD Project's arguments about the possible retroactivity of the amendment. See Wilson, 559 U.S. at 283 n.1.
CKD Project does not possess direct knowledge of the information on which the allegations are based. CKD Project is an entity formed solely for this litigation. It acquired its information from a third party whom the amended complaint describes as "an inside participant in one of the fraudulent joint venture transactions." J. App'x 717. The inside participant might possess direct knowledge, but CKD Project does not. Therefore, under the pre-2010 False Claims Act, CKD Project cannot avoid dismissal as an original source. See Dhawan, 252 F.3d at 121 ("[A] qui tam plaintiff does not satisfy the [direct and independent knowledge] requirement if a third party is the source of the core information upon which the qui tam complaint is based.") (internal quotation marks omitted).
CKD Project also has not shown that it has independent knowledge that materially adds to the public disclosures as required by the post-2010 False Claims Act. To have knowledge that "materially adds" to a public disclosure, a relator must "substantially or considerably add to information that is already public." Vierczhalek v. MedImmune Inc., 803 Fed.Appx. 522, 526 (2d Cir. 2020) (internal quotation marks omitted). Providing "detail or color to previously disclosed elements of an alleged scheme" is not a material addition. United States ex rel. Winkelman v. CVS Caremark Corp., 827 F.3d 201, 213 (1st Cir. 2016).
CKD Project alleges that it acquired some of its information from an insider to the Apollo-Hauppauge transaction. It argues that this knowledge, including the details of the transaction, is independent of the public disclosures. Appellant's Br. 43. As described above, the specific knowledge possessed by the insider pertains to (1) the corporate entities involved in the transaction; (2) non-compete agreements with physicians; (3) seller representations and warranties about the target dialysis centers; and (4) the allocation of the purchase price amount between tangible and intangible assets.
For the reasons stated above, even if these details were independent of Fresenius's public disclosures, the details do not "materially add" to the publicly disclosed information. 31 U.S.C. § 3730(e)(4)(A). Fresenius publicly disclosed (1) the New York regulatory regime that governed acquisitions such as Apollo-Hauppauge which required the use of several corporate entities that held different types of assets; (2) that it typically obtained non-compete agreements from physicians who held minority interests in its centers; (3) that it entered into acquisition agreements, which customarily would contain representations and warranties from sellers; and (4) that when acquiring centers, "a portion of the purchase price was allocated to ... intangible assets," J. App'x 159. CKD Project does not possess independent knowledge that materially adds to this public information.
C
The district court did not abuse its discretion in denying leave to amend the complaint. "A district court has broad discretion in determining whether to grant leave to amend, and we review such determinations for abuse of discretion." United States ex rel. Ladas v. Exelis, Inc., 824 F.3d 16, 28 (2d Cir. 2016) (quoting Gurary v. Winehouse, 235 F.3d 792, 801 (2d Cir. 2000)). Leave to amend should be "freely give[n] ... when justice so requires." Fed.R.Civ.P. 15(a)(2). But it "should generally be denied in instances of futility, undue delay, bad faith or dilatory motive, repeated failure to cure deficiencies by amendments previously allowed, or undue prejudice to the non-moving party." Ladas, 824 F.3d at 28 (quoting Burch v. Pioneer Credit Recovery, Inc., 551 F.3d 122, 126 (2d Cir. 2008)).
The district court acted within its discretion to deny leave to further amend the complaint given that CKD Project had the benefit of discovery, CKD Project failed to cure its complaint when amending it in response to Fresenius's pre- motion letter to dismiss, and there would be prejudice to Fresenius, a party that had been litigating the case for over six years.
We have considered CKD Project's remaining arguments, which we conclude are without merit. For the foregoing reasons, we AFFIRM the judgment of the district court.
[*] The Clerk of Court is directed to amend the caption as set forth above.