Opinion
No. 97 C 6502.
March 12, 1999
MEMORANDUM OPINION AND ORDER
This is a qui tam action pursuant to the False Claims Act ("FCA"). Relator Anil Bidani, M.D. was formerly employed by an entity controlled by defendant Edmund Lewis, M.D. The other two defendants are entities owned and controlled by Lewis. Bidani claims that defendants obtained excessive Medicare reimbursements for kidney dialysis supplies. The facts of this case are set forth in greater detail in the December 29, 1998 ruling on defendants' motion to dismiss (" Bidani I"). Familiarity with that ruling is presumed. Presently pending is relator's motion to reconsider parts of that ruling.
The original source arguments contained in Section C of relator's supporting memorandum were rejected at the time the motion was first presented. Defendants were only required to respond to the arguments contained in Sections B and D.
In Bidani I, all of relator's claims were dismissed except for FCA claims based on (1) violations of the anti-kickback provisions of 42 U.S.C. § 1320a-7b(b) that (2) accrued September 15, 1991 or later. The only information for which Bidani was an original source was Lewis's ownership of defendant American Medical Supply Corporation ("AMS"). See Bidani I at 12. Therefore, the claims were limited to those for which such information was essential factual support for the claim. See id. at 12-13. On reconsideration, relator argues that his claim based on AMS falsely representing that it qualified as a dialysis supplier should be reinstated because AMS being owned by Lewis precludes it from qualifying as a Method II dialysis supplier. See 42 U.S.C. § 1395rr(b)(1)(b) (1989); 42 C.F.R. § 414.330(a)(2)(i) (1992) ("The patient elects to obtain home dialysis equipment and supplies from a supplier that is not a Medicare approved dialysis facility."); 42 C.F.R. § 405.544 (superseded in 1990); 42 C.F.R. § 400.202 (" Supplier means a physician or other practitioner, or an entity other than a provider, that furnishes health care services under Medicare.").
Relator does not point to any statute or regulation specifically addressing whether common ownership of a supplier and provider precludes the former from qualifying as a supplier. Instead, relator relies on federal common law regarding piercing the corporate veil/alter ego liability. Relator contends that related corporate entities cannot be used to avoid regulatory limitations that would otherwise apply. Defendants respond that such a claim is not included in the complaint and, in any event, common ownership by itself is an insufficient basis for piercing the corporate veil, there must also be an abuse of corporate formalities.
Since at least 1986, 42 C.F.R. § 413.17 has limited reimbursement for costs incurred by a provider as a result of purchases of supplies from a commonly owned or controlled supplier. That regulation does not apply to the present situation where the commonly owned supplier is providing supplies directly to the patient. However, this regulation supports that treating commonly owned or controlled entities as a single entity is appropriate under at least some circumstances.
The complaint does not use the terms "alter ego," "pierce," or "corporate veil." It does refer to it being a "pretense that AMS was a separate and distinct entity in substance from CMM." Compl. ¶ 37. It is alleged that AMS had no business location and that "AMS had the same telephone number as CMM, and its billing functions were performed at the CMM business location by essentially the same personnel that performed the billing function for CMM." Id. ¶¶ 30(f), (k). However, it is also alleged that AMS had assets in the form of receivables and cash. Id. ¶ 30(g).
AMS is also referred to as a "fictitious medical supply corporation," Compl. ¶ 33, but the context makes clear that the fiction being referred to in this passage is whether AMS was the actual medical supplier instead of Abbott and Baxter, the companies that were sending the supplies directly to the dialysis patients.
Ordinarily, a plaintiff is not bound by the legal characterizations contained in the complaint and may argue any legal theory that is consistent with the facts alleged in the complaint. See Kirksey v. R.J. Reynolds Tobacco Co., 168 F.3d 1039, 1999 WL 93384 *1 (7th Cir. Feb. 25, 1999); Albiero v. City of Kankakee, 122 F.3d 417, 419 (7th Cir. 1997); Teumer v. General Motors Corp., 34 F.3d 542, 545 (7th Cir. 1994); Bartholet v. Reishauer A.G. (Zurich), 953 F.2d 1073, 1078 (7th Cir. 1992). Further, as long as they are consistent with the allegations of the complaint, a plaintiff ordinarily may assert additional facts in his or her response to a motion to dismiss. Albiero, 122 F.3d at 419; Travel All Over the World, Inc. v. Kingdom of Saudi Arabia, 73 F.3d 1423, 1428 (7th Cir. 1996); Highsmith v. Chrysler Credit Corp., 18 F.3d 434, 439-40 (7th Cir. 1994); Hrubec v. National Railroad Passenger Corp., 981 F.2d 962, 963-64 (7th Cir. 1992). Additionally, where the basis of liability is piercing the corporate veil, Rule 9(b)'s specificity requirement generally will not apply. See Kruse v. Aamed, Inc., 1997 WL 102528 *4 (N.D.Ill. March 4, 1997); Chicago District Council of Carpenters Pension Fund v. Ceiling Wall Systems, Inc., 915 F. Supp. 939, 942 (N.D.Ill. 1996); Francosteel Corp. v. National Industries, Inc., 1991 WL 166732 *1-2 (N.D.Ill. March 16, 1991). However, this is not a case where some other wrongdoing was committed and a particular entity or person is claimed to be liable on an alter ego theory. Here, the lack of corporate separation is itself claimed to be part of the false representation that AMS was a dialysis supplier. As previously held, Rule 9(b) applies to the FCA claims. Bidani I at 25. Therefore, the factual basis for AMS being disqualified as a supplier because indistinct from CMM must be pleaded with sufficient specificity.
It is also the rule that, in response to a motion to dismiss, the nonmovant must make an adequate legal argument in support of his or her legal theory. Kirksey, 1999 WL 93384 at *2; Stransky v. Cummins Engine Co., 51 F.3d 1329, 1335 (7th Cir. 1995); Teumer, 34 F.3d at 545; Leyin v. Childers, 101 F.3d 44, 46 (6th Cir. 1996); Carpenter v. City of Northlake, 948 F. Supp. 759, 765 (N.D.Ill. 1996). In his present motion, relator does not argue that AMS's separate corporate existence should be ignored because of a failure of corporate formalities or because of undercapitalization. He argues that it should be ignored primarily because of common ownership. Such common ownership and the intentional failure to acknowledge it when seeking Medicare reimbursement is specifically alleged in the complaint. It is also alleged with adequate specificity that AMS was established for the purpose of evading the Method I limitations. For this limited theory, the supporting facts are alleged with adequate specificity to satisfy Rule 9(b). Therefore, it must be considered whether, under the facts alleged, AMS was disqualified as a dialysis supplier.
Ordinarily, piercing the corporate veil requires a showing that the corporate form has been abused, which generally involves evidence of lack of corporate formalities and/or undercapitalization. See Van Dorn Co. v. Future Chemical Oil Corp., 753 F.2d 565, 569-70 (7th Cir. 1985) (Illinois law); Stepney v. Outsourcing Solutions, Inc., 1997 WL 722972 *3 (N.D.Ill. Nov. 13, 1997) (federal common law). However, the same showing is not necessarily required when the fiction of a corporate entity is being used to circumvent a statute. See Casanova Guns, Inc. v. Connally, 454 F.2d 1320, 1322-23 n. 2 (7th Cir.), cert. denied, 409 U.S. 845 (1972); Kayanaugh v. Ford Motor Co., 353 F.2d 710, 717 (7th Cir. 1965); United Electrical, Radio Machine Workers of America v. 163 Pleasant Street Corp., 960 F.2d 1080, 1091-92 (1st Cir. 1992); MCI Telecommunications Corp. v. O'Brien Marketing, Inc., 913 F. Supp. 1536, 1541 (S.D.Fla. 1995). See also United States v. Vitek Supply Corp., 151 F.3d 580, 583 (7th Cir. 1998) (favorably quoting Casanova, 454 F.2d at 1322). Here, the pertinent statutes and regulations were intended to limit the amounts that could be charged by a dialysis facility. Lewis, who fully owned and controlled a dialysis facility that could only obtain Method I reimbursements for supplies, established another fully owned and controlled corporate entity for the purpose of being able to obtain supply reimbursements at the Method II rates. The second corporation functioned out of the same office as the dialysis facility, used the same employees, and all the profits went into the hands of the same sole shareholder. On the facts alleged, establishing AMS clearly was an attempt to evade the statutory and regulatory limits. Even if AMS complied with corporate formalities and was adequately capitalized, justice and the purposes of the pertinent statutes and regulations call for treating AMS as part of a dialysis facility and therefore ineligible for Method II reimbursements. The claim based on AMS not qualifying as a dialysis supplier is reinstated to the extent such claim is based on common ownership with a dialysis facility.
The claim that AMS did not qualify as a dialysis supplier because it did not perform the functions of a supplier is not reinstated.
Relator's other contention on reconsideration is that the 10-year statute of repose contained in 31 U.S.C. § 3731(b)(2) should apply instead of the six-year limitation period of § 3731(b)(1) as was held in Bidani I at 27-28. As is set forth in Bidani I, three courts have held that the 10-year statute of repose does not apply to the present type of circumstances. See United States ex rel. Hyatt v. Northrop Corp., 91 F.3d 1211, 1216-18 (9th Cir. 1996) (" Hyatt II"); United States ex rel. El Amin v. George Washington University, 26 F. Supp.2d 162, 170-73 (D.D.C. 1998); United States ex rel. Thistlethwaite v. Dowty Woodville Polymer, Ltd., 6 F. Supp.2d 263, 265 (S.D.N.Y. 1998). Relator argues that the contrary holding in United States ex rel. Colunga v. Hercules Inc., 1998 WL 310481 *3-5 (D.Utah March 9, 1998), should be followed because it is consistent with the plain language of § 3731(b) and the legislative history.
Section 3731(b) provides:
A civil action under section 3730 may not be brought —
(1) more than 6 years after the date on which the violation of section 3729 is committed, or
(2) more than three years after the date when facts material to the right of action are known or reasonably should have been known by the official of the United States charged with the responsibility to act in the circumstances, but in no event more than 10 years after the date on which the violation is committed,
whichever occurs last.
Hyatt II holds that, when the action is brought by a relator, it is the relator's knowledge that measures the three-year period referred to in § 3731(b)(2). On that theory, the 10-year repose period does not apply in the present case because Bidani had the necessary knowledge more than three years prior to the filing of the present lawsuit. El Amin and Thistlethwaite hold that § 3731(b)(2) applies only to actions in which the government directly joins. Under that theory, the 10-year repose period does not apply because the government declined to intervene in the present action. Colunga holds that § 3731(b)(2) applies to cases brought by a relator and that the three-year rule only comes into play once the appropriate Justice Department official has knowledge. Under that theory, the 10-year statute of repose applies to the present case because there is no allegation (or judicially noticeable evidence) that, more than three years prior to the filing of the suit, any government official knew or should have known of the pertinent facts.
Since El Amin and Thistlethwaite reach the same conclusion, it will henceforth be referred to as the El Amin holding. Also, the district court decision in Hyatt applied the same reasoning. See Hyatt v. Northrop Corp., 883 F. Supp. 484, 486-88 (C.D.Cal. 1995) (" Hyatt I"), aff'd, Hyatt II, supra.
Defendants argue that the statute of repose cannot possibly apply because, even accepting the Colunga approach, there is no allegation in the complaint that the pertinent government official lacked knowledge. The statute of limitations, however, is an affirmative defense. A plaintiff is not required to affirmatively plead that his or her claim falls within the applicable statute of limitations. The statute of limitations may only be invoked on a motion to dismiss if the plaintiff pleads facts showing that the claim falls outside of the limitations period or if facts that can be taken by judicial notice show the claim is untimely. See Tregenza v. Great American Communications Co., 12 F.3d 717, 718 (7th Cir. 1993), cert. denied, 511 U.S. 1085 (1994); Early v. Bankers Life Casualty Co., 959 F.2d 75, 79 (7th Cir. 1992); Lyles v. Board of Commissioners of Cook County, 1991 WL 101633 *1 (N.D.Ill. May 29, 1991). Here, following El Amin would be a purely legal ruling regarding the applicability of § 3731(b)(2) and does not depend on the facts alleged. Finding Hyatt II to be applicable to this case would also be possible because Bidani expressly alleges that he gained knowledge of the underlying facts through his employment and the state court lawsuit, and judicial notice of pleadings and rulings in the state court lawsuit shows that the pertinent facts were known to Bidani more than three years prior to the filing of the present lawsuit. If Colunga is followed, there is no basis for presently finding that the pertinent government official had knowledge more than three years prior to the filing of the present lawsuit. To the extent defendants contend a government official had such knowledge, unless judicial notice can be taken of that fact, defendants must wait until summary judgment or trial to raise such a contention.
Considered in isolation and superficially examined, the plain language of § 3731(b)(2) is consistent with the Colunga holding. There is no express language limiting that provision to suits by the government and the express language of the subsection only refers to knowledge of the government official, not knowledge of a relator or original source. However, a court "may look beyond the express language of a statute in order to give force to Congressional intent . . . where a literal interpretation would thwart the purpose of the over-all statutory scheme or lead to an absurd result." United States v. Tex-Tow, Inc., 589 F.2d 1310, 1313 (7th Cir. 1978) (quoting International Telephone Telegraph Corp. v. General Telephone Electronics Corp., 518 F.2d 913, 917-918 (9th Cir. 1975)). Accord Time Warner Cable v. Doyle, 66 F.3d 867, 876 (7th Cir. 1995), cert. denied, 516 U.S. 1141 (1996); United States v. On Leong Chinese Merchants Association Building, 918 F.2d 1289, 1297 (7th Cir. 1990), cert. denied, 502 U.S. 809 (1991); Hyatt I, 883 F. Supp. at 487. See also Yorger v. Pittsburgh Corning Corp., 733 F.2d 1215, 1219 (7th Cir. 1984). Also, the true meaning of a section of a statute can only be ascertained by viewing it within the context of the entire statute. Time Warner, 66 F.3d at 876.
Section 3731(b) must be viewed within its context, which is as a statute of limitations for an action that can be brought either directly by the government or by a qui tam plaintiff in the name of the government. Therefore, use of the term "government" or other related terms, may sometimes be meant as references to the qui tam plaintiff as well. Section 3730 is clear in differentiating between the government and the qui tam plaintiff. The FCA, however, does not always clearly differentiate between actions brought by a relator and actions brought directly by the government. For example, § 3731(c) provides: "In any action brought under section 3730, the United States shall be required to prove all essential elements of the cause of action, including damages, by a preponderance of the evidence." (Emphasis added.) Although § 3731(c) expressly refers to the "United States" and does not mention the relator, it has been read as applying to actions brought by relators. Hagood v. Sonoma County Water Agency, 81 F.3d 1465, 1472 (9th Cir.), cert. denied, 117 S.Ct. 175 (1996); United States ex rel. Lamers v. City of Green Bay, 998 F. Supp. 971, 985 (E.D.Wis. 1998), aff'd, ___ F.3d ___, 1999 WL 80751 (7th Cir. Feb. 22, 1999); United States ex rel. Trim v. McKean, 31 F. Supp.2d 1308, 1998 WL 939490 *8 (W.D.Okla. Nov. 20, 1998); Blades on behalf of United States Government v. Gonzales, 1998 WL 195980 *1 (E.D. La. April 20, 1998). Equally or more important, the 10-year limitation period contained in § 3731(b)(2) is clearly intended as a statute of repose related to a tolling provision. It would be highly unusual to permit a party to benefit from a statute of repose where that party is already aware of the facts needed to bring a claim. See Hyatt II, 91 F.3d at 1217.
Section 3731(b)(2) was not added to the FCA until 1986. See Pub.L. 99-562, § 5, 100 Stat. 3158 (1986). Prior to that, the FCA provided: "A civil action under section 3730 of this title must be brought within 6 years from the date the violation is committed." 31 U.S.C. § 3731(b) (1982). Legislative history regarding the 1986 amendments to the statute of limitations is not extensive, but generally refers only to the "Government" benefitting from the extended statute of limitations. However, throughout the legislative history, the term "Government" is often used in discussing provisions that apply to the qui tam plaintiff as well.
In the version of the amendment initially passed by the Senate, the former version of § 3731(b) was to be amended by adding "or within three years after the date when facts material to the right of action are known or reasonably should have been known by the official of the United States charged with responsibility to act in the circumstances, whichever occurs last." 132 Cong. Rec. 20,531 (Aug. 11, 1986) (S. 1562, 99th Cong. § 3(1)). This is the proposed language that is being discussed in the Senate Report relied upon by plaintiff and Colunga. Unlike the House version that was eventually adopted by both chambers of Congress, the Senate version contained no 10-year statute of repose.
In setting forth modifications proposed in response to concerns expressed by the Department of Justice, the Senate Report states:
Seventh, the subcommittee added a modification of the statute of limitations to permit the Government to bring an action within 6 years of when the false claim is submitted (current standard) or within 3 years of when the Government learned of a violation, whichever is later. The subcommittee agreed that because fraud is, by nature, deceptive, such tolling of the statute of limitations is necessary to ensure the Government's rights are not lost through a wrongdoer's successful deception.
S.Rep. No. 99-345, at 15, reprinted in 1986 U.S.C.C.A.N. 5266, 5280 (emphasis added). It cannot be assumed, however, that this reference to the "Government" means that it was intended that the new three-year rule would apply only to the government and not to the qui tam plaintiff. In this same discussion, the report also refers to adding "a provision permitting the United States to bring an action against a member of the armed forces," id. (emphasis added), even though that amendment would also permit a qui tam plaintiff to bring a claim against a member of the armed forces. Similar uses of the term "Government" appear elsewhere in the Senate Report. See, e.g., id. at 17, 1986 U.S.C.C.A.N. at 5282 ("increase the Government's recoverable damages"); id. at 21, 1986 U.S.C.C.A.N. at 5286 ("permits the Government to sue"); id. at 30-31, 1986 U.S.C.C.A.N. at 5295-96 ("the Government is required to prove all essential elements of the cause of action by a preponderance of the evidence").
To the same effect, see also S. Rep. at 18, 1986 U.S.C.C.A.N. at 5283 (section-by-section analysis).
The passage of the Senate Report relied upon by Bidani and quoted in Colunga, 1998 WL 310481 at *3, is the section-by-section analysis of the subsection 3731(b) amendment. The entire analysis is:
Subsection (b) of section 3731 of Title 31, as amended by section 3 of the bill, would include an explicit tolling provision on the statute of limitations under the False Claims Act. The statute of limitations does not begin to run until the material facts are known by an official within the Department of Justice with the authority to act in the circumstances.
This is mostly a recitation of the amending language.
The House bill, as proposed by the assigned committee, contained the § 3731(b) language that was eventually passed by both chambers of Congress. See H.R. 4287, 99th Cong. § 5, reprinted in H.R. Rep. No. 99-660, at 4-5 (1986). Like the Senate Report, the House Report makes references to the "Government" that also apply to the qui tam plaintiff. See, e.g., H.R. Rep. 99-660, at 17 ("expand the jurisdiction of the Government in False Claims Act cases"); id. at 20 ("allows the Government to prosecute a [reverse] false claim"); id. at 21 (new knowledge standard "enables the Government . . . to effectively prosecute . . . those who play ostrich"); id. at 25 ("prevent the Government from filing a false claims action regarding the same matter that is already the subject of a Contract Disputes Act claim"); id. at 32 ("requires the United States to prove . . . by a preponderance of the evidence").
Like the Senate Report, the House Report makes references to the "Government" when discussing the statute of limitations amendment.
H.R. 4827 expands the statute of limitations in the False Claims Act. Under current law, the statute of limitations is to be not more than six years after the date of the occurrence of the violation. H.R. 4827 provides that the statute of limitations shall be not more than six years (as provided by current law), nor more than three years after the date when the material facts of the violation are known or should have been known by the official of the United States with responsibility to act, but no action may be brought more than 10 years after the occurrence of the violation.
It was brought to the attention of the Committee that fraud is often difficult to detect and that the statute of limitations should not preclude the Government from bringing a cause of action under this Act if they were not aware of the fraud. The Committee agreed that this was unfair and so expanded the statute of limitations. However, the Committee did not intend to allow the Government to bring fraud actions ad infinitum, and therefore imposed the strict 10 year limit on False Claims Act cases.
H.R. Rep. 99-660, at 25 (emphasis added).
A similar statement was made on the House floor during debate.
Section 5 amends the statute of limitations to permit the Government to bring an action within 6 years of when the false claim is submitted, the current standard, or within 3 years after the Government learns of the violations, whichever is later.
132 Cong. Rec. 22,337 (Sept. 9, 1986) (statement of Rep. Fish).
Also like the Senate Report, the House Report's section-by-section analysis essentially recites the language of the amendment. Section 5. This section provides a dual statute of limitations. The statute of limitations is to be not more than six years after the date of the occurrence of the violation, or not more than 3 years after the date when the material facts of the violation are known or should have been known by the official of the United States with responsibility to act, but no action is to be brought more than 10 years after the date of the occurrence of the violation.
H.R. Rep. No. 99-660, at 36.
Because of the lack of consistency in differentiating between the government and the qui tam plaintiff, the legislative history does not indicate with any clarity whether § 3731(b)(2) was intended to apply only to the government and, if not, whether knowledge of the relator was to be ignored in applying the three-year rule. To a limited degree, the legislative history does indicate a tendency to treat the qui tam relator as if he or she is the government. This is also supported by the section of the FCA providing that the action is to be brought by the relator in the name of the government. 31 U.S.C. § 3730(b)(1).
In light of the rationale and general practices regarding tolling provisions, it is highly doubtful that Congress intended that a relator could take advantage of the 10-year repose period regardless of when the relator first learned the pertinent facts. Cf. Hyatt II, 91 F.3d at 1217. Neither is there any express acknowledgment in the legislative history that Congress had such intentions. Further, the legislative history and the language in § 3731(c) indicates that care was not always taken to clearly set forth distinctions between the government and the relator. Therefore, § 3731(b)(2) should be read as applying the three-year and 10-year rule to the party that is actually bringing the action in the government's name. If the responsible government official is not bringing the action directly in the government's name, then it is the relator who is bringing the action in the government's name. When the government declines joining in the action, then the three-year rule is measured by the knowledge of the relator.
Applying the three-year rule to the relator is consistent with Congress's intent to have the relator act promptly. See United States v. Bank of Farmington, 166 F.3d 853, 1999 WL 25680 *14 (7th Cir. Jan. 20, 1999). Also, Congress expressed its intention to avoid vexatious and harassing qui tam suits. See 31 U.S.C. § 3730(c)(2)(D), 3730(d)(4). Permitting the relator to potentially wait up to 10 years after gaining knowledge of the false claim would be more likely to result in harassing lawsuits and therefore would be inconsistent with Congress's intentions. Cf. Hyatt II, 91 F.3d at 1218. By applying the three-year-knowledge/10-year-repose rule to qui tam relators, Congress's intention of avoiding wrongdoing being covered up by deception ( see S.Rep. No. 99-345, at 15, 1986 U.S.C.C.A.N. at 5280; H.R. Rep. 99-660, at 25) is served, as is Congress's desire for prompt, non-harassing actions by qui tam relators.
Colunga, 1998 WL 310481 at *4-5, indicates that applying the three-year rule to qui tam plaintiffs goes against Congress's intention to expand the availability of the qui tam procedure. That discussion, however, ignores that Congress did not intend unfettered availability of private actions. If it did, Congress would not have imposed the original source provision, a much more limiting requirement than the three-year knowledge rule. Colunga also ignores that three years after gaining knowledge of the facts is already a substantial period of time for the qui tam plaintiff to act. Moreover, since a qui tam plaintiff will often obtain contemporaneous knowledge of wrongful conduct, under § 3731(a), he or she will often be able to bring suit up to six years after first obtaining knowledge of the wrongful conduct.
For the foregoing reasons, § 3731(b)(2) is construed as applying to actions brought by a qui tam plaintiff and in which the government has not joined. In such cases, the three-year knowledge rule is measured by the knowledge of the qui tam plaintiff. As previously held, Bidani cannot benefit from this rule because he had knowledge of the pertinent facts more than three years before filing suit.
IT IS THEREFORE ORDERED that Bidani's motion to reconsider [32-1] is granted in part and denied in part. The claim based on American Medical Supply not qualifying as a dialysis supplier is reinstated to the extent such claim is based on common ownership with a dialysis facility.