District Court in Eleventh Circuit Holds Relator Cannot Overcome First-to-File Bar by Amending Complaint
September 30, 2020 – Analysis
A Florida district court recently dismissed without prejudice a False Claims Act (FCA) qui tam action, finding the action precluded by the first-to-file bar. See United States ex rel. Cho v. H.I.G. Capital, LLC, No. 8:17-cv-983-T-33AEP, 2020 U.S. Dist. LEXIS 155373 (M.D. Fla. Aug. 26, 2020). The court’s opinion offers a helpful overview of the current circuit split on “whether amendment of a qui tam complaint following dismissal of a first-filed suit protects the action from the first-to-file bar”—an issue on which the Eleventh Circuit has not yet spoken. See id. at *16–17.
The Cho relators sued private equity firm H.I.G. Capital, LLC and its wholly owned subsidiary Surgery Partners (later H.I.G. Surgery Centers, LLC), a national network of surgical facilities also providing pain management and other services (collectively, “H.I.G. Defendants”). They alleged H.I.G. Defendants implemented a fraudulent scheme to pressure physicians to order the most expensive type of urine drug testing (UDT) for their patients regardless of medical need. Id. at *4–8. Logan Laboratories LLC (Logan Labs), another wholly owned subsidiary, id. at *2–5, allegedly fraudulently billed Medicare and other government health care programs for the cost of the tests. Id. at *6–7, 9.
When the Cho relators filed their qui tam in April 2017, an action alleging similar UDT fraud by Logan Labs and another Surgery Partners subsidiary was pending before the Eastern District of Pennsylvania. See id. at *16. That action, United States ex rel. Ashton v. Logan Labs., LLC, No. 16-4583 (E.D. Pa. 2016), had been filed in August 2016. In April 2020, the government settled with certain defendants in Cho and all defendants in Ashton. Id. at *10–11, 16.1 In June 2020, Ashton was dismissed, id. at *16–17, and later that month, the Cho relators filed their second amended complaint, id. at *12–13, 16–17. Thereafter, H.I.G. Defendants moved to dismiss the action, arguing relators’ complaint was barred by the first-to-file rule.2 Id. at *13, 14. Under that provision, “[w]hen a person brings a[] [qui tam] action . . . , no person other than the [g]overnment may intervene or bring a related action based on the facts underlying the pending action.” 31 U.S.C. § 3730(b)(5).
The court identified twin issues for determination: (I) Was Ashton “pending” when Cho was brought? (II) Are the two actions “related”? Id. at *15. Regarding the first issue, relators argued that when they filed their second amended complaint, Ashton had already been dismissed. Id. at *16–17. But can the first-to-file bar be overcome, after the dismissal of the earlier-filed action, by amendment of the complaint in the later action? That question, on which there is a circuit split and the Eleventh Circuit has not yet spoken, became the hinge on which the Cho decision turned.
The Second Circuit and D.C. Circuit have held amendment cannot cure a first-to-file defect, because the “date . . . when the original complaint was filed in the second action” governs the analysis. Id. at *17 (citing United States ex rel. Wood v. Allergan, Inc., 899 F.3d 163, 171–72 (2d Cir. 2018), United States ex rel. Shea v. Cellco P’ship, 863 F.3d 923, 929 (D.C. Cir. 2017)). The First Circuit, on the other hand, has held that developments subsequent to filing of a qui tam—such as dismissal of the earlier-filed, related complaint—can potentially “dissolve[] the jurisdictional bar,” thus enabling the later action to proceed via amendment of the complaint. Id. at *18 (citing United States ex rel. Gadbois v. PharMerica Corp., 809 F.3d 1, 6 (1st Cir. 2015)).3
The court found Wood and Shea more persuasive, see id. at *18 (citing United States ex rel. Zelickowski v. Albertsons LLC, No. SA-15-CV-957-XR, 2018 U.S. Dist. LEXIS 211538, at *14–15 (W.D. Tex. Dec. 17, 2018)), in large measure because § 3730(b)(5)’s plain text bars “bring[ing] a related action.” Id. at *18–19 (emphasis and alteration added). The statute “makes no provision for a stay of proceedings until the prior-filed action is resolved.” Id. at *19 (quoting Wood, 899 F.3d at 172). The court clarified that, under a plain-language reading, amending a complaint “does not bring a new action, it only brings a new complaint into an action that is already pending,” and therefore cannot overcome the first-to-file bar. Id. (quoting Wood, 899 F.3d at 172).4
The court therefore concluded that the “pending action” element of the first-to-file bar applied to the Cho complaint. Id. at *21. That shifted the analysis to the second issue: whether the earlier-filed action, Ashton, was a “related” action. Id. For its analysis, the court considered only the original complaints in each case, id. at *21–22 (citing United States ex rel. Bernier v. Infilaw Corp., 347 F. Supp. 3d 1075, 1083 (M.D. Fla. 2018)).
The Court rejected relators’ claims that the actions were unrelated both because the H.I.G. Defendants were not named in Ashton, and because the scheme alleged by relators was “materially different” from that alleged in Ashton. Id. at *23. The court pointed out that the Cho complaint identified the H.I.G. Defendants as the corporate parents of the main defendants in the earlier action, supporting the relatedness of the actions. Id. at *25–26 (citing Grynberg v. Koch Gateway Pipeline Co., 390 F.3d 1276, 1280 n.4 (10th Cir. 2004)).
Substantively, the court found that, details aside, both complaints “allege[d] the same essential facts” centered on “a broad policy of requiring expensive and medically unnecessary UDT for a large number of patients . . . and then reaping . . . profits by submitting these claims to Government programs for payment.” Id. at 27–28.5
Finding the “related action” element thus also met, the court determined the action was barred by the first-to-file rule. Id. at *32. However, “because a case ceases to be pending once it is decided or dismissed, dismissal under this rule must be without prejudice to refiling once the earlier action is no longer pending.” Id. (quoting United States ex rel. Denis v. Medco Health Solutions, Inc., Civ. No. 11-684-RGA, 2017 U.S. Dist. LEXIS 1357, at *37 (D. Del. Jan. 5, 2017)). The court therefore dismissed relators’ claims without prejudice. Id.
The district court’s decision in Cho does not, of course, disturb the current circuit split on whether amendment can cure a first-to-file defect. In combination with other district court cases, it may, however, hint at the possibility that the split as it now stands, at 2–1 against allowing such amendments, may widen and leave Gadbois as an outlier.
1 See also U.S. Department of Justice, Reference Laboratory, Pain Clinic, and Two Individuals Agree to Pay $41 Million to Resolve Allegations of Unnecessary Urine Drug Testing (Apr. 15, 2020), https://www.justice.gov/opa/pr/reference-laboratory-pain-clinic-and-two-individuals-agree-pay-41-million-resolve-allegations.
2 H.I.G. Defendants also argued that the second amended complaint (1) brought claims already released in the settlement agreement in the case, (2) failed to state a plausible claim against H.I.G. Defendants because it did not sufficiently allege H.I.G. Defendants knowingly caused the submission of false claims, and (3) failed to meet FRCP 9(b)’s stringent pleading requirements for fraud. Cho, 2020 U.S. Dist. LEXIS 155373, at *14. Because the court found that the first-to-file rule was applicable and dispositive, it limited its analysis to the effects of § 3730(b)(5). Id. at *14–15.
3 To hold otherwise, requiring a relator to refile her complaint after dismissal of the earlier-filed action, would in the court’s view be to indulge in “a pointless formality.” See id. at *18 (quoting Gadbois, 809 F.3d at 6).
4 The court also found the Wood and Shea approach better avoided “anomalous outcomes.” Id. at *19 (quoting Shea, 863 F.3d at 930). Shea’s hypothetical involved two relators who each file suit while a prior, related action is pending: the more diligent of the two is penalized because her action is dismissed under § 3730(b)(5), while the more lax relator reaps a windfall because she “filed her suit so late in the game that the district court fails to dismiss her action before dismissing the first-filed suit,” id. at *20 (quoting Shea, 863 F.3d at 930), enabling her to amend her complaint “and thereby secure herself pole position in the first-to-file queue,” id. (quoting Shea, 863 F.3d at 930). The court agreed with the D.C. Circuit that “Congress presumably would not have intended a relator’s fate to depend on chance considerations such as the extent of a particular court’s backlog and the timeliness of a particular court’s entry of dismissal.” Id. at *20–21 (quoting Shea, 863 F.3d at 930).
5 The court also rejected relators’ assertion that “Ashton did not put the [g]overnment on notice of H.I.G.’s liability” as deploying the wrong standard: “[T]he relevant . . . question is whether the [later] [r]elators [] alleged a fraudulent scheme that the [g]overnment would already be equipped to investigate based on the first complaint.” Cho, 2020 U.S. Dist. LEXIS 155373, at *30–31. The court reasoned that the Ashton allegations clearly “equipped [the government] to launch a broad, nationwide investigation into the UDT fraud perpetrated by Surgery Partners,” including potential FCA liability of that defendant’s corporate parents. Id. at *31.
