CIVIL FALSE CLAIMS ACT: District Court Says Government Cannot Use Civil Investigative Demands To Cure Its Own Pleading Deficiencies

United States District Judge Richard Bennett, a former U.S. Attorney, rejected attempts by his former Justice Department colleagues to use a Civil Investigative Demand ("CID") to attempt to gather the information necessary to overcome a Rule 9(b) dismissal of the government's False Claims Act ("FCA") complaint. Through his ruling in United States v. Kernan Hospital, No. RDB-11-2961, 2012 WL 5879133 (D. Md. Nov. 20, 2012), Judge Bennett made clear what should have already been obvious—namely, that the pleading rules applicable to other civil litigants apply equally to the government in FCA cases. Just as a normal plaintiff typically is not permitted to take discovery to learn particulars of a fraud claim for pleading purposes, once the government files an FCA case, it cannot use its extraordinary CID authority to gather facts necessary to file an amended complaint that can pass muster under Rule 9(b). Indeed, the decision reinforces the key role played by Rule 9(b) in FCA litigation—even where the action is commenced by the United States rather than a qui tam relator.

The FCA's Civil Investigative Demand Provision

FCA Section 3733(a)(1) provides in part:

[T]he Attorney General, or a designee, may, before commencing a civil proceeding under section 3730(a) or other false claims law, or making an election under section 3730(b), issue in writing and cause to be served upon such person, a civil investigative demand....

31 U.S.C. § 3733(a)(1) (emphasis supplied).

The 1986 amendments to the FCA authorized the Justice Department to issue CIDs in FCA investigations and to require a person who may possess information relevant to the investigation to produce documentary evidence, answer written interrogatories, give oral testimony, or provide any combination of the above. Recent amendments to the FCA made it easier for the Justice Department to obtain CIDs, but did not alter this fundamental limitation on the timing of when CIDs could be employed in cases brought by the United States. See John T. Boese, Civil False Claims and Qui Tam Actions § 5.07[A][1] (Wolters Kluwer Law & Business) (4th ed. & Supp. 2012-2) ("BOESE").

The Investigation and Complaint in Kernan Hospital

The underlying allegations in Kernan Hospital stemmed from a government investigation into a possible "upcoding" scheme by which the hospital sought to increase its reimbursements under federal health care programs. In the course of the investigation, the government issued a series of...