Healthcare Law Update: October 2021

Published date20 October 2021
Subject MatterFood, Drugs, Healthcare, Life Sciences, Food and Drugs Law
Law FirmHolland & Knight
AuthorMr Nathan Adams IV, Charles A. Weiss, Shannon Britton Hartsfield, Eddie Williams III, Kathryn Isted, Sydney Kanjuparamban and Jennifer C. Lee

Discovery

Return of Privileged Materials Required Due to "Callous Disregard" of Federal Prosecutors

Kathryn Isted

In Harbor Healthcare System, L.P. v. United States, 5 F.4th 593 (5th Cir. 2021), the court of appeals ruled that the district court abused its discretion in refusing to exercise its equitable jurisdiction over a healthcare provider's motion for return of property, in which the provider sought the return of privileged materials seized by the United States during a pre-indictment criminal investigation led by the U.S. Attorney's Office for the Eastern District of Texas. On May 18, 2017, the government executed search warrants on Harbor Healthcare System (Harbor), seizing hundreds of boxes of paper records and 3.59 terabytes of data contained in multiple computers, hard drives, mobile devices and email accounts. The materials seized included the computer, email account, iPhone and paper documents of Eric Sprott, Harbor's general counsel and director of compliance, and consequently, contained substantial information protected by the attorney-client privilege and work product doctrine. The government assembled a "filter team" from "another division of the Eastern District" to review the seized materials for privileged information. After Harbor repeatedly sought the return of its privileged documents from the government to no avail, Harbor initiated an action in the U.S. District Court for the Southern District of Texas on Sept. 7, 2018, and filed a motion for the return of property under Rule 41(g) of the Federal Rules of Criminal Procedure.

In that action, at the district court's insistence, the parties proposed a "privilege-screening plan." During the test phase of that plan, Harbor identified 3,843 emails from Sprott's account as privileged and discovered that "a significant number of privileged documents" had already been transferred from the government's filter team to its civil and criminal investigators. Meanwhile, the government moved to dismiss Harbor's action on the grounds that the district court lacked equitable jurisdiction, arguing that Harbor had not "demonstrate[d] any irreparable harm to its legitimate property interests" and that the Rule 41(g) motion was mooted by the privilege-screening plan. The district court granted the motion, declining to continue exercising its equitable jurisdiction and dismissing Harbor's action.

The court of appeals reversed, finding the district court erred in its application of the Richey v. Smith, 515 F.2d 1239, 1242-43 (5th Cir. 1975) factors for evaluating pre-indictment motions for return of property, which include: "(1) [W]hether the motion for return of property accurately alleges that the government agents ... displayed 'a callous disregard for the rights of [the plaintiff]'; (2) [W]hether the plaintiff has an individual interest in and need for the material whose return he seeks; (3) [W]hether the plaintiff would be irreparably injured by the denial of the return of the property and (4) [W]hether the plaintiff has an adequate remedy at law for the redress of his grievance."

As to the first factor, the court of appeals found the government showed a "callous disregard" for Harbor's rights because it knew that Sprott's office and computer contained privileged materials when it executed the search warrants, yet it "did not seek express prior authorization from the issuing Magistrate Judge for the seizure of attorney-client privileged materials." The court of appeals also found the government disregarded Harbor's rights after the search when it refused to return or destroy materials it agreed were privileged. In addressing the second factor, the court of appeals rejected the district court's determination that Harbor lacked a "practical need for access to the copies of the documents retained by the government." Rather, the court of appeals concluded that Harbor needed the copies held by the government to be returned or destroyed in order to protect its "great privacy interest" in its privileged information. As to the third factor, the court of appeals found that the government's "ongoing intrusion on Harbor's privacy constitutes an irreparable injury that can be cured only by Rule 41(g) relief." Finally, in finding for Harbor on the fourth factor, the court of appeals rejected the government's contention that Harbor had an adequate remedy at law through a potential motion to suppress admission of the privileged information in a possible criminal proceeding. The court of appeals explained that there may never be criminal proceedings and, regardless, such a motion would not remedy the government's ongoing intrusion on Harbor's privacy.

Enforcement

False Claims Act Complaint Against "Sophisticated" Medicaid Plan Allowed to Proceed

Shannon Britton Hartsfield

Molina Healthcare of Illinois (Molina) was a Managed Care Organization (MCO) that received a per-patient capitated payment from the Illinois Medicaid program to provide certain services. These services included, among other things, certain professional services delivered within a skilled nursing facility to Molina's Medicaid beneficiaries receiving nursing facility services. The services were supposed by be rendered by "SNFists," who are medical professionals focused on providing and coordinating medical care for individuals residing in a nursing facility. Molina provided SNFist services through a subcontract with GenMed. GenMed eventually terminated its contract with Molina due to a payment dispute, yet Molina continued to receive capitation payments from the state without providing SNFist services, either directly or through another subcontractor.

As an MCO, Molina had a risk-based contract in which it agreed to receive a per-enrollee fee, and in exchange, Molina assumed the risk that its cost of providing services could exceed those fees. For a two-year period after the termination of the GenMed agreement, Molina did not deliver SNFist services, yet it continued to receive the full capitation amount for those SNFist services from the Illinois Medicaid program.

GenMed's founder, Thomas Prose, was aware of this situation and filed a qui tam complaint under the False Claims Act (FCA) and its state law corollary. The lower court dismissed the case for failure to state a claim because it found that the relator's complaint failed to sufficiently allege that Molina knew that the failure to provide SNFist services was material. On Aug. 19, 2021, the...

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