United States ex. rel. Dresser v. Qualium Corp.

          ORDER GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS THE UNITED STATES’ AMENDED COMPLAINT AND DENYING MOTION TO DISMISS DRESSER’S SECOND AMENDED COMPLAINT

          BETH LABSON FREEMAN United States District Judge.

         This case involves two plaintiffs, four defendants, and five theories of Medicare fraud. Plaintiff-relator Elma Dresser and Plaintiff-intervenor the United States of America sue Defendants under the False Claims Act (“FCA”), alleging that Defendants submitted false claims to federal healthcare programs for diagnostic sleep studies and sleep disorder-related medical devices. See Second Amended Compl. (“SAC”), ECF 63; United States’ Amended Compl. in Intervention (“FAC”), ECF 62. Defendants move to dismiss both complaints. See Mots., ECF 57, 58, 66, 67. The Court heard argument on these motions on May 5, 2016. For the reasons stated on the record and below, Defendants’ motion to dismiss the United States’ Amended Complaint is GRANTED IN PART and DENIED IN PART, with leave to amend, and Defendants’ motion to dismiss Dresser’s Second Amended Complaint is DENIED, but leave to amend is granted on the implied false certification claim.

         I. BACKGROUND

         In 2012, Dresser sued Defendants under the FCA. See Compl., ECF 1. After the United States intervened in part and filed an Intervenor Complaint, Dresser amended her complaint. See Compl. in Intervention, ECF 22; First Amended Compl., ECF 24. Defendants then moved to dismiss both complaints, see Mots., ECF 57, 58, and the United States and Dresser amended their complaints. See FAC, SAC.

         A. United States’ Claims

         Defendants Tahereh Nader and Anooshiravan Mostowfipour own and operate Defendants Qualium Corp. and Amerimed Corp. See FAC ¶¶ 12-13. Qualium owns a chain of California clinics, doing business as Bay Sleep Clinic, that provides diagnostic services and treatment for sleep disorders. See Id. ¶ 10. Qualium, doing business as CPAP Specialist, also dispenses durable medical equipment (“DME”), specifically sleep disorder-related devices. See Id. ¶¶ 4, 11. Amerimed also provides diagnostic services and treatment for sleep disorders, and dispenses DME products. See Id. ¶ 14. In its Amended Complaint, the United States alleges that from April 4, 2002 to the present, Defendants engaged in a scheme to violate Medicare rules in three ways: first, by conducting sleep and titration tests in locations that had not been approved by Medicare; second, by employing unqualified personnel to conduct those tests; and third, by dispensing DME to Medicare patients based on those tests, and/or from unapproved locations, and/or by an unapproved provider. See Id. ¶ 90.

         1. Unapproved Locations

         Defendants have twenty sleep clinics, but enrolled only two of them as Medicare-approved Independent Diagnostic Testing Facilities (“IDTF”). See Id. ¶¶ 47, 93, 94. Defendants did not apply to enroll the other 18 clinic locations as Medicare-approved IDTFs. See Id. ¶ 98. Even if Defendants had applied to enroll those locations, however, they would not have been approved, because they did not post and maintain regular business hours, as required for Medicare IDTFs. See Id. ¶ 100. Under Medicare regulations, each IDTF practice location must be enrolled in order to bill Medicare. See Implementation of New Compliance Standards for Independent Diagnostic Testing Facilities (IDTFs), CMS Manual System, Pub. 100-08, Transmittal 216 (July 13, 2007), at 4.19.1(B). Defendants nonetheless performed sleep tests on Medicare beneficiaries in the 18 unapproved clinics, and then submitted payment claim forms that falsely stated that the tests had occurred at one of the two approved clinics. See FAC ¶¶ 95, 96. By signing and submitting the payment claim forms, Defendants expressly certified that their claims for payment complied with Medicare laws, regulations, and program instructions, and that they were true, accurate, and complete. See Id. ¶ 97.

         2. Unqualified Personnel

         In addition to conducting tests in unapproved clinics, Defendants used unlicensed personnel to conduct those tests, concealed this fact from Medicare, and submitted claims for diagnostic tests that were not performed by licensed or certified technologists.

         In order to bill Medicare, personnel performing sleep tests at IDTFs must be licensed or certified. See 42 C.F.R. §§ 410.33(c), (g); Implementation of New Compliance Standards for Diagnostic Testing Facilities (IDTFs), CMS Manual System, Pub. 100-08, Transmittal 216 (July 13, 2007). Defendants, however, knowingly and deliberately employed at least 30 individuals who were not licensed or registered to perform sleep and titration tests, because they believed that employing licensed or registered sleep technicians was too expensive. See FAC ¶¶ 111, 121. The unlicensed, unregistered employees performed sleep and titration tests on Medicare beneficiaries and Defendants then submitted payment claim forms for these tests. See Id. ¶¶ 104-05, 121.

         Defendants also concealed the identities of their unlicensed employees. See Id. ¶ 108. Medicare requires IDTFs to submit a Medicare Enrollment Application, Form CMS-855B, which provides information to determine whether the IDTFs meet all of the standards for IDTFs. See Id. ¶¶ 55-56. Section D of Attachment 2 to the CMS-855B requires the supplier to list all non-physician personnel who perform tests at that IDTF and attach copies of their state licenses or certificates. See CMS 855-B, FAC, Ex. 1 at US0000835, ECF 62-1. In July 2010, Defendants submitted a CMS-855B to update the location of their Los Gatos clinic, and despite employing several unlicensed employees to perform tests, Defendants listed only two technicians on their CMS-855B and omitted the unlicensed employees. See FAC ¶ 110. In January 2012, Defendants submitted a CMS-855B to re-validate the enrollment of their San Francisco clinic, and similarly listed only two technicians on their CMS-855B. See Id. ¶ 108-09.

         3. DME Dispensing

         In addition to performing sleep tests, Qualium and Amerimed also dispensed sleep disorder-related DME to Medicare beneficiaries from unapproved locations and in violation of the payment prohibition. See Id. ¶ 122. Qualium was approved by Medicare to dispense DME only from its Los Gatos clinic location. See Id. ¶ 123. Qualium dispensed DME from other Bay Sleep clinic locations, however, and falsely represented on the Medicare claim forms that the DME had been dispensed from the approved Los Gatos location. See Id. ¶¶ 128, 131. Amerimed, meanwhile, dispensed DME to Medicare beneficiaries even though it was not approved by Medicare to do so, and obtained reimbursement from Medicare by having Qualium submit claim forms stating that Qualium, not Amerimed, had dispensed the DME. See Id. ¶¶ 124-25. Finally, by dispensing DME while also providing sleep tests, Defendants violated the payment prohibition in 42 C.F.R. § 424.57(f), which provides that “No Medicare payment will be made to the supplier of a CPAP device if that supplier, or its affiliate, is directly or indirectly the provider of the sleep test used to diagnose the beneficiary with obstructive sleep apnea.” Defendants performed sleep and titration tests at clinics that were not approved by Medicare and not attended by appropriately qualified technicians, dispensed DME from those same clinics, and submitted claims to Medicare that violated the payment prohibition. See FAC ¶¶ 132-35.

         Based on these allegations, the United States raises four causes of action: (1) presentation of false claims under the FCA, 31 U.S.C. §§ 3729(a)(1), (a)(1)(A); (2) using false statements to get false claims paid under the FCA, 31 U.S.C. §§ 3729(a)(2), (a)(1)(B); (3) payment by mistake; and (4) unjust enrichment. See FAC ¶¶ 140-54.

         B. Dresser’s Claims

         Following the United States’ intervention on the above allegations, Dresser separately alleges that Defendants engaged in a scheme to violate Medicare rules in two more ways: first, by using unlicensed personnel to dispense DME and fraudulently obtaining licenses for unlicensed employees to dispense DME; and second, by giving kickbacks to doctors in exchange for patient referrals. See SAC ¶¶ 71-85.

         1. DME Dispensing

         Dresser alleges that Qualium hired and directed unlicensed employees to dispense DME and fraudulently obtained licenses for unqualified employees to dispense DME. See Id. ¶ 71. Dresser identifies one employee, Carolyn Dubbel, who dispensed DME from the Menlo Park location, which was not enrolled in Medicare, even though she initially was unlicensed. See id. While Dresser worked at Qualium, Nader signed license applications for employees that falsely stated that the employees had worked in the business for a year, as required by California law. See Id. ¶ 73; Cal. Health & Safety C. § 111656.4. Many of the employees, however, had not worked for the required year, and the work they had done consisted of dispensing DME without a license and without a licensed dispenser on the clinic premises. See Id. Among the ranks of the unlicensed personnel who dispensed DME are Soosan Mostowfipour (Mostowfipour’s sister), Sina Nader (Nader’s son), Aline Smith (Nader’s housekeeper), Mersiha Begovic, Dr. Moiz (first name unknown), Jasmin (last name unknown), Lora (last name unknown), Nermina Donka, Jackie Floyd, Erica Vega, and Anel Catic. See SAC ¶ 73. When submitting claim forms for DME dispensed by unlicensed employees, Defendants stated that one of their few licensed employees had dispensed the DME. See Id. ¶ 74.

         2. Anti-Kickback Statute

         Dresser also alleges that Defendants paid physicians for referring patients to Defendants’ sleep clinics, in violation of the Anti-Kickback Statute. See Id. ¶¶ 1, 76; 42 U.S.C. § 1320a-7b(b). Defendants directed their employees to give payments to Dr. William Lewis and Dr. David Arnstein. See SAC ¶ 76. The doctors received $100 for each patient they referred to Defendants for sleep tests. See Id. The payments were nominally for patient consultations that the doctors gave Defendants’ patients after Defendants had conducted sleep tests on those patients, but in actuality, the doctors were paid whether or not they provided the consultation and whether or not they had expertise in reading sleep studies. See Id. From 2008 to 2013, Lewis and Arnstein referred at least seven Medicare beneficiary patients to Bay Sleep Clinic for sleep tests. See id.

         Based on these allegations, Dresser raises one cause of action under the FCA, 31 U.S.C. §§ 3729(a)(1)-(2), 31 U.S.C. §§ 3729(a)(1)(A)-(B). See Id. ¶¶ 103-109.

         Defendants renew their motions to dismiss the United States’ Amended Complaint and Dresser’s Second Amended Complaint. See Mots., ECF 66, 67.

         II. LEGAL STANDARD

         To survive a Rule 12(b)(6) motion to dismiss, “a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). When considering a motion to dismiss, the Court “accept[s] factual allegations in the complaint as true and construe[s] the pleadings in the light most favorable to the nonmoving party.” Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1031 (9th Cir. 2008). The Court “need not, however, accept as true allegations that contradict matters properly subject to judicial notice or by exhibit.” Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001).

         “In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally.” Fed.R.Civ.P. 9(b). Because they involve allegations of fraud, qui tam actions under the FCA must meet the particularity requirements of Rule 9. See Bly-Magee v. California, 236 F.3d 1014, 1018 (9th Cir. 2001). Rule 9 requires only that the circumstances of fraud be stated with particularity; other facts may be pled generally or in accordance with Rule 8. See Iqbal, 556 U.S. at 686-87; Meijer, Inc. v. Ferring B.V. (In re DDAVP Direct Purchaser Antitrust Litig.), 585 F.3d 677, 695 (2d Cir. 2009), cert. denied, 130 S.Ct. 3505 (2010).

         III. DISCUSSION

         When Defendants moved to dismiss, a case on implied false certification under the False Claims Act was pending before the Supreme Court. See Universal Health Servs. v. U.S. ex rel. Escobar, 136 S.Ct. 582 (Mem.) (2015). The Supreme Court recently issued its ruling and so this Court fully considers the holding of Universal Health Services in adjudicating the Motions to Dismiss. See Universal Health Servs. v. United States, 579 U.S., 2016 WL 3317565 (2016).

         A. Motion to Dismiss United States’ Amended Complaint

         Defendants initially moved to dismiss the United States’ Complaint. See Mot., ECF 57. After the United States amended its pleadings, Defendants renewed their motion to dismiss. See Mot., ECF 66. The renewed motion incorporates the earlier motion by reference and lists the changes in the amended pleadings, but does not present any new arguments. The initial motion is DENIED as moot and the renewed motion is GRANTED IN PART and DENIED IN PART, as explained below.

         Defendants move to dismiss the United States’ Amended Complaint because it relies on a theory of implied false certification and does not allege false claims; intentional, palpable lies; materiality; or claims on the government fisc with sufficient plausibility or particularity. See Mot. at 18-24, ECF 57. ...