Magistrate Recommends Dismissal of Takemoto False Claims Act Amended Complaint

Article by Rafael Gonzalez, Esq. Vice President, Strategic Solutions HELIOS Settlement Solutions
Article by
Rafael Gonzalez, Esq.
Vice President, Strategic Solutions
HELIOS Settlement Solutions

On June 24, 2015, Jeremiah J. McCarthy, United States Magistrate Judge at the United States District Court for the Western District of New York, published its report and recommendations on United States of America ex rel Dr. Kent Takemoto v. ACE et al, concluding that since Dr. Takemoto’s Amended Complaint fails to allege a basis for liability “above the speculative level” against any particular named defendant, it fails to plausibly state a cause of action, and therefore recommends it should be dismissed.

On July 18, 2011, Dr. Kent Takemoto commenced an action on behalf of the United States pursuant to the False Claims Act (FCA), 31 U.S.C. §§3729 et seq., seeking to recover damages from defendants, including various insurance and holding companies, for their alleged failure to reimburse the government for payments made by the government to Medicare beneficiaries. On March 14, 2014, the United States elected not to intervene in the action. By Order dated April 3, 2014, Judge Skretny unsealed the Complaint and directed that it be served upon the defendants within 20 days.

On April 10, 2014 Dr. Takemoto moved for an extension of that deadline, stating that he intended “to substantially amend his complaint to narrow the number of defendants and add additional detail gathered since the complaint was filed”. Instead of narrowing the number of defendants, on October 31, 2014, over three years after filing the original Complaint, Dr. Takemoto filed an Amended Complaint significantly increasing the number of defendants. Arguing that the Amended Complaint fails to properly state a cause of action, defendants here seek its dismissal.

31 U.S.C Section 3729(a)(1)(G) imposes liability upon “any person who knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government.” The word “or” is almost always disjunctive, that is, the words it connects are to be given separate meanings, strongly suggesting that the “knowing avoidance” prong of §3729(a)(1)(G) does not require proof of fraud, and instead applies “regardless of whether such actions involve a falsehood.”

While the statute requires knowing concealment or knowing and improper avoidance of an obligation to pay, the Amended Complaint repeatedly alleges that defendants “have knowingly concealed and knowingly and improperly avoided their obligation to pay or transmit money or property to the Government.” At oral argument, Dr. Takemoto’s attorney, Mr. Robert King, requested leave of court to drop the “knowingly concealed” allegation. The Magistrate here grants counsel’s oral request to drop the allegations of knowing concealment, so as to “strictly focus on a knowing avoidance claim.”

The court notes that although Dr. Takemoto need not plead with the specificity required by Rule 9(b) for fraud allegations, his Amended Complaint must still comply with Rule 8(a)(2), which requires “a short and plain statement of the claim showing that the pleader is entitled to relief.” “Rule 8 requires that a plaintiff provide facts sufficient to allow each defendant to have a fair understanding of what plaintiff is complaining about and to know whether there is a legal basis for recovery.” This requirement is important, because the FCA “penalizes a person for his own acts, not for the acts of someone else.”

The court finds that the Amended Complaint groups related corporations together without differentiating as to the involvement of each, and that such grouping violates Rule 8(a).

The court noted that Dr. Takemoto’s failure to specify each defendant’s involvement was hardly surprising in light of the troubling admissions made by Mr. King during oral argument. For example, when the Magistrate Judge pointed out that “the named defendants include parent corporations” and asked how the court can “know from the allegations that those defendants would have had any obligations under the False Claims Act as opposed to one of their subsidiaries,” Mr. King responded that “if in fact those defendants were truly holding companies and not operating companies and did not write insurance, exactly which companies did which things is far from clear at this point. Sorting out which company on the front end before any discovery, which company did what is not an easy thing.”

The Magistrate Judge then asked Mr. King whether there was a problem with “naming companies that you don’t even know whether or not they did any of the type of activity that would even conceivably give rise to a False Claim Act violation”, to which Mr. King replied “I don’t think that is a problem here as that is something that I expect that we will learn in discovery.”

The court indicates that if that approach to pleading was ever acceptable, clearly it is no longer. “The day is past when our notice pleading practice invited the federal practitioner to file suit first and find out later whether he had a case or not.” “Complaints should not be filed in matters where plaintiffs intend to find out in discovery whether or not, and against whom, they have a cause of action.”

The court finds that not only does the Amended Complaint fail to make allegations specific to each defendant, it also fails to properly allege the basis for a claim against any defendant. A party cannot “knowingly and improperly avoid” an obligation to repay the government unless there is first an obligation to repay.

The court also notes that while the Amended Complaint does not identify any particular payment obligations which defendants have avoided (knowingly or otherwise), Dr. Takemoto argues that “allegations may be based on information and belief when facts are peculiarly within the opposing party’s knowledge,” and that he “has supplied information and belief, that permit a plausible inference that each of the defendants have incurred MSP repayment obligations under either the pleading standards of Rule 8(a) or 9(b).” The court however finds none of the Amended Complaint’s allegations are made “upon information and belief,” nor does Dr. Takemoto explain why the facts as to whether or not the beneficiaries have reimbursed the government – or which have done so – are “peculiarly within defendants’ knowledge”.

“To survive a 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. A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Even if there was factual support for the allegation that only a small fraction of Medicare beneficiaries repaid the government, it would still be unclear as to whether the remaining beneficiaries (who presumably did not repay) had received payments from any particular named defendant, or whether that defendant knew or should have known about the beneficiary’s failure to repay – meaning that the obligation of any particular defendant to repay the government would be speculative at best.

The court therefore concludes that since the Amended Complaint fails to allege a basis for liability “above the speculative level” against any particular named defendant, it fails to plausibly state a cause of action, it should therefore be dismissed.

While arguing that the Amended Complaint is legally sufficient, Dr. Takemoto suggests that “in the alternative, should the Court determine that any of Dr. Takemoto’s allegations are insufficient and require dismissal, the dismissal should be without prejudice, and Dr. Takemoto should be given an opportunity to cure any such deficiencies”. The court concludes that such bare-bones request does not warrant granting leave to replead. As a matter of fact, the court indicates that the statements made by Mr. King at oral argument lead him to conclude that Dr. Takemoto lacked a good faith basis for the allegations of the Amended Complaint. Although the court did not impose sanctions, the Magistrate Judge considered this factor in deciding whether to allow him to replead.

For these reasons, the Magistrate Judge recommend that the Joint Motion be granted and that the Amended Complaint be dismissed, with prejudice as to Dr. Takemoto, but without prejudice to the government’s ability to assert claims on its own behalf. All other pending motions were also denied as moot, with leave to renew if his recommendation to grant the Joint Motion is not adopted.

This may not be the last we hear about this case as most expect Dr. Takemoto to object to these conclusions. As a result, unless otherwise ordered by Judge Skretny, any objections to the Magistrate Judge’s Report and Recommendation must be filed by July 13, 2015. In addition, it is expected that there may be additional requests for extension of this deadline, as a party who fails to object to such recommendations timely, waives any right to further judicial review of this decision. As always, Helios Settlement Solutions will continue to follow this case and report on any further activity.

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