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Contract — Lawyer’s Advice No Defense in FCA Case

Deborah Elkins//July 14, 2015

Contract — Lawyer’s Advice No Defense in FCA Case

Deborah Elkins//July 14, 2015

U.S. ex rel. Drakeford v. Tuomey (Lawyers Weekly No. 15-01-0704, 67 pp.) (Diaz, J.) No. 13-2219, July 2, 2015; USDC at Columbia, S.C. (Perry, Seymour, JJ.) 4th Cir.

Holding: In this False Claims Act suit against a South Carolina nonprofit hospital, the trial court did not err in granting a retrial, and the 4th Circuit affirms a $237.4 million award for plaintiff in the second trial; although the original trial judge ordered the new trial after deciding it had erred in excluding a hospital executive’s deposition testimony, we affirm on the alternative ground that the trial court erred in excluding evidence of a lawyer’s advice that the hospital’s proposed contracts could violate the Stark Law.

The government pressed two grounds in support of its motion for a new trial. First, it argued that the district court erred by excluding testimony from Kevin McAnaney, an attorney and expert on the Stark Law who was consulted by the hospital and the doctor who declined to enter into a contract with the hospital for its outpatient services. Second, the government argued that the district court erroneously excluded deposition excerpts from the hospital’s CEO, Gregg Martin, about his recollections of a discussion he had with Tuomey’s counsel concerning McAnaney’s opinions on the employment contracts. While the district court granted a new trial on the latter ground, we instead affirm the district court on the basis of its more glaring error, the exclusion of McAnaney’s testimony.

Expert Advice

We affirm the district court’s order granting a new trial on the alternative ground urged by the government: that it was prejudiced by the exclusion of McAnaney’s testimony and other related evidence of his warnings to Tuomey regarding the legal peril that the employment contracts posed. To make its case that Tuomey “knowingly” submitted false claims under the FCA, the government needed to show that Tuomey knew there was a substantial risk that the contracts violated the Stark Law, and was nonetheless deliberately ignorant of or recklessly disregarded that risk. McAnaney’s testimony was a relevant, and indeed essential, component of the government’s evidence on that element, and Tuomey offered no good reason why the jury should not hear it. We think that McAnaney’s specific warnings to Tuomey regarding the dangers posed by the contracts were critical to making this showing.

McAnaney warned Tuomey that procuring fair market valuations, by itself, was not conclusive of the accuracy of the valuation. He emphasized that it would be very hard to convince the government that a contract that paid physicians “substantially above even their collections, much less their collections minus expenses,” would constitute fair market value. According to McAnaney, compensation arrangements under which the contracting physicians are paid in excess of their collections were “basically a red flag to the government.” He noted that similar cases had previously been prosecuted before, although all of them ultimately settled.

McAnaney also pointed out that the 10-year term of the contracts, combined with the 30-mile, two-year noncompete provision would reinforce the government’s view that Tuomey was paying the physicians above fair market value for referrals. He concluded that the contracts did not pass the “red face test,” and warned that the government would find this “an easy case to prosecute.”

We have no cause to upset the jury’s reasoned verdict that Tuomey violated the FCA.

Tuomey contends the district court erred by failing to instruct the jury that Tuomey was entitled to rely on legal advice even if it turned out to be wrong. However, the district court instructed the jury that knowledge does not include actions taken “through ignorance, mistake or accident.” It later emphasized that the jury could not conclude that Tuomey had knowledge “from proof of mistake, negligence, carelessness or a belief in an inaccurate proposition.” Because the import of Tuomey’s proposed charge was covered by the district court’s instructions, we reject Tuomey’s claim of error.

Judgment affirmed.


Wynn, J.: Because Tuomey opened the door to the admission of Kevin McAnaney’s testimony by asserting an advice-of-counsel defense, and because I cannot say, based on the record before me, that no rational jury could have determined that Tuomey violated both the Stark Law and the False Claims Act, I concur in the outcome today. I write separately to emphasize the troubling picture this case paints: An impenetrably complex set of laws and regulations that will result in a likely death sentence for a community hospital in an already medically underserved area.

Having put the advice it got from its lawyers squarely at issue, Tuomey should not have been permitted to cherry-pick which advice of counsel the jury was permitted to hear. Instead, the jury should have been allowed to consider all the advice of all Tuomey’s counsel, including McAnaney. The decision to grant a new trial must be upheld.

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