McClary v. Powers

          MEMORANDUM DECISION AND ORDER

          B. LYNN WINMILL, U.S. DISTRICT COURT JUDGE

         INTRODUCTION

         The Court has before it a motion to dismiss filed by defendants and a motion to amend filed by plaintiff McClary. The motions are fully briefed and at issue. For the reasons explained below, the Court will grant the motion to amend, and deny the motion to dismiss in large part, granting only the unopposed request to dismiss the conspiracy count (Count VI).

         LITIGATION BACKGROUND

         Plaintiff Patty McClary filed this lawsuit against her former employer, North Canyon Medical Center (NCMC) and its chief executive officer, Tim Powers, alleging that she was retaliated against for raising concerns about patient health and safety. NCMC was a Medicare & Medicaid Services (CMS) certified hospital, and was audited regularly to determine whether its certification should be renewed based in part on the hospital's record of patient care and safety.

         In 2015, the certifying agency determined that NCMC was not in compliance with a requirement that it have a Director of Nursing position to oversee patient care and safety. To keep the hospital's certification and to continue to receiving funding, Powers created the Director of Nursing position and hired McClary to fill that position. But McClary alleges that Powers directed her not to file reports on infection control and other matters that would show that patient care and safety was not being improved. She alleges that when she complained, she was passed over for promotion, demoted, and eventually forced to resign.

         In this lawsuit, McClary alleges several claims related to her wrongful termination, and also alleges two counts on behalf of the United States alleging the defendants violated the False Claims Act. The case remained sealed while the Government investigated the matter, and was later unsealed when the Government decided not to intervene.

         The defendants filed a motion to dismiss the two claims under the False Claims Act, alleging that the complaint fails to describe the defendants' misconduct with particularity. McClary agreed, and instead of responding to the motion to dismiss directly, filed a motion to amend her complaint to cure the defects identified by defendants. The defendants object to the proposed amendments, arguing that they are futile because they fail to identify a false statement, fail to explain why any false statements were material, and fail to state a claim for conspiracy. McClary agrees the conspiracy claim (Count VI) should be dismissed but opposes a dismissal of the other False Claim Act count (Count V). The issue before the Court is whether the proposed amendments to Count V are futile because of the shortcomings listed by defendants above.

         ANALYSIS

         Courts are directed by Rule 15 to “freely give leave [to amend] when justice so requires.” This policy is “to be applied with extreme liberality.” Eminence Capital LLC v. Aspeon, Inc., 316 F.3d 1048, 1049 (9^th Cir. 2003). However, leave to amend is not granted when the amendments are futile - that is, subject to dismissal. Id.

         In her proposed amendments, McClary has alleged a false certification theory of liability under the False Claims Act. Under this theory, a false claim can occur when a party represents compliance with a statute or regulation as a condition to payment, without actually complying with that statute or regulation. U.S. ex rel. Hendow v. University of Phoenix, 461 F.3d 1166, 1171 (9^th Cir. 2006). To prevail on this claim, McClary must prove four elements: (1) a false statement or fraudulent course of conduct, (2) made with scienter, (3) that was material, causing (4) the government to pay out money or forfeit moneys due. Id. at 1174.

         Defendants allege that McClary's proposed amendments fail to establish the first, third, and fourth elements - a false statement that is material and causes the government to pay out money. But in the proposed amendments, McClary alleges that Powers “purposefully caused NCMC to submit false statements and/or reports or records regarding operating room infection control to the Government for the purpose of meeting CMS required standards and complying with the proposed corrective action-all of which was done to not lose federal funding and to receive Government payments.” Proposed Amended Complaint (Dkt. No. 20-1)at ¶ 74. This is an allegation of a false statement by defendant Powers, acting as CEO of defendant NCMC, to obtain funding from the government, and hence material.

         McClary also alleges that Powers directed her not to report certain types of wrongful conduct that she was otherwise required to report and that could “trigger a federal or state payment adjustment . . . .” Id. at ¶ 106. Meanwhile, Powers was representing to the Government that McClary was hired to a position - Director of Nursing - that was created in response to a demand by the certifying agency for the purpose of improving patient care and safety to meet the funding standards for a CMS certified hospital. Id. at ¶¶ 40-43. But what Powers was not telling the certifying agency was that he was directing McClary to hide damaging reports. This is an allegation of an omission that renders misleading Powers' representations that NCMC was meeting all the standards for funding. The Supreme Court has held that when “a defendant makes representations in submitting a claim but omits its violations of statutory, regulatory, or contractual requirements, those omissions can be a basis for liability if they render the defendant's representations misleading with respect to the goods or services provided.” Universal Health Services, Inc. v. U.S., 136 S.Ct. 1989, 1999 (2016).

         Defendants argue that this case is governed by U.S. ex rel. Hopper v. Anton,91 F.3d 1261 (9^th Cir. 1996). In that case, the plaintiff alleged that a school district accepted federal funds to assist the disabled despite failing to comply with some of the requirements of the very federal law providing the funding. Id. at 1267. The Circuit affirmed dismissal of that claim because the plaintiff could not prove any false statements - the school district was not ...