United States Court of Appeals
For the First Circuit
No. 16-1304
ANDREW HAGERTY, ex rel. UNITED STATES;
Relator, Appellant,
STATE OF CALIFORNIA; STATE OF COLORADO; STATE OF CONNECTICUT;
STATE OF DELAWARE; STATE OF FLORIDA; STATE OF GEORGIA; STATE OF
HAWAII; STATE OF ILLINOIS; STATE OF INDIANA; STATE OF IOWA;
STATE OF LOUISIANA; STATE OF MARYLAND; COMMONWEALTH OF
MASSACHUSETTS; STATE OF MICHIGAN; STATE OF MINNESOTA; STATE OF
MONTANA; STATE OF NEVADA; STATE OF NEW JERSEY; STATE OF NEW
MEXICO; STATE OF NEW YORK; STATE OF NORTH CAROLINA; STATE OF
OKLAHOMA; STATE OF RHODE ISLAND; STATE OF TENNESSEE; STATE OF
TEXAS; COMMONWEALTH OF VIRGINIA; STATE OF WASHINGTON; STATE OF
WISCONSIN; DISTRICT OF COLUMBIA
Plaintiffs,
v.
CYBERONICS, INC.,
Defendant, Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. F. Dennis Saylor, IV, U.S. District Judge]
Before
Barron, Selya, and Stahl,
Circuit Judges.
Joseph S. Hall, with whom Silvija A. Strikis, Katherine C.
Cooper, Rachel Proctor May, Kellogg, Huber, Hanson, Todd, Evans &
Figel, P.L.L.C., Suzanne E. Durrell, Durrell Law Office, Robert M.
Thomas, Jr., and Thomas & Associates were on brief, for appellant.
William M. Katz, Jr., with whom Melissa Michelle Davis, J.
Patrict Bredehoft, Richard B. Phillips, Thompson & Knight LLP,
Timothy H. Madden, and Donnelly, Conroy & Gelhaar LLP were on
brief, for appellee.
December 16, 2016
STAHL, Circuit Judge. Relator-Appellant Andrew Hagerty
("Hagerty") brought a qui tam action against Appellee Cyberonics,
Inc. ("Cyberonics") alleging, among other things, that Cyberonics
violated the False Claims Act ("FCA"), 31 U.S.C. § 3729 et seq.,
and related state statutes. Specifically, Hagerty alleged that
Cyberonics promoted medically unnecessary replacements of
batteries in nerve stimulator devices used to treat epilepsy
patients, which in turn resulted in patients and medical providers
filing false claims for reimbursement from government health care
programs.
The district court dismissed all but two of Hagerty's
claims under Federal Rule of Civil Procedure 12(b)(6), including
the FCA allegations, holding that Hagerty's First Amended
Complaint was not pled with the particularity required by Federal
Rule of Civil Procedure 9(b).1 Following this dismissal, the
district court also denied Hagerty's request for leave to file a
Second Amended Complaint on the basis of undue delay. Hagerty now
challenges the district court's ruling on both fronts, maintaining
that his First Amended Complaint satisfies Rule 9(b) and asserting
1Hagerty's surviving claims against Cyberonics were his
allegations regarding retaliatory discharge under 31 U.S.C. §
3730(h) (Count 31) and wrongful termination and retaliation in
violation of public policy under Mass. Gen. Laws ch. 12, § 5J
(Count 33). These claims were voluntarily dismissed without
prejudice and are not on appeal. Hagerty also does not separately
address the dismissal of his other state law claims in his briefing
to this court. We similarly decline to do so in our opinion.
- 3 -
that the district court abused its discretion when denying his
motion for leave to file a Second Amended Complaint. After careful
consideration, we affirm.
I. Facts & Background
We recite the relevant facts as they appear in Hagerty's
First Amended Complaint. See Hochendoner v. Genzyme Corp., 823
F.3d 724, 730 (1st Cir. 2016). The Vagus Nerve Stimulator (VNS)
is a medical device that is implanted in patients with refractory
epilepsy, a severe form of the disease in which a patient's
seizures seriously interfere with their quality of life and do not
respond to other medications or treatment. The VNS works by
delivering short electrical pulses to the vagus nerve through a
wire. Each VNS system contains a battery, and the entire VNS
system must be surgically replaced when the battery nears the end
of its life.
Patients with refractory epilepsy often qualify for
coverage under government healthcare programs like Medicare and
Medicaid. Some treatments for refractory epilepsy, including
placement of the VNS, are reimbursed by those programs. These
programs impose certain requirements on healthcare providers, such
as signing a Provider Agreement with the Centers for Medicare and
Medicaid Services ("CMS"). In these agreements, providers
certify, among other things, that their claims for reimbursement
- 4 -
relate to a reasonable and medically necessary treatment. 42
U.S.C. § 1395y(a)(1)(A).
On February 4, 2013, Hagerty filed a qui tam complaint
under seal against Cyberonics, alleging that it engaged in a
fraudulent scheme to encourage doctors and patients to prematurely
and unnecessarily replace batteries in VNS systems. Hagerty,
having gained knowledge of the scheme firsthand as a former sales
representative of Cyberonics, further alleged that this scheme
caused significant monetary damages to government healthcare
programs by inducing patients and medical providers to file false
claims for reimbursement in violation of 31 U.S.C. § 3729(a). On
October 29, 2013, the government filed a notice declining to
intervene in the case, and on December 5, 2013 the complaint was
unsealed and served on Cyberonics. Cyberonics then moved to
dismiss the complaint on April 28, 2014 on several grounds,
including under Rule 12(b)(6) for failure to state a claim and
Rule 9(b) for failure to allege instances of fraud with
particularity.
Hagerty amended his pleadings and filed his First
Amended Complaint on May 19, 2014. The First Amended Complaint
alleged that in 2005, the FDA approved the VNS as a treatment for
depression, and, anticipating that much of its future growth would
come from this market, Cyberonics hired 300 new salespersons.
Cyberonics then allegedly began lobbying CMS to approve Medicare
- 5 -
reimbursement for VNS therapy in depressive patients, which CMS
ultimately declined to grant. Facing a dire financial situation2,
Cyberonics reportedly decided to refocus its sales efforts on
epilepsy patients, with a particular interest in re-sales to
already existing VNS patients.
The First Amended Complaint emphasized that this new
sales plan was driven by a "carrot and stick" approach, where sales
representatives were rewarded for meeting "aggressive sales
quotas," were placed in a Performance Improvement Program if they
did not achieve 75% of their revenue goals in a given quarter, and
were terminated the following quarter if their performance did not
improve. Hagerty alleged that, under such conditions, Cyberonics'
sales representatives resorted to fraudulent sales tactics, such
as refusing to provide doctors and patients with accurate VNS
battery life calculations and encouraging doctors and patients to
replace these batteries prematurely.3
The First Amended Complaint further alleged that
approximately 50% of Cyberonics' revenue came from Medicare and
Medicaid, with additional revenues coming from TRICARE, the
2 At the time CMS denied its request, Cyberonics was allegedly
$132.5 million in debt.
3 Cyberonics employees purportedly represented that these
batteries should be replaced after four or five years despite their
average lifespan being between eight and nine years. As a result
of this new sales tactic, Hagerty alleges that Cyberonics erased
its debt by 2010 and avoided bankruptcy.
- 6 -
Department of Defense, the Department of Veterans Affairs, and the
Federal Employee Health Benefits Program. Hagerty went on to list
sixteen hospitals which he claimed had performed and billed for
VNS therapy implants in epileptic patients, and specifically named
the Southbury Training School, Monson Development Center, and
Wrentham Development Center as "long-term care facilities . . . in
which vulnerable patients were subjected to unnecessary surgeries
to implant replacement devices." The First Amended Complaint
further identified a Dr. Pena, who had three patients undergo
battery replacement procedures between September 30, 2010 and
November 18, 2010. It also identified a Dr. Thompson, who
allegedly told Hagerty that a Cyberonics sales representative
falsely told physicians to replace VNS batteries prematurely.
Moreover, the First Amended Complaint alleged that Hagerty
reviewed an internal patient list and saw that several of Dr.
Thompson's patients had received VNS device replacements in 2010.
By way of conclusion, the First Amended Complaint
projected that at least 10,000 medically unnecessary VNS device
replacements had occurred at these hospitals and centers since
2007. Coupled with an estimated cost of $20,000 per procedure and
an assumption that government healthcare programs covered
approximately 50-60% of these procedures, Hagerty reasoned that
government healthcare programs lost at least $100 million as a
result of Cyberonics' scheme.
- 7 -
Cyberonics again moved to dismiss the case. On March
31, 2015, the district court granted the motion, finding that
Hagerty had not pled his allegations with the requisite
particularity required by Rule 9(b). On August 14, 2015, Hagerty
moved for leave to file a Second Amended Complaint. Three months
later, the district court denied Hagerty's motion on the basis of
undue delay.4 This appeal followed.
II. Analysis
Hagerty insists that his First Amended Complaint
satisfied Rule 9(b)'s particularity requirement and, regardless of
the district court's view on that matter, that he should have been
given leave to file a Second Amended Complaint. We review the
granting of a motion to dismiss de novo, United States ex rel.
Gagne v. City of Worcester, 565 F.3d 40, 45 (1st Cir. 2009), and
the denial of a motion to amend for abuse of discretion, United
States ex rel. Kelly v. Novartis Pharms. Corp., 827 F.3d 5, 10
(1st Cir. 2016) (citing United States ex rel. Poteet v. Bahler
Med., Inc., 619 F.3d 104, 116 (1st Cir. 2010)).
4 Cyberonics alternatively argues that the district court also
denied Hagerty's motion because any amendment would have been
futile. Since, as we will explain, the district court's denial
was justified under an undue delay analysis, we decline to consider
the futility of Hagerty's proposed amendments.
- 8 -
A. The FCA and Rule 9(b)
The FCA penalizes those who present, or cause to be
presented, "false or fraudulent claim[s] for payment or approval"
to the federal government. 31 U.S.C. § 3729(a)(1). Thus, fraud
under the FCA has two components: the defendant must submit or
cause the submission of a claim for payment to the government, and
the claim for payment must itself be false or fraudulent. United
States ex rel. Ge v. Takeda Pharm. Co., 737 F.3d 116, 124 (1st
Cir. 2013) ("Because FCA liability attaches only to false claims,
merely alleging facts related to a defendant's alleged misconduct
is not enough. Rather, a complaint based on [the FCA] must
sufficiently establish that false claims were submitted for
government payment as a result of the defendant's alleged
misconduct.") (internal citations omitted).
Federal Rule of Civil Procedure 9(b), meanwhile,
requires that a complaint state these components with
"particularity," meaning relators like Hagerty must allege the
"who, what, when, where, and how of the alleged fraud." Id. at
123 (internal citation and quotation marks omitted). Still, we
have repeatedly emphasized that there is no "checklist of mandatory
requirements" that each allegation in a complaint must meet to
satisfy Rule 9(b), United States ex rel. Karvelas v. Melrose-
Wakefield Hosp., 360 F.3d 220, 233 (1st Cir. 2004), abrogated on
other grounds by Gagne, 565 F.3d at 46 n.7, and that a "somewhat
- 9 -
'more flexible' standard" applies in qui tam actions where the
defendant is alleged to have induced third parties to file false
claims, Kelly, 827 F.3d at 13 (1st Cir. 2016) (quoting United
States ex rel. Duxbury v. Ortho Biotech Prods., L.P., 579 F.3d 13,
29-30 (1st Cir. 2009)).
A relator can meet this more accommodating standard by
"providing 'factual or statistical evidence to strengthen the
inference of fraud beyond possibility' without necessarily
providing details as to each false claim." Ge, 737 F.3d at 123-
24 (quoting Duxbury, 579 F.3d at 29) (emphasis added). Such
evidence generally includes, inter alia, the "'specific medical
providers who allegedly submitted false claims,' the 'rough time
periods, locations, and amounts of the claims,' and 'the specific
government programs to which the claims were made.'" Kelly, 827
F.3d at 13 (quoting Ge, 737 F.3d at 121, 124).
As the district court noted, "the allegations concerning
[Cyberonics' scheme] are unquestionably adequate to survive a
motion to dismiss." United States ex rel. Hagerty v. Cyberonics,
Inc., 95 F. Supp. 3d 240, 264 (D. Mass. 2015). Nonetheless, the
First Amended Complaint's factual and statistical evidence
struggles to connect these allegations with the submission of any
false claims to government programs.
Hagerty compares his complaint to those we deemed
adequate in Duxbury and United States ex rel. Escobar v. Universal
- 10 -
Health Servs., Inc., 780 F.3d 504 (1st Cir. 2015), overruled on
other grounds by 136 S. Ct. 1989 (2016). In Duxbury, the relator
alleged that the defendant-company paid kickbacks to eight named
medical providers, thereby inducing these providers to submit
false claims for reimbursement to Medicare. Duxbury, 579 F.3d at
30. Despite being a "close call," we held that the complaint
satisfied Rule 9(b) because "Duxbury ha[d] identified, as to each
of the eight medical providers (the who), the illegal kickbacks
(the what), the rough time periods and locations (the where and
when), and the filing of the false claims themselves." Id., see
also Ge, 737 F.3d at 124 (noting allegations in Duxbury were
"barely adequate" under Rule 9(b)).
Similarly, in Escobar, we concluded that the relator
satisfied Rule 9(b) by alleging "twenty-seven separate dates on
which claims were submitted in connection with [care provided by
unlicensed and unsupervised personnel], each time including the
relevant billing codes, amount invoiced, and the name of the
[defendant's] staff member who provided the treatment for which
reimbursement was sought." 780 F.3d at 515. Though the
allegations concerned claims made in connection with a single
patient's care, we allowed the complaint's other, more general,
allegations to proceed because they stemmed from a "systematic
failure" to enforce licensure and supervision requirements that
necessarily "infected" other claims with fraud. Id.
- 11 -
The allegations in Hagerty's First Amended Complaint are
neither as specific as those in Duxbury nor as systematic as those
in Escobar. Despite referencing a long list of healthcare
providers who performed and billed for VNS replacement surgeries,
the complaint does not allege whether these providers submitted
reimbursement claims to the government for unreasonable and
medically unnecessary procedures. Likewise, the complaint does
not allege how many false claims these providers purportedly
submitted or how Cyberonics' actions caused their submission. And
though Hagerty identifies several doctors and hospitals with
patients who had VNS replacement surgeries, he does not allege
that any government healthcare program covered these patients or
that any medical provider submitted claims for reimbursement on
their behalf.
Similarly, the First Amended Complaint alleged that
Cyberonics employees tried to contact patients about scheduling
VNS replacement surgeries without first consulting their doctor.
The complaint, however, contains no assertion that these efforts
actually resulted in patients scheduling, doctors performing, or
government healthcare programs reimbursing the contemplated
surgeries. See Kelly, 827 F.3d at 15 (holding that relators failed
to tie their allegations of misconduct to "specific fraudulent
claims for payment"); Ge, 737 F.3d at 124 (rejecting a "per se
rule that if sufficient allegations of misconduct are made, it
- 12 -
necessarily follows that false claims and/or material false
information were filed"). Simply put, we cannot infer, based on
the allegations before us, that Cyberonics' actions "infected"
other VNS reimbursement claims with fraud.
The complaint's most specific allegation comes where
Hagerty states that three healthcare providers, Southbury Training
School, Monson Development Center, and Wrentham Development
Center, had patients who were "seriously disabled" and eligible
for various government healthcare programs, and that the VNS
replacement surgeries conducted on those patients necessarily
resulted in the submission of at least some false reimbursement
claims. But again, without any allegation that the patients were
actually covered by government programs or that certain
replacement procedures conducted on these patients were medically
unnecessary, Hagerty has "[a]t most . . . [only] raise[d] facts .
. . suggest[ing] fraud was possible."5 United States ex rel. Rost
v. Pfizer, Inc., 507 F.3d 720, 733 (1st Cir. 2007), overruled on
other grounds by Allison Engine v. United States ex rel. Sanders,
553 U.S. 662 (2008).
5 Only one patient from these facilities is actually
identified in the complaint: "F.P.," a Medicare-eligible epileptic
whose VNS device was replaced on May 12, 2010. Paralleling the
broader problems with Hagerty's allegations, there is no
indication that F.P. was an actual Medicare recipient, that his
replacement surgery was unnecessary, or that any false claim was
submitted on his behalf.
- 13 -
Fighting an uphill battle, Hagerty supplements his
factual allegations with certain statistical allegations which, he
claims, compel the inference he wants us to recognize. First, the
complaint alleges that a majority of the patients receiving
replacement devices are covered by government healthcare programs
and that approximately half of Cyberonics' revenues came from these
programs. Second, the complaint estimates that there have been
"over 10,000 medically unnecessary and unreasonable VNS device
replacements" since 2007 and that patients covered by government
healthcare programs "account for at least 50-60% of these
unnecessary replacements."
These statements are too broad to be given much weight.
Hagerty does not allege that any particular patient was actually
covered by a government program, provides no basis for his estimate
of 10,000 unnecessary procedures, and does not link Cyberonics'
revenues to these procedures. Viewed individually or as a whole,
Hagerty's "evidence and arguments proceed more by insinuation than
any factual or statistical evidence that would strengthen the
inference of fraud beyond possibility." See Kelly, 827 F.3d at 15
(internal marks omitted). Accordingly, we affirm the district
court's dismissal of Hagerty's First Amended Complaint.
B. Motion to Amend
Hagerty also claims that the district court abused its
discretion when it denied his motion to amend the First Amended
- 14 -
Complaint on the basis of undue delay. Federal Rule of Civil
Procedure 15(a) provides that a party may, in certain
circumstances, amend a pleading without leave of a court.6 In all
other cases, however, a party may only amend its pleadings with
the opposing party's written consent or the court's leave. Fed.
R. Civ. P. 15(a)(2).
Though courts "should freely give leave when justice so
requires," id., amendments may be denied for several reasons,
including "undue delay, bad faith, dilatory motive of the
requesting party, repeated failure to cure deficiencies, and
futility of amendment," Rost, 507 F.3d at 733-34 (citing Foman v.
Davis, 371 U.S. 178, 182 (1962)). As relevant here, undue delay,
on its own, may be enough to justify denying a motion for leave to
amend.7 Calderón-Serra v. Wilmington Trust Co., 715 F.3d 14, 20
6 A party may amend a pleading once as a matter of course
within "21 days after serving it," or "if the pleading is one to
which a responsive pleading is required, 21 days after service of
a responsive pleading or 21 days after service of a motion under
Rule 12(b), (e), or (f), whichever is earlier." Fed. R. Civ. P.
15(a)(1).
7 Hagerty cites to a long list of our decisions, including
Hayes v. New England Millwork Distribs., Inc., 602 F.2d 15, 19
(1st Cir. 1979), and Klunder v. Brown Univ., 778 F.3d 24, 34 (1st
Cir. 2015), which, he claims, requires us to also find that the
delay was prejudicial to the opposing party. Hayes, however, noted
that "[w]hile courts may not deny an amendment solely because of
delay and without consideration of the prejudice to the opposing
party, it is clear that 'undue delay' can be a basis for denial[.]"
602 F.2d at 19 (internal citations omitted). Similarly, although
Klunder states that "[i]n reviewing a district court's decision on
whether or not to grant an amendment, [appellate courts] routinely
focus [their] analysis on the prejudice to the non-moving party,"
- 15 -
(1st Cir. 2013); see also United States ex rel. Wilson v. Bristol-
Myers Squibb, Inc., 750 F.3d 111, 119-20 (1st Cir. 2014). In these
cases, a movant has "[at the very least] the burden of showing
some valid reason for his neglect and delay." Perez v. Hosp.
Damas, Inc., 769 F.3d 800, 802 (1st Cir. 2014) (quoting In re
Lombardo, 755 F.3d 1, 3 (1st Cir. 2014)) (alteration in original).
In assessing whether a movant has carried this burden, courts must
take into account "[w]hat the plaintiff knew or should have known
and what he did or should have done." Leonard v. Parry, 219 F.3d
25, 30 (1st Cir. 2000).
A significant amount of time clearly passed here. See,
e.g., In re Lombardo, 755 F.3d at 3-4 (discussing cases that
imposed on the movant the burden to explain grounds for delay when
the delay was fourteen, fifteen, and seventeen months,
respectively). The district court aptly summarized Hagerty's
listless approach toward amending his complaint as follows:
Hagerty filed his initial complaint on August 8, 2012.
He filed the present action on February 4, 2013. After
Cyberonics filed a motion to dismiss, Hagerty amended
the complaint on May 19, 2014. Cyberonics moved to
dismiss the first amended complaint . . . on June 18,
2014. The Court ruled on that motion on March 31, 2015.
Hagerty did not move for leave to file a second amended
complaint until August 14, 2015. That motion was filed
(1) more than three years after Hagerty filed the initial
lawsuit; (2) more than two and a half years after he
filed the initial complaint . . . ; (3) more than
778 F.3d at 34, its immediate citation to the Hayes language
identified above signifies that we were referring to delay, not
undue delay. Id.
- 16 -
fourteen months after he filed the first amended
complaint; (4) more than thirteen months after
Cyberonics moved to dismiss the first amended complaint;
and (5) more than four months after the Court's
memorandum and order on the motion to dismiss.
United States ex rel. Hagerty v. Cyberonics, Inc., 146 F. Supp. 3d
337, 343-44 (D. Mass. 2015).
Hagerty's proffered explanations for his delay are
twofold. First, Hagerty argues that the only relevant period of
delay was the four months after the granting of the motion to
dismiss and places responsibility for any delay accruing before
the dismissal squarely on the district court. We can easily reject
this argument, however, because nothing prevented Hagerty from
moving for leave to plead any new information once he became aware
of it. Where we have excused delay based on the actions of a
district court, it has been because the district court did not
promptly deal with a motion to amend, not because the district
court took its time evaluating a motion to dismiss. See Farkas v.
Tex. Instruments, Inc., 429 F.2d 849, 851 (1st Cir. 1970). In the
motion to amend cases, the delay is attributable to the district
court because the motion evidences the movant's proactive approach
to addressing known weaknesses in the First Amended Complaint.
Second, Hagerty maintains that he could not have known
or anticipated the deficiencies that would form the basis of the
district court's dismissal of his First Amended Complaint. He
specifically contends that unlike in other cases where the amended
- 17 -
complaints were dismissed due to the plaintiff's lack of diligence,
see Acosta-Mestre v. Hilton Intern. of P.R., Inc., 156 F.3d 49, 53
(1st Cir. 1998), he has shown "care and attentiveness" towards
assuaging the district court's concerns about his complaint. But
Cyberonics' motion to dismiss, filed in June 2014, put Hagerty on
notice of the deficiencies in the complaint, and he made no attempt
to fix these deficiencies until August 2015. See Feliciano-
Hernández v. Pereira-Castillo, 663 F.3d 527, 538 (1st Cir. 2011)
(upholding district court's undue delay determination where motion
to amend was filed "nearly a year after the motion to dismiss was
filed"); ACA Fin. Guaranty Corp. v. Advest, Inc., 512 F.3d 46, 57
(1st Cir. 2008) ("Plaintiffs may not, having the needed
information, deliberately wait in the wings . . . with another
amendment to a complaint should the court hold the first amended
complaint was insufficient. Such an approach would impose
unnecessary costs and inefficiencies on both the courts and party
opponents.").
Thus, we conclude both that Hagerty did not meet his
burden of providing a valid reason for his delay and that the
district court did not abuse its discretion in denying his motion
for leave to amend.
III. Conclusion
The judgment of the district court is AFFIRMED.
- 18 -