Shatish Patel v. Catholic Health Initiative

Case: 18-20395 Document: 00515207622 Page: 1 Date Filed: 11/20/2019

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit

FILED
November 20, 2019
No. 18-20395
Lyle W. Cayce
Clerk
United States of America, ex rel, SHATISH PATEL, Medical Doctor, ex rel.;
HEMALATHA VIJAYAN, Medical Doctor, ex rel.,

Plaintiffs - Appellants

v.

CATHOLIC HEALTH INITIATIVES; ST. LUKE’S HEALTH SYSTEM
CORPORATION; ST. LUKE’S COMMUNITY DEVELOPMENT
CORPORATION-SUGARLAND; DAVID FINE; DAVID KOONTZ; STEPHEN
PICKETT,

Defendants - Appellees

Appeal from the United States District Court
for the Southern District of Texas
USDC No. 4:17-CV-1817

Before JONES, SMITH, and HAYNES, Circuit Judges.
PER CURIAM:*
This case involves a qui tam action brought under the False Claims Act
(“FCA”), 31 U.S.C. §§ 3729–3733. 1 The relators, Shatish Patel and Hemalatha

* Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH
CIR. R. 47.5.4.
1 The claims at issue on appeal all arise under federal law, and therefore subject
matter jurisdiction exists under 28 U.S.C. § 1331. Because Relators timely appealed, we have
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No. 18-20395
Vijayan 2 (“Relators”), are physicians who owned a partnership interest (via the
St. Luke’s Sugar Land Partnership, L.L.P.) in the St. Luke’s Sugar Land
Hospital (the “Hospital”), which was controlled by the St. Luke’s Health
System (the “System”). 3 They sued various defendants over alleged violations
of the FCA involving misrepresentations of the Hospital’s ownership, the Anti-
Kickback Statute (“AKS”), 4 and the Stark Law. 5 They also sued under a Texas
statute. 6 The district court ultimately dismissed the federal claims with
prejudice and the Texas claim without prejudice, declining to exercise
supplemental jurisdiction. We AFFIRM.

I. Background
The district court’s opinion in this case is lengthy and thorough. United
States ex rel. Patel v. Catholic Health Initiatives (Patel II), 312 F. Supp. 3d 584
(S.D. Tex. 2018). Additionally, the events relevant to this case have previously
been the subject of other litigation and appeals. Patel v. St. Luke’s Sugar Land
P’ship (Patel I), 445 S.W.3d 413 (Tex. App.—Houston [1st Dist.] 2013, pet.
denied); Sonwalkar v. St. Luke’s Sugar Land P’ship, 394 S.W.3d 186 (Tex.
App.—Houston [1st Dist.] 2012, no pet.). Accordingly, we write only briefly to
address the issues raised in this appeal.

jurisdiction over the district court’s final decision under 28 U.S.C. § 1291.
The third physician who was part of the district-court case, Wolley Oladut, did not
2

join the appeal.
Previously, forty-nine percent of the partnership was owned by the physicians and
3

fifty-one percent was owned by Defendant St. Luke’s Community Development Corporation-
Sugar Land (“SLCDC-SL”), which was controlled by the System. At some point, Catholic
Health Initiatives became the owner of the System.
4 42 U.S.C. § 1320a-7b(b).
5 Id. § 1395nn.
6 The Texas Medicaid Fraud Prevention Act, TEX. HUM. RES. CODE ANN. §§ 36.001–
.132.
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The Hospital was originally structured with individual doctors,
including Relators, as partners. When a provision of the Affordable Care Act
(“ACA”) prevented the Hospital from expanding while preserving physician
ownership, 7 the System made offers to rescind Relators’ and other physicians’
partnership interests pursuant to the Texas Securities Act (“TSA”). The TSA
allows rescission for the original price paid for a security, plus interest, in
exchange for a release of potential liability under the TSA. TEX. REV. CIV.
STAT. ANN. art. 581-33.
Relators refused to accept rescission and, after multiple lawsuits in state
court, sued the System under the FCA. They have three theories of liability
under the FCA. The first two rely on the argument that there was no risk of
TSA liability, and the rescission transactions were therefore improper.
Consequently, Relators argue that (1) the rescission violated the AKS because
it was really designed to induce Medicare referrals, and (2) the rescission
violated the Stark Law because it constituted an improper financial
relationship between an entity and physicians. Proven violations of these
statutes can support liability under the FCA. 8 Relators’ final federal claim is
that, by stating to the government that ownership of the Hospital passed from
the original partnership to its management entity by operation of law (without

7The relevant provision, which the ACA added to the Stark Law, is 42 U.S.C.
§ 1395nn(i)(1)(B).
8 When “the government has conditioned payment of a claim upon a claimant’s
certification of compliance with . . . a statute or regulation, a claimant submits a false or
fraudulent claim when he or she falsely certifies compliance with that statute or regulation.”
United States ex rel. Thompson v. Columbia/HCA Healthcare Corp., 125 F.3d 899, 902 (5th
Cir. 1997). Relators alleged in their complaint that the Hospital certified compliance with
the AKS and the Stark Law in their Medicare filings and that reimbursement was
conditioned upon these certifications. Additionally, the AKS specifically provides that “a
claim that includes items or services resulting from a violation of this section constitutes a
false or fraudulent claim for purposes of subchapter III of chapter 37 of Title 31” (the FCA).
42 U.S.C. § 1320a-7b(g).
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a winding-up period)—a theory that was held to be incorrect by a Texas Court
of Appeals—the System made a material misrepresentation and thereby
violated the FCA.

II. Standard of Review
Intermixed with the Federal Rule of Civil Procedure 12(b)(6) arguments
are arguments that Relators’ pleadings had to meet the higher pleading
standards of Federal Rule of Civil Procedure 9(b). We review dismissals under
Rules 12(b)(6) and 9(b) de novo. United States ex rel. Grubbs v. Kanneganti,
565 F.3d 180, 185 (5th Cir. 2009). A plaintiff must satisfy Rule 12(b)(6) by
alleging “enough facts to state a claim to relief that is plausible on its face.”
Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). “We accept all well-
pleaded factual allegations as true, and we interpret the complaint in the light
most favorable to the plaintiff.” United States ex rel. Steury v. Cardinal Health,
Inc., 625 F.3d 262, 266 (5th Cir. 2010). For a claim under the FCA, a plaintiff
must also “state with particularity the circumstances constituting fraud or
mistake.” Grubbs, 565 F.3d at 185 (internal quotation marks omitted) (quoting
FED. R. CIV. P. 9(b)). Relators also contend that, if they failed to meet the
pleading standards as to their claims, they should have been granted leave to
amend under Federal Rule of Civil Procedure 15. We review denials of leave
to amend a complaint for abuse of discretion. Ashe v. Corley, 992 F.2d 540, 542
(5th Cir. 1993). We now turn to the specific issues on appeal.

III. Discussion

AKS Claims
Relators pleaded that “the System and SLCDC-SL knowingly and
willfully forced the [p]artnership to offer statutory rescission to, among other
things, induce the physician partners to continue referring services for which
a Federal healthcare program may make payment in whole or in part.” In

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other words, because, according to Relators, the relevant defendants feigned a
need to apply the TSA and award rescission payments higher than the “actual
value” of the shares to buy out the physicians, those payments constituted
kickbacks for referrals in violation of the AKS. As the district court correctly
noted, however, Relators failed to tie one with the other: “If the AKS and FCA
are interpreted to sanction this conduct, it is not clear what the System could
have done to respond to Congress’s new discouragement of physician
ownership while complying with health care fraud statutes.” Patel II, 312 F.
Supp. 3d at 595. We agree with the district court’s thorough analysis 9 of
Relators’ arguments. In the end, the defendants had a reasonable basis to
utilize the TSA approach (not the least of which was Relators’ own state-court
lawsuit) and nothing ties the allegedly high payment for physician shares to
any inducement of referrals. Id. at 594–99. We affirm the dismissal of the
AKS-based claims.

Stark Law Claims
The Stark Law prohibits a physician from making referrals for health
services to an entity with which he or she has a financial relationship. 42
U.S.C. § 1395nn(a)(1)(A). In turn, the entity may not seek reimbursement
from a federal health care program arising from a referral by a physician who
has a financial relationship with the entity. Id. § 1395nn(a)(1)(B). However,
an exception exists for an “isolated financial transaction” between an entity

9 Relators argued that half the potential TSA claims were subject to a statute of
limitations defense by the time of the defendants’ rescission efforts and, therefore, that the
“fear of claims” argument for the rescission process was untrue. We agree with the district
court’s analysis of that claim as it relates to claims under the TSA. The district court also
discussed the potential for common law claims. To the extent that the district court intended
this discussion to explain that the defendants were also seeking to release non-TSA claims
via the rescission, see 312 F. Supp. 3d at 597–98, we agree with that analysis and limit our
agreement with that discussion to that conclusion.
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and the physician. Id. § 1395nn(e)(6). One requirement of this exception—
“the lone leg on which Relators’ claims stand,” Patel II, 312 F. Supp. 3d at 600—
is that the remuneration for the transaction reflect the “fair market value” of
the transaction. 42 C.F.R. § 411.357(f)(i). This argument once again
implicates the question of whether there was a true threat of litigation that
needed to be addressed via the TSA rescission mechanism. The district court
analyzed this question under the Stark Law claims in a manner similar to that
of the AKS claims. Patel II, 312 F. Supp. 3d at 599–600. Under the same
analysis we applied to the AKS claims, we agree.

Allegations of False Claims of Hospital Ownership
Finally, we address Relators’ allegation that the System made false
claims in violation of FCA § 3729(a)(1)(B). In relevant part, the FCA prohibits
“knowingly mak[ing] . . . a false record or statement material to a false or
fraudulent claim.” 31 U.S.C. § 3729(a)(1)(B). The definitions of “knowingly”
and “material” are as follows:
The Act’s scienter requirement defines “knowing” and
“knowingly” to mean that a person has “actual
knowledge of the information,” “acts in deliberate
ignorance of the truth or falsity of the information,” or
“acts in reckless disregard of the truth or falsity of the
information.” And the Act defines “material” to mean
“having a natural tendency to influence, or be capable
of influencing, the payment or receipt of money or
property.”
Univ. Health Svcs., Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989, 1996
(2016) (citations omitted) (first quoting 31 U.S.C. § 3729(b)(1)(A); then quoting
31 U.S.C. § 3729(b)(4)).
The essence of Relators’ claim is that, following the purchase of all but

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four physicians’ 10 shares and the termination of those four shares after a
missed capital call, the System alleged that SLCDC-SL now owned the entirety
of the Hospital. Relators allege that the System’s own counsel indicated that
such ownership conversion was not automatic and later appellate decisions in
the state-court litigation suggested the same. In Sonwalkar, decided in August
2012, the court granted a temporary injunction to two physician partners,
holding that they had a probable right to relief because “the capital call was
disallowed” and therefore the physicians’ “interests could not be terminated for
failure to pay the capital call.” 394 S.W.3d at 203. Then, in November 2013,
the same court held that the ownership of the Hospital did not automatically
transfer from the partnership to SLCDC-SL. Patel I, 445 S.W.3d at 422–23.
Notably, the court did not require the System “to reverse any of its actions
predicated on termination of the physicians’ partnership interests” because the
court was not requested to do so, but it held that such a request would not be
moot. Id. at 423. Thus, Relators contend, the continuing claim of changed
ownership represented a “false claim.”
The district court addressed the issue of whether the falsity claim was
directed to a “legal falsity” or “factual falsity.” Patel II, 312 F. Supp. 3d at 601–
05; see United States ex rel. Ruscher v. Omnicare, Inc., 663 F. App’x 368, 373
(5th Cir. 2016) (per curiam) (explaining the difference); see also Hutcheson v.
Blackstone Med., Inc., 647 F.3d 377, 385–86 (1st Cir. 2011) (criticizing the
distinction). It is unnecessary to parse through these distinctions because we
conclude that the alleged falsity, under the circumstances of this case, was not
material.

10 In addition to the three physicians who sued in the district court in this case, Dr.
Subodh Sonwalkar also refused the rescission offering. He participated in the state-court
litigation but not the federal proceeding on appeal here.
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In a unanimous decision in Escobar, the Supreme Court clarified the
bounds of the materiality requirement. The Court held:
A misrepresentation cannot be deemed material
merely because the Government designates
compliance with a particular statutory, regulatory, or
contractual requirement as a condition of payment.
Nor is it sufficient for a finding of materiality that the
Government would have the option to decline to pay if
it knew of the defendant’s noncompliance.
Materiality, in addition, cannot be found where
noncompliance is minor or insubstantial.
Escobar, 136 S. Ct. at 2003. A violation is not material just because “the
defendant knows that the Government would be entitled to refuse payment
were it aware of the violation.” Id. at 2004. In other words, “the Government’s
decision to expressly identify a provision as a condition of payment is relevant,
but not automatically dispositive.” Id. at 2003. To use the Court’s example,
just because the government might require contractors to use American-made
staplers does not mean that it would be a material misrepresentation under
the FCA to knowingly use foreign-made ones. See id. at 2004.
Under the Escobar standard, proof of materiality might include
“evidence that the defendant knows that the Government consistently refuses
to pay claims” involving the type of misrepresentation at issue. Id. at 2003.
But, crucially, “if the Government regularly pays a particular type of claim
despite actual knowledge that certain requirements were violated, and has
signaled no change in position, that is strong evidence that the requirements
are not material.” Id. at 2003–04.
As the district court correctly stated, “the Supreme Court understands
materiality to turn on whether the government would pay the claim or not if it
knew of the claimant’s violation.” Patel II, 312 F. Supp. 3d at 605. “Nothing
in Relators’ filings suggests that the government would stop the flow of funds

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to this hospital if it knew the truth of its ownership; Relators’ allegations
concern only the direction in which they think the funds should flow.” Id.
Relators do not allege that the government “consistently refuses to pay claims”
that contain an incorrect statement concerning the ownership of a hospital.
See Escobar, 136 S. Ct. at 2003. Instead, the complaint specifies that the
System has continued to submit claims and receive reimbursement, even after
a court determined that the entity designated as owner of the Hospital was not
really the owner. This suggests that the government does not care who the
“rightful” owner of the Hospital is, and Relators have not alleged facts to the
contrary. Importantly, nothing about the alleged misrepresentation here
suggests that goods or services were falsely certified or improperly provided.

IV. Conclusion
Relators failed to state a plausible claim for relief under the FCA. We
therefore AFFIRM the district court’s dismissal of Relators’ federal claims with
prejudice and their Texas claim without prejudice. We also reject Relators’
leave-to-amend argument for substantially the same reasons as the district
court. See Patel II, 312 F. Supp. 3d at 607.

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