United States Ex Rel. Williams v. Renal Care Group, Inc.

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
File Name: 12a0355p.06

UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________

X
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UNITED STATES OF AMERICA, ex rel., JULIE

Plaintiffs-Appellees, --
WILLIAMS,

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No. 11-5779
JOHN MARTINEZ, M.D.,
Plaintiff, ,>
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v.
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RENAL CARE GROUP, INC.; RENAL CARE

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GROUP SUPPLY COMPANY; FRENSENIUS

Defendants-Appellants. -
MEDICAL CARE HOLDINGS, INC.,
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Appeal from the United States District Court
for the Middle District of Tennessee at Nashville.
No. 3:09-cv-738—William J. Haynes, Jr., District Judge.
Argued: July 25, 2012
Decided and Filed: October 5, 2012
Before: COLE and COOK, Circuit Judges; ROSEN, Chief District Judge.*

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COUNSEL
ARGUED: James F. Bennett, DOWD BENNETT, LLP, St. Louis, Missouri, for
Appellants. Michael P. Abate, UNITED STATES DEPARTMENT OF JUSTICE,
Washington, D.C., for Appellees. ON BRIEF: James F. Bennett, Megan S. Heinsz,
DOWD BENNETT, LLP, St. Louis, Missouri, Michael L. Dagley, Matthew M. Curley,
BASS BERRY & SIMS, Nashville, Tennessee, for Appellants. Michael P. Abate,
Michael S. Raab, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C.,
for Appellees.
COLE, J., delivered the opinion of the court in which, COOK, J., and ROSEN,
C. D.J., joined. ROSEN, C. D.J. (pp. 22–25), delivered a separate concurring opinion.
_________________

*
The Honorable Gerald E. Rosen, Chief Judge of the United States District Court for the Eastern
District of Michigan, sitting by designation.

1
No. 11-5779 United States, et al. v. Renal Care Group, et al. Page 2

OPINION
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COLE, Circuit Judge. Renal Care Group, Inc., a dialysis provider, created a
wholly-owned subsidiary to take advantage of loopholes in the Medicare regulatory
scheme that would permit it to increase profits. The United States, by and through its
relators, brought suit against Renal Care Group, its subsidiary, and its successor, alleging
that such actions constituted a number of False Claims Act violations. The district court
granted summary judgment in favor of the United States as to the main claim, Count
One—the only claim upon which damages were sought—and then proceeded to enter
summary judgment as to the ancillary claims as well, though without explanation. For
the reasons set forth below, we REVERSE the district court’s judgments as to Counts
One and Two, and GRANT summary judgment on those counts in favor of the
defendants. Further, we REVERSE the district court’s judgments as to all remaining
counts and REMAND for proceedings consistent with this opinion, but DENY the
defendants’ motion for reassignment of this case to another district judge.

I. BACKGROUND

A. Factual Background

Renal Care Group, Inc. (RCG) was, for all times relevant to the instant case, the
parent company of Renal Care Group Supply Company (RCGSC). Fresenius Medical
Care Holdings, Inc., (Fresenius) is the successor-in-interest to both RCG and RCGSC.
RCG provided dialysis to patients with end-stage renal disease (ESRD) at more than
260 RCG dialysis facilities, in addition to providing dialysis supplies and services to
home dialysis patients. RCGSC, meanwhile, supplied only dialysis equipment to home
dialysis patients. Both entities submitted claims for payment for these services to
Medicare.
No. 11-5779 United States, et al. v. Renal Care Group, et al. Page 3

1. End-stage renal disease and Medicare

ESRD occurs when the kidneys are no longer able to function at a level needed
for daily life because they are unable to remove waste and excess water from the body.
Persons suffering from ESRD must undergo some form of kidney disease treatment,
which may include either hemodialysis or peritoneal dialysis. Patients undergoing
hemodialysis use a machine that removes blood from the body, runs it through a filter,
and then returns the blood to the body. In peritoneal dialysis, a dialysis solution travels
through a catheter into a patient’s abdomen and draws wastes, chemicals, and extra water
from blood vessels in the peritoneal membrane. The solution is then removed, and the
process repeated. There are two types of peritoneal dialysis: continuous ambulatory
peritoneal dialysis (CAPD), which requires no machine, and continuous cycler-assisted
peritoneal dialysis (CCPD), in which a machine called a “cycler” fills and empties the
abdomen while the patient sleeps.

In 1972, Congress expanded Medicare to provide insurance coverage for patients
suffering from ESRD, regardless of their age. Pub. L. No. 92-603, § 2991, 86 Stat. 1329,
1463-64 (1972). In 1978, citing a need to lower costs, Congress amended the program
to permit Medicare to reimburse dialysis facilities for the cost of home dialysis
equipment. Pub. L. No. 95-292, § 2, 92 Stat. 307, 308 (1978). Initially, all services,
including home dialysis, were reimbursed at a uniform composite weighted payment.
Pub. L. No. 97-35, § 2145(a), 95 Stat. 357, 799-800 (1981). This reimbursement rate is
known as “Method I” reimbursement.

The uniform Method I reimbursement rate did not apply to independent
companies that provided only equipment and supplies (but not services) directly to home
dialysis patients. Those companies were reimbursed under a “Method II” protocol,
whereby payment is made on a “fee-for-service basis, which is the reasonable charge
method used for [Medicare] Part B services.” 57 Fed. Reg. 54,179 (Nov. 17, 1992).
Method II reimbursements eventually became more expensive than Method I
reimbursements. See H.R. Conf. Rep. No. 101-386, reprinted in 1989 U.S.C.C.A.N.
3018, 3429.
No. 11-5779 United States, et al. v. Renal Care Group, et al. Page 4

Congress eventually capped Method II payments at the Method I rate, except for
payments for supplies for CCPD treatments, which were capped at 130% of the Method
I rate. 42 U.S.C. § 1395rr(b)(7).

Congress further restricted Method II reimbursements with 42 U.S.C.
§ 1395rr(b)(4)(B), which permits such reimbursements only “to a supplier of home
dialysis supplies and equipment furnished to a patient whose self-care home dialysis is
not under the direct supervision of an approved provider of services or renal dialysis
facility . . . .” (emphasis added). This was clarified in 1994, when Congress required
that Method II payments may only go to an entity that is not “a provider of services [or]
a renal dialysis facility . . . .” 42 U.S.C. § 1395rr(b)(1); see also 42 C.F.R. § 400.202
(defining a supplier as “a physician or other practitioner, or an entity other than a
provider, that furnishes health care services under Medicare”). Such an entity must
obtain a supplier number before it can bill Medicare for supplies and equipment,
42 U.S.C. § 1395m(j)(1)(A), and may only be reimbursed if it is “not a Medicare
approved dialysis facility,” 42 C.F.R. § 414.330(a)(2)(i). In 2010, the Secretary for
Health and Human Services eliminated Method II reimbursements altogether. 75 Fed.
Reg. 49,030, 49,058 (Aug. 12, 2010).

2. Conversion of RCG patients to RCGSC patients

RCGSC had its basis in a 1997 e-mail written by Russell Dimmitt, RCG’s
director of material management, which compared Method I and Method II
reimbursements. The e-mail made clear that Method II reimbursements were
substantially higher, and would result in less overhead. A subsequent memorandum to
RCG associates directed them to “convert CCPD Medicare patients to method 2.” The
memorandum also instructed associates to place new CCPD patients on Method II, even
those who might initially be CAPD patients (which had an equivalent reimbursement
rate for Method I CAPD patients), because the companies would “plan to convert them
later.”

RCGSC was formed in 1998 as a wholly-owned subsidiary of RCG, and RCG
employees, officers, and directors all held key roles in RCGSC’s corporate structure.
No. 11-5779 United States, et al. v. Renal Care Group, et al. Page 5

Gary Brukardt, RCG’s chief executive officer, was also RCGSC’s president. The
companies shared office space, payroll, insurance benefits, contracts, and human
resource services. Money deposited into RCGSC’s account was swept into RCG’s
corporate account nightly, RCG’s accounts payable department paid RCGSC’s supply
vendors, and RCGSC’s director could not spend RCGSC’s funds. All RCGSC
employees were managed or directed by RCG employees. From 1999 to 2005, RCG and
RCGSC received close to eighty-four million dollars in Medicare Method
II reimbursements, comprising approximately seventy-seven percent of all Medicare
reimbursements the two entities received.

On October 26, 1998, David Jones, RCG’s chief operating officer for RCG’s
south central region, expressed his hesitation to convert Method I patients into Method
II patients in an e-mail to Dimmitt. Jones wrote that such a plan “is not in the best
interests of our patients. . . . I do not think it is legal to force our patients into a Method
II arrangement simply to increase profits of our Company. I do not wish to go to
jail . . . .” Jones left the company in 1999.

3. RCG’s attempts for clarification

Around the time that Jones told Dimmitt that he believed RCG’s plan was illegal,
RCG itself began inquiring into the plan’s legality. On October 28, 1998, Dawn
Alexander, outside counsel for RCG, prepared a memo on “Method I v. Method
II Issues.” Alexander noted that a joint entity between a dialysis facility, like RCG, and
another party could not be eligible for Method II reimbursements. She reserved
judgment, however, on whether a wholly-owned subsidiary, like RCGSC, could do so,
but noted that the Office of Inspector General (OIG) had issued a fraud alert concerning
the use of shell corporations to maximize Medicare reimbursements. The OIG cautioned
that hallmarks of such shell corporations could be that the parent corporation owned the
capital equipment, and that the parent corporation was responsible for all day-to-day
operations of the shell.

Alexander also sought clarification from Gene Richter, a federal official with the
Health Care Financing Administration (HCFA), on the legality of establishing an entity
No. 11-5779 United States, et al. v. Renal Care Group, et al. Page 6

like RCGSC (though never mentioning either RCG or RCGSC). In a letter to Richter,
Alexander referred to a previous conversation with Richter in which Alexander asked
whether “a dialysis facility’s wholly-owned subsidiary supply company could act as a
Method II supplier,” and noted that Richter’s interpretation was that “as long as the
wholly owned supply company has its own provider number and is established as a
separate entity, it may act as a supplier for Method II patients [legally].” Richter’s
justification for this interpretation, Alexander memorialized, was “that there is now a
payment cap on Method II payments that did not exist in the past.” Alexander closed
the letter by asking for confirmation that this understanding was correct. She received
no response.

RCGSC underwent a Medicare site investigation in 2000 to ensure compliance
with regulatory standards, and no referral of improper operations was made.
Additionally, other supply companies, such as St. Louis Supply Company, Midwest
Renal Support, and Dialysis Associates LLC, made clear in their Medicare disclosures
that RCG either owned them outright or managed their day-to-day operations. RCGSC
repeatedly disclosed to Medicare that it was owned by “RCGI” or RCG, and that it
shared personnel, contracts, and insurance policies with RCG. RCG eventually closed
RCGSC upon its merger with Fresenius in 2005.

B. Procedural Background

Also in 2005, two former RCG employees, Julie Williams and Dr. John Martinez
(“the relators”), filed a qui tam action under the False Claims Act, 31 U.S.C. §§ 3729-33,
against RCG and RCGSC in the United States District Court for the Eastern District of
Missouri. The relators contended that RCGSC “is not a legitimate and independent
durable medical equipment supply company,” but a “billing conduit” used to unlawfully
inflate Medicare reimbursements. Two years later, the United States intervened in the
case, and the relators’ claim was voluntarily dismissed.

The United States alleged that the defendants violated the False Claims Act by
submitting claims while knowing that RCGSC was a sham corporation created for the
sole purpose of increasing Medicare reimbursements (Count One); while knowing that
No. 11-5779 United States, et al. v. Renal Care Group, et al. Page 7

RCGSC was not in compliance with Medicare rules and regulations (Count Two); while
knowing that RCGSC was misleading patients over their right to choose between
Method I and Method II reimbursements (Count Three); and for facility support charges
for services rendered to home dialysis patients who had selected Method II
reimbursements (Count Four). The United States also sought recovery under common
law theories of payment by mistake (Count Five) and unjust enrichment (Count Six).
The district court denied the defendants’ affirmative defenses of estoppel, waiver, and
laches, noting that the government does not “waive a defendant’s liability for false
claims simply due to the government’s knowledge of the circumstances.” The
defendants thereafter moved to transfer the case to the Middle District of Tennessee in
the interests of justice, which was granted.

1. The Alexander letter

During discovery, the defendants sought evidence related to whether
Medicare/Centers for Medicare and Medicaid Services (CMS) was aware of the
RCG/RCGSC relationship. As part of this effort, they requested evidence related to
CMS’s consideration of Alexander’s October 1998 letter to Richter. In September 2008,
the United States denied that it was in possession of the letter. Richter also testified that
the conversation described in the letter never occurred, and that he was positive that he
had never received the letter.

In April 2009, a few weeks before the deadline for completion of all discovery,
the United States informed defense counsel that responsive documents may have been
inadvertently archived. Leila Carp, an attorney in the Office of General Counsel of the
United States Department of Health and Human Services (HHS), had been asked by an
HHS employee for assistance in drafting a response to the Alexander letter. Carp did so,
and then archived the requested materials. The United States sent a letter explaining this
to defense counsel and included a copy of the Alexander letter with a handwritten
annotation in the corner reading, “assign to: Gene,” as well as a privilege log indicating
that a “[d]raft letter to Dawn Alexander discussing Method II” was being withheld for
No. 11-5779 United States, et al. v. Renal Care Group, et al. Page 8

“DP, AC.” “DP” and “AC” stand for “deliberative process” and “attorney-client”
privilege, respectively.

The defendants moved the district court to compel the United States to turn over
the documents, as well as to provide unredacted versions of related documents that had
already been provided. The defendants also moved the district court to impose sanctions
on the United States for maintaining “for more than two years that Richter (a) did not
recall having the conversation with Alexander and (b) did not receive the confirming
letter sent by [Alexander].” The United States opposed the motion, contending that it
“made good faith efforts to satisfy [its] discovery obligations[,] did not make false
discovery responses, offer false deposition testimony, or coerce a partial waiver of the
attorney client privilege.” The district court denied both the motion to compel and the
motion for sanctions without explanation.

2. The Initial Grant of Summary Judgment

Immediately prior to the case being transferred, the United States moved for
partial summary judgment, but only as to the issues of falsity and materiality, two of the
four elements of Count One (violating the False Claims Act by submitting claims to
Medicare while knowing that RCGSC was a sham corporation), as well as liability under
Count Six (the unjust enrichment claim). The United States noted that granting the
motion would “streamline and greatly simplify the issues for trial, focusing the fact-
finder on the key issues[,] defendants’ knowledge under the FCA and the scope of any
remedy to be awarded under Counts I and VI.” The defendants also filed a motion for
summary judgment, but as to all counts.

The district court granted the government’s motion and denied the defendants’
motion (“the March 2010 order”). It noted that the Defendants acted with “reckless
disregard” of relevant Medicare statutes and regulations, and that in doing so they were
unjustly enriched. It then adopted the United States’s damages calculation and noted
that it is “unnecessary to consider the United States’[s] other claims.”
No. 11-5779 United States, et al. v. Renal Care Group, et al. Page 9

The defendants promptly appealed this and eleven other orders to this Court. The
United States sought an indicative ruling from the district court clarifying, inter alia,
whether the partial grant of summary judgment was in fact a total grant of summary
judgment. In its ruling (“the June 2010 order”), the district court made clear that, “based
on undisputed facts,” it decided the issue of knowledge (an element of a False Claims
Act allegation), even though the United States only sought summary judgment as to the
issues of materiality and falsity in Count One. And, although the defendants had not
discussed the issue of knowledge in their response to the United States’s motion for
summary judgment, the district court noted that by virtue of their own motion for
summary judgment, the defendants “were on actual notice to come forth with all of their
proof.” The district court also made clear that it “would have also granted summary
judgment on the United States’s claims in Counts 2 through 5.”

This Court denied the defendants’ appeal because “the March [2010] order does
not resolve all claims pending in this action, [so] the order is not appealable as a final
order . . . .” United States ex rel. Williams et al. v. Renal Care Group et al., No. 10-
5327/5746 (6th Cir. Sept. 23, 2010). On remand, the United States requested an award
under Count One of $105,898,930 and a grant of summary judgment as to Counts Two
through Five. The district court granted that motion, but also reconsidered its previous
damages calculations (“the May 2011” order). It clarified that “the United States seeks
a judgment on the merits of all of its claims, but only an award of damages and penalties
on its FCA claims in count one of its amended complaint.” The award included
$12,957,864 on Count One, which, because it was a False Claims Act liability, was
trebled for a total damage award of $38,873,592. Additionally, the district court granted
statutory penalties of $43,769,000 based on its determination that the defendants
“admitted 3979 patients to whom equipment was provided under the Method II program
and the $11,000 statutory penalty standard” under the False Claims Act. Thus, the total
award equaled $82,642,592.

The United States notified the district court that it did not intend to seek a higher
amount of damages. The district court then issued another indicative ruling, noting that
No. 11-5779 United States, et al. v. Renal Care Group, et al. Page 10

the March 2010 order “was a final judgment awarding damages on count I,” and the May
2011 order “awarded the United States judgment against the Defendants on the
remaining counts II-VI and awarded damages.” The defendants timely appealed
fourteen of the district court’s orders to this Court.

II. ANALYSIS

A. Discovery Disputes

The defendants appeal two of the district court’s discovery rulings. First, they
contend that the district court erred in failing to issue sanctions against the United States
over the Alexander letter/Richter response. Second, they contend that the documents
protected by the deliberative process privilege should have been produced. We review
the district court’s rulings on these discovery disputes for an abuse of discretion.
Bentkowski v. Scene Magazine, 637 F.3d 689, 696 (6th Cir. 2011). “[A]n abuse of
discretion occurs when (1) the district court’s decision is based on an erroneous
conclusion of law, (2) the district court’s findings are clearly erroneous, or (3) the
district court’s decision is clearly unreasonable, arbitrary or fanciful.” Tisdale v. Fed.
Express Corp., 415 F.3d 516, 525 (6th Cir. 2005) (alterations and quotations omitted).

1. The Alexander letter

The defendants’ motion for sanctions had been premised on a number of issues
surrounding the Alexander letter and CMS officials’ response to it. These included the
filing of interrogatories and document request responses that contained false information,
as well as the testimony of Richter, who stated under oath that he was positive that the
exchange with Alexander had never taken place. In their motion, the defendants
requested the dismissal of the entire action as sanction, but did not indicate whether the
sanctions should be awarded pursuant to any particular Federal Rule of Civil Procedure
or under the district court’s inherent authority. The district court denied the defendants’
motion for sanctions without discussion.

Factors to consider in determining whether the district court abused its discretion
in failing to award sanctions include “prejudice resulting from the discovery abuse,
No. 11-5779 United States, et al. v. Renal Care Group, et al. Page 11

whether the noncooperating party was warned that violations would result in sanctions,
and whether the court considered less drastic sanctions.” Id. Two of the three factors
outlined in Tisdale are at issue here and weigh in the defendants’ favor. First, Richter’s
false testimony and the United States’s late turnover of the Alexander letter prejudiced
the defendants’ ability to meaningfully depose Richter, which would have assisted in
their efforts to prove that they were not in reckless disregard of the truth of their requests
for payment. Second, although the defendants requested particularly strident
sanctions—the dismissal of the complaint with prejudice—they also requested the
“intermediate, interim relief” of “compelling Richter to appear for re-deposition at the
government’s expense” and “precluding [the United States] from enlarging upon the
waiver of Defendants’ privileges.” Although the United States contends that no
prejudice resulted because “the alleged conversation with Richter was not even the
primary basis for the lawyers’ advice to [the defendants],” such a position is far too
reliant on questionable inferences drawn from out-of-context statements by Alexander.

We have previously remanded close questions regarding a motion for sanctions
if the district court’s denial of sanctions lacks explanation, Moross Ltd. P’ship v.
Fleckenstein Capital, Inc., 466 F.3d 508, 519-20 (6th Cir. 2006), and do so here. This
issue, of course, may become moot should the defendants not seek to depose Richter
again; assuming otherwise, their request to do so should be granted.

2. Documents protected by deliberative process

The defendants requested documents related to CMS’s interpretation of the
relevant Medicare provisions and its knowledge of industry practice. The United States
refused, submitting instead a privilege log showing that the documents were protected
by the deliberative process privilege. The district court denied the defendants’ motion
to compel the production of 323 documents, stating that “the materials are both
predecisional and deliberative” and that “[i]n the absence of a showing that the privilege
is claimed in error or in bad faith, no in camera review is warranted.”

The deliberative process privilege, a carve-out of the Freedom of Information Act
(FOIA), 5 U.S.C. § 552, aims to protect documents that are both “predecisional” and
No. 11-5779 United States, et al. v. Renal Care Group, et al. Page 12

“deliberative.” Norwood v. FAA, 993 F.2d 570, 576 (6th Cir. 1993). “A document is
predecisional when it is received by the decisionmaker on the subject of the decision
prior to the time the decision is made, and deliberative when it reflects the give-and-take
of the consultative process.” Id. (quotation marks and alterations omitted). The
privilege extends when “the disclosure of materials would expose an agency’s
decisionmaking process in such a way as to discourage candid discussion within the
agency and thereby undermine the agency’s ability to perform its functions.” Id. at 577
(quotation marks omitted). Purely factual and investigative matters that are severable
without compromising the confidentiality of other documents do not enjoy the privilege.
Id.

We have previously held that the district court must be aware of “how each
document fits into the deliberative process” and whether it is an “essential element of
that process . . . .” Parke, Davis & Co. v. Califano, 623 F.2d 1, 6 (6th Cir. 1980). Given
that FOIA encourages complete disclosure, the privilege may only be invoked with
specificity and “detailed explanations,” and the burden lies with the agency to prove that
disclosure would create a chilling effect. Id. In camera review may be undertaken by
the district court after consideration of judicial economy, agency bad faith, strong public
interest, and the parties’ wishes. Rugiero v. U.S. Dep’t of Justice, 257 F.3d 534, 543-44
(6th Cir. 2001). “This circuit, however, encourages use of in camera review sparingly,
when no other procedure allows review of the agency’s response to a FOIA request.”
Id. at 544. One such alternative procedure is a detailed affidavit, which is entitled to a
presumption of good faith. Id. The affidavit is sufficient if it describes “the content of
the material withheld and adequately states its grounds for nondisclosure, and if those
grounds are reasonable and consistent with the applicable law . . . .” Id.

The United States provided an eight-paragraph listing of the documents
contained in the privilege log, as well as declarations and testimony from government
officials employed by the Office of Inspector General. The affiants do not discuss each
of the 323 documents individually, but place them in categories, and then discuss why
each category is covered by the deliberative process privilege. Total materials submitted
No. 11-5779 United States, et al. v. Renal Care Group, et al. Page 13

in defense of the privilege’s assertion include more than sixty pages of deposition
testimony, and thirty pages of affiant declarations . The materials covered solely by the
deliberative process privilege (and not also covered by attorney work product or other
privileges) include HHS e-mails on agency comments and clearance of OIG draft
reports, e-mails on a draft of an agency’s report, e-mails comprising suggestions on a
draft OIG report, and correspondence on a draft ESRD publication. The affiants’
declarations, which carry a presumption of good faith, explain the nature of the
documents, how disclosure would affect the agency process, and are not blanket
assertions. The district court did not abuse its discretion in denying the defendants’
motion to compel.

B. Count One

The complaint against the defendants centers around RCGSC’s requests for
Method II reimbursements. A number of other actions were also alleged to be false
claims violations, though there is little in the way of factual development that provides
us with a basis to affirm or reverse the district court’s decisions on those claims. The
United States made clear to the district court that it would not seek damages under those
ancillary counts if the defendants were liable under Count One, and the district court’s
damages calculations were based entirely on the conduct alleged under Count One of the
complaint.

For a defendant to be liable under the False Claims Act, it must knowingly
present, or cause to be presented, “a false or fraudulent claim for payment or approval.”
31 U.S.C. § 3729(a)(1)(A). Liability does not require proof of specific intent to defraud,
31 U.S.C. § 3729(b)(1)(B), but does require that the falsity be material to the claim,
United States ex rel. A+ Homecare, Inc. v. Medshares Mgmt. Grp. Inc., 400 F.3d 428,
444 (6th Cir. 2005). The defendants put forth two distinct bases for their position that
their actions do not constitute False Claims Act violations. First, they contend that the
United States’s interpretation of the federal laws and regulations at issue is erroneous,
and that the submitted reimbursements were not in fact false. Second, they contend that
even if the claims technically were false, the statutory guidance is ambiguous, such that
No. 11-5779 United States, et al. v. Renal Care Group, et al. Page 14

they did not act with the requisite knowledge to be held liable under the False Claims
Act. We address both in turn.

1. Falsity

The district court’s March 2010 order provides minimal insight into whether a
separately incorporated entity with its own Medicare supplier number was an entity
eligible for Method II reimbursements. After conducting a lengthy inquiry into the
origins of Medicare’s regulations for Method II reimbursements, the district court
concluded that “RCG’s creation, operation and control of RCGSC was to receive the
higher Method II payments.” The district court did not, however, articulate any reason
as to why this was inherently improper. Indeed, it stated that Congress passed relevant
Medicare regulations that would reimburse “legitimate supply companies,” but the
statute at issue in that discussion, 42 U.S.C. § 1395rr(b)(1)(B), highlights only that home
dialysis supply companies are eligible for Medicare reimbursement.

The United States’s argument boils down to this: dialysis facilities may not seek
Method II reimbursements, and RCGSC was an alter ego of RCG, a dialysis facility;
ergo, RCGSC improperly sought Method II reimbursements. The flaw in the argument,
however, is that it misunderstands the contours of our alter-ego jurisprudence. As
became clear during oral argument, the United States focuses, somewhat obsessively,
on evidence demonstrating that RCG sought Method II reimbursements for the sole
purpose of increasing its profit margins.

Why a business ought to be punished solely for seeking to maximize profits
escapes us. The corporate form need not be disregarded when its adoption was meant
to “secure its advantages and where no violence to the legislative purpose is done by
treating the corporate entity as a separate legal person.” Schenley Distillers Corp. v.
United States, 326 U.S. 432, 437 (1946). The United States does not, however, identify
any clear legislative purpose emanating from either the text of 42 U.S.C. § 1395rr or
from the legislative materials predating its passage. Its failure to do so is fatal for its
assertion of the alter-ego doctrine, for we are similarly unable to divine any such purpose
from the scheme transgressed by the defendants’ acts.
No. 11-5779 United States, et al. v. Renal Care Group, et al. Page 15

Courts have not addressed why Congress adopted a bifurcated reimbursement
model for home dialysis ESRD suppliers. In the statutory text, Congress made clear that
it wanted to encourage ESRD patients to have dialysis at home in order to reduce costs
for the patient and Medicare. 42 U.S.C. § 1395rr(b)(3)(B) (requesting the HHS
Secretary to promulgate ESRD reimbursement methods which will “effectively
encourage[] the efficient delivery of dialysis services and provide incentives for the
increased use of home dialysis”); see also 75 Fed. Reg. 49, 030-01, 49, 062 (Aug. 12,
2010) (“[T]here remain very good reasons to develop and expand home [peritoneal
dialysis] programs. For example, PD treatment costs considerably less than comparable
in-facility treatments.”). But Method I and Method II both apply to home dialysis
suppliers—the only difference is that Method I suppliers also offer support services.
Based on the structure of the statute, Congress seems to have differentiated between
Method I and Method II for two reasons: first, to ensure that home dialysis patients could
engage in cost comparisons for their supplies and purchase dialysis supplies and
equipment from a broader range of providers; and second, to make clear that Method II
suppliers would have to have some type of written agreement with their patients,
ensuring that support services would be offered if necessary. See 57 Fed. Reg. 54, 179,
54, 179 (Nov. 17, 1992) (“Method II is an alternative to Method I which allows the
beneficiary to make his or her own arrangements for supplies and equipment.”). Neither
of these purposes are violated by allowing RCGSC to receive Method II reimbursements.

The relevant statute, 42 U.S.C. § 1395rr(b)(4)(B) precludes Method II payments
to dialysis suppliers that are also “renal dialysis facilit[ies],” and 42 C.F.R. § 400.202
defines a “supplier” as “an entity other than a provider, that furnishes health care
services under Medicare.” Other federal regulations provide insight into what an
“entity” is, which, in many ways, is the key question—whether RCGSC is an “entity”
for purposes of 42 C.F.R. § 400.202. See 42 C.F.R. § 1001.1001 (allowing the Office
of Inspector General to exclude entities from participation if certain individuals have a
direct or indirect ownership of five or more percent in the entity); 42 C.F.R. § 73.7
(articulating when an entity—there, a private institution of higher education—is
No. 11-5779 United States, et al. v. Renal Care Group, et al. Page 16

controlled by another); 42 C.F.R. § 420.206 (discussing what information about an
entity’s ownership structure needs to be disclosed). Additionally, federal regulations
routinely address the common ownership/control inquiry. See 42 C.F.R. § 417.484
(defining a “related entity” as “any entity that is related to the [party] by common
ownership or control . . . .”); 42 C.F.R § 433.52 (noting that an “entity related to a health
care provider” is, inter alia, “an organization, association, corporation, or partnership
formed by or on behalf of a health care provider”); 42 C.F.R. § 423.501 (“Related entity
means any entity that is related . . . by common ownership or control . . . .”). Although
not dispositive, these regulations suggest that an organization can be controlled by
another and yet still be considered an “entity” for purposes of Method II reimbursement.

All of this points to the conclusion that the structure of RCG and RCGSC is not
obviously inconsistent with Congress’s goals for the payment scheme. As the district
court noted, “[i]f the Medicare statutes or regulations were unclear and ambiguous, the
Defendants’ proof on their contacts and disclosures would be probative on the United
States’s FCA claim.” We agree, and therefore must next answer the question of whether
the defendants’ actions constituted reckless disregard of the relevant federal statutes and
regulations.

2. Knowledge

The defendants contend that they did not knowingly submit false claims; that is,
that they did not know, at the time that the claims were submitted, that RCGSC was not
a valid entity for purposes of receiving Method II reimbursements. The United States’s
original motion for summary judgment was limited to two of the four elements of a False
Claims Act violation—falsity and materiality. The defendants moved for total summary
judgment, but the theory underlying that motion was specific to the element of falsity.
The district court, however, answered the question of knowledge as well, noting that the
Defendants acted with “reckless disregard” of relevant Medicare statutes and
regulations. This determination is reviewed de novo. See United States ex rel. Schell
v. Battle Creek Health Sys., 419 F.3d 535, 537-38 (6th Cir. 2005).
No. 11-5779 United States, et al. v. Renal Care Group, et al. Page 17

For a defendant to be liable under the False Claims Act, it must have acted
knowingly; such knowledge can be actual, 31 U.S.C. § 3729(b)(1)(A)(i), or constructive,
either because it acted in deliberate ignorance of the truth, 31 U.S.C. § 3729(b)(1)(A)(ii),
or in reckless disregard of it, 31 U.S.C. § 3729(b)(1)(A)(iii). The “reckless disregard”
prong was enacted in a 1986 amendment to the False Claims Act, and what appears to
be the only congressional report accompanying that bill states that the obligation is “to
make such inquiry as would be reasonable and prudent to conduct under the
circumstances. . . . Only those who act in ‘gross negligence’ of this duty will be found
liable under the False Claims Act.” S. Rep. 99-345, at 20, 1986 U.S.C.C.A.N. 5266,
5285. The provision is meant to target that defendant who has “buried his head in the
sand” and failed to make some inquiry into the claim’s validity. Id at 21, 1986
U.S.C.C.A.N. at 5286. The inquiry, however, need only be “‘reasonable and prudent
under the circumstances,’ which clearly recognizes a limited duty to inquire as opposed
to a burdensome obligation.” Id. (emphasis added).

In United States ex rel. Compton v. Midwest Specialties, Inc., 142 F.3d 296 (6th
Cir. 1998), the defendant was accused of violating the False Claims Act by failing to
comply with a testing requirement for Army jeep brake shoes that it supplied. This
Court affirmed the district court’s grant of summary judgment in favor of the United
States, noting that the defendant had a reckless disregard for the falsity of its claims for
payment:

Midwest’s president testified in his deposition that he knew the
plug-welded brake shoes were subject to the testing requirement.
Despite knowledge of this requirement, Midwest did not test the brake
shoes as required by the contracts. Midwest then submitted claims for
payment to the government attesting that the brake-shoe kits conformed
to contract requirements. This is sufficient to constitute “reckless
disregard” of the truth of its representations as to contract compliance.

Id. at 304. No similar allegations are made here by the United States—there is no claim
that RCG or RCGSC officials knew that submitting Method II claims by a wholly-owned
subsidiary ran afoul of the Medicare regulations. Rather, the United States contends that
No. 11-5779 United States, et al. v. Renal Care Group, et al. Page 18

the regulations were clear that wholly-owned subsidiaries were ineligible, and that
reliance on statements by government officials could not surmount such clear direction.

Other circuits have had the opportunity to define the exact contours of the
“reckless disregard” standard. See United States ex rel. K & R Ltd. P’ship v. Mass.
Hous. Fin. Agency, 530 F.3d 980, 983 (D.C. Cir. 2008) (“Reckless disregard under the
FCA is an extreme version of ordinary negligence.”) (quotation marks omitted); United
States ex rel. Burlbaw v. Orenduff, 548 F.3d 931, 945 n.12 (10th Cir. 2008) (equating
“reckless disregard” with “an aggravated form of gross negligence”); see also United
States ex rel. Ervin & Assocs., Inc. v. Hamilton Sec. Grp., Inc., 370 F. Supp. 2d 18, 41
(D.D.C. 2005) (“Reckless disregard, as used in the False Claims Act, lies on a continuum
between gross negligence and intentional harm.”) (quotation marks and emphasis
omitted). Given that 1) the defendants sought legal counsel on this issue; 2) defendants’
legal counsel sought clarification on the rules from CMS officials; 3) the Alexander
letter referenced a positive conversation with Richter, and her notes and billing records
reflect as such; 4) the defendants were aware of large dialysis providers that had wholly-
owned subsidiaries filing for Method II reimbursements; 5) industry publications openly
encouraged the use of Method II reimbursements to increase profit; 6) RCGSC was a
separately incorporated entity with its own Medicare supplier number; and 7) CMS and
OIG knew of RCGSC’s ownership structure, the defendants were not in reckless
disregard of the truth or falsity of their claims. Rather, they consistently sought
clarification on the issue, followed industry practice in trying to sort through ambiguous
regulations, and were forthright with government officials over RCGSC’s structure. To
deem such behavior “reckless disregard” of controlling statutes and regulations imposes
a burden on government contractors far higher than what Congress intended when it
passed 31 U.S.C. § 3729(b)(1)(A)(iii).

The defendants did not act with reckless disregard of the alleged falsity of their
submissions to Medicare. And given that there is no evidence in the record that they
acted with actual knowledge (in violation of 31 U.S.C. § 3729(b)(1)(A)(i)), or in
deliberate ignorance of the truth (in violation of 31 U.S.C. § 3729(b)(1)(A)(ii)), they are
No. 11-5779 United States, et al. v. Renal Care Group, et al. Page 19

therefore not liable under Count One of the complaint for False Claims Act liability. As
such, we need not address their claim of error regarding the district court’s damages
calculations.

C. Counts Two Through Six

The district court granted summary judgment, without explanation, as to the
remainder of the United States’s substantive claims against the defendants. There is
little in the record for us to review as to those counts, and what little we can find must
be gleaned from the vague language in the initial complaint. As such, we are unable to
review substantively the district court’s judgments as to the majority of those claims.

The one exception to this, however, is Count Two, which alleges that the
defendants violated the False Claims Act by “submitting false and fraudulent claims . . .
knowing full well that RCGSC was merely a billing conduit [that] was not in compliance
with the durable medical equipment supplier standards set forth at 42 U.S.C. § 1395m
and 42 C.F.R. § 424.57.” For a dialysis supplier like RCGSC to receive reimbursement,
it “must meet and must certify in its application for billing privileges that it meets and
will continue to meet” certain standards, including honoring warranties, filling orders
from its own inventory or via contract, and maintaining an appropriate place of business.
42 C.F.R. § 424.57(c). The provision also has an independent sanction. 42 C.F.R.
§ 424.57(d) (“CMS will revoke a supplier’s billing privileges if it is found not to meet
the [applicable standards].”). The defendants contend that violations of such conditions
do not render a claim materially false, and thus may not subject them to False Claims
Act liability.

The defendants are correct, irrespective of whether they in fact violated the
regulations. The False Claims Act is not a vehicle to police technical compliance with
complex federal regulations. See, e.g., United States ex rel. Wilkins v. United Health
Grp., Inc., 659 F.3d 295, 308 (3d Cir. 2011) (“[An allegation] that appellees violated the
regulations do[es] not state a plausible claim for relief under the FCA inasmuch as the
Government’s payments of appellees’ Medicare claims were not conditioned on their
compliance with the marketing regulations.”); United States ex rel. Gross v. AIDS
No. 11-5779 United States, et al. v. Renal Care Group, et al. Page 20

Research Alliance-Chicago, 415 F.3d 601, 604 (7th Cir. 2005) (“An FCA claim
premised upon an alleged false certification of compliance . . . also requires that the
certification of compliance be a condition of or prerequisite to government payment.”)
(alteration omitted); United States v. Southland Mgmt. Corp., 326 F.3d 669, 684 (5th Cir.
2003) (“[T]he punitive treble damages and penalties afforded by civil FCA actions are
not interchangeable with remedies for ordinary breaches of contract.”); United States ex
rel. Jamison v. McKesson Corp., 784 F. Supp. 2d 664, 679 (N.D. Miss. 2011)
(“Defendants cannot be held to have submitted false claims where the governmental
agency charged with compliance certified that [the defendant] was in compliance with
the regulations.”); Hansen v. Freedom Mobility, Inc., No. 5:08-CV-131, 2009 WL
3784958, at *2 (W.D.N.C. Nov. 10, 2009) (“Failure to comply with regulations
regarding billing or insurance might result in removal of Medicare billing privileges by
the government, but would not establish any tort or negligence liability here.”) (citation
omitted); United States ex rel. Landers v. Baptist Mem’l Health Care Grp., 525 F. Supp.
2d 972, 978-79 (W.D. Tenn. 2007) (precluding False Claims Act liability for violations
of conditions of participation, which are “the requirements providers must meet to
participate in the Medicare program,” because the HCFA/CMS forms do not expressly
or impliedly condition payment upon compliance with participation conditions) (citation
and alteration omitted).

The regulations set forth in the United States’s complaint are conditions of
participation, the violation of which do not lead to False Claims Act liability.
Consequently, the district court erred in granting summary judgment in favor of the
United States on this claim, and the defendants’ motion for summary judgment as to
Count Two is granted. There is insufficient evidence in the record, however, for us to
conduct a similar analysis as to the remaining counts, and we therefore reverse and
remand those district court judgments for further proceedings that are consistent with
this opinion, if necessary.
No. 11-5779 United States, et al. v. Renal Care Group, et al. Page 21

D. Reassignment

Finally, the defendants ask that the case be reassigned to another district judge
if a remand is necessary. To determine whether reassignment is necessary, the following
factors are considered:

(1) whether the original judge would reasonably be expected to have
substantial difficulty in putting out of his or her mind previously
expressed views or findings; (2) whether reassignment is advisable to
preserve the appearance of justice; and (3) whether reassignment would
entail waste and duplication out of proportion to any gain in preserving
the appearance of fairness.

Solomon v. United States, 467 F.3d 928, 935 (6th Cir. 2006). Reassignment “is an
extraordinary power and should be rarely invoked.” Id. (quotation marks omitted).

There is no question that this is a case with a “complex factual record.” Hamad
v. Woodcrest Condo. Ass’n, 328 F.3d 224, 239 (6th Cir. 2003) (declining reassignment
based, in part, on the “extensive joint appendix and hundreds of pages of briefs”). And,
unlike our decisions in other cases supporting reassignment, there are no comments
made by the district court here that would undermine the appearance of justice. See, e.g.,
United States v. Gapinski, 422 F. App’x 513, 521-22 (6th Cir. 2011) (listing a series of
statements by the district court that warranted reassignment). False Claims Act cases are
exceedingly fact-determinative and technical, and mistakes of law should not warrant
the use of a tool that should be wielded with “the greatest reluctance,” Solomon, 467
F.3d at 935. The defendants’ request for reassignment is therefore denied.

III. CONCLUSION

The district court’s judgments as to Counts One and Two are REVERSED, and
the defendants’ motion for summary judgment as to those counts is GRANTED. The
district court’s judgments as to all remaining counts are REVERSED and REMANDED
for further proceedings consistent with this opinion, but the defendants’ motion for
reassignment is DENIED.
No. 11-5779 United States, et al. v. Renal Care Group, et al. Page 22

___________________

CONCURRENCE
___________________

ROSEN, Chief District Judge, concurring. I concur with the majority’s decision
to reverse the district court’s grant of summary judgment in favor of the plaintiff United
States of America on Counts One and Two of the complaint, and to instead award
summary judgment in the defendants’ favor on these claims. As the majority observes,
the Government’s claim in Count One rests upon the proposition that defendant Renal
Care Group Supply Company (“RCGSC”) did not qualify as a separate “entity” from its
parent corporation, defendant Renal Care Group, Inc. (“RCG”), and the numerous
subsidiaries of RCG that operated renal dialysis facilities, so that RCGSC therefore was
ineligible for so-called “Method II” reimbursement under the pertinent Medicare
statutory provisions and regulations. I write separately to emphasize that the governing
statutory and regulatory scheme offers virtually no signposts for resolving this key
question of RCGSC’s eligibility for Method II payments, and to explain why, in my
view, this uncertainty alone leads fairly directly to the conclusion that the evidence
marshaled by the Government fails as a matter of law to establish the “knowledge”
element of its Count One claim under the False Claims Act (“FCA”), 31 U.S.C. §§ 3729-
33.

As is evident from the majority opinion, it is no simple task in this case to
determine whether the claims submitted by RCGSC for Method II reimbursement truly
qualified as “false” within the meaning of the FCA. In asserting that these claims were
indeed false, the Government relies principally upon statutory language that authorizes
Method II payments to a “supplier of home dialysis supplies and equipment” only if this
supplier “is not a provider of services [or] a renal dialysis facility.” 42 U.S.C.
§ 1395rr(b)(1)(C). As explained by the majority, the Government maintains that
RCGSC failed this test for Method II reimbursement because it was a mere alter ego of
its parent company, RCG, which in turn had a number of other subsidiaries that operated
renal dialysis facilities. The defendants, in contrast, argue that RCGSC was a separate
No. 11-5779 United States, et al. v. Renal Care Group, et al. Page 23

legal entity from the RCG subsidiaries that provided renal dialysis services, and that this
supply company therefore was eligible for Method II payments by virtue of its separate
corporate existence.

The crux of the parties’ dispute, then, is the degree of “separateness” demanded
under the pertinent Medicare statutory provisions and regulations in order for a supplier
to be deemed “not a provider of services [or] a renal dialysis facility.” As the defendants
observe, there is no basis in the Medicare statute or its implementing regulations for
concluding that a Method II supplier must be wholly independent from any service
provider or renal dialysis facility, without any corporate affiliation whatsoever. On the
other hand, there surely must come a point at which a supplier could be deemed
“separate” from a service provider or dialysis facility in only the most formalistic or
technical sense, with one of these two entities being a mere shell of the other.

Accordingly, to determine whether RCGSC’s claims for Method II
reimbursement were false, we must first ascertain where Medicare draws this line, and
then decide whether the defendants crossed it. Yet, upon reviewing the various
Medicare provisions and regulations cited by the parties, I see no clear answers to these
questions, nor even a fixed, determinate set of criteria that a supplier must meet in order
to be considered a separate “entity” from an affiliated service provider or renal dialysis
facility. The majority evidently shares my reluctance to declare that RCGSC’s Method
II claims either were or were not false, as it concludes only that “the structure of RCG
and RCGSC is not obviously inconsistent with Congress’s goals” in creating the Method
I/Method II reimbursement scheme. (Majority Op. at 19.)

Against this backdrop, I agree with the majority that the Government cannot
show that RCGSC’s claims for Method II reimbursement reflected a reckless disregard
of the relevant Medicare statutes and regulations. As the majority observes, it certainly
made business sense for RCG and its subsidiaries to attempt to secure a greater share of
the more lucrative Method II payments, provided that this profit-maximizing goal could
be lawfully achieved. As it commenced this effort, RCG took a number of steps to
ensure that its newly formed subsidiary, RCGSC, was eligible for Method II
No. 11-5779 United States, et al. v. Renal Care Group, et al. Page 24

reimbursement as a supplier of home dialysis supplies and equipment, including
(i) engaging a law firm to analyze this issue, and (ii) reaching out to federal agency
officials to obtain their views on the lawfulness of the parent/subsidiary relationship
between RCG and RCGSC. RCG then largely followed the advice it received through
these communications with counsel and with federal officials, creating RCGSC as a
separate entity with its own Medicare provider number. In addition, RCG took steps to
ensure the separate corporate existence of RCGSC and the RCG subsidiaries that
operated renal dialysis facilities; although parent RCG provided payroll, legal, human
resources, and accounting support for RCGSC’s operations, furnished office space to this
subsidiary, and allowed RCGSC to obtain supplies through RCG’s contracts with
various manufacturers, the defendants state without contradiction that there was no
similar sharing of office space, employees, or resources among RCGSC and any of the
RCG subsidiaries that provided renal dialysis services. Finally, the defendants divulged
this chosen corporate organizational scheme to the Government on a number of
occasions over the years, including in Medicare re-enrollment applications and in audits
and inspections, without ever being advised that this arrangement was problematic.

To be sure, there were a few “storm warnings” along the way that raised
questions about the legality of RCGSC’s claims for Method II reimbursement. Yet, in
each such instance, RCG made further inquiries to satisfy itself that its supplier
subsidiary was acting in accordance with the relevant Medicare statutes and regulations.
For instance, when the chief operating officer of RCG’s South Central Region, David
Jones, expressed concern in an October 1998 e-mail that RCG’s proposed plan to obtain
Method II payments might be an illegal scheme “simply to increase profits of our
Company,” the company did not ignore this warning or sweep it under the rug. Instead,
Jones’s message was forwarded to a number of senior company officials, who in turn
continued their exploration, through outside counsel and contacts with federal officials,
into the lawfulness of Method II reimbursement through a supplier subsidiary.
Similarly, when RCG later learned that a competitor, Gambro Healthcare, was under
federal investigation, resulting in a Gambro subsidiary pleading guilty to health care
No. 11-5779 United States, et al. v. Renal Care Group, et al. Page 25

fraud related to its Method II billing, company officials reviewed RCGSC’s operations
to ensure that RCG’s supplier subsidiary was not operating in a similar fashion.1

In short, when RCG sought to increase its profits through greater utilization of
Method II reimbursement, it elected to accomplish this objective by forming a wholly-
owned subsidiary, RCGSC. In order for this supplier to lawfully collect Method II
payments, RCG had to ensure that this newly-formed subsidiary was sufficiently
separate and distinct from other RCG subsidiaries that provided dialysis services, such
that RCGSC would not also be deemed “a provider of services [or] a renal dialysis
facility.” 42 U.S.C. § 1395rr(b)(1)(C). Although the district court construed the
pertinent Medicare statutes and regulations as clearly prohibiting the parent/subsidiary
arrangement adopted by RCG, my colleagues and I agree that the statutory scheme
provides little or no guidance as to whether and how suppliers and service providers may
co-exist within the same corporate family tree. Faced with this unclear and ambiguous
statutory scheme, RCG sought the advice of counsel and federal officials as to whether
its plan for Method II reimbursement was lawful, and it made no secret of the corporate
arrangement it had chosen to pursue Method II payments. Under this record, I cannot
see how the defendants could be found to have acted in reckless disregard of the
Medicare statutes and regulations governing Method II reimbursement. Because the
majority reaches this same conclusion, I join in its decision.

1
As the defendants observe, the federal criminal charge against Gambro’s subsidiary, REN
Supply Corporation, was based on REN’s failure to disclose that Gambro was its parent company.
Although RCGSC’s initial 1999 application for a Medicare supplier number suffered from a similar defect
— i.e., a failure to identify RCG as the parent of this supplier — RCGSC’s subsequent renewal
applications correctly disclosed this parent/subsidiary relationship, as did other communications with
Government officials during the relevant period.