United States ex rel. Morgan v. Champion Fitness, Inc.

368 F.Supp.3d 1198

UNITED STATES of America, EX REL. Barbara MORGAN, Plaintiff-Relator,

v.CHAMPION FITNESS, INC., and Jeff Schade, Defendants.

Case No. 1:13-cv-1593

United States District Court, C.D. Illinois, Peoria Division.

Signed February 19, 2019

Hilary W. Frooman, Lillian N. Stewart, US Atty., Rodger A. Heaton, Hinshaw & Culbertson, Springfield, IL, Daniel M. Purdom, Hinshaw & Culbertson, Lisle, IL, Michael I. Leonard, Leonard Meyer LLP, Chicago, IL, for Plaintiff-Relator.

Stuart J. Chanen, Valorem Law Group, LLP, Chicago, IL, for Defendants.

ORDER & OPINION

JOE BILLY McDADE, United States Senior District Judge

This matter is before the Court on Relator's Motion to Dismiss Defendants' Counterclaims (Doc. 51). For the reasons stated below, Relator's Motion (Doc. 51) is GRANTED IN PART and DENIED IN PART.

BACKGROUND ¹

Defendant Champion Fitness, owned at the times relevant to this suit by Defendant Jeff Schade, hired Relator Barbara Morgan in 1998 as a third-party specialist to handle billing for physical therapy services. Initially, she received 6% of revenue received from government and private insurers, which was later increased to 7.5%. In November 2012, Defendants terminated her employment.

In late 2013, Relator filed this qui tam action alleging Defendants violated the False Claims Act (FCA) by submitting claims for reimbursement through Medicare. The Complaint (Doc. 1) was unsealed in May 2019. Following this Court's denial of their Motion to Dismiss (Docs. 36, 45), Defendants filed an answer and counterclaims (Doc. 46). Specifically, Defendants filed a claim under the FCA, five claims seeking contribution or indemnification under different theories, and two claims seeking disgorgement of Defendants' payments to Relator. Relator responded with the instant motion (Doc. 51).²

LEGAL STANDARD

Rule 12(b)(6) allows motions to dismiss on the ground that a complaint does not state a claim upon which relief may be granted. Hallinan v. Fraternal Order of Police of Chi. Lodge No. 7 , 570 F.3d 811, 820 (7th Cir. 2009). "To survive a motion to dismiss, the [allegations in a complaint] must state a plausible claim to relief." Ochoa v. State Farm Life Ins. Co. , 910 F.3d 992, 994 (7th Cir. 2018) (citing Bell Atl. Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ). "A claim has the requisite plausibility ‘when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.’ " Archer v. Chisholm , 870 F.3d 603, 612 (7th Cir 2017) (quoting Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) ). The Court takes as true all well-pleaded allegations in the complaint and construes all reasonable inferences in favor of the nonmoving party. Kemper v. Deutsche Bank AG , 911 F.3d 383, 389 (7th Cir. 2018).

DISCUSSION

As stated, Defendants allege seven claims in their Countercomplaint (Doc. 46). Relator argues all seven claims fail due to a doctrine sounding in public policy that bars counterclaims in FCA cases and that each claim is deficient in some additional respect. The Court will review Relator's public policy argument first and turn to Relator's additional arguments only on surviving claims.

I. Public Policy

As an initial matter, the Court finds Relator's argument that allowing Defendants' counterclaims would be against public policy is sufficiently developed to be reviewed and therefore not waived, contrary to Defendants' argument. While the Court agrees this argument is not particularly well-developed in Relator's memorandum of law, it has been developed beyond the "perfunctory one-sentence assertions" Defendants reference. See United States v. Key , No. 14-cr-5624, 2016 WL 3693427, at *3 (N.D. Ill. July 12, 2016) (St. Eve, J.); Gerrard v. Garda Sec., Inc. , 08-cv-1146, 2011 WL 3511481, at *6 (C.D. Ill. Aug. 11, 2011) (suggesting an argument was undeveloped and therefore waived where it was solely a conclusory statement). Relator's failure to explain how or why each counterclaim seeks to shift the blame does venture perilously close insufficiency, especially with regard to Counts VI and VII which do not on their face seek contribution or indemnification. However, the citation to numerous other cases along with parentheticals discussing their holdings clearly sufficed to allow Defendants to meaningfully respond and is enough for this Court to review the merits of the argument.

This public policy argument covers well-trod ground; the first instance of counterclaims being barred in an FCA case was in 1947. United States ex rel. Miller v. Bill Harbert Int'l Constr., Inc. , 505 F.Supp.2d 20, 25 (D.D.C. 2007) (citing United States ex rel. Rodriquez v. Weekly Publ'ns , 74 F.Supp. 763, 769 (S.D.N.Y. 1947) ). There is wide-spread consensus among the federal courts that an FCA defendant may not file a counterclaim seeking contribution or indemnification, nor a counterclaim which has the equivalent effect of contribution or indemnification. Id. at 26 (stating the rule and collecting cases). "The reason for the rule is simple to understand; without it, relators would be discouraged from bringing suit, thereby ‘imperil[ing] the federal interests which the FCA seeks to vindicate.’ " United States ex rel. Nehls v. Omnicare, Inc. , No. 07 C 05777, 2013 WL 3819671, at *20 (N.D. Ill. July 23, 2013) (quoting Miller , 505 F.Supp.2d at 26 ). Because the FCA itself provides for a reduction or elimination of a relator's share of the ultimate award due to the relator playing a leading role in the fraud, 31 U.S.C. § 3730(d)(3), allowing counterclaims amounting to indemnification or contribution would also "upset the carefully calibrated framework under which relator compensation is to be figured." Id. (quoting Miller , 505 F.Supp.2d at 26 ).

Counterclaims by an FCA defendant are allowed in two circumstances. First, counterclaims may be brought which arise from conduct unrelated to the FCA claims and which do not "require as an essential element that the FCA defendant was liable—or not liable—in the FCA case." Miller , 505 F.Supp.2d at 27 (providing as examples cases in which unrelated billing records were deleted, the relator breached a fiduciary duty by failing to deliver a subpoena sent to her as the qui tam defendant's agent, and costs were awarded for serious litigation abuses occurring after the FCA violations). Second, counterclaims are allowed "where the defendant's claim, though bound up in the facts of the FCA case, can only prevail if the defendant is found not liable in the FCA case." Id. at 27–28 (providing as examples defamation, libel, malicious prosecution, and abuse of process). "The simple rule that emerges from these cases is therefore that a claim by an FCA defendant which requires for its success a finding that the FCA defendant is liable is the kind of claim barred by the FCA." Id.

Defendants contest the general rule as "unmoored from principled application," suggesting a parade of mere unthinking applications of precedent devoid of thoughtful development throughout the cases resulted in the consensus of the other federal courts. (Doc. 56 at 17). This argument is necessary because Defendants concede Counts II through V do not survive the application of this test.

Foremost among this Court's responses is that judges are not unthinking automatons reflexively adopting statements made in other cases and applying nonbinding precedent³ without considering whether it ought to be applied. The reason for this consensus on public policy is that it is persuasive. Well-written and well-reasoned opinions are convincing to other courts. There is no need to reinvent the wheel—indeed, our legal system is premised on doing precisely the opposite. So, when a judge finds all that need be said has already been said eloquently by another court, it is both natural and an efficient use of judicial resources to quote and paraphrase the other court, with gratitude. "Any decision may have persuasive force, and invite—indeed compel—the careful and respectful attention of a court confronted with a similar case. But unless the earlier decision is authoritative, the court that decides the later case does not discharge its judicial responsibilities by merely citing the earlier decision and following it without so much as indicating agreement with it, let alone analyzing its merits." Colby v. J.C. Penney Co., Inc. , 811 F.2d 1119, 1123 (7th Cir. 1987). The Court is disinclined to believe every federal court to have considered the issue over the last seventy years has abdicated its judicial responsibilities. That the cases applying this policy cite to one another does not show lack of thoughtful development as Defendants suggest—it shows agreement.

The public policy is far from untethered. The FCA seeks to protect taxpayer funds from being wrongfully obtained through fraud on the government. United States ex rel. McElmurray v. Consol. Gov't of Augusta-Richmond Cty. , 464 F.Supp.2d 1327, 1341 (N.D. Ga. 2006) (citing United States ex rel. Marcus v. Hess , 317 U.S. 537, 551, 63 S.Ct. 379, 87 L.Ed. 443 (1943) ). In order to ensure fraudulent schemes are uncovered, Congress created the private suit provision of the FCA to incentivize those with knowledge of fraud to come forward. United States ex rel. Joseph v. Cannon , 642 F.2d 1373, 1376–77 (D.C. Cir. 1981) ("To encourage actions against defrauders, Congress authorized private citizens to bring civil actions against wrongdoers on the Government's behalf, and to retain half of any recovery."). This provision is not designed only to encourage innocent parties who happen upon fraud to report; it also serves to drive a wedge between conspiring fraudsters and entice persons involved to turn upon a fraudulent scheme. Miller , 505 F.Supp.2d at 25–26. Indeed, a careful reading of the statute shows it contemplates almost the precise situation Defendants allege is occurring here. Com...