Legal Malpractice Suit Exposes ‘Judgment Calls’ in Fraud Practices

Malpractice lawsuits against health-care fraud and compliance attorneys are exceedingly rare, but a recent $603 million malpractice lawsuit filed against law firm LeClairRyan shows how high the stakes are for attorneys and clients in this legal discipline.

The malpractice lawsuit, filed late last year by LaTonya Mallory, alleges LeClairRyan gave her “incorrect legal advice” concerning processing and handling payments to physicians who sent testing samples to the now-bankrupt clinical testing provider, Health Diagnostic Laboratory Inc. (HDL), she founded. A jury Jan. 31 found Mallory, two other individuals, and a related company liable for submitting $17 million in false claims to federal health-care programs based on the firm’s payments to physicians. She claims the company relied on legal advice provided by LeClairRyan attorneys.

The HDL saga represents perhaps a worst-case scenario for a law firm dispensing health-care compliance advice, but it illustrates the deep level of expertise needed by health-care attorneys who dispense such advice. Providing legal advice on health-care compliance and enforcement of the Stark physician self-referral law may be the most perilous for clients and attorneys because a client can be held liable for a violation even when relying in good faith on the advice of counsel.

Mallory and two co-defendants involved in an affiliated business were accused and found liable for False Claims Act and anti-kickback law violations stemming from HDL’s use of processing and handling fees, with $16.6 million in false claims being attributed to Mallory and her two co-defendants. Mallory now faces a damage award that will triple the government’s recovery to almost $50 million, and potentially add up to $11,000 in civil penalties for each of over 35,000 individual false claims submitted to the government.

The allegations and huge potential damage award against Mallory in her FCA case has fueled he malpractice lawsuit against LeClairRyan. The firm settled with HDL’s bankruptcy trustee concerning its alleged incorrect legal advice in 2016 for $20.3 million.

“We worry about malpractice exposure all the time,” said Patric Hooper, a partner with health-law firm Hooper, Lundy & Bookman PC in Los Angeles. Hooper told Bloomberg Law that attorneys at the firm who focus on forward-looking transactional matters “are much more conservative than our litigators,” and that attorneys who advise clients in this area “seldom go out on a limb.”

Qualified Advice

The biggest potentials for health-care fraud liability for health-care providers and entities are through the False Claims Act, the anti-kickback law, and the Stark law, which prohibits referrals in certain instances from physicians to providers with which they have financial arrangements. Stark and anti-kickback violations are themselves frequently enforced through the FCA as well, which requires a defendant to act with an intent to defraud, or with a reckless disregard of legal requirements.

Typically, legal advice regarding the False Claims Act “is caveated” and “given with some acknowledgment that there are no bright line rules,” according to Kevin G. McAnaney, a health-care attorney with the Law Offices of Kevin G. McAnaney in Princeton, N.J., who also is a Bloomberg Law health-care advisory board member. The intent requirement in the FCA, and the anti-kickback law as well, create considerable uncertainty concerning whether a component of a business or operation, like HDL’s processing and handling payments, is prohibited by law.

McAnaney told Bloomberg Law that the relative dearth of court opinions in FCA cases—which typically end up settling rather than going to trial—contributes to the uncertainty that attorneys face in dispensing legal advice and necessarily leads attorneys to qualify that advice. “The advice is usually so qualified that I wouldn’t think a client could” mount a malpractice lawsuit over FCA advice, McAnaney said.

Mallory alleged that the advice she received from at least two LeClairRyan attorneys, Dennis Ryan and Michael Ruggio, wasn’t so qualified, and instead they opined that HDL’s processing and handling fees were legal. Further, Mallory alleged that another LeClairRyan attorney, Patrick Hurd, expressed “concerns” about the fees’ legality that weren’t relayed to her.

HDL also retained the law firm Ropes & Gray in 2012, according to an affidavit from Laura G. Hoey, a Ropes & Gray partner in Chicago. Hoey said in her affidavit filed in Mallory’s FCA litigation that Ropes & Gray attorneys found HDL’s processing and handling fees “posed a high level of risk” of government fraud enforcement action, and that the advice from LeClairRyan that the fees fell into an anti-kickback law safe harbor “was not correct.”

Judgment Calls

Mallory’s allegations of conflicting legal advice given to her and to HDL no doubt contributed to her decision to sue her former attorneys. However, Jesse A. Witten, a partner at Drinker Biddle & Reath LLP in Washington who specializes in health-care fraud defense, told Bloomberg Law that a lot of FCA advice comes down to “judgment calls,” and legal advice “can turn on the precise facts of a case.”

McAnaney noted, though, that HDL’s processing and handling fees “were a high-risk proposition,” given the concern about such fees being cited as kickbacks in several guidance documents from the Department of Health and Human Services Office of Inspector General. “The optics are terrible,” McAnaney said.

Witten said it’s much harder in his experience to advise clients on compliance based on proposed actions than to advise a client facing litigation in an enforcement action. Witten agreed with McAnaney’s assessment that a malpractice case brought against an attorney based on FCA or anti-kickback law advice faces hurdles because of the element of intent in both laws.

S. Craig Holden, a shareholder with Baker, Donelson, Bearman, Caldwell & Berkowitz PC in Baltimore who represents health-care providers facing fraud matters, said a client’s good faith reliance on advice of counsel should provide a good defense in an FCA action. One way that “things get messy” in compliance advice, Holden said, is when a client doesn’t give his attorney all the facts, either intentionally or inadvertently.

McAnaney noted that intent, an FCA and anti-kickback element, “is a fact and circumstances issue” and added that “frequently the facts that a client gives you are wrong.” Hooper agreed that attorneys “have to watch out for clients that push for particular advice.”

A client’s omission of facts, or providing attorneys with false information, could provide a defense to a malpractice lawsuit, Holden said.

Stark’s Strict Liability

The Stark law, however, does have clearer “yes or no” answers than the FCA or anti-kickback law, McAnaney said. The Stark law also has over two dozen safe harbor exceptions that have detailed provisions of what types of financial relationships won’t trigger liability, which can aid attorneys and clients seeking more definitive answers.

The Stark law is also a strict liability law, so following the advice of counsel in good faith is no defense to a violation. In these cases, Witten said, “a client could seek contribution,” perhaps in the form of a malpractice lawsuit, from an attorney who makes a mistake.

“If a client is given bad Stark advice, they have a nice FCA defense, but that doesn’t give them a defense against an overpayment” stemming from a Stark law violation, Holden said. A health-care provider can be forced to return the entire Medicare or Medicaid reimbursement amount or more if the claim violated the Stark law, a significant financial hit even if it’s lower than potential FCA damages. However, an identified overpayment that isn’t returned within 60 days as required by regulation can itself become an FCA violation.

Advice of Counsel Defense Problems

Health-care fraud litigation usually doesn’t include an advice of counsel defense though, and McAnaney said it’s likely because in many cases the advice a defendant received from counsel doesn’t quite match up with what a defendant actually did. An advice of counsel defense also requires the waiver, to a certain extent, of attorney-client privilege, something few health-care entities are eager to do.

Filing a malpractice lawsuit against an attorney involves waiver of attorney-client privilege, which Holden said was a “strong disincentive” to bringing malpractice lawsuits. Filing a malpractice lawsuit could expose communications with other attorneys not named as defendants by the client, Holden said, and expose all types of company information to the public through court filings.

Experienced Counsel Required

None of the attorneys Bloomberg Law spoke with saw potential malpractice lawsuits from health-care clients as an urgently pressing or rising concern. Witten said it was possible that a whistleblower could bring an FCA case against a law firm based on its advice to a health-care client, perhaps alleging a conspiracy, and noted that a law firm with “deep pockets” could conceivably make an appealing FCA target.

Witten noted that many potential malpractice disputes are simply settled or resolved without an actual court filing, which could mask the number of disputes that health-care clients have with compliance advice received from their attorneys. HDL’s settled malpractice dispute with LeClairRyan was atypical because it occurred in the context of a bankruptcy proceeding, Witten noted, which puts all the information “out in the open” in court filings.

McAnaney agreed that given potentially huge liability for a health-care client, financially as well as criminally, “you really shouldn’t be doing this [work] unless you know what you’re doing.”