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UNITED STATES EX REL. MIKES v. STRAUS

June 26, 1996

UNITED STATES ex rel. PATRICIA S. MIKES and PATRICIA S. MIKES, Individually, Plaintiffs, against MARC STRAUS, JEFFREY M. AMBINDER and ELIOT L. FRIEDMAN, Defendants.


The opinion of the court was delivered by: CONNER

 CONNER, SR. D.J.:

 Plaintiff Patricia Mikes brings this action on behalf of the United States and herself against her former employers under the qui tam provisions of the False Claims Act ("FCA"), 31 U.S.C. § 3729 et seq., for alleged improper billing for medical procedures, including magnetic resonance imaging ("MRI") tests. Plaintiff has moved to dismiss defendants' counterclaims and to strike certain affirmative defenses. Defendants' have cross-moved for summary judgment dismissing plaintiff's MRI-related claims for lack of subject matter jurisdiction. For reasons discussed below, plaintiff's motion is granted in part and denied in part, and defendants' motion is denied.

 BACKGROUND

 The facts of this case are set forth fully in United States ex rel. Mikes v. Straus, 853 F. Supp. 115 (S.D.N.Y. 1994) [hereinafter Mikes I], and Mikes v. Strauss, 889 F. Supp. 746 (S.D.N.Y. 1995) [hereinafter Mikes II]; we summarize portions that are relevant to the instant motions. In 1992, plaintiff filed suit claiming, inter alia, that defendants are liable under the FCA for submitting claims to the United States through the Medicare program for unwarranted and improperly administered spirometry tests, under 31 U.S.C. § 3730(h) and New York Labor Law § 740 for retaliatory discharge, and under New York Labor Law § 191 for unpaid wages for work that she performed after defendants terminated her employment agreement. Defendants moved to dismiss for, among other things, failing to state a claim on which relief could be granted under Fed. R. Civ. P. 12(b)(6), and for failing to meet the heightened pleading requirements for claims based on fraud under Fed. R. Civ. P. 9(b). Judge Broderick granted defendants' motion, but also granted plaintiff leave to amend her complaint to comply with Rule 9(b)'s requirements. Mikes I, 853 F. Supp. at 117.

 Plaintiff then filed a First Amended Complaint further detailing defendants' fraudulent practices, including allegations that defendants caused to be submitted claims to the United States through the Medicare program for unwarranted MRI tests by referring patients for MRI tests more frequently than medically necessary. That complaint charged defendants with knowingly presenting or causing to be presented false claims to the government in violation of 31 U.S.C. § 3729(a)(1), using false records to facilitate payment of a fraudulent claim in violation of 31 U.S.C. § 3729(a)(2), conspiring to defraud the Government in violation of 31 U.S.C. § 3729(a)(3), discharging plaintiff in retaliation for preparing to file this action in violation of 31 U.S.C. § 3730(h), and failing to pay plaintiff wages for the two-week period that she worked after her termination in violation of New York Labor Law § 191(3). Defendants again moved to dismiss the action under Rules 12(b)(6) and 9(b) or, in the alternative, to compel arbitration. Converting defendants' motion sua sponte into a motion for summary judgment, the court found that the First Amended Complaint and plaintiff's affidavit raised genuine issues of fact for trial on plaintiff's qui tam and retaliatory discharge claims, and denied defendants' converted motion for summary judgment, but granted in part defendants' motion to compel arbitration. See Mikes II, 889 F. Supp. at 749. *fn1"

 In December 1995, defendants filed an answer with affirmative defenses and counterclaims. Pursuant to Fed. R. Civ. P. 12(b)(6) and 12(f), plaintiff has moved to strike certain affirmative defenses and to dismiss counterclaims. *fn2" Defendants have moved for summary judgment dismissing plaintiff's MRI-related claims for lack of subject matter jurisdiction on the ground that the MRI-related claims are based upon the public disclosure of allegations or transactions in a civil hearing within the meaning of 31 U.S.C. § 3730(e)(4)(A).

 DISCUSSION

 I. Affirmative Defenses

 Plaintiff has moved to strike the following affirmative defenses pursuant to Fed. R. Civ. P. 12(f):

 
Sixth Affirmative Defense
 
The United States has suffered no injury.
 
Seventh Affirmative Defense
 
The relator is not the original source of the information contained in the complaint and has no standing to sue defendants.
 
Ninth Affirmative Defense
 
A written copy of the First Amended Complaint and written disclosure of substantially all material, evidence and information the relator possesses was not served on the government.
 
Tenth Affirmative Defense
 
The First Amended Complaint was not filed in camera.

 Am. Ans. PP 41-42, 44-45. Defendants have moved for summary judgment on the seventh, ninth and tenth affirmative defenses, dismissing plaintiff's complaint with respect to MRI-related claims.

 The seventh affirmative defense challenges subject matter jurisdiction under section 3730(e)(4), and will therefore be addressed first. United States ex rel. Kreindler & Kreindler v. United Technologies Corp., 985 F.2d 1148, 1157 (2d Cir.), cert. denied, 508 U.S. 973, 125 L. Ed. 2d 663, 113 S. Ct. 2962 (1993). All material factual allegations in the qui tam complaint must be accepted as true when considering defendants' motion to dismiss for lack of subject matter jurisdiction. Scheuer v. Rhodes, 416 U.S. 232, 236, 40 L. Ed. 2d 90, 94 S. Ct. 1683 (1974); Atlantic Mut. Ins. Co. v. Balfour Maclaine Int'l Ltd., 968 F.2d 196, 198 (2d Cir. 1992); United States ex rel. Pentagen Technologies Int'l Ltd. v. CACI Int'l Inc., 1996 WL 11299, at *3 (S.D.N.Y. Jan. 4, 1996).

 A. Subject Matter Jurisdiction

 Under section 3730(e)(4)(A), no court may assume jurisdiction over an action under the FCA based upon public disclosure of allegations or transactions in a civil hearing unless the action is brought by the Attorney General or the person bringing the action is an original source of the information. 31 U.S.C.A. § 3730(e)(4)(A) (West Supp. 1996). *fn3" "Section 3730(e)(4) is intended to bar 'parasitic lawsuits' based upon publicly disclosed information in which would-be relators 'seek renumeration although they contributed nothing to the exposure of the fraud.'" Kreindler, 985 F.2d at 1157 (citing United States ex rel. Doe v. John Doe Corp., 960 F.2d 318, 319 (2d Cir. 1992)).

 The 1986 amendments to the qui tam provisions of the FCA set up a two-part test for determining jurisdiction. *fn4" First, the reviewing court must ascertain whether the "allegations or transactions" upon which the suit is based were "publicly disclosed" in a "criminal, civil, or administrative hearing, in a congressional, administrative, or Government Accounting Office report, hearing, audit or investigation, or from the news media." 31 U.S.C.A. § 3730(e)(4)(A) (West Supp. 1996). If the answer to the first question is negative, section 3730(e)(4)(A) does not bar jurisdiction, and the court need not proceed to the second step of the jurisdictional analysis. If--and only if--the answer to the first question is affirmative, United States ex rel. Springfield Terminal Ry. v. Quinn, 304 U.S. App. D.C. 347, 14 F.3d 645, 651 (D.C. Cir. 1994) (citing Wang v. FMC Corp., 975 F.2d 1412, 1416 (9th Cir. 1992)), will the court then proceed to the "original source" inquiry, under which it asks whether the qui tam plaintiff "has direct and independent knowledge of the information on which the allegations are based." 31 U.S.C.A. § 3730(e)(4)(B) (West Supp. 1996). Under these circumstances, if the qui tam plaintiff qualifies as an original source, the action may proceed; if she does not, the action if barred.

 Defendants argue that the information upon which plaintiff's claims regarding MRI testing are based was contained in the pleadings and motions filed with the New York State Supreme Court, Westchester County, in 1991 in J & M Enterprises v. Tri-County Mobile MRI, No. 91-6485 (N.Y. Sup. Ct. filed Dec. 18, 1990) [hereinafter the "J & M Litigation"]. In the J & M Litigation, J & M Enterprises ("J & M"), a limited partnership of which Straus (defendant in the instant action) is a general partner, alleged that Tri-County Mobile MRI ("Tri-County"), a limited partnership operating a mobile MRI facility in Westchester County, breached a contract (the "Agreement") under which Tri-County was to pay J & M for consulting services. *fn5" Tri-County asserted that the Agreement called for payments for MRI referrals and was therefore illegal. See Kilgannon Aff., Ex. D, at *14. In an affidavit in connection with the J & M Litigation, Straus stated as follows:

 
Defendants are asserting that the contract at issue is "illegal" and was "a subterfuge to compensate me for the referral of patients" to defendant Tri-County Mobile. . . . In reality, quite the reverse is what is occurring. Defendants have breached the consulting agreement and failed to make payments thereunder to plaintiff because I have not referred patients to Tri-County. . . .
 
The idea for a mobile MRI for Westchester County was conceived by me. A mutual friend introduced me to William Ruffa, Esq. (defendants' counsel herein) who is knowledgeable about MRIs, as well as limited partnerships.
 
In turn, Ruffa introduced me and my partner to Al Woolf of Worchester, Massachusetts, who was potentially (and eventually became) a general partner. Many meetings were held among the partners of J&M, Ruffa, Woolf and a radiologist, who I also brought to the group. Most, if not all meetings were held in my home or office.
 
As a result of these meetings, Tri-County Mobile was formed. . . . To compensate me and my partner for initiating the deal, bringing the parties together, attending the many meetings to bring the business arrangement to a close and contributing to its structuring and commencement, the consulting agreement was entered into between J&M and Tri-County.
 
The first agreement proposed and drawn by Ruffa provided that J&M receive a percentage of the profits of Tri-County. I immediately rejected such a concept as it would have constituted fee-splitting. I insisted upon receiving compensation which was entirely unrelated to any patient referrals made by me or my partner to Tri-County. Ruffa was fully aware of this issue and it was agreed among all parties that the renumeration would be a fixed amount, i.e. $ 60,000 per year for twenty (20) years. In this manner, there would be no obligation for me or my partner to refer patients to Tri-County and no compensation correlated with either any referrals or even the success of the business. . . .
 
Tri-County breached its contract with J&M as a direct result of our referring patients to other MRI facilities and our not sending patients to Tri-County. . . . Defendants have refused to honor their obligation under the contract and have attempted to coerce me into referring all patients to them with the threat (and action) of withholding payments to J&M if I refer patients elsewhere.

 Kilgannon Aff., Ex. D, at *14-18 (emphasis in original).

 Defendants argue that plaintiff in the instant action formulated her claims with respect to MRIs from information gleaned from the J & M Litigation court file and, in particular, from Straus's affidavit. According to defendants, plaintiff's MRI-related claims are based upon the allegation of MRI referral payments from Tri-County to J & M, which were publicly disclosed in the J & M Litigation, and is ...


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