United States Ex Rel. Grenadyor v. Ukrainian Village Pharmacy, Inc.

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 13-3383
UNITED STATES, et al., ex rel. YURY GRENADYOR,
Plaintiffs/Relator-Appellants,
v.
UKRAINIAN VILLAGE PHARMACY, INC., et al.,
Defendants-Appellees.
____________________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 9 C 7891 — Harry D. Leinenweber, Judge.
____________________
ARGUED OCTOBER 3, 2014 — DECIDED DECEMBER 3, 2014
____________________
Before POSNER, ROVNER, and TINDER, Circuit Judges.
POSNER, Circuit Judge. This appeal is from the dismissal
with prejudice of a complaint filed under the False Claims
Act, 31 U.S.C. § 3729 et seq., by Yury Grenadyor. He seeks a
bounty for exposing fraudulent claims submitted by the de-
fendants both to the federal government, id., § 3730, and to
several state governments on whose behalf he has filed pen-
dent state law claims. The complaint also alleges retaliation
against him by his employer in violation of the Act. The
2 No. 13-3383
judge dismissed the pendent and retaliation claims along
with the fraud claim.
Our bounty hunter (in False Claims Act cases called the
“relator”) is a pharmacist formerly employed by defendant
Ukrainian Village Pharmacy. The pharmacy primarily serves
Chicago’s Ukrainian community. There are believed to be
about 46,000 persons of Ukrainian descent living in Chicago.
See “Ukrainian American,” Wikipedia, http://en.wikipedia.or
g/wiki/Ukrainian_American (visited Dec. 1, 2014, as were
the other websites cited in this opinion). Together with
pharmacies that serve similar communities in other states
and are joined as additional defendants in this suit, Ukrain-
ian Village Pharmacy is alleged to be controlled by a handful
of individuals of Ukrainian origin, mainly members of a
family named Bogacheck. To simplify the opinion we’ll gen-
erally pretend that Ukrainian Village Pharmacy is the only
defendant.
Grenadyor claims that the pharmacy defrauded the gov-
ernment by making gifts to customers (such as tins of cav-
iar), or forgiving their copays (even if they were not entitled
under the law to such forgiveness), in order to induce them
to have their prescriptions filled by it rather than by compet-
ing pharmacies. (The “copay” is the part of a medical bill
that is not reimbursed by the government or an insurer.) The
complaint also alleges that the pharmacy sought govern-
ment reimbursement for drugs that were not delivered to the
buyers.
The fraudulent character of claiming reimbursement for
drugs that customers never received is obvious. The fraudu-
lent character of giving discounts or refunds to the phar-
macy’s customers is less obvious—what is wrong with offer-
No. 13-3383 3
ing an inducement that reduces a product’s cost to the con-
sumer? The answer is that a discount or refund can become a
“kickback” (a derogatory term meaning approximately
“bribe”) in a case such as this because it artificially inflates
the price that the government pays pharmacies for prescrip-
tion drugs for Medicare or Medicaid beneficiaries. (The gov-
ernment reimburses the pharmacy for the entire price
charged the consumer, but places a ceiling on what the
pharmacy can charge.) So for example the maximum that a
pharmacy would be permitted to bill the government for a
drug that the pharmacy sells for $10 would be, assuming a
$1 copay, $9. But if the pharmacy waived the copay without
telling the government, thus charging $9 rather than $10 to
its customer but billing the government for the full $9 to
which it would have been entitled had it not refunded the
copay, it would be transferring $1 from the government to
the patient. For it should have charged the government only
$8, since all the customer paid was $9, of which $1 was sup-
posed to be the copay, for which the government is not li-
able.
The $1 refund to the customer would thus have been a
“kickback” in an appropriately pejorative sense because it
would have increased the pharmacy’s sales (and presumably
its profits, as otherwise it wouldn’t provide refunds) at the
government’s expense. It would have had done so either by
diverting customers from other pharmacies or by inducing
customers to purchase drugs that they would not have been
willing to purchase had they been responsible for the copay.
See Office of the Inspector General, “Special Fraud Alert,” 59
FR 65372 (Dec. 19, 1994), https://oig.hhs.gov/fraud/docs/
alertsandbulletins/121994.html; Bruce Stuart & Christopher
Zacker, “Who Bears the Burden of Medicaid Drug Copay-
4 No. 13-3383
ment Policies?,” 18 Health Affairs no. 2, pp. 201–12 (1999),
http://content.healthaffairs.org/content/18/2/201. There are
additional concerns with such kickbacks, but we needn’t get
into them.
A person violates the False Claims Act if he “knowingly
presents, or causes to be presented, a false or fraudulent
claim for payment or approval” by the government. 31
U.S.C. § 3729(a)(1)(A). He must know the claim is false. Unit-
ed States ex rel. Gross v. AIDS Research Alliance-Chicago, 415
F.3d 601, 604 (7th Cir. 2005). Grenadyor alleges a knowingly
false promise that the pharmacy made on a form that it had
to submit to the government in order to be permitted to en-
roll in the Medicare program and thus receive reimburse-
ment for the drugs it sells to Medicare participants. The
form, which the pharmacy signed before making any kick-
backs, states: “I agree to abide by the Medicare laws, regula-
tions and program instructions that apply to this supplier. …
I understand that payment of a claim by Medicare is condi-
tioned upon the claim and the underlying transaction com-
plying with such laws, regulations, and program instruc-
tions (including, but not limited to, the Federal anti-kickback
statute …).” Department of Health & Human Services, Cen-
ters for Medicare & Medicaid Services, Medicare Enrollment
Application: Clinics/Groups Practices and Certain Other Suppli-
ers, CMS-855B, § 15A, ¶ 3.
The district court ruled that this was not a false claim but
merely a promise that the pharmacy failed to keep. The rul-
ing was incorrect. If you say “I agree” when you don’t agree,
you’re making a false statement, which in this case, Grena-
dyor alleges, induced the government to honor improper
claims for reimbursement made by the pharmacy ($9 instead
No. 13-3383 5
of $8, in our example). Making a false promise in order to
obtain something of value is fraud, The Wharf (Holdings) Ltd.
v. United International Holdings, Inc., 532 U.S. 588, 596 (2001),
and can be the basis of a claim under the False Claims Act.
United States ex rel. Main v. Oakland City University, 426 F.3d
914, 917 (7th Cir. 2005).
The problem with this part of Grenadyor’s complaint lies
elsewhere: in an insufficient showing that the “I agree”
statement was false when the pharmacy made it. It may
have been an honest statement of intentions at the time, fol-
lowed by a change of heart, motivated perhaps by greed,
that caused the pharmacy to renege—and in that case the
pharmacy would not have made any false statements, but
simply have billed Medicare when it shouldn’t have. The
complaint alleges that the pharmacy knew when it made the
statement that other pharmacies in the Bogacheck network
had been giving kickbacks, and knew that as a member of
the network it would do so as well. In other words Grena-
dyor is alleging a two-step false claim: first the falsity (which
would have to be deliberate in order for the False Claims Act
to apply), which lay in the pharmacy’s promise not to give
kickbacks, and then the claim for reimbursement by the
Medicare or Medicaid program for drugs provided to cus-
tomers who received kickbacks.
Because a public accusation of fraud can do great dam-
age to a firm before the firm is (if the accusation proves base-
less) exonerated in litigation, Rule 9(b) of the Federal Rules
of Civil Procedure requires that “in alleging fraud … a party
must state with particularity the circumstances constituting
fraud.” Missing from the complaint in this case are non-
conclusory allegations that the pharmacy had decided to pay
6 No. 13-3383
kickbacks at the time it promised otherwise by signing the “I
agree” statement. It may have believed that sooner or later
the Bogacheks would exert pressure to which it might have
to yield, but that would be different from what is alleged in
the complaint—that it “never had any intention of keeping
that agreement” (emphasis added). Anyway how could
Grenadyor know? He didn’t start working at the pharmacy
until 2006—two years after the signing of the form.
The requirement of pleading fraud with particularity in-
cludes pleading facts that make the allegation of fraud plau-
sible. Windy City Metal Fabricators & Supply, Inc. v. CIT Tech-
nology Financing Services, Inc., 536 F.3d 663, 668–69 (7th Cir.
2008); Vicom, Inc. v. Harbridge Merchant Services, Inc., 20 F.3d
771, 777–78 (7th Cir. 1994). The complaint must state “‘the
identity of the person making the misrepresentation, the
time, place, and content of the misrepresentation, and the
method by which the misrepresentation was communicated
to the plaintiff.’” Bankers Trust Co. v. Old Republic Ins. Co., 959
F.2d 677, 683 (7th Cir. 1992), quoting Sears v. Likens, 912 F.2d
889. 893 (7th Cir. 1990). Grenadyor failed to satisfy this
pleading requirement.
He has, however, an alternative false-claim theory, called
“implied certification,” see Michael Holt & Gregory Klass,
“Implied Certification Under the False Claims Act,” 41 Public
Contract L.J. 1, 1–4 (2011), and recognized in such cases as
United States ex rel. Wilkins v. United Health Group, Inc., 659
F.3d 295, 306 (3d Cir. 2011), though treated as unsettled by
our court in United States ex rel. Absher v. Momence Meadows
Nursing Center, Inc., 764 F.3d 699, 711 and n. 13 (7th Cir.
2014). This theory does not depend on a defendant’s having
intended to make illegal kickbacks at the time it signed the
No. 13-3383 7
form for enrolling in the Medicare program. It requires only
that the government, had it known the defendant was billing
Medicare or Medicaid for drugs on which it had given kick-
backs, would not have reimbursed it for any part of the cost
of those sales. The theory treats a bill submitted to the gov-
ernment as an implicit assurance that the bill is a lawful
claim for payment, an assurance that’s false if the firm sub-
mitting the bill knows that it’s not entitled to payment.
Even if we accept the validity of the implied-certification
theory of false claims, Grenadyor has not alleged conduct
within the scope of the theory with sufficient specificity to
satisfy Rule 9(b). Regarding his allegation that the defendant
routinely waived copays for Medicare and Medicaid pa-
tients, the complaint fails to allege facts sufficient to show
that the pharmacy waived copays for other than “dual eligi-
bles”—persons who being enrolled in both Medicare and
Medicaid are allowed to be given such waivers provided
that the pharmacy does not advertise the practice. See 42
U.S.C. § 1320a-7b(b)(3)(G). No waiver mentioned in the com-
plaint exceeded the maximum copays that pharmacies are
permitted to charge their dual-eligible customers. (The cur-
rent maximums are $3.10 for brand-name drugs and $1 for
generics. See 42 C.F.R. § 423.782(a)(2)(iii)(A).) And
Grenadyor alleged no facts that would support his allegation
that the waivers were advertised.
The principal kickbacks were not copays but instead tins
of caviar. That sounds like a big deal if when one hears “cav-
iar” one thinks Beluga, a type of sturgeon whose roe (i.e.,
eggs) might command a retail price of $250 an ounce or
more. But the word is commonly applied to the eggs of other
fish as well—for example, salmon roe is commonly referred
8 No. 13-3383
to as “salmon caviar,” and the roe of other fish, such as trout,
steelhead trout, lumpfish, and whitefish are also commonly
called “caviar.” The complaint alleges that it was the defen-
dant’s “standard practice to give at least the following with
each delivery of prescriptions: one tin of caviar, plus either a
packet of whole grains or a tin of Riga sprats (a small fish
packed in oil), plus a Russian language T.V. Guide. This
would be delivered every month. Customers with many
prescriptions received an even larger allotment of gifts, often
as much as two tins of caviar, and a packet of whole grains,
and a tin of Riga sprats, and a Russian-language TV guide”
(footnotes omitted). The complaint alleges that all customers
received at least the “standard” package and that “this prac-
tice was so regular that when customers did not receive their
regular monthly allotment, they would telephone the
[Ukrainian Village Pharmacy] location to complain that they
were missing whichever part of this package that was not
included.” Grenadyor alleges that both he and “Confidential
Witness ‘A’” saw defendants distribute gifts; photographs of
the gifts are attached to the complaint.
But it is not enough to allege, or even prove, that the
pharmacy engaged in a practice that violated a federal regu-
lation. Violating a regulation is not synonymous with filing a
false claim. To comply with Rule 9(b) Grenadyor would
have had to allege either that the pharmacy submitted a
claim to Medicare (or Medicaid) on behalf of a specific pa-
tient who had received a kickback, or at least name a Medi-
care patient who had received a kickback (presumably if the
pharmacy provided a drug to a Medicare patient it billed
Medicare for the cost of the drug minus the copay). See Unit-
ed States ex rel. Bledsoe v. Community Health Systems, Inc., 501
F.3d 493, 504 (6th Cir. 2007); United States ex rel. Clausen v.
No. 13-3383 9
Laboratory Corp. of America, Inc., 290 F.3d 1301, 1311–12 (11th
Cir. 2002); Harrison v. Westinghouse Savannah River Co., 176
F.3d 776, 785 (4th Cir. 1999). The complaint contains no such
allegations. Similarly, by failing to identify a single patient
who received multiple gift bags over the course of the year
the complaint fails to allege with the requisite particularity
that any customer received more than $50 worth of these
goodies, the permissible amount before the anti-kickback
rules kick in, see 65 Fed. Reg. 24411 (Apr. 26, 2000), or that
those customers who did receive more were not Medicare or
Medicaid recipients and so cost the government nothing.
Regarding the third type of fraud alleged—charging for
drugs never delivered—again Grenadyor trips over Rule
9(b). The complaint alleges that the pharmacy would
fax prescription refill requests for Medicare and Medi-
caid beneficiaries to the offices of their doctors for au-
thorization even when neither the doctor nor patient
requested it and the prescription was not medically
necessary. On the times when that happened and the
doctor nevertheless authorized a refill, it was particu-
larly likely that the beneficiary would not appear to
pick up the medicine because the beneficiary did not
even know that the prescription had been filled—
Defendants would, for example, ask for refills on non-
chronic medications, such as antibiotics, without the
patients’ knowledge. The Bogacheks directed manag-
ers of [the defendant pharmacies] to bill Medicare and
Medicaid for these prescriptions, even though the ben-
eficiaries named in the claims never received their
medication.
Missing is any allegation that indicates how Grenadyor, a
pharmacist working for just one of the defendant pharma-
10 No. 13-3383
cies, obtained such information about a large number of
pharmacies scattered over a number of states (besides Illi-
nois, they are, according to Grenadyor, Florida, Georgia,
Massachusetts, Minnesota, Missouri, and Ohio). He does al-
lege that “Confidential Witness ‘B’,” who was employed in
Minnesota, observed the practice in that state, but it is only
one of the six states other than Illinois in which Grenadyor
alleges kickbacks.
The complaint alleges two occasions on which the defen-
dant pharmacy billed Medicare or Medicaid for drugs that
patients never picked up. Grenadyor alleges that even after
it became apparent that they would never pick up the pills,
the pharmacy failed to “reverse[]” the charges for the pills—
that is, erase its claim for reimbursement of all or part of the
charges. This adequately pleads that the pharmacy submit-
ted claims to Medicare and Medicaid for reimbursement of
drugs that customers failed to take home, but not that the
pharmacy failed to reverse the charges and did so with the
intention of defrauding the government. Thus, for example,
the complaint alleges that “at the Bogacheks’ orders and di-
rection Kharlamova [the manager of the Ukrainian Village
Pharmacy] directed that the charges for the antihistamine
and amoxicillin not be reversed. Accordingly, neither Khar-
lamova nor the pharmacy technicians working at her direc-
tion (Irina Milovanova, Oleksandra Polovinko, and Nadia
Gnopko) ever reversed the charges for the antihistamine or
amoxicillin, even though Patient H never received them.”
This allegation is insufficient because there is nothing to in-
dicate when Kharlamova directed that the charges not be re-
versed, whether Grenadyor was present, and if not how he
learned that the charges were never reversed. These are all
things that Grenadyor, if he isn’t fabricating the incident,
No. 13-3383 11
would know without having to conduct discovery. And if he
can’t allege how he learned that the charges had not been
reversed, what basis has he for alleging they were never re-
versed? “I know they were never reversed, but I don’t know
how I know they were never reversed,” is nonsense.
Repeatedly his complaint invokes “information and be-
lief” as the basis for its allegations. That familiar formula
won’t do in a fraud case—for it can mean as little as “on ru-
mor”—unless “(1) the facts constituting the fraud are not ac-
cessible to the plaintiff and (2) the plaintiff provides ‘the
grounds for his suspicions.’” Pirelli Armstrong Tire Corp. Re-
tiree Medical Benefits Trust v. Walgreen Co., 631 F.3d 436, 443
(7th Cir. 2011), quoting Uni*Quality, Inc. v. Infotronx, Inc., 974
F.2d 918, 924 (7th Cir. 1992). The lonely reference to Confi-
dential Witness ‘B’ does not suffice, given the breadth of
Grenadyor’s allegations.
It remains to consider his claim that the Ukrainian Vil-
lage Pharmacy fired him in retaliation for his telling his su-
periors in the pharmacy that he was troubled by the kick-
backs and by other unlawful acts that he claims to have ob-
served. To establish retaliation under the False Claims Act a
relator must prove that he was retaliated against “because of
lawful acts done by [him] in furtherance of an action under
this section or other efforts to stop 1 or more violations of
this subchapter.” 31 U.S.C. § 3730(h). That is the current
wording of the statute, but it appears that Grenadyor was
fired when the statute, not yet amended, had forbidden re-
taliation “because of lawful acts done ... in furtherance of an
action under this section, including investigation for, initia-
tion of, testimony for, or assistance in an action filed or to be
filed.” Even under that language, however, as we indicated
12 No. 13-3383
in Fanslow v. Chicago Manufacturing Center, Inc., 384 F.3d 469,
481 (7th Cir. 2004), and earlier in Neal v. Honeywell Inc., 33
F.3d 860, 865 (7th Cir. 1994), in accordance with United States
ex rel. Yesudian v. Howard University, 153 F.3d 731, 742 (D.C.
Cir. 1998), retaliation for filing an internal complaint (that is,
a complaint with one’s employer, as distinct from a lawsuit)
is forbidden; the language of the amended statute is merely
clearer.
Apart from Grenadyor’s claim of retaliation, his com-
plaint that the defendants violated the False Claims Act is as
we have explained fatally deficient. Ordinarily the dismissal
of a deficient pleading is without prejudice, thus giving the
pleader an opportunity to replead. Grenadyor was given
that opportunity and filed an amended complaint, yet he
failed to cure the deficiencies of his original one. For exam-
ple, though alerted by the judge to his failure to name even
one person who had received more than $50 worth of kick-
backs in a year, see 895 F. Supp. 2d 872, 875–76, 878–79 (N.D.
Ill. 2012), Grenadyor was unable to repair the failure. The
district court did find that Grenadyor had identified the
provision of free laxatives to a named customer on a speci-
fied date, but he had failed to allege who gave the laxatives
to the woman or who directed that gifts be given out for free.
“Rule 15(a) says that a party may amend its complaint
once as a matter of course. After that, leave to amend de-
pends on persuading the judge that an amendment would
solve outstanding problems without causing undue preju-
dice to the adversaries.” Bank of America, N.A. v. Knight, 725
F.3d 815, 819 (7th Cir. 2013). The district judge noted that
since filing suit in 2009 Grenadyor had “had four opportuni-
ties to plead his claims. In the process, he has dropped par-
No. 13-3383 13
ties, dropped claims, and added allegations in an attempt to
describe adequately a fraudulent scheme involving Defen-
dants. It now appears to the Court that he cannot do so,
though not for lack of trying.” The district judge thus did not
abuse his discretion in dismissing with prejudice the kick-
back claims in the complaint. But we must reverse and re-
mand with regard to the retaliation claim, as we have ex-
plained.
It remains only to consider the pendent state law claims.
Grenadyor mentions them only briefly, at the end of his
opening brief, saying: “Both sides and the District Court
agree that these state statutes are construed substantially as
the federal FCA is, and so Counts under the State Statutes
rise or fall with the federal claims. Dkt. No. 312 at 13-14.
Moreover, in Amgen [New York v. Amgen Inc., 652 F.3d 103(1st Cir. 2011)] the First Circuit analyzed the Illinois and
Massachusetts healthcare laws and found that they justified
valid pendent state false claims act claims when kickbacks
were provided in those two states by healthcare providers.
As shown above, Mr. Grenadyor’s claims are sufficiently
pleaded under the FCA. If this Court returns the case to the
District Court, the state claims should also be revived.” The
only reference is to kickbacks. There is no mention of retalia-
tion in relation to the state claims, either in the district
court’s opinion or in any of the briefs in this court. But we’ll
leave it to the district judge to decide in the first instance
whether Grenadyor should be permitted to press a state-law
retaliation claim on remand.
AFFIRMED IN PART, REVERSED IN PART, AND REMANDED.