Summary
striking Indictment's reference to general phenomenon of widespread Medicare abuse and fraud as "inflammatory and beyond the scope of the offenses stated in the Indictment"
Summary of this case from U.S. v. JardineOpinion
Criminal No. 03-321(1-8) ADM/AJB
March 11, 2004
Michael J. Quinley, and Christopher A. Buscagalia, for Plaintiff
David J. Wallace-Jackson, Robins, Kaplan, Miller Ciresi L.L.P., Minneapolis, MN, for Defendants Arizant, Inc. and Augustine Medical, Inc.
Andrew J. Luger, and William J. Otteson, Greene Espel, P.L.L.P., Minneapolis, MN, for Defendant Paul S. Johnson
William B. Michael, and Mark D. Larsen, Lindquist Vennum P.L.L.P., Minneapolis, MN, for Defendant Timothy W. Hensley
John W. Lundquist, and Dulce J. Foster, Fredrikson Byron, P.A., Minneapolis, MN, for Defendant Scott D. Augustine
Jeffrey Springer, Esq., Springer and Steinberg, P.C., Denver, CO, for Defendants Phillip C. Zarlengo and Health Finance and Marketing, Inc., aka PCZ Marketing and Finance Corporation, dba Strategic Reimbursement
William J. Mauzy, and Amos Cohen, Law Office of William J. Mauzy, Minneapolis, MN, for Defendant James Randall Benham
MEMORANDUM OPINION AND ORDER
I. INTRODUCTION
On January 30, 2004 and February 2, 2004, an evidentiary hearing and oral argument were held before the undersigned United States District Judge in support of Defendants' Joint Motion to Dismiss for Outrageous Government Misconduct [Docket Nos. 162, 163, 168]. Defendants move to dismiss Counts 3, 4 and 5 of the Superseding Indictment ("Indictment") against them, or, in the alternative, to suppress evidence acquired as the fruit of the alleged misconduct. Also before the Court are Defendants' Motions to Strike Surplusage [Docket Nos. 138, 150] and the Motion to Suppress Evidence Obtained Through a Defective Search Warrant of Defendants Phillip C. Zarlengo ("Zarlengo") and Health Finance and Marketing, Inc., aka PCZ Marketing and Finance Corporation, dba Strategic Reimbursement ("Health Finance") [Docket Nos. 128, 200]. For the reasons stated below Defendants' Motion to Dismiss or suppress evidence is denied, Defendants' Motions to Strike Surplusage are granted in part and denied in part, and the Motion to Suppress Evidence is denied.
Zarlengo and Health Finance also filed a Motion to Suppress Statements [Docket No. 137], but represented at the hearing that they are no longer challenging this evidence. This Motion is therefore moot.
II. BACKGROUND
The general factual background of this matter is set forth in this Court's February 10, 2004 Order [Docket No. 205] and is incorporated by reference for purposes of the instant Motions. The facts specific to each of the present issues will be discussed within the analysis of the individual Motion.
III. DISCUSSION
The testimony and physical evidence presented at the January 30, 2004 hearing related only to the Motion to Dismiss for outrageous government conduct. On Monday February 2, 2004, the Court heard legal argument on this Motion, as well as on the Motion to Strike Surplusage. The prosecution and Defendants Zarlengo and Health Finance agreed to waive oral argument and submit the Motion to Suppress Evidence Obtained Through a Defective Search Warrant for determination on the parties' memoranda. These Motions will be addressed in the sequence just described.
A. Outrageous Government Misconduct
The Eighth Circuit has recognized that outrageous government misconduct may violate defendants' due process rights and prevent "the government from invoking judicial processes to obtain a conviction" in cases where "the most intolerable government conduct" has occurred. United States v. Pardue, 983 F.2d 835, 840, 841-42 (8th Cir. 1993) (internal quotations omitted). However, "government agents may go a long way in concert with the individual in question without being deemed to have acted so outrageously as to" create a bar to criminal prosecution.United States v. Hunt, 171 F.3d 1192, 1195 (8th Cir. 1999) (internal citations omitted). The standard of misconduct is set deliberately high, requiring a defendant to show the government's behavior was "so outrageous and shocking that it exceeds the bounds of fundamental fairness." Id. Furthermore, "the outrageous conduct defense is generally unavailable where the criminal enterprise was already in progress before the government became involved." United States v. Haynes, 216 F.3d 789, 797 (9th Cir. 2000) (internal quotation omitted).
Defendants' Motion specifically focuses on the June 2000 non-coverage decision of TriSpan, a Fiscal Intermediary ("FI") that processed Medicare claims, and on the issuance of a national non-coverage policy by the Centers for Medicare and Medicaid Services ("CMS") on January 14, 2002.
Beginning in 1998, TriSpan began reviewing materials on Warm-Up in response to a request by one of its healthcare providers for a determination as to whether or not Warm-Up was a Medicare-covered service. Correspondence between TriSpan policy development employee Lillie Johnson ("Johnson") and Dr. Fred May ("May"), the Medical Director who made reimbursement decisions for TriSpan, reveals that TriSpan was denying coverage at this time. Defs.' Hr'g Exs. 4, 5 (internal memos of 3/3/99 and 9/13/99 stating respectively: 1) need for further evaluation; and 2) TriSpan would "continue to deny" coverage for Warm-Up).
On January 14, 2000, representatives of Augustine Medical, Inc. ("AMI") and TriSpan met for an AMI presentation on the Warm-Up device. In a March 1, 2000 message to Johnson, Dr. May authorized coverage of Warm-Up.id. Ex. 10. However, TriSpan did not issue the more general Local Medical Review Policy ("LMRP") as requested by AMI, but rather reimbursed claims based on the particular patient on a case by case basis. On or about June 21, 2000, Dr. May wrote a letter to Defendant Dr. Scott D. Augustine ("Augustine") informing him that TriSpan had determined Warm-Up was investigational, which meant TriSpan would no longer provide coverage for the device. Id. Ex. 30; Hr'g of 1/30/04. E-mail exchanges between Johnson and Dr. May in early June of 2000 regarding the revocation of coverage refer to the decision of an undefined "committee." Defs.' Hr'g Ex. 26. The messages also mention literature and studies on Warm-Up, and the non-coverage decision of the Medical Director of another FI. Id.
On May 26, 2000, approximately one month prior to TriSpan's revocation of coverage of Warm-Up, FBI Special Agent Donald Freese ("Agent Freese") phoned Sue Reno ("Reno"), a Compliance Officer for the TriSpan Program Integrity department. According to Reno's testimony, Agent Freese asked her if she was familiar with Warm-Up and stated he had been informed TriSpan was paying claims for the product. Reno testified that she recalled Freese mentioning a wiretap and stated that she relayed the fact and substance of the call to Johnson and possibly to others at TriSpan. Johnson's notes reflect a call to Reno from a Don Freese of the FBI. Id. Ex. 20. They also make reference to "supplies," "dupped the MD," [sic] and "Rev. 270," which Johnson testified meant Revenue Code 270. Id.
In an effort to seek national coverage, AMI requested a decision from CMS on August 23, 2001. In December 2001, the FBI sent CMS a report prepared by Agent Freese on price inflation in the Medicare system, which details the criminal fraud investigation of the marketing and reimbursement of Warm-Up. Quinley Aff. in Resp. to Defs.' Non-Dispositive Disc. Mots. Ex. 16 [Docket No. 175]. CMS issued its national non-coverage decision on or about January 14, 2002. See Indict. ¶ 41. Defendants contend Agent Freese's contact with TriSpan and provision of his report to CMS interfered with the decision-making processes of these agencies by encouraging them to deny coverage for Warm-Up. They assert his actions thus "constitute the manufacturing of crimes." Defs.' Mem. in Supp. of Joint Mot. at 10.
Although the testimonial and documentary evidence adduced during the hearing revealed some obscurity as to the context of TriSpan's determination to reverse its position and resume denying reimbursement claims for Warm-Up, it fell short of meeting Defendants' high burden of proving government conduct that "shock[s] the conscience of the court."Pardue, 983 F.2d at 847. After testimony of five witnesses and citations from numerous documents, Defendants failed to establish that Agent Freese acted so egregiously as to violate due process. There was no proof the recollections and contemporaneous notes of TriSpan employees on which Defendants rely, such as the references to "duped the MD" and a "wiretap," actually were verbatim comments by Agent Freese, rather than the writer's or witnesses' impressions of the substance of the call, as related to her. Furthermore, Reno testified that in her position at TriSpan she had daily contact with law enforcement officials, such that a call from an FBI agent was not a shocking or highly unusual event. Hr'g of 1/30/04. Notably, despite all the argument as to the impropriety of what he intended and did, Defendants did not call Agent Freese, who was present and available, as a witness at the hearing.
The government argues that because no wiretap was actually used in the investigation the word was more likely chosen by one of the recipients of the relayed information, rather than stated by Agent Freese.
Similarly, the e-mail series regarding the "committee" and the decision to revoke coverage of Warm-Up does not conclusively show misconduct. This evidence proved at most that TriSpan representatives were embarrassed, contemplating a diplomatic, if less-than-candid, way to communicate with a business associate, or perhaps a reluctance to concede error.See Defs.' Hr'g Exs. 23-26. The testimony of the various TriSpan employees did not implicate Agent Freese's phone call as the impetus for the coverage change. To the contrary, Dr. May unequivocally stated the FBI call had no impact on his letter to Dr. Augustine explaining that Warm-Up would no longer be covered. FIr'g of 1/30/04. He testified that information TriSpan received from other Fiscal Intermediaries prompted the reconsideration. Id.
Likewise, Defendants have proffered no evidence other than temporal proximity linking CMS's national non-coverage decision to the allegedly prejudicial and inflammatory FBI report by Agent Freese. Two of the government doctors involved in the CMS Warm-Up coverage evaluation reported they did not learn of the criminal investigation of AMI until late in the scientific review process and that it had no influence on the coverage determination. Quinley Aff. in Supp. of Government's Opp'n Exs. 7, 8 (Reports of Interviews) [Docket No. 177]. Defendants have not established that the FBI procured or improperly interfered with this or the TriSpan decision so as to warrant dismissal or suppression. This Motion is denied.
Defendants did not present evidence related to the CMS issue during the two-day hearing.
B. Motion to Strike Surplusage
Defendants contend three portions of the Indictment contain language irrelevant to the charges and are unfairly prejudicial. First, they object to inclusion of statements regarding Food and Drug Administration ("PDA") 510(k) clearance of Warm-Up, including allegations Defendants concealed and misrepresented marketing limitations. See Indict, ¶¶ 11-16, 56, 61. Defendants assert these paragraphs imply violations of FDA regulations in an Indictment that does not allege misbranding. Secondly, they move to strike reference to the CMS non-coverage determination because it occurred subsequent to the identified period of the conspiracy. See id., ¶ 41. Lastly, Defendants argue a "background" paragraph citing "widespread billing and reimbursement fraud" against Medicare serves only to inflame the jury and imply wrongdoing beyond the specific crimes alleged in the Indictment. See id., ¶ 42. The government responds that these topics provide necessary context and background for a jury faced with a very complicated case.
Defendants also seek to strike the phrase "set up by the Headwaters Task Force" from lines 2-3 of paragraph 43. Defendants Zarlengo and Health Finance additionally request that the Court strike paragraphs 43-55, relating to the government's undercover operation. Mot. to Strike Surplusage at 2 [Docket No. 138].
Federal Rule of Criminal Procedure 7(d) provides the court may strike surplusage from an indictment upon a motion by the defense. The court's authority to strike surplusage is permissive rather than mandatory, and motions to strike surplus language from the indictment "should be granted only where it is clear that the allegations contained therein are not relevant to the charge made or contain inflammatory and prejudicial matter." United States v. Figueroa, 900 F.2d 1211, 1218 (8th Cir. 1990) (citing Dranow v. United States. 307 F.2d 545, 558 (8th Cir. 1962)). Motions to strike surplusage are not lightly granted and require the defendant to meet a significant burden of proof.United States v. Watt, 911 F. Supp. 538, 554 (D.D.C. 1995);United States v. Chaverra-Cordona, 667 F. Supp. 609, 611 (N.D. Ill. 1987). Furthermore, in factually and legally complex cases, background information is particularly helpful for contextualizing the criminal conduct alleged. Watt, 911 F. Supp. at 554.
Defendants first move to strike the portion of the Indictment describing the FDA's clearance of Warm-Up. Paragraph 11, which begins this discussion, reads as follows:
The United States [FDA] generally must clear a new medical device, such as AMI's [Warm-Up] wound care product as safe and effective before the device may be marketed in the United States. Some medical devices are cleared through a Premarket Approval Process (PMA), by which the FDA determines that a completely new medical device is safe and effective. Other medical devices are cleared by the FDA through a Premarket Notification of intent to market a device which is substantially equivalent to existing and approved devices. This Premarket Notification is also known as "510(k) clearance."
Indict, ¶ 11. The subsequent paragraphs of this section proceed to cite various representations to the FDA by AMI during the clearance process, including that "the Wound Cover is intended to be for single use only and is supplied sterile . . . and the rest of the system is considered to be durable medical equipment." id., ¶¶ 12, 13-16.
Though Defendants argue inclusion of the PDA background material will require a great deal of additional evidence and expert testimony in order to explain the FDA clearance process and standards, it may not necessarily be so. The government contends this information provides a history of Defendants' view of their product and is important for showing how their claims evolved to false statements. An explanatory instruction to advise the jury of applicable PDA rules and requirements may be appropriate at an early point in the trial.
Defendants have not established that the description in paragraphs 11-16 of AMI's application for and receipt of FDA clearance to market Warm-Up is irrelevant or so prejudicial as to warrant striking it from the indictment. It provides background information about the device and is probative of the issue of fraudulent intent by showing Defendants' characterizations of and claims about its product at different times and in different contexts. Any disjunction in product description between that required to meet minimum FDA standards and that which may legally be stated in marketing literature can be explained to the jury by testimony or instruction.
By contrast, the allegation of paragraph 56 that Defendants concealed FDA marketing limitations does raise the potential for prejudice by insinuating a violation of misbranding laws, despite the absence of any count of alleged misbranding. This paragraph states:
The defendants concealed, and caused others to conceal, that Warm-Up was subject to FDA marketing limitations that the device may not be labeled as having any accelerating effect on the rate of wound healing or epitheliazation and that the device may not be labeled as a treatment or cure for any type of wound.
Indict. ¶ 56. However, because Defendants' representations to FIs and healthcare providers are at the heart of this prosecution, the Court will reserve ruling on whether this portion of the Indictment should be redacted until the government's evidence on this averment has been presented, at which time the Court will weigh the prejudice and relevance of this paragraph to determine whether to strike it. See United States v. Weinberger, Crim.A. No. 92-235, 1992 WL 294877, at *7 (D.D.C. Sept. 29, 1992).
Finally, paragraph 61 appears both irrelevant and prejudicial. This verbiage in the Indictment avers that AMI created a marketing memo in which it asserted that Warm-Up was subject to no special PDA limitations other than those applicable to all wound care devices. Specifically, it alleges:
On or about May 11, 1998, AMI created, and later used with its sales force, its customers, and Medicare representatives, a memorandum on "FDA Clearance of Warm-Up Products" that asserted "the Warm-Up System has no special restrictions applied that are different from those of all wound care devices," without revealing that by the express terms of the FDA clearance Warm-Up may not be labeled as having any accelerating effect on the rate of wound healing or epitheliazation and may not be labeled as a treatment or cure for any type of wound.
Indict, ¶ 61. The government concedes that Defendants had no legal obligation to go beyond the marketing restrictions set forth in the 510(k) clearance and does not allege the cited May 1998 memorandum was false. This paragraph will therefore be stricken.
Defendants next argue paragraph 41, reciting the issuance of the CMS national non-coverage policy, is immaterial and likely to confuse the jury. This paragraph provides,
As it became more difficult to conceal Warm-Up through the defendants' fraudulent scheme, AMI applied to CMS for Medicare coverage for Warm-Up. In response to AMI's request for coverage, CMS denied Medicare coverage for Warm-Up in a Coverage Decision Memorandum, published on or about January 14, 2002, which is binding on all Medicare agencies.
Indict, ¶ 41. The national coverage decision was published in January 2002, and the conspiracy is alleged to have occurred from approximately July 1997 to July 26, 2001, thus ending more than five months prior to the CMS publication. Id. ¶¶ 41, 1. Nonetheless, despite this gap in the chronology of events, the application for and result of the CMS determination may be probative of Defendants' conduct and state of mind during the period in which the government contends the crimes took place, and such evidence is therefore arguably relevant. See United States v. Thomas, 875 F.2d 559, 562 (6th Cir. 1989) ("if the language in the indictment is [legally relevant] information the government hopes to properly prove at trial, it cannot be considered surplusage no matter how prejudicial it may be") (quoting United States v. Climatemp, Inc., 482 F. Supp. 376, 391 (N.D. Ill. 1979)). Defendants have not established that this reference is completely irrelevant, but if it becomes apparent at a later juncture that the non-coverage decision is not sufficiently linked to evidence of Defendants' intent and will be unfairly prejudicial, Defendants may renew their request to strike.
Lastly, the reference to widespread Medicare abuse and fraud is inflammatory and beyond the scope of the offenses stated in the Indictment. Indict, ¶ 42. The Indictment contains no allegations of a broader conspiracy involving other, unindicted participants and the grand jury which indicted this case considered testimony regarding Medicare fraud only as it related to the instant case. The mention of a large scale problem prompting the creation of a special task force may cause the jury to infer Defendants' involvement in additional, uncharged crimes. See United States v. Alsugair, 256 F. Supp.2d 306, 317-18 (D.N.J. 2003). Accordingly, this language is unduly prejudicial to Defendants, as well as being unnecessary to the jury's understanding of the specific fraud charges at issue. However, the discussion of the government's undercover operation and its relation to the manner and means alleged in the Indictment is proper explanatory information. Indict, ¶¶ 43-55. Paragraph 42 and the words "set up by the Headwaters Task Force" in paragraph 43 will be stricken.
This paragraph states: "Medicare has been subjected to widespread billing and reimbursement fraud and abuse. Law enforcement investigators determined that some medical device manufacturers, as well as some healthcare providers and others, encouraged and participated in certain types of Medicare fraud. To combat this problem, law enforcement agencies, including the Federal Bureau of Investigation, the HHS Office of Inspector General, and the United States Postal Service, established the Headwaters Task Force."
C. Motion to Suppress Evidence
Defendants Zarlengo and Health Finance argue for suppression of evidence obtained during a search of Zarlengo's office on the ground that the affidavit underlying the search warrant contained false statements and material omissions. They request a Franks evidentiary hearing to establish support for this Motion. See Franks v. Delaware, 438 U.S. 154, 155-56 (1978). In order to be entitled to aFranks hearing, Defendants must make "a substantial preliminary showing" not only that the affidavit contained false information, but that the inaccuracies were the result of "deliberate falsehood or reckless disregard for the truth" and were "necessary to the finding of probable cause." id, at 155-56, 171; see United States v. Mathison, 157 F.3d 541, 547-48 (8th Cir. 1998). A Franks hearing is appropriately granted only in `Very limited circumstances."United States v. Ozar, 50 F.3d 1440, 1445 (8th Cir. 1995).
On July 23, 2001, U.S. Postal Inspector Dana S. Kimbrough, ("Inspector Kimbrough" or "Kimbrough") signed an eight-page affidavit in support of his application for a search warrant in connection with this case. A U.S. Magistrate Judge issued the requested warrant to search Zarlengo's Colorado office and the following day law enforcement officials executed the warrant and seized various business records of Health Finance. Defendants challenge the validity of the underlying affidavit, alleging the affiant made three essential misrepresentations or omissions. They contend Inspector Kimbrough recklessly failed to include a letter from a government contractor (the "SADMERC letter") concluding that Warm-Up was not Durable Medical Equipment ("DME"), that he omitted that Defendants applied for and were issued Health Common Procedure Coding System ("HCPCS") codes, and finally, that the affidavit's allegations regarding Defendants' presentation of Warm-Up as a product requiring application by a skilled physical therapist were false.
Defendants have not made the requisite "strong initial showing" of intentional falsehood or recklessness to warrant an evidentiary hearing on this matter. Id. In fact, with respect to the statements regarding HCPCS codes and the requirement of a physical therapist for use of the product, Defendants do not even submit evidence that this testimony is false. When read in context, these portions of the affidavit are not bald assertions, but rather Kimbrough's relating of recorded conversations by various Defendants in which they advise that AMI did not request HCPCS codes because of the expected low reimbursement amount, and that Warm-Up should be billed as a therapy despite AMI's own studies that it may be used as a non-skilled, in-home product. Kimbrough Aff. at iv-v (Springer Aff. Ex. A.). Defendants do not aver these recordings are inaccurate or fabricated. Furthermore, Zarlengo and Health Finance offer no proof to support their theory that Inspector Kimbrough was aware that AMI had applied for and received HCPCS codes, and therefore knowingly omitted the information. Even though Defendants sought code assignments prior to submission of the affidavit, there is no indication Kimbrough knew this at the time he applied for the warrant. Their reliance on the "circumstances of the affiant's conduct" without further elaboration or support to prove knowledge and recklessness does not meet the high threshold of the Franks standard. Reply Mem. at 8; Franks, 438 U.S. at 155-56.
Similarly, with regard to the SADMERC letter, Defendants have not met their burden to show Inspector Kimbrough withheld the letter in a deliberate effort to mislead the magistrate judge. See United States v. Buchanaa 167 F.3d 1207, 1210 (8th Cir. 1999) (defendant must establish the affiant omitted facts with the intent to render the affidavit misleading or in reckless disregard of whether the affidavit would be misleading). Even assuming Inspector Kimbrough knowingly omitted reference to this document with the intent to deceive, Defendants are required to prove it would have affected the finding of probable cause. They have failed to do so. See id. The affidavit would continue to provide probable cause to support the search warrant even if the details of the SADMERC letter were included. The affidavit is replete with citations of Defendants' own statements evincing a contradiction between their understanding of the characteristics of Warm-Up and their expression and description of the product to others. Kimbrough Aff. at iv-vi. It details numerous comments by Defendants encouraging certain billing practices, while revealing an intent not to disclose various information to Medicare representatives. See, e.g., id., at v.
As with the aforementioned Motion to Dismiss the Indictment, Defendants' focus on the technical "legality" of their billing methods misses the mark. See Order of 2/10/04. The issue was and is not whether the magistrate judge would have believed Warm-Up should or should not be classified as DME, or may permissibly be billed under Revenue Code 270, but whether Defendants were manipulating rules and concealing facts to commit fraud. The presumption of validity of the warrant has not been rebutted and Defendants' Motion for a Franks hearing is denied.
IV. CONCLUSION
Based on the foregoing, and all the files, records and proceedings herein, IT IS HEREBY ORDERED that:1. Defendants' Joint Motion to Dismiss for Outrageous Government Misconduct [Docket Nos. 162, 163, 168] is DENIED.
2. Defendants' Motions to Strike Surplusage [Docket Nos. 138, 150] are DENIED as to Indictment ¶¶ 11-16, 41, 43-56 and GRANTED as to Indictment ¶¶ 42, 61 and the words "set up by the Headwaters Task Force" in paragraph 43,
3. The Motion to Suppress Evidence Obtained Through a Defective Search Warrant by Defendants Phillip C. Zarlengo and Health Finance and Marketing, Inc. [Docket Nos. 128, 200] is DENIED, and
4. The Motion to Suppress Statements [Docket No. 137] is DENIED as moot.