United States ex rel. Hagerty v. Cyberonics, Inc.

Citations: 146 F. Supp. 3d 337; 2015 U.S. Dist. LEXIS 155249; 2015 WL 7253675Docket: Civil Action No. 13-10214-FDS

Court: District Court, D. Massachusetts; November 16, 2015; Federal District Court

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Andrew Hagerty has initiated a qui tam action against Cyberonics, Inc., alleging the illegal promotion of medically unnecessary device replacements for epilepsy patients related to the Vagus Nerve Stimulator Therapy (VNS) system. The case was filed under seal on February 4, 2013, and unsealed on December 5, 2013, after the United States declined to intervene. Cyberonics moved to dismiss the complaint multiple times, leading to a partial grant of dismissal on March 31, 2015, which upheld claims related to retaliatory discharge under 31 U.S.C. § 3730(h) and wrongful termination under Massachusetts law, while dismissing the majority of the federal and state False Claims Act claims.

On May 13, 2015, Cyberonics filed a motion to compel arbitration regarding the remaining claims. Hagerty subsequently requested permission to file a second amended complaint on August 14, 2015. The court denied Hagerty's motion to amend and granted Cyberonics' motion to compel arbitration, resulting in a stay of the case pending the arbitration outcome. The background indicates that Hagerty signed an employment application on April 19, 2010, which included an arbitration clause for resolving disputes related to his employment. This was reinforced by an Offer Letter from Cyberonics, which also contained an arbitration agreement and stated that it superseded prior representations concerning his employment.

On August 8, 2012, Hagerty initiated a wrongful termination lawsuit against Cyberonics (Hagerty I), which did not mention government health-care programs or the False Claims Act (FCA), although it contained fraud allegations against Cyberonics. Cyberonics informed Hagerty's attorney on January 31, 2013, that it believed the claims were subject to arbitration. Hagerty voluntarily dismissed Hagerty I on February 2, 2013, and filed a new sealed complaint alleging FCA violations on February 4, 2013, as a qui tam action on behalf of the United States. The government declined to intervene on October 29, 2013, and the case was unsealed on December 5, 2013.

Hagerty amended his complaint on May 19, 2014, bringing multiple claims, including violations of the FCA, conspiracy to violate the FCA, state FCA analogs, retaliatory discharge, breach of contract, and wrongful termination. Cyberonics moved to dismiss the amended complaint on June 18, 2014, which was partially granted on March 31, 2015, dismissing the federal FCA claims, state FCA claims, and breach of contract claims, while allowing the retaliatory discharge and wrongful termination claims to proceed.

On May 13, 2015, Cyberonics sought to compel arbitration and dismiss the remaining claims. During a July 22, 2015 hearing on this motion, Hagerty indicated his intention to file a second amended complaint, which he formally moved to do on August 14, 2015. The legal standard for amending pleadings under Rule 15 of the Federal Rules of Civil Procedure allows for amendments with the opposing party's consent or court's leave, emphasizing that leave should be granted freely unless there is undue delay, bad faith, repeated failure to cure deficiencies, undue prejudice to the opposing party, or futility of amendment. The court must consider the totality of the circumstances in deciding on the motion to amend.

Cyberonics argues against Hagerty's motion to amend based on two primary grounds: futility and undue delay. 

Futility concerns the Court's prior ruling in March 2015, which found that 30 of the 33 counts in Hagerty's first amended complaint failed to meet the heightened pleading standard for False Claims Act (FCA) claims and their state-law equivalents. Although Hagerty's proposed second amended complaint aims to address these deficiencies, it still does not specify a single false claim made to the government or adequately demonstrate that any particular medical procedure or purchase of a battery or VNS system was unnecessary. However, the Court opts not to decide on futility because it will deny the motion on the basis of undue delay.

Undue delay is recognized in the First Circuit as a valid reason to deny a motion to amend, even when considered alone. Significant time lapses between the original complaint and the amendment require the movant to provide justifiable reasons for the delay. The First Circuit has previously identified periods of fourteen to seventeen months as considerable and warranting explanation. Here, Hagerty's timeline shows substantial delays: he filed his initial complaint on August 8, 2012, and the present action on February 4, 2013. After Cyberonics' motion to dismiss, Hagerty amended his complaint on May 19, 2014. Cyberonics then moved to dismiss this first amended complaint on June 18, 2014, and the Court issued its ruling on March 31, 2015. Hagerty's motion for leave to file a second amended complaint came over three years after the initial lawsuit, more than two and a half years after the initial complaint in this case, over fourteen months after the first amended complaint, over thirteen months after Cyberonics' motion to dismiss, and more than four months after the Court’s ruling. Consequently, Hagerty carries the burden to justify this considerable delay.

Hagerty argues that he promptly sought to amend his complaint following the Court's clarification of the applicable pleading standard. He claims that any delay in amendment reflects a careful investigation rather than undue procrastination. However, he fails to adequately justify why he did not include new information earlier in the litigation process. Instead of integrating this information into his original or first amended complaint, Hagerty allowed extensive briefing on the motion to dismiss and waited for the Court's decision before seeking further amendments over four months later. This approach, as critiqued by the First Circuit in ACA Financial Guaranty Corp. v. Advest, Inc., is seen as problematic, as it creates delays, inefficiencies, and unnecessary burdens on the judicial system. The plaintiffs do not benefit from repeatedly amending their complaints after a motion to dismiss, which undermines judicial finality. Hagerty was made aware of the deficiencies in his complaint through the motion to dismiss and should have sought to amend at that time. He has had ample opportunity to present any additional relevant information since June 2014 but has not provided a valid reason for his delay and neglect.

Hagerty argues that undue delay should not independently justify denying a motion to amend, where no prejudice to the opposing party is demonstrated, referencing Klunder v. Brown University. Although Klunder emphasizes analyzing prejudice to the non-moving party, it implies that prejudice is a distinct ground for denying amendments. The Supreme Court's ruling in Foman supports the notion that "undue prejudice" is one of several reasons to deny amendments. However, the Klunder court's citation of Hayes suggests that amendments cannot be denied solely due to delay without considering prejudice. Subsequent First Circuit rulings clarify that "undue delay" can alone suffice to deny an amendment request, with appreciable delay being sufficient justification in the absence of a valid explanation. Therefore, a separate showing of prejudice is not required for denying a motion based on undue delay, which inherently affects the opposing party. The delays and repeated amendment attempts by Hagerty are determined to have prejudiced Cyberonics, leading to the denial of Hagerty’s motion for leave to file a second amended complaint due to undue delay. 

In relation to Cyberonics' motion to compel arbitration and dismiss two counts, the Federal Arbitration Act (FAA) governs arbitration agreements, emphasizing a federal policy favoring enforcement and treating such agreements on par with other contracts. The FAA applies broadly, including employment cases outside of transportation, and courts must honor the contractual rights and expectations of the parties involved. Any ambiguities surrounding the scope of arbitrable issues should be resolved in favor of arbitration.

To compel arbitration, a party must prove the existence of a valid arbitration agreement, demonstrate entitlement to invoke the arbitration clause, show that the opposing party is bound by the clause, and establish that the claim falls within the clause's scope. If a valid agreement exists, courts may either stay litigation pending arbitration or compel arbitration under the Federal Arbitration Act. Cyberonics seeks to compel arbitration and dismiss specific counts, asserting a valid arbitration agreement exists, those counts are covered by this agreement, and it has not waived its right to arbitration.

Federal courts apply state law principles to assess the validity of arbitration agreements. Under Massachusetts law, contract formation requires a definitive offer, acceptance, and consideration, evaluated through the objective conduct of the parties. An agreement can bind an employee in an at-will relationship, even if not explicitly written, with continued employment serving as sufficient consideration. The validity hinges on whether the employee received adequate notice that statutory claims would be subject to arbitration, determined by whether a prudent employee would recognize the waiver of judicial rights.

In this case, the arbitration agreement is evident in both the Employment Application and the Offer Letter, confirmed by the employee's signature and actual notice of the terms. The duration of employment provided adequate consideration for enforceability. Additionally, determining if a dispute falls under the arbitration clause's scope is governed by federal law, with a strong presumption favoring arbitrability unless it can be definitively stated that the clause does not cover the dispute.

If a contract is ambiguous regarding the mandatory nature of arbitration, federal policy favoring arbitration prevails. However, an agreement to arbitrate certain disputes does not imply an intent to arbitrate all potential disputes. The determination of whether a dispute is covered by an arbitration clause hinges on the clause's breadth and the nature of the claim. Phrases like “arising under” or “arising out of” typically suggest a broad intent to arbitrate, while clauses limited to disputes about contract performance or interpretation are often narrower. 

In this case, the arbitration agreements related to Hagerty’s employment with Cyberonics indicate a broad scope, applying to claims "arising out of or relating to" his employment or application. The arbitration clauses specifically encompass employment and termination issues. The retaliation claims under the federal and Massachusetts False Claims Acts (FCAs) are connected to Hagerty’s employment and termination, aligning them with the arbitration provisions. Courts have previously ruled that similar FCA retaliation claims fall within the scope of arbitration clauses that cover employment-related disputes.

Relators' claims of retaliation under the False Claims Act (FCA) are deemed arbitrable based on an arbitration clause mandating that employment-related claims, including termination, be resolved through binding arbitration. The case references include United States ex rel. Cassaday v. KBR, Inc., which affirms this position, and Mikes v. Strauss, which interprets a broad arbitration clause as inclusive of FCA retaliation claims. Hagerty argues that his anti-retaliation claims fall outside the arbitration clause's scope, asserting that it lacks "clear and unmistakable terms" for enforcing arbitration of statutory claims, citing Warfield v. Beth Israel Deaconess Medical Center. In Warfield, the court ruled that statutory discrimination claims did not fall within a specific arbitration clause, emphasizing that such clauses must be explicitly stated to limit rights under Massachusetts law. However, the court's application of state contract law principles in Warfield is critiqued, as the determination of arbitration scope is governed by federal law, which operates under a presumption of arbitrability. This presumption dictates that arbitration should proceed unless it can be definitively shown that the clause does not cover the dispute. The Warfield "clear and unmistakable terms" standard is deemed inappropriate here, as it would conflict with the federal presumption of arbitrability. Additionally, the arbitration clauses in this case are broader than those in Warfield, encompassing claims related to both Hagerty's employment application and his employment with Cyberonics, thereby supporting the arbitration of his wrongful termination claims.

Hagerty argues that the arbitration clause in the Offer Letter overrides the one in the Employment Application, asserting that the Offer Letter indicates a desire for arbitration concerning employment terms, excluding retaliation, termination, or discrimination claims. He claims the current dispute arises from his termination, thus falling outside the scope of employment-related arbitration. However, the Offer Letter specifies that it only supersedes written or verbal representations by Cyberonics, and since the Employment Application’s clause is a mutual agreement, it is not superseded. Furthermore, Hagerty's argument is deemed unpersuasive; without an employment relationship, there can be no termination, making it illogical to arbitrate employment matters while excluding termination issues. Therefore, Counts 31 and 33 are subject to arbitration.

Regarding waiver of arbitration rights, courts uphold a strong federal policy favoring arbitration, and waiver is not easily inferred. Prejudice resulting from delays is assessed through factors such as the length of delay, litigation participation, inconsistency with arbitration rights, and significant intervening events. Hagerty claims Cyberonics waived its arbitration rights by filing two motions to dismiss. However, since many claims were not arbitrable, Cyberonics' actions were justified to avoid bifurcation and resolve all claims. It is established that filing a motion to dismiss does not equate to waiving the right to arbitrate. The cases Hagerty cites are distinguishable, as they involved motions to dismiss all claims within a valid arbitration agreement, unlike the current case where thirty of thirty-three claims were not arbitrable.

Moving to dismiss was appropriate and did not contradict Cyberonics' right to arbitrate, as established in prior case law. On March 31, 2015, all claims except two retaliation claims were dismissed, and Cyberonics asserted that the remaining claims were subject to binding arbitration in its April 28, 2015 answer. The subsequent motion to compel arbitration filed on May 13, 2015, was timely and did not prejudice Hagerty significantly. The court found the arbitration provisions enforceable and addressed the proper case disposition. It noted that while Cyberonics could seek dismissal of the remaining two claims with prejudice, a stay pending arbitration would be more efficient and allow for issue consolidation for appeal. Consequently, Hagerty's motion to file a second amended complaint was denied, Cyberonics' motion to compel arbitration for the two counts was granted, and the case was stayed pending arbitration. Hagerty's argument regarding the legal standards and the applicability of prior rulings was found unconvincing, particularly in light of established precedents. Cyberonics' filing of multiple motions to dismiss did not affect the court's decision.