A Violation of a Regulation Can be “Knowing” Even if There is No Judicial Decision Saying So at the Time of the Conduct at Issue

Allstate Ins. Co. v. Northfield Medical Center, P.C., ___ N.J. ___ (2017).  After a bench trial, defendants were found to have violated the Insurance Fraud Prevention Act, N.J.S.A. 17:33A-1 to -30 (“IFPA”).  The violation arose from defendants’ use of “a practice structure that was designed to circumvent regulatory requirements with respect to the control, ownership, and direction of a medical practice.”  But an IFPA violation must be “knowing,” and defendants argued that plaintiff Allstate had not shown that defendants had proven that state of mind.  The Appellate Division agreed and reversed.  But the Supreme Court granted review and, in an opinion by Justice LaVecchia, found that the “knowing” requirement had been satisfied and reinstated the verdict in favor of Allstate.

The State Board of Medical Examiners is the relevant administrative agency in this area.  In 1995 and 1997, the Board issued informal guidances, in the form of letter opinions, in response to requests for opinions as to the propriety of certain practice structures that were somewhat comparable to that employed by defendants here.  That latter opinion shortly preceded the formation of the practice at issue in this appeal.  But there was no opinion by a court in this area until 1999, well after defendants had begun operations.

Allstate began to receive insurance claims for treatments by defendant, and was suspicious about the structure of that practice.  Allstate began an investigation and, at a certain point, stopped paying on defendant’s claims.  In 1999 (making this case even older than the eleven-year old one recently discussed here), Allstate sued defendant under the IFPA.  As Justice LaVecchia noted, the case had “a tortuous procedural history” thereafter.  Allstate’s theory was not that any claims were false, but that the structure of defendant’s practice was unlawful, and that compliance with standards governing corporate practice was “a necessary precondition to an insurance claim.”

The Supreme Court applied deferential review to the findings and conclusions of the trial judge, while noting that questions of law would receive de novo review.  The key issue was what “knowing” meant.  The Legislature did not import the criminal law definition of “knowing.”  The issue came down to a plain language interpretation, which Justice LaVecchia found did not require “contortions” to resolve.  “‘Knowing’ is well understood to be an awareness or knowledge of the illegality of one’s act.”

There need not have been a “prior decision holding that the precise conduct at issue gives rise to a violation of a legal requirement.”  Instead, knowledge could be inferred from “the surrounding factual circumstances.”  The plain language of the regulation that defendant violated, along with the 1995 informal guidance, left “no basis for crediting the argument that defendants could not have known that their structure violated the Board’s regulatory requirements.”  Moreover, the evidence showed that defendants had gone to great lengths to conceal the true nature of their structure.  There was thus ample evidence to support the trial court’s ruling that defendants’ violation was “knowing.”

 

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