2009 Year-End False Claims Act Update

January 8, 2010

In 2009, the United States government invested trillions of dollars into the economy.  Coupled with this unprecedented spending came increased demands for transparency and accountability.  Meanwhile, the False Claims Act (FCA)[1] underwent significant change in 2009, and we witnessed record-breaking settlements, statutory amendments, legislative proposals, and important judicial decisions.  In the end, these developments should encourage contractors, grantees, and other direct and indirect recipients of federal funds to reevaluate and, if necessary, strengthen their FCA compliance efforts.

1.  FCA Enforcement Activity in 2009

A.   Total Recovery Amounts

2009 was a monster year for FCA enforcement.  The Department of Justice (DOJ) announced $2.4 billion in civil settlements and judgments in FCA cases for the fiscal year ending September 30, 2009.[2]  This total represents the second largest annual recovery of civil fraud claims and only the third time recoveries have exceeded $2 billion in a single year.  The 2009 figures raise total federal FCA recoveries since 1986 to more than $24 billion.[3]

The FCA’s enormous whistleblower incentives were most evident in 2009.  Nearly $2 billion of the FY 2009 settlements and judgments stemmed from actions initiated under the qui tam provisions of the FCA, and relators received more than $255 million in FY 2009 alone.  Moreover, recent legislative enactments have strengthened whistleblower protections, and pending legislation would strengthen them even further.[4]  The current political climate suggests ever increasing incentives for, and reliance upon, private qui tam enforcement of the FCA.

B.  Industry Breakdown

In 2009, health care and procurement fraud in connection with Department of Defense (DOD) contracts continued to dominate FCA recoveries.  The following chart depicts federal civil FCA recoveries within these industries over the last decade:

FCA Recoveries By Industry

i.  Health Care Fraud

As with all previous years for which statistics are available, the overwhelming majority of recoveries in FY 2009, nearly $1.6 billion, came from the health care industry.[5]  The statistics are not surprising given the massive amounts of federal health care spending.  In FY 2009 alone, assistance from the Department of Health and Human Services (HHS) exceeded $363 billion (30.7% of total federal grant dollars for the fiscal year).  And the National Health Care Anti-Fraud Association estimates that the United States government loses at least $60 billion to health care fraud every year.

In its November 19, 2009 Press Release, the DOJ stated that fighting health care fraud is a “top priority,” and noted that its Civil Division “is pursuing allegations of a variety of schemes” within the health care industry.[6]  Earlier this year, on May 29, 2009, the DOJ and HHS announced a joint task force comprised of law-enforcement agents and prosecutors aimed at preventing fraud and enforcing anti-fraud laws known as the Health Care Fraud Prevention & Enforcement Action Team (HEAT).  HHS Secretary Kathleen Sebelius announced that the taskforce would “turn[] up the heat on perpetrators who steal from the taxpayers and threaten the future of Medicare and Medicaid.”[7]  DOJ credits much of its recent, significant health care recoveries to the work of HEAT and similar health care strike forces.

ii.  Procurement Fraud

FY 2009 procurement fraud settlements and judgments totaled more than $608 million and represented a quarter of all FY 2009 FCA recoveries.  $422 million of those recoveries were attributable to defense contracts ($59 million of which related to contracts in support of the wars in Iraq and Afghanistan).  Throughout 2009, President Obama and members of Congress repeatedly have called for increased oversight, accountability, and transparency in government contracting.  On March 4, 2009, President Obama observed, “Over the last eight years, government spending on contracts has doubled to over half a trillion dollars.  Far too often, the spending is plagued by massive cost overruns, outright fraud, and the absence of oversight and accountability.”[8]

Not surprisingly, Assistant Attorney General Tony West proclaimed,

“Addressing procurement fraud [remains] among [the] highest priorities at the [DOJ] and for the Civil Division . . . This includes everything from pursuing fraud in connection with the delivery of vital services to our men and women in uniform, to ensuring that the American taxpayers are not overcharged for what we purchase; ensuring that the equipment we deploy is built to specifications, tested, and properly performs, and enforcing the laws against bribery or other corruption that taints our contracts.”[9]

In addition, Section 841 of the National Defense Authorization Act for Fiscal Year 2008 created the Commission on Wartime Contracting in Iraq and Afghanistan (CWCIA), tasked with, among other things, “assess[ing] a number of factors related to wartime contracting, including the extent of waste, fraud, abuse, and mismanagement of wartime contracts.”[10]  In its June 2009 Interim Report to Congress, the CWCIA stated, the “environment in Iraq and Afghanistan has been and continues to be susceptible to waste, fraud, and abuse.”[11]  The CWCIA continued:

Without proper oversight, the government cannot confirm that contractors are performing in accordance with contract requirements, cannot support payment of award or incentive fees, cannot support the certification of invoices for services performed, and cannot ensure that services critical for the completion of our military and reconstruction missions are performed.  Any one of these conditions invites waste and abuse.  Taken together, they are a perfect storm for disaster.[12]

While the CWCIA focuses on operations in Iraq and Afghanistan, in January 2009, Congress created an ad hoc subcommittee on contracting oversight to focus on all federal contracting.  The subcommittee held several hearings during 2009, including “Improving the Ability of Inspectors General to Detect, Prevent, and Prosecute Contracting Fraud,” in April 2009, and “Achieving the President’s Objectives: New OMB Guidance to Combat Waste, Inefficiency, and Misuse in Federal Government Contracting” in October 2009, which examined, among other things, “what additional controls and government oversight are needed to make sure that [government] contracts don’t result in the waste, fraud, and abuse we saw in Iraq.”[13]

Given the government’s extensive and ever increasing reliance on private contractors and the cry for increased oversight, we expect a further increase in FCA enforcement activity within the procurement arena over the next several months.

C.  Significant FCA Settlements and Judgments in FY 2009

DOJ press releases in 2009 announced several record-breaking recoveries, including, “the largest criminal fine ever imposed in the United States for any matter,”[14] the “largest civil fraud settlement in history against a pharmaceutical company,”[15] “one of the largest recoveries ever in a case involving a medical device,”[16] and “a record federal recovery by the Justice Department for the Medicaid Program.”[17]  Among the most substantial settlements in 2009 were:

• Pfizer:  In September 2009, the DOJ announced its settlement with pharmaceutical company Pfizer Inc. and its subsidiary Pharmacia & Upjohn Company Inc.[18]  Pfizer agreed to pay $1 billion to resolve FCA allegations regarding alleged illegal promotion of four drugs.  The federal share of the civil settlement exceeded $668.5 million and the state Medicaid share of the civil settlement exceeded $331 million.  Six whistleblowers will receive payments totaling more than $102 million from the federal share of the civil recovery.  Under the terms of the settlement, Pharmacia & Upjohn Company also pleaded guilty to a felony violation of the Food, Drug and Cosmetic Act and agreed to pay a criminal fine of nearly $1.2 billion.  Pharmacia & Upjohn also forfeited $105 million, for a total criminal resolution of $1.3 billion.
• New York State and New York City:  In July 2009, the DOJ announced a settlement that represented at the time “a record federal recovery by the Justice Department for the Medicaid Program” when New York State and New York City agreed to pay $540 million to settle allegations that they submitted or caused to be submitted false claims for reimbursement for school-based health care services provided to Medicaid eligible children.  The qui tam relator who initiated the FCA investigation and actions received $10 million.[19]
• Sanofi-Aventis:  In May 2009, Sanofi-Aventis agreed to pay $95.5 million to settle allegations that it violated Medicaid’s “best prices” requirement.  Under the Medicaid Drug Rebate Statute, Sanofi-Aventis was required to report to Medicaid the lowest, or “best” price that it charged commercial customers, and pay quarterly rebates to the states based on those reported prices.  Of the total settlement amount, $49 million went to the federal government, more than $40 million went to several states, and more than $6 million was awarded to certain public health services entities who allegedly paid inflated prices for the drugs.[20]
• Quest Diagnostics:  In April 2009, the DOJ announced a $302 million global settlement with Quest Diagnostics and its subsidiary, Nichols Institute Diagnostics (NID), resolving criminal and civil claims concerning various types of diagnostic test kits that NID manufactured, marketed, and sold to laboratories throughout the country.[21]  According to the DOJ, the payment “represents one of the largest recoveries ever in a case involving a medical device.”[22]  Quest and NID paid the United States $262 million plus interest to resolve the civil FCA allegations, and paid various state Medicaid programs approximately $6.2 million.  The qui tam relator received approximately $45 million from the federal share of the settlement amount.
• Northrop Grumman:  In April 2009, Northrop Grumman Corp., one of its subsidiaries, and a predecessor company agreed to settle FCA claims in connection with the sale of allegedly defective satellite parts.  The DOJ valued the settlement at $325 million, which was used to offset claims Northrop had asserted against the government in an earlier, unrelated contract dispute action.[23]  A former employee whistleblower was awarded more than $48 million as his share of the recovery under the qui tam provisions of the FCA.
• NetApp:  In April 2009, GSA Contractor NetApp Inc. and NetApp U.S. Public Sector Inc. agreed to pay $128 million to resolve claims that they violated the FCA during contract negotiations and administration by knowingly failing to provide GSA with current, accurate, and complete information about its commercial sales practices and discounts for hardware, software, and storage management services for computer networks sold to government entities through the GSA program.[24]  A former NetApp employee whistleblower was awarded more than $19 million as his share of the recovery.
• APL:  In February 2009, APL Limited agreed to settle FCA claims for more than $26 million stemming from allegations that it submitted inflated invoices for shipping containers to troops in Iraq and Afghanistan.[25]
• Eli Lilly:  On January 15, 2009, Eli Lilly and Company agreed to pay $1.415 billion to resolve criminal and civil allegations stemming from off-label promotion of prescription drugs.[26]  The federal share of the civil FCA settlement was $438 million.  At the time, the reported $515 million criminal fine was “the largest ever in a health care case, and the largest criminal fine for an individual corporation ever imposed in a United States criminal prosecution of any kind.”  In addition, the plea agreement provided for a $100 million forfeiture of assets.  The qui tam relators were awarded more than $78 million from the federal share of the civil settlement amount.

2.   Legislative Action in 2009

As we noted throughout the year in various other Client Alerts, for the first time in more than twenty years, Congress passed legislation in 2009 that amended essential provisions of the False Claims Act.  And more awaits, as pending legislation is poised to further amend the Act.  2009 also brought legislation, both passed and proposed, that will likely impact FCA investigation and enforcement activity.

A.  Fraud Enforcement and Recovery Act of 2009 (FERA)[27]

In our May 26, 2009 client alert, “President Obama Signs Legislation Significantly Expanding the Scope of the False Claims Act ,” we provided a detailed summary of important changes to the FCA embodied within FERA.  FERA provides substantial funding for federal fraud detection and enforcement, including appropriations of $165 million in 2010 and 2011 for “investigations and prosecutions and civil and administrative proceedings involving Federal assistance programs and financial institutions.”  What follows below is a recap of important procedural and substantive changes to the FCA embodied within FERA.

i.  The Civil Investigative Demand (CID)

The CID is a potent investigative device.  Whenever the Attorney General has reason to believe that a person may be in possession of documents or information relevant to an FCA investigation, the Attorney General may issue and serve a CID requiring the recipient to produce documents, answer written interrogatories, and/or provide oral testimony, even before litigation commences.  See 31 U.S.C. § 3733(a)(1).  Before FERA, the Attorney General was required to personally approve the issuance of all CIDs, and dissemination of information acquired through the CID process was limited.  FERA amended the FCA to provide that the Attorney General may now delegate his authority to issue a CID.  Further, investigators may share information obtained through the CID process with qui tam relators and other government agencies without demonstrating “substantial need” or obtaining prior approval from a district court, as was required under the prior version of the Act.

In a briefing with reporters on November 19, 2009, Assistant Attorney General Tony West, the head of the Civil Division, said that Attorney General Eric Holder planned to give him authority to issue CIDs and that West was, “anxious to use that authority in appropriate ways.”[28]  Further, the DOJ reportedly is finalizing a policy that may authorize many lower-level government investigators to issue CIDs.  Senator Charles Grassley (R-IA) in particular is focused on CID authority implementation and “want[s] to hear about any problems the Justice Department is having implementing this powerful tool, and efforts to implement the new authority to share information obtained from CIDs with qui tam relators.”[29]  As a result, we expect to see a marked increase in the frequency of CIDs issued in FCA investigations over the coming months.

ii.  Modification of Intent Requirement

In Allison Engine Co. v. United States ex rel. Sanders, 128 S. Ct. 2123 (2008),[30] the Supreme Court held that Sections 3729(a)(2) and 3729(a)(3) of the FCA apply only to fraud directed against the federal government and not to frauds that subcontractors may commit against prime contractors working on projects funded with federal dollars.  The Court held that a defendant must “intend that a claim be paid . . . by the Government and not by another entity.”  Id. at 2129.

FERA legislatively overruled Allison Engine.  The law now imposes FCA liability even if a company submits a false claim to a non-government entity and did not specifically intend to defraud the government directly.  Of particular note regarding this aspect of FERA, Congress made certain provisions of the new law retroactive to June 7, 2008–the date Allison Engine was decided.  As discussed below in Section 3, litigation has ensued over this retroactivity provision, and the majority of federal courts that have thus far addressed the issue, including the district court that received the Allison Engine case on remand, have refused to apply the amendment retroactively to the case at bar.

iii.  Elimination of any Presentment Requirement

Under FERA, the FCA now extends to any false or fraudulent claim for government money or property, whether or not the claim is presented to a government official or employee, and whether or not the government has title to, or physical custody of, the money or property.  FCA’s new definition of a “claim,” includes, “any request or demand . . . for money or property and whether or not the United States has title to the money or property, that . . . is made to a contractor, grantee, or other recipient, if the money or property is to be spent or used on the Government’s behalf or to advance a Government program or interest.”  31 U.S.C. § 3729(b)(2).  The implications of this change are profound.  So long as that money is used to “advance a Government program or interest,” a phrase the amendments do not define, then any false claim made to any recipient of federal money will trigger FCA liability.  Under a broad reading of the Act, the FCA could apply to nearly any fraud committed against any federal recipient or grantee.

iv.  FCA Penalizes the Knowing Retention of “Overpayments”

The FCA previously penalized any person who “knowingly makes, uses, or causes to be made or used, a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the Government.”  31 U.S.C. § 3729(a)(7).  FERA amended the FCA to specifically define an “obligation” to include “the retention of any overpayment.”  31 U.S.C. § 3729(b)(3).  This opens up new avenues of exposure for federal contractors or grantees who knowingly retain government “overpayments.”  As a result of the amendments, a contractor that innocently obtained government funds in the first place may become liable under the FCA if it later has reason to believe that it was overpaid.  This new provision raises many unanswered questions, such as when the statute of limitations begins to run (e.g. does the statute begin to run on the date of submitting the original claim, the date of payment, the date the recipient should have known it was overpaid, the date the government demands repayment, or some other date), and what will happen in situations where the contracting parties expect a “true up” or off-set under the contract.

In our November 13, 2008 Client Alert, “New Federal Regulation Requires Mandatory Disclosure and Amplified Compliance Programs for Government Contractors,” we discussed rules effective December 12, 2008, that required mandatory disclosure by federal government contractors of “credible evidence” of certain violations of the FCA and “significant” overpayments on a contract.  According to Lynn McCormick, Manager, DOD Contractor Disclosure Program, as of October 13, 2009, DOD had received 80 disclosures since the Federal Acquisition Regulation (FAR) amendments took effect.[31]  FAR requires a “timely,” disclosure of overpayments, but does not define “timely.”  Of particular note, the FCA has a provision for “reduced damages” (double instead of treble) for cooperation and voluntary self-disclosure if “the person committing the violation of [the FCA] furnished officials of the United States responsible for investigating false claims violations with all information known to such person about the violation within 30 days after the date on which the defendant first obtained the information.”  31 U.S.C. § 3729(a)(2)(A).  Thus contractors subject to FAR and considering self-disclosure of an overpayment might consider reporting suspected overpayments or other potential FCA violations within thirty days to take advantage of the reduced damages provision under the FCA should the overpayment be deemed an FCA violation.

v.  Definition of Materiality

FERA resolved a circuit split by defining “materiality” as “having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property,” which was the more liberal standard previously applied by some courts.  31 U.S.C. § 3729(b)(4).

vi.  Relation Back

After FERA, the FCA now provides that when the government intervenes in a qui tam case it can expand the relator’s allegations and include new substantive claims, which will “relate back” to the filing date of the original qui tam complaint for statute of limitations purposes.  As a practical matter, the “relation-back” provision may operate to extend the statute of limitations in FCA suits.

vii.  Expanded Whistleblower Protections

The FCA previously afforded protection to any “employee” that suffered retaliation from his or her employer as a result of protected conduct.  Following FERA, whistleblower protections now extend beyond “employees” to any “contractor or agent” if that “employee, contractor, or agent is discharged, demoted, suspended, threatened, harassed, or in any other manner discriminated against in the terms and conditions of employment because of lawful acts done by the employee, contractor, or agent on behalf of the employee, contractor, or agent or associated others in furtherance of other efforts to stop 1 or more violations of” the FCA.  31 U.S.C. § 3730(h)(1).

B.  American Recovery and Reinvestment Act of 2009[32]

On February 17, 2009, President Barack Obama signed into law the American Recovery and Reinvestment Act of 2009 (ARRA).  ARRA’s combined spending and tax provisions are expected to cost $787 billion over 10 years.  More than two dozen federal agencies have been allocated a portion of the $787 billion in recovery funds, and each agency has awarded or will distribute those funds to state governments or directly to contractors and grantees.

ARRA includes several provisions aimed at ensuring accountability and transparency.  Among other things, ARRA creates a Recovery Accountability and Transparency Board to “prevent and detect waste, fraud, and abuse” and to “provide transparent reporting of Recovery-related funds as they are distributed and used.”[33]  Awarding agencies are required to file weekly spending reports, and, starting in October 2009, recipients began filing quarterly reports on ARRA fund spending.  Further, all ARRA recipients and sub-recipients must promptly refer to the DOJ, Office of Inspector General (OIG) any credible evidence that a principal, employee, agent, contractor, subgrantee, subcontractor, or other person has submitted a false claim for ARRA funds under the FCA.

Since the enactment of ARRA in February 2009, the DOJ OIG has trained more than 800 grant officials to recognize the specific fraud, waste, and abuse risks related to ARRA and other grant funding.  In addition, the OIG prepared a document, entitled “Improving the Grant Management Process,” which contained recommendations and best practices that OIG auditors and investigators have identified and that granting agencies should consider adopting to reduce waste, fraud, and abuse.[34]  As a result of this spending, reporting, and investigative efforts, we expect to see FCA activity in connection with ARRA funds in the coming months.

C.  Emergency Economic Stabilization Act of 2008 (EESA) and the Troubled Asset Relief Program (TARP)

According to the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP), as of September 30, 2009, the United States Treasury had announced commitments to spend $643.1 billion of the $699 billion maximum available for the purchase of troubled assets under TARP.  The following GAO graphic depicts spending through the end of FY 2009:

SIGTARP, created by section 121 of the EESA, is responsible, among other things, to conduct, supervise, and coordinate audits and investigations of the purchase, management, and sale of assets under TARP.  One of SIGTARP’s oversight responsibilities is to prevent fraud, waste, and abuse.  To that end, SIGTARP reportedly has developed a close working relationship with the FBI, DOJ, SEC, and United States Attorney’s Offices.  According to SIGTARP’s October 2009 quarterly report to Congress, “[t]hrough September 30, 2009, SIGTARP has opened 61 and has 54 ongoing criminal and civil investigations.”[35]  In addition, “[s]ince its inception, the SIGTARP Hotline received and analyzed more than 7,000 contacts, running the gamut from expressions of concern over the economy to serious allegations of fraud.”[36]  With billions of dollars in government spending and significant investigative activity, increased FCA enforcement activity and qui tam litigation is sure to follow in connection with TARP funds.

D.  Pending Legislation

i.  S. 458 and H.R. 1788, the False Claims Act Clarification Act of 2009

On February 24, 2009, Senator Charles Grassley (R-IA) introduced S. 458, the “False Claims Act Clarification Act of 2009.”  On March 30, 2009, Representative Howard Berman (D-CA) introduced H.R. 1788, entitled the “False Claims Act Correction Act of 2009.”  Some of the proposed FCA amendments included within these bills were incorporated into FERA.  In addition, these bills look to expand the class of individuals permitted to bring qui tam actions and effectively eliminate potent FCA defenses.  For example, the amendments would (i) allow dismissal of a private action based upon the prior public disclosures only upon timely motion to dismiss by the Attorney General; (ii) narrowly redefine what constitutes a “public disclosure;” and (iii) amend the FCA to provide that private persons bringing qui tam actions shall not be required to identify specific claims that result from an alleged fraudulent scheme under certain circumstances, significantly curtailing a defendant’s ability to successfully move for dismissal under Rule 9(b) prior to costly discovery.

ii.  S. 1959, the Health Care Fraud Enforcement Act of 2009

On October 28, 2009, S.1959, the Health Care Fraud Enforcement Act of 2009 (HCFEA), was read twice and referred to the Senate Judiciary Committee.  Senator Patrick Leahy (D-VT) joined with Senator Ted Kaufman (D-DE) to introduce the bill, which is cosponsored by Arlen Specter (D-Pa.), Herb Kohl (D-Wis.), Chuck Schumer (D-N.Y.), and Amy Klobuchar (D-Minn.).  In relevant part, the bill would amend the Social Security Act to provide that any claim submitted in violation of the Anti-Kickback Statute (AKS) “constitutes a false or fraudulent claim for purposes of” the FCA.

In announcing the bill, Senator Kaufman noted, “By making all payments that stem from an illegal kickback subject to the False Claims Act, this bill leverages the private sector to help detect and recover money paid pursuant to these illegal practices.”[37]  The Senator also referred to a recent court decision that proved an “obstacle” to filing FCA actions in cases involving anti-kickback claims submitted by pharmacies and hospitals.  “This section remedies the problem,” he asserted, “by amending the AKS to ensure that all claims resulting from illegal kickbacks are false, even when the claims are not submitted directly by the wrongdoers themselves.”[38]

On December 22, 2009, the Senate voted 60-39 on a manager’s amendment from Senate Majority Leader Harry Reid (D-Nev.) that would incorporate elements of the HCFEA into the Senate health care reform bill.  The manager’s amendment included the HCFEA provision that would amend the AKS to ensure that all claims resulting from illegal kickbacks are considered false claims for the purpose of civil action under the FCA.

iii.  S. 2782 and H.R. 2349, Lieutenant Colonel Dominic “Rocky” Baragona Justice for American Heroes Harmed by Contractors Act

On March 4, 2009, Senator Claire McCaskill (D-MO) introduced S. 526, entitled, Lieutenant Colonel Dominic “Rocky” Baragona Justice for American Heroes Harmed by Contractors Act.  On November 17, 2009, the bill was revised and reintroduced as S. 2782.[39]  The Committee on Homeland Security and Governmental Affairs Subcommittee on Contracting Oversight held hearings on the proposed legislation on November 18, 2009.[40]  On May 12, 2009, Representative Timothy Ryan (D-OH) introduced similar legislation in the House, H.R. 2349, which was referred to the Subcommittee on Government Management, Organization, and Procurement on June 26, 2009.[41]  For a detailed discussion of the proposed legislation, see our December 21, 2009 Client Alert “Proposed Legislation Would Allow Foreign Contractors to Be Sued in U.S. Courts.”

Under the proposed legislation foreign contractors would be required, among other things, to consent to personal jurisdiction of the U.S. courts over civil or criminal actions brought by the government stemming from “wrongdoing associated with the performance of the covered contract.”[42]  The proposed legislation would also amend the FAR to provide that a foreign contractor may be debarred or suspended from contracting with the United States for evasion of service of process or failure to appear in U.S. court.

During the Senate Hearings, Assistant Attorney General Tony West noted, “the Department has brought cases successfully against foreign contractors and subcontractors, and other nonresident defendants, for violations of the False Claims Act. . . . To date, [the government] ha[s] not yet faced a personal jurisdiction challenge in connection with a procurement fraud matter arising out of contracts related to the wars and reconstruction efforts in Iraq and Afghanistan.”[43]  Nevertheless, West remarked that he anticipated personal jurisdiction challenges in FCA cases in the future and, thus, “requiring contractors to consent to personal jurisdiction in U.S. courts as a condition of their contract with the United States should assist us in establishing personal jurisdiction over foreign contractors in procurement fraud cases.”[44]

iv.  Additional Bills in the Current Congress with Potential FCA Application

• On January 6, 2009, H.R. 27, the Medicare Fraud Prevention and Enforcement Act of 2009, was introduced in the House. On February 9, 2009, the bill was referred to the Subcommittee on Crime, Terrorism, and Homeland Security.  Among other things, the bill would amend the Social Security Act to allow the government to exclude from participation in any federal health care program any billing agency or individual that knowingly submitted or caused to be submitted a claim for Medicare reimbursement that it knows or should know is false or fraudulent.
• On January 22, 2009, S. 301, the Physician Payments Sunshine Act of 2009, was read twice in the Senate and referred to the Senate Finance Committee.  On July 9, 2009, H.R. 3138 was introduced in the House and referred to the House Ways and Means Committee.  Both bills would require annual reporting, in electronic form, of specified information by any manufacturer of a covered drug, device, biological, or medical supply that makes a payment or another transfer of value to a physician, a physician medical practice, or a physician group practice.  Although we have witnessed little activity in the current session on these bills, the House and Senate actively are debating health care reform and the reform bills under consideration include provisions for public disclosure of payments to health care professionals.  It is unclear whether such reports would constitute “public disclosures,” sufficient to bar qui tam actions based upon the disclosures or whether the required public periodic reporting of all payments that could be construed as kickbacks may result in an increase in FCA litigation.
• On February 3, 2009, S. 372, the Whistleblower Protection Enhancement Act of 2009, was introduced in the Senate.  The bill was reported by the Senate Committee on Homeland Security and Governmental Affairs on July 29, 2009, and placed on the Senate Legislative Calendar on December 3, 2009.  On March 12, 2009, a similar bill was introduced in the House, H.R. 1507, also entitled the “Whistleblower Protection Enhancement Act of 2009,” and referred to the House Committee on Homeland Security.  Although the bills are not identical, both would amend the Whistleblower Protection Act, Chapter 23 of Title 5 of the United States Code, to clarify current law and give new protections to federal employees and contractors who report abuse, fraud, and waste involving government activities.
• On March 5, 2009, H.R. 1360, the Contractor Accountability Act, was introduced in the House.  On May 4, 2009, the bill was referred to the Subcommittee on Government Management, Organization, and Procurement.  Among other things, the bill would require the head of each federal agency to report to Congress annually on each covered contract or order awarded or issued by the agency during the year.  The report would be publicly available on the agency’s website, and would contain a list of the names of each contractor found to be in breach of its obligations.  Although potential relators may review such reports for evidence of FCA violations, those reports may constitute “public disclosures,” thereby barring qui tam actions based thereupon.
• On March 12, 2009, H.R. 1472, the TARP and ARRA Reporting and Waste Prevention Act, was introduced in the House and referred to the House Oversight and Government Reform Committee.  Among other things, the bill would establish additional reporting requirements each time funds from TARP or ARRA are received or redistributed, would establish a waste, fraud, and abuse hotline for such funds, and would provide additional whistleblower protections.  Again, increased reporting and transparency may lead to increased FCA activity.
• On October 1, 2009, S. 1745, the Non-Federal Employee Whistleblower Protection Act of 2009, was introduced in the Senate and referred to the Committee on Homeland Security and Governmental Affairs.  Among other things, the bill would expand whistleblower protections to non-federal employees of companies that receive funding from any government agency (in the form of either grants or contracts).

E.  State Legislative Action

In 2009, Kansas, Minnesota, and North Carolina enacted civil false claims statutes modeled after the federal FCA.  The Deficit Reduction Act of 2005 provided a financial incentive for states to pass their own qualified false claims acts by offering the states a 10% increased share in FCA recoveries.  Now, more than thirty states, some cities, and the District of Columbia have their own versions of the FCA, most of which include qui tam provisions and apply to all false claims (although a handful of state statutes are limited to Medicaid claims only).[45]  Companies doing business with the government should be aware that many programs are jointly funded by the federal and state governments (such as Medicaid), and many government contracts are similarly funded by the federal and state governments (such as infrastructure improvement).  The federal government has also distributed significant amounts of ARRA funds to the states for redistribution to private entities.  Accordingly, companies may face concurrent allegations of liability under federal and state versions of the FCA.

3.  Hot Topics and Key Cases in 2009

In our 2009 Mid-Year False Claims Act Update, we discussed several important judicial decisions during the first half of 2009 regarding the FCA.  Courts continued to be active in deciding FCA-related cases during the second half of 2009.  Most recently, on November 30, 2009, the U.S. Supreme Court heard oral argument in Graham County Soil & Water Conservation Dist. v. United States ex rel. Wilson, No. 08-304, to determine whether state and local government reports constitute “public disclosures” under the meaning of the FCA, which would preclude qui tam actions “based upon” those disclosures.  In addition, many lower courts have faced issues of first impression, including decisions interpreting FERA, the constitutionality of the FCA’s seal provisions, and the ability of FCA defendants to bring contractual indemnity and other independent claims against third parties.

A.  Matters of First Impression

i.   Interpreting FERA

As discussed above in Section 2(A), the FCA was amended in 2009 through FERA.  Among other things, FERA legislatively overturned the Supreme Court’s unanimous ruling in Allison Engine Co. v. United States ex rel. Sanders, 128 S.Ct. 2123 (2008), and eliminated the former intent requirement under 31 U.S.C. § 3729(a)(2), which required a relator to show that a defendant had knowingly made or used a false record or statement “to get” a false or fraudulent claim “paid or approved by the Government.”  Although enacted on May 20, 2009, FERA contains a retroactivity clause: the amendments “shall take effect on the date of enactment and shall apply to conduct on or after the date of enactment, except that [the amendments to former 31 U.S.C. §3729(a)(2)] shall take effect as if enacted on June 7, 2008, and apply to all claims under the False Claims Act.”  Since FERA’s passage, a number of courts have addressed the retroactivity of FERA’s amendments to the FCA.

Upon remand from the Supreme Court, the Southern District of Ohio held “[a] plain reading of the retroactivity clause results in the conclusion that the FCA as amended by FERA does not apply to this case,” because the amendments referred to “claims” that existed on June 7, 2008 rather than “cases.”  United States ex rel. Sanders v. Allison Engine Co, Inc., No. 1:95-CV-970, 2009 WL 3626773, at *10 (S.D. Ohio Oct. 27, 2009).  The court also held that the retroactive application of FERA to the defendants in Allison Engine “violates the Ex Post Facto Clause because Congress intended for the FCA to be punitive and because FCA sanctions are punitive in purpose and effect.”  Id. at *10.  Two other district courts have reached similar results.  United States v. Aguillon, 628 F. Supp. 2d 542, 550-51 (D. Del. 2009) (determining sua sponte that FERA’s amendments were not to be applied retroactively because it “would increase [a] defendant’s liability for past conduct.”); United States v. Sci. Applications Int’l Corp., No. 04-1543 (RWR), 2009 WL 2929250, at *14 (D.D.C. Sep. 14, 2009) (FERA did not retroactively apply because the amendments applied to “claims” pending on or before June 7, 2008 and not “cases.”).  Indeed, the majority of courts to have addressed the issue to date have refused to apply FERA retroactively to pending cases.  Id.; see also, e.g., Hopper v. Solvay Pharms., Inc., No. 08-15810, 2009 WL 4429519, at *11 n. 3 (11th Cir. Dec. 4, 2009).  But see United States ex rel. Stephens v. Tissue Sci. Labs, Inc., No 1:07-CV-2357, 2009 WL 3363727, at *9 n.2 (N.D. Ga. Aug. 13, 2009) (“Because this action was pending on June 7, 2008, the amended § 3729(a)(1)(B) applies to this action”); United States ex rel. Walner v. Northshore Univ. Healthsystem, No. 08 C 2642, 2009 WL 3055357, at *5 n.3 (N.D. Ill. Sept. 18, 2009) (“Because the alleged conduct here occurred before May 20, 2009, this Court will apply the older versions of § 3729(a)(3) and § 3729(a)(1) for Counts I and II; however, because Walner’s claim was pending on June 7, 2008, the Court will apply the new version of § 3729(a)(1)(B) for Count III.”).

ii.  District Court Finds FCA’s Seal Provision to be Constitutional

When a relator institutes a qui tam action, the complaint must be filed in camera and under seal.  Section 3730(b)(2) provides that the complaint “shall remain under seal for at least 60 days, and shall not be served on the defendant until the court so orders.”  31 U.S.C. § 3730(b)(2).  During these sixty days, the government may investigate and determine whether to intervene.  Although the statute provides a 60-day seal period for the government to investigate, the government routinely seeks, and is granted, extensions of the time period to investigate the relator’s claims fully.  After the government completes its investigation and informs the court regarding its decision whether or not to intervene, the seal is lifted, the qui tam complaint becomes public, and the defendant is served.

In a matter of first impression, the American Civil Liberties Union (ACLU) recently challenged the constitutionality of the FCA’s seal provisions.  See ACLU v. Holder, No. 1:09-cv-042, 2009 WL 2596641 (E.D. Va. Aug. 21, 2009).  The ACLU argued (1) that the FCA’s seal provisions are facially unconstitutional because they violate the public’s First Amendment rights of access to information; (2) the FCA’s seal provisions are content-based restrictions that prevent the relator from discussing the case in violation of the relator’s First Amendment rights; and, (3) the FCA’s seal provision violates the separation of powers by infringing on a court’s inherent authority to determine, on a case-by-case basis, “whether a particular FCA action should be hidden from public scrutiny.”  Id. at *2.

The Eastern District of Virginia rejected each of the ACLU’s challenges.  First, the court held that there is no First Amendment right of access to a sealed qui tam complaint and that the seal’s provisions were narrowly tailored to serve a compelling government interest.  Id. at *7.  Second, after noting that the ACLU lacked standing to assert the rights of third-party relators not before the court, the court held that the FCA’s seal provisions are neither a content-based restriction on speech nor a prior restraint on speech.  Id. at *10, 13.  Finally, the court determined that the FCA’s seal provisions did not violate separation of powers because the FCA’s seal provisions did not dictate any result nor did it usurp the ability of the court to decide cases on a case-by-case basis.  Id. at *14.  The plaintiffs (ACLU, OMB Watch and the Government Accountability Project) appealed the decision to the Fourth Circuit and filed their Opening Brief on November 9, 2009 (Case No. 09-2086).  The Attorney General’s Response Brief presently is due on January 27, 2010.

iii.  Court Protects Contractual Indemnity Claims in Qui Tam Litigation

As another matter of first impression, the Ninth Circuit recently decided that a target defendant who settles a qui tam lawsuit may still seek recovery from third parties for contractual indemnity and independent claims.  Cell Therapeutics Inc. v. Lash Group Inc., 586 F.3d 1204 (9th Cir. 2009).  Cell Therapeutics Inc. (CTI) developed a cancer drug (Trisonex) that the FDA approved for the treatment of leukemia.  Id. at 1206.  Because this was the first time that CTI had received FDA approval for any drug, it sought the assistance of Lash Group Inc.’s predecessor Documedics Acquisition Company (Documedics) to handle Medicare reimbursement on CTI’s behalf.  Id.  Documedics erroneously advised CTI and medical practitioners that off-label uses of Trisonex were reimbursable under Medicare.  Id. at 1206-07.  CTI asserted that based on this advice, it made a variety of business decisions including no longer pursuing further research and publications that would have supported Medicare reimbursement.  Id. at 1207.

In 2006, a CTI employee filed a qui tam complaint against CTI and Lash.  Id.  CTI settled with the relator and the government without admitting liability.  Id.  While the qui tam complaint was pending, however, CTI brought suit against Lash to recover damages related to the FCA settlement as well as other claims unrelated to the FCA settlement including the negligent provision of professional services and contractual indemnity.  Id.  The U.S. District Court for the Western District of Washington granted Lash’s motion for judgment on the pleadings holding that “qui tam defendants may not seek indemnification or contribution from co-participants in a scheme to defraud the government.”  Id.  

On appeal, the Ninth Circuit recognized that indemnification and contribution claims are ordinarily impermissible when a qui tam defendant has been found liable under the FCA, but nevertheless reversed, holding that many of the claims that CTI brought were “independent claims” that were not precluded by the qui tam settlement.  Id. at 1208-10.  Further, because the qui tam settlement did not contain an admission of liability, even CTI’s “dependent” claims should not have been dismissed at the pleadings stage.  Id. at 1210-12.  Cell Therapeutics thus suggests that FCA settlements without admissions of liability may preserve potential indemnity or contribution claims.

B.  Cases Highlighting Ongoing Circuit Splits

i.  What Types of Disclosures Are Public Disclosures?

Courts lack jurisdiction over qui tam FCA actions based upon a “public disclosure” unless the relator is an “original source” of the information that has been disclosed.  Examples of public disclosures include those made in a “Congressional, administrative, or Government Accounting Office report, hearing, audit, or investigation.”  31 U.S.C. § 3730(e)(4)(A).  As stated above, the U.S. Supreme Court held oral arguments on November 30, 2009, regarding whether a state administrative report qualifies as a public disclosure, and we expect an opinion soon.

In the meantime, the lower courts continue to evaluate various types of disclosures to determine whether they qualify as public disclosures under the FCA.  For example, the First Circuit recently joined the Third, Fifth, Sixth, and Tenth Circuits when it held that a response to a Freedom of Information Act (FOIA) request constituted a public disclosure.  United States ex rel. Ondis v. City of Woonsocket, 587 F.3d 49, 55 (1st Cir. 2009).  In Ondis the First Circuit held that a response to a FOIA request constituted a “report” for purposes of the FCA.  See id. at 56 (rejecting Ninth Circuit’s “narrow” definition of the word “report”).

Meanwhile, a circuit split remains regarding whether information obtained in response to a state equivalent of the federal FOIA constitutes a public disclosure.  See United States ex rel. Hixson v. Health Mgmt. Sys., Inc., No. 4:07-cv-0465-JAJ, 2009 WL 3003258, at *5 (S.D. Iowa Sep. 21, 2009) (collecting cases).  And courts remain divided regarding “whether a discovery document produced during a civil hearing but never filed with the clerk’s office can also result in a public disclosure.”  United States ex rel. v. E. Idaho Reg’l Med. Ctr., No. Civ. 07-192 E-BLW, 2009 WL 2901233, at *9 (D. Idaho Sep. 8, 2009) (collecting cases and holding that deposition transcripts not filed with the court did not constitute a public disclosure).

ii.  A Minority of One

Once a court determines that a public disclosure has occurred, the next question the court asks is whether the qui tam action is “based upon” the public disclosure.  Most courts hold that if the relator’s allegations are substantially similar to the allegations contained in the public disclosure then the relator’s allegations are “based upon” the public disclosure.  The First Circuit recently joined the Second, Third, Eighth, Ninth, Tenth, Eleventh, and D.C. Circuits in adopting the substantially similar standard.  United States ex rel. Ondis v. City of Woonsocket, 587 F.3d 49, 58 (1st Cir. 2009).

For at least a decade, however, the Fourth and Seventh Circuits have interpreted “based upon” far more narrowly, and required proof that the relator’s allegations actually derived from the publicly disclosed information.  In July of this year, the Seventh Circuit reversed course leaving the Fourth Circuit as a minority of one in adhering to the more restrictive view.  See Glaser v. Wound Care Consultants, Inc., 570 F.3d 907, 920 (7th Cir. 2009) (reversing Seventh Circuit cases that previously followed minority view because the “actually derived from” “standard renders the original source exception superfluous.”).  The decision was not made en banc, but it was circulated “among all judges in regular active service [and n]o judge . . . requested to hear the case en banc.”  Id. at 910 n.1.

iii.  A Three-Way Circuit Split Regarding “Original Source” Requirements

If there has been a public disclosure and if the relator’s claims are “based upon” that public disclosure, the Court does not have jurisdiction over a qui tam FCA action unless the relator can demonstrate that he or she is an “original source” of the information.  The FCA defines an original source as “an individual who has [1] direct and independent knowledge of the information on which the allegations are based and [2] has voluntarily provided the information to the Government before filing an action under this section which is based on the information.”  31 U.S.C. § 3730(e)(4)(B).  The Circuit Courts remain divided over how to interpret the requirement that the original source “has voluntarily provided the information to the Government before filing an action.”

For example, the Fourth Circuit simply requires that the relator provide the information “to the government before filing his qui tam action.”  United States ex rel. Siller v. Becton Dickinson & Co., 21 F.3d 1339, 1351 (4th Cir. 1994) (emphasis omitted).  The Second and Ninth Circuits require that the relator “must have directly or indirectly been a source to the entity that publicly disclosed the allegations on which a suit is based.”  United States ex rel. Dick v. Long Island Lighting Co., 912 F.2d 13, 16 (2d Cir. 1990); United States ex rel. Wang v. FMC Corp., 975 F.2d 1412, 1419 (9th Cir. 1992).  A middle approach, adopted by the D.C. and Sixth Circuits, requires a relator to provide the government with the information prior to any public disclosure, yet does not require the relator to be the cause of the public disclosure.  See United States ex rel. Findley v. FPC-Boron Employees’ Club, 105 F.3d 675, 690 (D.C. Cir. 1997); United States ex rel. McKenzie v. BellSouth Telecomms., Inc., 123 F.3d 935, 942-43 (6th Cir. 1997).

Recently, the First Circuit, based on an analysis of the plain language of the original source exception, joined the Fourth Circuit in requiring that a relator provide the information upon which the relator’s suit is based to the government prior to bringing suit and rejecting any other timing requirements.  United States ex rel. Duxbury v. Ortho Biotech Prods., L.P., 579 F.3d 13, 22 (1st Cir. 2009).

iv.  Statute of Limitations

Over the years, courts have disagreed on what events trigger the FCA’s statute of limitations.  Section 3731(b)(1) of the FCA simply declares that the six year statue of limitations starts to run when a “violation of section 3729 is committed.”  Some courts have held that the statute of limitations begins to run when a false claim is submitted to the government.  See, e.g., United States v. Vanoosterhout, 898 F. Supp. 25, 28 (D.D.C. 1995), aff’d, 96 F.3d 1491 (D.C. Cir. 1996).  Other courts have held that the statute of limitations begins to run on the date the government makes payment.  See, e.g., Jana, Inc. v. United States, 41 Fed. Cl. 735, 742-43 (Fed. Cl. 1998).  In United States ex rel. Bauchwitz v. Holloman, the Eastern District of Pennsylvania recently predicted that the Third Circuit would hold that the statute of limitation was triggered by the filing of the claim in part because “the government is harmed by the false claim before payment is made.” No. 04-2892, 2009 WL 4362819, at *10 (E.D. Pa. Dec. 1, 2009).

C.  Resolution of Personal Employment Suit Does Not Preclude a Separate Qui Tam Action

The FCA prohibits an employer from discriminating against or discharging an employee (or agent or contractor) for engaging in conduct protected by the FCA, such as investigating or bringing an FCA action.  31 U.S.C. § 3730(h).  But does resolving personal employment litigation preclude an employee from bringing a qui tam action against the employer?  The Seventh Circuit recently joined the Fifth Circuit in holding that resolution of personal employment litigation does not foreclose a qui tam claim brought by the same employee.  United States ex rel. Lusby v. Rolls-Royce Corp., 570 F.3d 849, 852 (7th Cir. 2009).

In Lusby, the relator filed suit against Rolls-Royce based on section 3730(h) of the FCA.  Id. at 851.  A year later the parties entered a joint stipulation for dismissal.  Two months before filing the joint dismissal, the relator, presumably without Rolls-Royce’s knowledge, filed a qui tam complaint under seal.  Id.  Years later, the qui tam complaint was unsealed and Rolls-Royce moved to dismiss the relator’s complaint for failing to plead fraud with the particularity required by Rule 9(b).  Id.  The district court rejected the relator’s attempt to amend the complaint, “ruling that the qui tam action [was] barred by the claim preclusion (res judicata) effect of Lusby’s employment suit.”  Id.  On appeal the Seventh Circuit reversed for two reasons: (1) the United States as a real party in interest should not lose that interest because “a potential relator thoughtlessly omitted a qui tam claim from a personal suit,” and (2) “qui tam litigation is subject to requirements that make combining it with a personal damages suit awkward.”  Id. at 852.

D.  Insurers May Have No Duty to Provide Coverage for FCA Claims

On May 20, 2009, the Seventh Circuit confirmed that insurance carriers generally have no duty to defend or indemnify insureds in connection with underlying FCA lawsuits.  After surveying relevant decisions from jurisdictions throughout the country, the Seventh Circuit concluded courts, “uniformly hold that an insurer is not obligated to defend a qui tam suit merely because the insurer would have to defend the insured against a suit for damages resulting from the insured’s conduct underlying the qui tam action.”  Health Care Indus. Liab. Ins. Program v. Momence Meadows Nursing Center, Inc., 566 F.3d 689, 695 (7th Cir. 2009) (no duty to defend or indemnify based on qui tam complaint alleging submission of false claims for reimbursement for sub-standard care at nursing homes). 

4.  Looking Ahead to 2010: Practical Guidance and Concluding Thoughts

According to figures released to Senator Grassley from the DOJ, at the end of FY 2009, more than 1000 qui tam cases remained under seal awaiting the government’s intervention decision.  Of those pending cases, there were 985 health care fraud cases and 205 DOD procurement fraud cases.  In addition to cases pending a DOJ intervention decision, there were 130 pending qui tam cases that the DOJ had joined and approximately 490 active qui tam cases in which the DOJ declined to intervene. [46]

The DOJ’s 2010 Budget Request seeks a $62.6 million increase in funding, for 54 agents and 165 attorneys, to “aggressively pursue mortgage fraud, corporate fraud, and other economic crimes.”[47]  The DOJ asserts that the budget increase is necessary, in part, because “demands on the Criminal Division’s Fraud Section and U.S. Attorney’s Offices around the country will greatly increase as more fraud cases are investigated and referred for criminal prosecution.  [Further t]he Civil Division’s litigation also will increase through the aggressive pursuit of fraud under the False Claims Act.”[48]  Congress also has authorized establishment of the Special Inspector General for Iraq Reconstruction, the Special Inspector General for Afghanistan Reconstruction, and the Special Inspector General for the Troubled Asset Relief Program, all of whom are working to expose contracting fraud and abuse.  The increased enforcement budgets and investigative efforts of the DOJ and federal agency OIGs, combined with an increase in federal spending and attendant legislative demands for transparency, accountability, and reporting, are sure to lead to increased FCA activity in 2010.

All direct and indirect recipients of federal funds should strive for increased transparency, carefully document claims, and actively monitor compliance with federal regulations and contract specifications.  From the outset, companies that receive TARP funds or stimulus funds under ARRA must understand the FCA and implement controls to avoid fraudulent procurement or inducement claims that might taint every future claim for payment.  Companies should then closely monitor their activities to detect and prevent improper claims and follow all reporting requirements and guidelines.  Not only will false certifications of compliance with contract specifications or federal regulations expose companies to sweeping FCA liability, but a failure to promptly detect and disclose overpayments may lead to FCA liability and disbarment under FAR Rules.  Effective compliance programs aid early detection of matters before they ripen into conduct actionable under the FCA, may negate scienter, and may help to persuade the government not to intervene in qui tam litigation.

On November 16, 2009, the DOJ announced intervention in an FCA action seeking treble damages and civil penalties from Kuwait-based companies with multi-billion dollar contracts to supply food to U.S. service members in the Middle East.[49]  Perhaps this action was on Assistant Attorney General Tony West’s mind when he told reporters a few days later, “Next year ought to be a good year, too.  So stay tuned.” 

Rest assured, Gibson Dunn will “stay tuned” and keep you up to date on any major FCA developments in the coming months.