2010 Mid-Year False Claims Act Update

July 9, 2010

Many consider the False Claims Act (the “FCA”) to be the “fastest growing area of federal litigation.”[1]  At the outset of the federal government’s fiscal year 2010, Senator Charles Grassley (R-Iowa) reported that the government had more than 1,000 qui tam cases awaiting its decision on intervention.[2]  New FCA cases filed in the first quarter of 2010 exceeded the number of filings seen in the same quarter last year and matched the number of filings seen in the final quarter of 2009.[3]  In the first half of 2010 alone, the U.S. Supreme Court and lower federal courts issued more than 200 decisions citing the FCA.  And, after decades of legislative inactivity, the FCA was amended twice within the span of one year, most recently with the passage of the Patient Protection and Affordable Care Act in March 2010.  These recent FCA amendments have greatly expanded the scope of the FCA, increased the pool of potential defendants, removed judicially imposed impediments to private qui tam actions, and encouraged whistleblower lawsuits.

Recently, the U.S. government has increased reliance on government contractors and infused unprecedented amounts of funds into all areas of the economy.  Not surprisingly, therefore, in June 2010, Assistant Attorney General for the Civil Division of the Department of Justice Tony West described this Administration’s “unparalleled focus” on fighting fraud through “aggressive civil enforcement action aimed at fraud, including increased use of the False Claims Act.”[4]  West promised continued and vigorous use of the FCA “going forward, in ways both traditional and creative . . . .”[5]

These factors have contributed to skyrocketing FCA recoveries and a recent explosion in FCA litigation and enforcement activities that has continued unabated into the first half of 2010.

In this update, we first summarize recent legislative action, including important amendments to the FCA enacted in March 2010.  Next, we briefly overview the government’s enforcement budgets and priorities, which signal an even greater increase in FCA activity.  Then, we summarize significant FCA settlements from the first half of 2010.  Finally, we discuss important judicial decisions and continuing trends during the first half of 2010.  A collection of Gibson Dunn’s recent publications on the FCA, including more in-depth discussions of the FCA’s framework and operation along with practical guidance to help companies avoid or limit liability under the FCA, may be found on our Website.

I. Legislative Action in the First Six Months of 2010

A. PPACA Significantly Amends the False Claims Act

In May 2009, Congress passed the Fraud Enforcement and Recovery Act (“FERA”),[6] which amended essential provisions of the FCA for the first time in more than 20 years.  Less than one year later, in March 2010, Congress passed the Patient Protection and Affordable Care Act (“PPACA.”)[7]  As detailed in our April 2, 2010 client alert, U.S. Health Care Reform Legislation Significantly Expands the False Claims Act, tucked away within 900+ pages of the PPACA were sweeping changes to the FCA that are not limited to the health care sector and will impact all direct and indirect federal fund recipients.  Some of the most significant changes are summarized below.

1. Substantial Weakening of the Public Disclosure Bar

Before the passage of the PPACA, a defendant could move to dismiss a qui tam action for lack of subject matter jurisdiction if the allegations were based on public disclosures and the relator was not an “original source.”  The PPACA reversed the judicial trend construing this public disclosure bar broadly in the following ways:

• Granting federal prosecutors veto power:  As amended, the FCA now states that “the Court shall dismiss an action or claim under this section, unless opposed by the Government, if substantially the same allegations or transactions alleged in the action or claim were publicly disclosed.”  31 U.S.C. 3730(e)(4)(A) (emphasis added).  Previously the government could “save” an FCA action by intervening because the public disclosure provision only bars FCA actions brought by private individuals.  Now, however, the government, which is the real party in interest in every qui tam action and stands to benefit from the lion’s share of any recovery, may simply oppose dismissal without intervening and permit private actions to go forward in the hopes of a recovery.  Unfortunately, Congress provided no guidance as to when, and under what circumstances, the government should or should not oppose dismissal.
• Abrogating the Supreme Court’s recent decision in Graham County Soil and Water District v. U.S. ex rel. Wilson[8] by amending the FCA to bar only actions based on disclosures from federal sources or the news media, allowing lawsuits based on publicly disclosed information available from state and local sources to proceed.
• Expanding the scope of the “original source” exception by eliminating the “direct knowledge” requirement.  A qui tam relator can now maintain a claim based on publicly disclosed information, even if their knowledge is merely indirect, so long as the relator has “independent knowledge that materially adds to the publicly disclosed allegations.”

2. Expansive Definition of False Claims

In addition to lowering the public disclosure bar, the PPACA directly applies the FCA to multiple provisions of the new healthcare legislation.  Specifically, the PPACA:

• Subjects any payments made through the newly created state-run health insurance “exchanges” to the FCA if they include any federal funds.
• Requires the report and return of any Medicare or Medicaid overpayments within 60 days of identification or when any corresponding cost report is due.  FERA already had extended FCA liability to expressly include the knowing retention of overpayments, but the PPACA now imposes time limits.
• Amends the Social Security Act to provide expressly that any claim submitted in violation of the Anti-Kickback Statute constitutes a false and fraudulent claim for purposes of the FCA.

B. Pending Legislation

Congress is on the cusp of revising, once again, the whistleblower protection provision of the FCA.  As noted in our 2009 Year-End False Claims Act Update, FERA extended the scope of 31 U.S.C. § 3730(h) to also cover contractors or agents engaging in protected activity.  The latest version of the Financial Reform Bill, prepared by the House-Senate Conference Committee, would broaden the scope of protected conduct to include not only “efforts to stop 1 or more violations” of the FCA, but also lawful actions taken “in furtherance of an action” under the FCA.  See H.R. 4173, 111th Cong. § 1079A(c) (2010).

The Financial Reform Bill would also add a new provision to Section 3730(h) setting a uniform statute of limitations for retaliation actions at “3 years after the date when the retaliation occurred.”  Id.  This legislatively overrides the “crazy quilt of limitations periods stitched together from the laws of 51 jurisdictions” created in Graham County Soil & Water Conservation District v. United States ex rel. Wilson, when the Supreme Court ruled that that the six-year statute of limitations governing civil actions under Section 3730 did not apply to retaliation actions and, instead, courts should apply the most closely analogous state limitations period.  545 U.S. 409, 427 (2005) (Breyer, J., dissenting).

C. The Mini-FCA

Reportedly, Deputy Director Michael Granston of the Civil Division, Commercial Litigation Branch of the Department of Justice (“DOJ”) recently suggested that changes may be coming to the Program Fraud Civil Remedies Act (“PFCRA”), commonly known as the “mini FCA.”[9]  The PFCRA allows certain government agencies to pursue false claims of up to $150,000 through administrative proceedings.  In brief, any person who knowingly submits a false claim to an affected federal agency is liable for an assessment of up to twice the amount falsely claimed and a penalty of up to $5,500 per false claim.[10]  The PFCRA was enacted in 1986 to allow federal agencies to pursue administratively “small” false claims that the DOJ typically declined to prosecute due to low potential recovery.  Deputy Director Granston suggested that Congress might soon raise that cap, providing greater incentives and opportunity for government investigators to use the PFCRA to administratively prosecute false claims.[11]

D. State Legislative Action

Presently, more than thirty states, the District of Columbia, and a few cities have some version of a false claims act.  A majority of states (and the District of Columbia), but not all, have enacted false claims acts that contain qui tam provisions which enable private individuals to bring suit on behalf of the state and share in any recovery.  Most states also have false claims acts which broadly apply to fraud in connection with any state-funded programs or contracts.  Approximately ten states limit their false claims acts to Medicaid fraud.

Section 1909 of the Social Security Act, as enacted by section 6031 of the Deficit Reduction Act of 2005 (the “DRA”)[12] provides a financial incentive for states to enact false claims acts that penalize the submission of false claims to the state’s Medicaid program:  States that enact laws satisfying certain enumerated federal standards are entitled to receive an additional 10% of any recoveries of federal Medicaid funds recovered through a state action.[13]

In response to the DRA, states continue to enact false claims acts.  In the first half of 2010, Colorado and Maryland passed state false claims acts with qui tam enforcement mechanisms applicable to false claims submitted in connection with the Medicaid program.  In 2009, North Carolina, Minnesota and Oregon passed broad state false claims acts modeled after the federal statute, all of which first became effective in 2010.

The U.S. Department of Health and Human Services, Office of the Inspector General (“HHS OIG”) determines whether a state’s false claims act meets DRA’s requirements and is therefore eligible for an increased share of Medicaid recoveries.[14]  To date, fourteen states have received its approval.  On April 28, 2010, Senator Grassley (R-Iowa) sent a letter to Attorney General Eric Holder and Inspector General Daniel Levinson asking them to review existing state false claims acts for compliance with the recent amendments to the FCA and to issue guidance to states interested in receiving increased shares of Medicaid recoveries.[15]  Accordingly, Gibson Dunn expects to see continued state legislative efforts to amend existing, and pass new, DRA-compliant false claims acts.

The increasing number of state false claims acts and state attorney generals’ focus on enforcement of those laws expose persons and entities to concurrent allegations of liability under federal and state versions of the FCA, which likely will, among other things:

• Increase the complexity (and cost) of litigation due to an increased number of potential plaintiffs and varying statutory schemes:  state laws frequently vary both from the FCA and from each other in significant ways.
• Increase the risk of government intervention, which history suggests leads to larger settlements or awards:  qui tam relators who may not be able to convince the federal government to intervene in their actions may convince one or more state attorney generals to intervene.  By way of example only, in a recently unsealed qui tam action pending in the Central District of California regarding alleged false statements and claims arising from the sale of allegedly defective PVC pipe used in water systems around the country, the Federal Government and the State of California declined intervention, but four other states (Nevada, Delaware, Tennessee and Virginia) and over 44 California localities (cities and municipal water districts) thus far have intervened.[16]

The ABA reports that enforcement actions and recoveries obtained under state versions of the FCA are “skyrocketing.”[17]  Gibson Dunn too expects to see even greater state and local activity in the coming months as states increasingly redistribute and police the use of federal funds (such as those provided under the American Recovery and Reinvestment Act of 2009), and as private individuals and the law firms who represent relators test the boundaries of many new state laws.

II.  Increasing Investigation and Enforcement Powers

Amendments to the FCA that broaden the scope and reach of the statute, along with a strong political will to go after fraud in our current economic climate, have contributed to robust enforcement activity in the first half of this year, which shows no signs of slowing down.

A. Enforcement Budgets and Priorities

Federal budgets for enforcement actions are increasing.  The Obama Administration’s fiscal year 2011 budget proposal, as announced on February 1, 2010, totals $29.2 billion for the DOJ–representing a 5.4 percent increase in budget authority and an increase of 2,880 positions over the FY 2010 enacted appropriation.[18]  Within its Budget Request, DOJ requests “program increases totaling $96.8 million for economic fraud enforcement efforts, a 23 percent increase from FY 2010 … [to] support additional FBI agents, federal prosecutors, civil litigators, and bankruptcy attorneys to ultimately improve the Department’s capacity to prosecute and investigate financial fraud.”[19]  In addition, DOJ requests “substantial funding to … enable the Department to aggressively pursue traditional law enforcement and litigation activities ranging from mortgage fraud, corporate fraud, and other economic crimes, to other mission-critical activities that support the overall functioning and efficiency of the Department.  [To that end, the] FY 2011 Budget requests a $234.6 million program increase … [and] 708 additional positions, including 143 agents and 157 attorneys.”[20]

Recently created inter-agency task forces have been aggressive in pursuing fraud in healthcare and finance.  As Acting Deputy Attorney General Gary G. Grindler recently said when speaking of the newly created Financial Fraud Enforcement Task Force, “Never before have such government resources been brought together to provide coordinated fraud enforcement.”[21]  The DOJ and HHS also teamed up in 2009 to create the Health Care Fraud Prevention and Enforcement Action Team (“HEAT”) — “a senior-level, joint task force that is designed to use the combined resources of both agencies in new ways to combat all facets of the health care fraud problem.”[22]  In fiscal year 2011, HHS requested an increase of $60.2 million to combat health care fraud.  These funds will be used in part to further HEAT’s efforts.

B. Civil Investigative Demands (CIDs)

As explained in our 2009 Year-End False Claims Act Update, FERA authorized the Attorney General to delegate his or her authority to issue a CID, a powerful investigative device requiring recipients to produce documents, answer interrogatories, and/or provide oral testimony relevant to an FCA investigation, even before litigation commences.  Attorney General Eric Holder initially delegated this power to Assistant Attorney General Tony West on January 15, 2010.  On March 24, 2010, Holder further delegated this authority to all U.S. Attorneys, effectively eliminating the substantial barrier of approval from the highest level for issuance of a CID.[23]

III. FCA Settlements During the First Six Months of 2010

FCA civil enforcement actions are occurring in nearly every industry supported in whole or in part by government spending.  For instance, in the first half of 2010, the DOJ settled civil FCA claims with:

• Several pharmaceutical manufacturers that allegedly marketed drugs for unapproved, “off-label” uses; paid kickbacks to doctors and pharmacies for recommending their drugs; and/or failed to comply with rebate obligations under Medicaid regulations.
• Medical device manufacturers that allegedly paid kickbacks to healthcare providers for purchasing and using their devices.
• Dozens of hospitals, nursing homes, dentist offices, and other healthcare providers that allegedly submitted false, fraudulent, or inflated claims to federal healthcare agencies; provided unneeded and sometimes unsolicited services to patients covered by Medicare and Medicaid; and/or paid kickbacks to doctors for recruiting Medicare and Medicaid patients.
• Two major oil & gas companies that allegedly underpaid royalties owed under natural gas leases on federal and American Indian lands.
• A helicopter manufacturer that allegedly overcharged the Department of Defense and other government agencies for the purchase and sale of helicopters, parts, modifications, customizations, and related goods and services.
• A manufacturer of ballistics fabric that allegedly sold bulletproof vests to government agencies allegedly knowing that the fabric was unfit for use in body armor.
• A small business lender that allegedly submitted fraudulent and noncompliant loan applications to the Small Business Administration (SBA).
• A technology vendor that allegedly made fraudulent representations to the General Services Administration regarding its pricing practices and also allegedly paid kickbacks to influence the government to purchase the company’s products.
• An information technology training company that allegedly invoiced federal agencies for training courses the company never provided.

Some of these and other significant FCA settlements in the Healthcare, Financial, and Government Procurement areas are discussed separately below.

A. Healthcare Fraud

The healthcare industry continues to be the locus of the most frequent and most substantial FCA recoveries.  Much of this momentum was generated by the 2009 creation of the HEAT joint task force.  In April 2010, the DOJ credited its HEAT initiative with recovering almost $2.8 billion since January 2009 in cases involving fraud against federal health care programs.[24]  Further, during fiscal year 2009, DOJ’s Civil Division reportedly opened nearly 900 new civil health care fraud investigations and had more than 1,100 pending cases.[25]  The following are significant recoveries from the healthcare industry from the first half of this year:

• In a March 16, 2010 settlement, American pharmaceutical manufacturer Alpharma Inc. agreed to pay $42.5 million to resolve FCA claims that it made misrepresentations and engaged in illegal kickbacks in connection with the marketing of the drug Kadian.[26]  The case alleged that Alpharma misrepresented the safety and efficacy of the drug and paid healthcare providers to induce them to promote or prescribe it.[27]  The qui tam relator will receive $5.33 million out of the federal share of the recovery.

In a one-week period, from April 27, 2010 to May 4, 2010, the DOJ announced four separate settlements of FCA claims by pharmaceutical manufacturers totaling more than $695 million.  Attorney General Eric Holder said that such cases demonstrate the Obama Administration’s commitment “to recovering taxpayer money lost to health care fraud, whether it’s by bringing cases against common criminals operating out of vacant storefronts or executives at some of the nation’s biggest companies.”[28]  The four settlements included:

1. 1. An agreement announced on April 27, 2010, by AstraZeneca Pharmaceuticals LP to pay $520 million to settle claims that it illegally marketed the anti-psychotic drug Seroquel for non-FDA-approved “off-label” uses and improperly influenced the content of medical education programs and literature regarding Seroquel by paying illegal kickbacks to doctors it recruited to promote the drug.[29]  Attorney General Eric Holder labeled the settlement “the largest amount ever paid by a company in a civil only settlement of off-label marketing claims.”[30]  The case was originally brought by James Wetta, a former AstraZeneca employee who also brought a case against drug manufacturer Eli Lilly that settled in 2009, and resulted in total civil and criminal recoveries of $1.415 billion.  Wetta, the qui tam relator, stands to receive approximately $45 million from the federal share of the civil recovery from AstraZeneca (he also received an undisclosed portion of approximately $100 million reserved for several whistleblowers in the Eli Lilly settlement).
   2. An April 29, 2010 agreement by two subsidiaries of Johnson & Johnson to pay a combined $81 million to settle criminal and civil proceedings under the FCA and the Food, Drug, and Cosmetic Act.[31]  The companies were alleged to have marketed Topamax, an epilepsy drug, for unapproved uses and doses.[32]  The $81 million total comprised a $6.14 million criminal fine and a $75.37 million settlement of civil claims under the FCA.[33]  The qui tam relators will receive over $9 million from the federal share of the civil recovery.
   3. An agreement by Schwarz Pharma Inc., also announced on April 29, 2010, to pay $22 million to resolve allegations that the company failed to inform federal healthcare programs that two of its drugs were ineligible for coverage, resulting in false claims made upon Medicare and Medicaid.[34]  The qui tam relators will receive over $1.8 million from the federal share of the settlement, in addition to a portion of the state share.
   4. A May 4, 2010, $72 million settlement agreement with Novartis Vaccines & Diagnostics Inc. to resolve claims that Novartis marketed its cystic fibrosis drug TOBI for unapproved uses, resulting in false claims upon federal healthcare programs.[35]  The qui tam relators, former Novartis employees, will receive $7.825 million of the federal share of the settlement.

Notably, on June 28, 2010, Senator Grassley (R-Iowa) sent letters to 16 pharmaceutical companies regarding the FCA:  “The purpose of th[e] letter[s] is to follow up on how [the pharmaceutical company] is progressing with its compliance program, including educating employees on the FCA and whistleblower provisions.”[36]  Grassley sought a response to several questions no later than July 20, 2010.  The letters signify lawmakers’ continued focus on potential false claims within the pharmaceutical industry and the responses to those letters may trigger increased attention and investigations.

Additionally, some of the largest FCA settlements over the past several months have been against hospitals, pharmacies, and other healthcare providers.  For instance:

• On May 10, 2010, The Health Alliance of Greater Cincinnati and one of its former member hospitals agreed to pay $108 million to settle claims that they paid unlawful remuneration to cardiologists in exchange for referring patients to the hospital.[37]  The government asserted that these alleged kickbacks not only violated the federal Anti-Kickback Statute, which prohibits hospitals and doctors from exchanging anything of value in return for patient referrals, but also rendered the hospital’s Medicare and Medicaid claims on behalf of those patients violations of the FCA.[38]  The qui tam relator, a cardiologist formerly employed at the hospital, will receive $23.5 million from the settlement amount.

B. Financial Fraud

The President’s government-wide, DOJ-run Financial Fraud Enforcement Task Force, established in November 2009, also uses the FCA to fight against perceived financial fraud.  Acting Deputy Attorney General Gary G. Grindler stated “Never before have such government resources been brought together to provide coordinated fraud enforcement.”[39]  To combat mortgage fraud alone, the DOJ has requested $178 million in the fiscal year 2011 budget, an increase of over $18.4 million.[40]  And in a March 25, 2010 speech, Attorney General Holder noted “right now, the FBI is investigating more than 2,800 mortgage fraud cases, up almost 400 percent from five years ago.”[41]

The Financial Fraud Enforcement Task Force has already produced results this year.  For example:

• On May 6, 2010, the DOJ announced a settlement agreement by Ciena Capital LLC, a small business lender in New York City, to pay $26.3 million to resolve claims that it submitted misleading applications for loans backed by the Small Business Administration (SBA).[42]  By allegedly lying about its compliance with the SBA’s rules and regulations, the company caused the SBA to guarantee loans that were likely to default shortly after being made.  The qui tam relators will receive $4.3 million as their share of the government’s recovery.

C. Government Procurement / Contract Fraud

At the start of this year, Attorney General Holder reaffirmed the government’s commitment to scrutinizing the recipients of federal spending.  He warned, “We will protect the taxpayers’ investment in America’s economic recovery, and ensure that every American . . . has a chance to participate in that recovery.”[43]  Likewise, Assistant Attorney General West cautioned, “Those who do business with the government must act fairly and in accordance with the law. . . . [T]he Department of Justice will investigate and pursue allegations of fraud against contractors and subcontractors, whether they are foreign or domestic.”[44]  The following are significant recoveries from government contractors in the first half of this year:

• On May 26, 2010, the DOJ announced that EMC Corporation, a Massachusetts-based technology vendor, had agreed to pay $87.5 million to settle FCA claims in connection with allegations that it made false representations to the government that it would match government contract prices with any lower prices offered to EMC’s commercial customers.[45]  The DOJ further alleged that EMC had also engaged in an illegal kickback scheme designed to influence the government to purchase the company’s products.[46]
• On the same day, Bell Helicopter Textron, Inc. agreed to increase a prior settlement from $12.8 million to a total of $16.5 million in connection with FCA claims that Bell overcharged the Department of Defense and other agencies in connection with the sale, customization, and servicing of helicopters.[47]
• On February 12, 2010, the DOJ announced the addition of $4 million to the prior total of $54 million in settlements from manufacturers of defective body armor containing Zylon fabric.[48]  The settlement with Lincoln Fabrics Ltd., a Canadian company, represented the seventh recovery to date in connection with the body armor industry’s sale of defective bulletproof vests to state, local, and federal law enforcement agencies.[49]

And additional, significant, recoveries may be on the horizon.  On April 1, 2010, DOJ announced that it had filed a lawsuit against Kellogg Brown & Root Services (“KBR”) alleging that the defense contractor and more than 30 subcontractors violated the FCA by knowingly including impermissible costs for private armed security in billings to the Army under the Logistics Civil Augmentation Program III contract.[50]  On May 5, 2010, the DOJ announced the government’s intervention in a qui tam action pending in Texas against KBR and others alleging that employees of two freight forwarders provided unlawful kickbacks to KBR transportation department employees.[51]  DOJ asserts both actions are being prosecuted as part of its National Procurement Fraud Initiative.  Gibson Dunn will be monitoring these actions closely.

IV. The FCA as an “All-Purpose Anti-Fraud Statute”

In our earlier alerts, we noted that despite the Supreme Court’s efforts in Allison Engine to prevent the FCA from morphing into an “all-purpose antifraud statute,” the DOJ and relators continue to push expansive theories of liability based on alleged regulatory noncompliance.  Private individuals who would not otherwise have standing to enforce the myriad of federal laws that lack private enforcement mechanisms (e.g., healthcare or environmental regulations) use the FCA to enforce compliance with those laws.  A recent example is the June 15, 2010 letter submitted to Attorney General Holder, by the National Whistleblowers Center, which urged the DOJ to investigate British Petroleum and all of its contractors and subcontractors for alleged FCA violations in connection with the Gulf of Mexico oil spill disaster.[52]  According to the letter, “Facts already on the public record evidence that BP made misrepresentations about its safety and emergency response procedures in order to operate under leases from the United States and profit from offshore drilling.”  Acknowledging that “the purpose of the False Claims Act is not to protect the environment per se,” the Center contends the law “is a clarion call to patriotic Americans who are concerned about the beauty of our environment and the integrity of our mineral wealth.”  The FCA “is the appropriate legal instrument to police BP’s alleged misconduct,” the Center argues, “because BP’s leases permitted them to obtain oil owned and controlled by the United States in exchange for payments and commitments under leasing obligations.”  Others may disagree with the use of the FCA as a back-door mechanism to enforce compliance with environmental laws.

V. Case Law Developments and Judicial Trends in 2010

The FCA continues to be a significant source of litigation.  As noted above, in the first half of 2010 alone, federal courts issued approximately 200 decisions citing the FCA.  Developments at the Supreme Court were of particular note, where the Court issued an opinion on public disclosures, but declined to resolve two circuit splits involving the FCA.  Lower courts were also very active, examining several important FCA issues, including the application of FERA, FOIA public disclosures, pre-suit releases, the time to file a notice of appeal, and tolling the FCA’s statute of limitations.

A. Supreme Court Developments

1. The Supreme Court Expands the Public Disclosure Bar to Include State and Local Sources, But the PPACA Limits the Decision’s Impact

As we noted in our 2009 Mid-Year FCA Update, the Supreme Court granted certiorari to resolve a circuit split regarding the scope of the public disclosure bar.  Graham County Soil & Water Conservation Dist. v. United States ex rel. Wilson, 130 S.Ct. 1396 (2010).  The FCA enumerates several sources of public disclosure, including disclosures in a “congressional, administrative, or Government Accounting Office report, hearing, audit, or investigation.”  31 U.S.C. § 3730(e)(4)(A).  At issue in Graham was whether a county audit report and a state (North Carolina) Department of Environment, Health and Natural Resources report constituted “public disclosures” within the meaning of the FCA.  By a 7-2 vote the Supreme Court held “the reference to ‘administrative’ reports, audits, and investigations . . . encompasses disclosures made in state and local sources as well as federal sources.”  Id.  The Court’s decision further strengthened the public disclosure bar by increasing the number of potential sources of public disclosures to include local and state entities.

The PPACA legislatively overruled Graham by amending the FCA to bar only those actions based on public disclosures from federal sources or the news media.  Because the PPACA does not contain a retroactivity provision, Graham should apply to all cases pending before the PPACA’s passage on March 23, 2010.

2. The Supreme Court Declines to Resolve a Three-Way Circuit Split Regarding “Original Source” Requirements

Under the FCA, 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.  Until recently, the FCA defined an original source as “an individual who has direct and independent knowledge of the information on which the allegations are based and 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) (2009).  As we noted in our 2009 Year-End False Claims Act Update, there is a three-way circuit split regarding the proper interpretation of “voluntarily provided the information to the Government before filing an action.”  The Supreme Court had the opportunity to resolve this split in 2010, but declined to do so.

In United States ex rel. Duxbury v. Ortho Biotech Prods., L.P., 579 F.3d 13, 22 (1st Cir. 2009), cert. denied, 78 U.S.L.W. 3361 (June 21, 2010), the First Circuit joined the Fourth and Eighth Circuits in holding that a relator qualifies as an original source if he supplies information to the government before filing his qui tam action, regardless of when the public disclosure occurred.  This position is at odds with (1) the District of Columbia and Sixth Circuits, which have held that to qualify as an original source a relator must provide information to the government prior to the public disclosure, and (2) the Second and Ninth Circuits, which have held that regardless of when a relator provides information to the government, he only qualifies as an original source if he was a direct or indirect source of the public disclosure.

The PPACA amended the FCA definition of original source, found in 31 U.S.C. § 3730(e)(4)(B), to require a relator to (1) voluntarily disclose information to the government “prior to a public disclosure” or (2) provide “knowledge that is independent of and materially adds to the publicly disclosed allegations” to the government before the relator files a qui tam suit.  PPACA § 10104.  The United States’ amicus brief argued that “Congress clarified the law going forward and thereby obviated the need for [the Supreme Court’s] intervention.”  Brief for the United States as Amicus Curiae at 13, Ortho Biotech Prods., L.P. v. United States ex rel. Duxbury, 78 U.S.L.W. 3361 (U.S. June 21, 2010) (No. 09-654).  The Supreme Court denied the petition for writ of certiorari.  But because the PPACA does not apply retroactively, the FCA statute of limitations can be as long as ten years, and a great number of qui tam cases (perhaps 1,000 or more) may presently be pending under seal, cases whether a litigant qualifies as an “original source” will continue to depend, in part, on where the relator filed suit.

3. The Supreme Court Declines to Resolve a Circuit Split Regarding Whether Qui Tam Complaints Must Identify Specific False Claims

Federal Rule of Civil Procedure 9(b) provides the pleading standard for an FCA qui tam complaint and requires the relator to “state with particularity the circumstances constituting fraud or mistake.”  Currently there is a circuit split as to whether a relator must identify specific false claims in his or her complaint.  The Supreme Court had two opportunities to resolve this split in the first half of 2010, but declined to do so.

In Duxbury, the First Circuit joined the Fifth and Seventh Circuits in holding that the particularized pleading requirements of Rule 9(b) can be satisfied in a FCA qui tam complaint without identifying specific false claims.  See Duxbury, 579 F.3d at 29; United States ex rel. Grubbs v. Kanneganti, 565 F.3d 180, 190 (5th Cir. 2009); United States ex rel. Lusby v. Rolls-Royce Corp., 570 F.3d 849, 854-55 (7th Cir. 2009).  Conversely, the Eleventh Circuit in Hopper v. Solvay Pharms., Inc., 588 F.3d 1318, 1326-27 (11th Cir. 2009), cert. denied, 78 U.S.L.W. 3531 (June 21, 2010), joined the Sixth, Eighth, and Tenth Circuits in holding that Rule 9(b) requires FCA qui tam complaints to identify specific false claims for payment submitted to the government.  See United States ex rel. Bledsoe v. Cmty. Health Sys., Inc., 501 F.3d 493, 504-05 (6th Cir. 2007); United States ex rel. Joshi v. St. Luke’s Hosp., Inc., 441 F.3d 552, 559-61 (8th Cir. 2006); United States ex rel. Sikkenga v. Regence BlueCross BlueShield of Utah, 472 F.3d 702, 727-28 (10th Cir. 2006).

In 2010, the Supreme Court was asked to resolve this circuit split in both Duxbury and Hopper.  The United States noted that this issue is “both unsettled and significant,” and thus warranted Court review.  Brief for the United States as Amicus Curiae at 17, Duxbury, 78 U.S.L.W. 3361 (No. 09-654).  Because it recommended that the Court not address the “original source” issue discussed above, the United States recommended that the Court deny certiorari in Duxbury, but grant it in Hopper, where “[t]he question whether a relator must identify a specific false claim in order to satisfy Rule 9(b) appears to be squarely presented.”  Id. at 18 n.6.  But despite the United States’ recommendation, the Supreme Court denied certiorari in both Duxbury and Hopper, and the circuit split remains intact.  See Ortho Biotech Prods., L.P. v. United States ex rel. Duxbury, 78 U.S.L.W. 3361 (U.S. June 21, 2010) (denial of certiorari); United States ex rel. Hopper v. Solvay Pharms., Inc., 78 U.S.L.W. 3531 (U.S. June 21, 2010) (same).

B. Applying FERA Amendments

During the first half of 2010, courts have determined a variety of issues regarding the interpretation and application of FERA.  Of particular importance were cases dealing with the “relation back” provision, the retroactivity of FERA, and the scope of potential defendants in retaliation cases under the amended version of Section 3730(h).

1. Court Holds That FERA’s Relation Back Provision Permits Government Intervention After the Limitations Period Has Run

The pre-FERA version of the FCA did not explicitly allow untimely claims to “relate back” to the filing date of the original qui tam complaint for statute of limitations purposes.  Federal Rule of Civil Procedure 15(c) sets forth general rules for permitting an otherwise untimely claim to relate back to the original filing.  But courts generally have not permitted relation back under Rule 15 in pre-FERA FCA cases, principally because courts must consider whether the original complaint adequately notified the defendants of the basis for liability that is alleged in the subsequent claims.  Because this focus on notice is at odds with the FCA requirement that original complaints be filed under seal, courts traditionally held that the pre-FERA FCA did not permit relation back.  See, e.g., United States v. Baylor Univ. Med. Ctr., 469 F.3d 263, 270 (2d Cir. 2006) (“The secrecy required by [the FCA] is incompatible with [Rule 15(c)] because (as is well-settled), the touchstone for relation back pursuant to [Rule 15(c)] is notice.”)

Now FERA amended the FCA to explicitly include a relation back provision, which states that a “Government pleading shall relate back to the filing date of the complaint of the person who originally brought the action, to the extent that the claim of the Government arises out of the conduct, transactions, or occurrences set forth . . . in the prior complaint.”  31 U.S.C. § 3731(c) (2010).  In a matter of first impression, the District of Columbia Circuit applied the FCA’s new relation back provision to a case in which the original qui tam complaint was timely filed under seal, but the government had waited to intervene, unseal, and serve the complaint on the defendants until “several years after the statute of limitations had run.”  United States ex rel. Miller v. Bill Harbert Int’l Constr., Inc., Nos. 08-5390-94, 2010 WL 2487962, *6 (D.C. Cir. June 22, 2010).  Although the FERA amendments were enacted post-trial, the court held that FERA’s directive that the relation back provision should be applied to “cases pending on the date of enactment” meant that the amendment applied to all pending FCA cases, including those in which the government intervened before FERA’s enactment.  Id. at *5 (citation omitted).

2. Multiple Courts Apply FERA Amendments Retroactively Based on the Date “Claims” Were Submitted for Payment, Not the Date of Filing Suit

As noted in our 2009 Year-End False Claims Act Update, FERA amended the language of 31 U.S.C. § 3729(a)(2) from prohibiting the use of a false record “to get” a false claim paid to prohibiting the use of a false record “material to a false or fraudulent claim.”  The amendment, codified as 31 U.S.C. § 3729(a)(1)(B), was enacted on May 20, 2009, but FERA’s retroactivity clause states that the amendment “shall take effect as if enacted on June 7, 2008, and apply to all claims under the False Claims Act.”  FERA § 4(f)(1).  Although a few courts have found that FERA’s retroactivity provision applies to all FCA cases pending on June 7, 2008, the overwhelming majority of courts addressing the issue have held that the amendment applies retroactively only to instances where claims for government payment were pending on June 7, 2008.

The District of New Mexico, like many before it, recently held that this FERA amendment retroactively applies to claims for government payment pending on June 7, 2008–not pending cases–because FERA’s use of “claims” is statutorily defined as requests for payment, and FERA makes other amendments, such as the relation back provision mentioned above, applicable to pending “cases.”  United States ex rel. Baker v. Cmty. Health Sys., Inc., No. 05-279 WJ/WDS, 2010 WL 1740624, at *16-17 (D.N.M. March 19, 2010).  Thus, “it is clear that Congress intended to distinguish ‘claims’ from ‘cases.'”  Id. at *16.  Nearly every court to consider the retroactivity of the FERA amendment in 2010 has agreed.[53]

3. Courts Evaluate Potential Defendants in Retaliation Claims

The pre-FERA version of 31 U.S.C. § 3730(h) allowed retaliation claims for “[a]ny employee who is discharged, demoted, suspended, threatened, harassed, or in any other manner discriminated against in the terms and conditions of employment by his or her employer because of lawful acts.”  FERA amended this provision in 2009 to allow retaliation claims if any “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.”  In 2010, two courts addressed the scope of defendants covered by the amended version of 31 U.S.C. § 3730(h).

a) No Claims Against State Officials

The Middle District of Alabama declined to apply FERA’s amended version of 31 U.S.C. § 3730(h) to FCA damages claims against state officials sued in their official capacity.  Bell v. Dean, No. 2:09-CV-1082-WKW, 2010 WL 1856086 (M.D. Ala. May 4, 2010).  The court noted that under the pre-FERA version of 31 U.S.C. § 3730(h), several federal courts had dismissed suits brought against state officials in their official capacity because the FCA did not express the requisite clear congressional intent to waive state sovereign immunity.  Id. at *3-4.  In Bell, the plaintiff argued that the amended version of 31 U.S.C. § 3730(h) permitted FCA retaliation suits for money damages against state officials sued in their official capacity.  The court agreed that FERA broadened the scope of 31 U.S.C. § 3730(h) by adding “contractors” and “agents” as potential plaintiffs, but ultimately concluded that these changes “do not add a clear statement of congressional intent to waive state sovereign immunity.” Id. at *3 n.5 (quotation marks omitted). 

b) Claims Against Individual Supervisors Permitted

In a recent 31 U.S.C. § 3730(h) case from the District of Puerto Rico, the defendant moved to dismiss the complaint because it stated a claim against the defendant in his individual capacity as the plaintiff’s supervisor.  Laborde v. Rivera-Dueno, No. 09-1368 (JP), 2010 WL 1416010, at *6 (D. Puerto Rico March 31, 2010).  In support, the defendant cited several cases holding that “there is no liability for individual supervisors under the FCA.”  Id.  But the cases all relied on the pre-FERA version of 31 U.S.C. § 3730(h), which limited liability to an “employer,” and “individuals are not ’employers’ within the meaning of the statute.”  Id.  FERA removed the word “employer” from 31 U.S.C. § 3730(h), and the amended version leaves the group of potential defendants undefined.  In light of this substantive change, the court refused to follow the cited authority because it “relies upon an outdated version of the statute,” and denied the motion to dismiss.  Id. 

C. The Second Circuit Joins a Circuit Split Over Whether a FOIA Response Constitutes a “Public Disclosure”

In United States ex rel. Kirk v. Schindler Elevator Corporation, 601 F.3d 94 (2nd Cir. 2010), the Second Circuit, in a matter of first impression for that Circuit, addressed the issue of whether the public disclosure bar applies “when the plaintiff’s allegations are based on materials produced in response to a FOIA request.”  Id. at 98.  The First, Third, and Fifth Circuits have all held that FOIA responses constitute “administrative reports” or “investigations” within the meaning of the FCA’s jurisdictional bar because the FOIA response itself is a “report” or “investigation.”  Id. at 104-05 (discussing cases).  The Second Circuit, however, rejected this approach.  Instead, the Second Circuit adopted the Ninth Circuit’s approach in United States ex rel. Haight v. Catholic Healthcare W., 445 F.3d 1147 (9th Cir. 2006), and held that whether a FOIA response constitutes a public disclosure “depends on the nature of the document[s]” disclosed.  Id. at 98, 105-07.  Ultimately, “the FCA’s jurisdictional bar applies only when the document [produced in response to the FOIA request] is a ‘congressional, administrative, or Government Accounting Office report, hearing, audit, or investigation.”  Id. at 98.

D. Is a Release Secured Before a Relator Files a FCA Claim Effective?

The Fourth Circuit recently issued a decision of particular interest to employers who secure general releases when discharging employees who could later serve as qui tam plaintiffs.  At issue are two competing public policies: “the public interest favoring the use of qui tam suits to supplement federal enforcement,” — which weighs against enforcement of pre-filed releases — and the public interest of encouraging the settlement of disputes — which weighs in favor of enforcement of pre-filed releases.  United States v. Purdue Pharma L.P., 600 F.3d 319, 332-33 (4th Cir. 2010).  In Purdue Pharma, the Fourth Circuit held that the “proper focus of the inquiry is whether the allegations of fraud were sufficiently disclosed to the government” prior to the filing of the qui tam action.  Id.  If the government was not aware of the fraudulent conduct prior to the filing of the qui tam action, the release should not be enforced; conversely, when the government is “aware, prior to the filing of the qui tam action, of the fraudulent conduct represented by the relator’s allegations, the public interest has been served and the Release should be enforced.”  Id. at 333.  Notably, the Tenth Circuit reached a similar result last year.  See United States ex rel. Ritchie v. Lockheed Martin Corp., 558 F.3d 1161, 1168-71 (10th Cir. 2009).

E. Court Changes Course on Whether Relators May take Advantage of the FCA’s Tolling Provision Absent Government Intervention

Section 3731(b)(1) of the FCA states that the typical statute of limitations period runs six years from the date of the unlawful conduct, but § 3731(b)(2) provides a tolling provision, which states in pertinent part that an action can be brought up to “3 years after the date when facts material to the right of action are known or reasonably should have been known by the official of the United States charged with responsibility to act in the circumstances.”  A three-way split has developed in the courts on whether the tolling provision applies to relators in qui tam suits in which the government declines to intervene.  Some courts have held that the tolling provision applies, and the limitations period begins to run on the date that the relator knew or reasonably should have known of the material facts–thus making the relator the “official of the United States” for purposes of § 3731(b)(2).  See, e.g., United States ex rel. Pogue v. Diabetes Treatment Ctrs. of Am., 474 F. Supp. 2d 75, 82-84 (D.D.C. 2007).  Other courts have held that the tolling provision applies to relators, but the limitations period begins to run when a government official learns of the conduct.  See, e.g., United States ex rel. Ven-A-Care v. Actavis Mid Atl. LLC, 659 F. Supp. 2d 262, 273-74 (D. Mass. 2009).  The majority of courts have concluded that the tolling provision simply does not apply to relators in cases where the government declined intervention.  See, e.g., United States ex rel. Sanders v. N. Am. Bus. Indus., Inc., 546 F.3d 288, 293-96 (4th Cir. 2008); Sikkenga, 472 F.3d at 725-26.

A district court that originally held that the tolling provision applied to relators and began to run when the government official learns of the conduct, recently changed course and held “that the tolling provision of (b)(2) does not apply to relators where the Government does not intervene.”  United States ex rel. Gonzalez v. Fresenius Med. Care N. Am., No. EP-07-CV-247-PRM, 2010 WL 1645969, at *5 (W.D. Tex. Jan. 21, 2010) (“The Court is convinced . . . that its prior ruling on the applicable statute of limitations was erroneous and should be reconsidered in the interests of justice.”).  Interim decisions by other courts convinced the Gonzalez court that its original position was untenable in light of “the statutory language, legislative history, and practical considerations.”  Id.  Thus, the court aligned itself with the emerging majority “view that the equitable tolling provided for in (b)(2) does not apply to relators” in cases in which the government declines to intervene.  Id. at *6.

VI. Conclusion

Unprecedented government spending, recent amendments to the FCA, increased fraud enforcement budgets and priorities, skyrocketing FCA recoveries, state legislative and enforcement activities, and the sheer volume of ongoing government investigations and pending qui tam actions suggest that the FCA will remain the fastest growing area of federal litigation.  The high level of activity we have observed over the past several years and into the first half of this year is here to stay.  Creative theories of liability and judicial decisions interpreting the ever-changing statute have created an erratic and sometimes unpredictable litigation landscape, and we anticipate that new developments will continue to emerge in the coming months.  It is essential, therefore, that direct and indirect recipients of federal funds stay abreast of these developments to avoid running afoul of the FCA and to address effectively any potential violations.  Gibson Dunn continuously monitors FCA activity and will keep you up to date on any major FCA developments in the coming months.