2012 Mid-Year False Claims Act Update

For years, on these pages, we have marveled at the precipitous increase in False Claim Act (FCA) enforcement.  And now, as if waking to the thunderous sound of the Department of Justice’s own efforts, the new Acting Assistant Attorney General, “ha[s] been struck by the sheer volume of the cases that are brought — and the recoveries that are obtained” under the FCA, the “government’s most potent civil weapon in addressing fraud.”[1]  Since January 2009, we have noted a nearly 50% increase in the number of new whistleblower matters filed with the Department of Justice (DOJ),[2] along with FCA recoveries exceeding $11 billion.[3]  More than 760 new FCA matters were initiated in 2011,[4] and 2012 is (not surprisingly) on pace to be the largest recovery year of all time.  Indeed, just last week, the DOJ announced “the largest health care fraud settlement in U.S. history and the largest payment ever by a drug company.”[5]  GlaxoSmithKline LLC (GSK) agreed to plead guilty and to pay a total of $3 billion to settle civil and criminal allegations that the company provided unlawful kickbacks and promoted certain prescription drugs off-label, failed to report drug safety data, and falsely reported drug prices.  Two billion dollars of the settlement will be paid to resolve civil claims.

The FCA, 31 U.S.C. §§ 3729-33, first enacted in 1863 under President Lincoln to address procurement fraud by Civil War contractors, today targets nearly every conceivable type of “fraud” against the government, or against its agents, contractors, grantees, and just about any other person or entity that receives money or property from the government to be spent or used on its behalf.  With strengthening amendments in 2009 and 2010, and with prosecutors and the plaintiffs’ bar pursuing increasingly creative theories of recovery and damages, the FCA is rapidly expanding into uncharted territory.  Despite Supreme Court warnings to the contrary, the FCA effectively has become an all-purpose anti-fraud statute frequently invoked as a mechanism to enforce compliance with other government regulations.  The FCA allegations that gave rise to the recent GSK settlement, for example, were based in large part on alleged violations of the Food, Drug, and Cosmetic Act.  And many would argue that aggressive FCA investigations and actions threatening treble damages and potentially huge per claim penalties are commenced upon discovery of mere billing mistakes or negligence, yet often make settlement the only viable option.

On January 31, 2012, members of Congress and the DOJ commemorated the 25th anniversary of the False Claims Act Amendments of 1986.[6]  The 1986 FCA amendments significantly empowered private attorneys general and established considerable protections and incentives for whistleblowers.  Since that time, total FCA recoveries have exceeded $33 billion, including more than $21 billion (nearly 70%) attributable to whistleblower or “qui tam” matters.[7]  In 2011 alone, whistleblowers realized more than half of a billion dollars in relator share awards.[8]  And, although recoveries in FCA actions are far greater when the government intervenes, the government typically intervenes in only 2 out of every 10 cases.[9]  According to one source, the result is a recovery rate for the government of about $15 for every $1 spent in enforcement.[10]

During the first half of 2012, as in the recent past, we continued to witness the majority of claims and recoveries within the health care industry.  But FCA activity in other industries also rose steadily.  In February 2012, for example, the DOJ, the Department of Housing and Urban Development (HUD), and 49 state attorneys general announced a landmark $25 billion settlement with the nation’s five largest mortgage servicers to resolve claims based on a variety of allegedly fraudulent or reckless lending practices, including claims under the FCA related to federally-insured mortgage loans.  The DOJ played a significant role in the $25 billion settlement agreement, as did several FCA whistleblowers — the settlement resolved and allocated more than $227 million to five qui tam lawsuits filed against the mortgage companies.[11]  Whistleblowers in those actions will receive a combined total of approximately $75 million in relator share awards.[12]  On the heels of this and other mortgage-based FCA settlements (discussed below), the DOJ recently requested a $55 million increase for the 2013 fiscal year budget to combat financial and mortgage fraud.[13]

In this mid-year update, as we have done for the past several years, we first summarize relevant federal and state legislation and rule-making activity during the first half of this year.  Next, we briefly summarize some key settlements in 2012.  Finally, we discuss important judicial decisions and enforcement trends during the first half of this year.  A collection of Gibson Dunn’s publications on the FCA, including prior client alerts and more in-depth discussions of the statute’s framework and operation, may be found on our website.

I.   Legislative Action in the First Six Months of 2012

A.   Federal Activity

In 2009 and 2010, Congress passed three laws that markedly expanded the reach of the FCA and strengthened whistleblower protections — the Fraud Enforcement and Recovery Act of 2009, the Patient Protection and Affordable Care Act (PPACA), and the Dodd-Frank Wall Street Reform and Consumer Protection Act.  We described much of this legislative activity in our earlier FCA alerts, available here.  Last month, the Supreme Court largely upheld recent challenges to the constitutionality of the PPACA — thus, the FCA amendments embedded within the PPACA are here to stay — at least for the short-term.

In our 2011 Mid-Year False Claims Act Update, we discussed the Fighting Fraud to Protect Taxpayers Act of 2011, S. 890, introduced on May 5, 2011, by Senators Patrick Leahy (D-VT) and Charles Grassley (R-IA).[14]  These senators continue to push for this legislation.[15]

Senator Grassley in particular remains focused on fighting fraud in federal programs.  On May 2, 2012, he and five other members of the Senate Finance Committee sent an open letter to “Members of the Health Care Community” soliciting ideas from interested stakeholders regarding solutions to improve federal efforts to combat waste, fraud, and abuse in the Medicare and Medicaid programs.[16]  On June 26, 2012, the American Hospital Association responded with several recommendations and voiced the concern shared by many federal contractors and the defense bar:  “The powerful weapon of the False Claims Act should not be wielded in a misguided attempt to correct or prevent mistakes. . . . .  A powerful weapon like the FCA must be wielded appropriately and with significant care.”[17]

On June 18, 2012, the U.S. Department of Health and Human Services, Office of Inspector General (“HHS OIG”) sought industry comment regarding its Self-Disclosure Protocol (“SDP”).  Since its inception in 1998, the SDP has provided an avenue for healthcare companies and providers to self-report potential fraud to the OIG in return for prosecutorial leniency.  The SDP reporting mechanisms have resulted in more than 800 settlements totaling $280 million,[18] despite criticism about the confusing language and requirements.  Over the last few years, HHS OIG has attempted to clarify reporting procedures, but key terms remain undefined.  HHS OIG now is “soliciting comments, recommendations, and other suggestions from concerned parties and organizations on how best to revise the Protocol to address relevant issues and to provide useful guidance to the health care industry.”[19]

Revisions to the SDP may provide much-needed clarity in HHS OIG’s expectations for repayment, explain the range of settlement multipliers, and better define the reporting requirements.  Such a result would be a welcome FCA risk management tool.  Through more concrete awareness of the potential benefits and risks associated with self-reporting, providers and health care companies can more intelligently weigh their options and better predict the outcome of self-disclosure and negotiations.  Interested parties can participate in the comment process by visiting the federal eRulemaking website at http://www.regulations.gov, and submitting comments on or before August 17, 2012.

B.   State Activity

In 2005, Congress passed the Federal Deficit Reduction Act (DRA), which provided a financial incentive to encourage states to combat Medicaid-related fraud.  States that enact laws that are at least as strict as the FCA may receive an additional 10% of any recoveries of federal Medicaid funds recovered through a state action.  Since that time, motivated by blockbuster federal recoveries and the 10% incentive, states increasingly are passing or strengthening their own false claims legislation that meets, and in some cases exceeds, the provisions of the FCA.  But states are struggling to keep up with the 2009 and 2010 FCA strengthening amendments.  Accordingly, there has been a flurry of state activity during the first six months of 2012 in this regard.  For example, the following states passed false claims legislation:

• Georgia: In April 2012, Georgia signed into law the Georgia Taxpayer Protection False Claims Act.  This new law expands the state’s Medicaid False Claims Act beyond Medicaid fraud to include every industry conducting business with the state.  The act increases civil penalties to $5,500 to $11,000 per false claim, allows for treble damages, attorney’s fees, and provides a significant bump in the state Attorney General’s investigatory and prosecutorial powers.[20]
• Rhode Island:  In June 2012, Rhode Island enacted legislation amending its Medicaid false claims act to enable municipalities to bring actions.[21]  Other proposed amendments remain pending (see below).
• Tennessee:  In April 2012, Tennessee enacted legislation amending its Medicaid false claims act in order to meet DRA requirements.[22]
• Washington: In late March 2012, Washington enacted legislation targeting Medicaid-related false claims.[23]  The act is designed to meet current FCA requirements and receive the DRA 10% bonus.

During the first half of 2012, several other state lawmakers introduced bills to enact or expand false claims laws, which bills remain in various stages of the legislative process.  These states include, for example:  Alabama (H.B. 594); Arizona (H.B. 2844); California (A.B. 2492); Hawaii (H.B. 1181); Kentucky (H.B. 401); Michigan (H.B. 5430); Maine (L.D. 1796); New Mexico (H.B. 80); Oklahoma (S.B. 1694); Rhode Island (S.B. 2769; H.B. 7903 (these differ from the legislation noted above)); South Carolina (S.B. 1233; S.B. 1018; S.B. 1003); and Wyoming (S.F. 0081).

Gibson Dunn predicts a tremendous increase in state false claims activity as state attorneys general and private plaintiffs begin to take full advantage of these laws.  For a glimpse at what is to come, consider the following:

• In April 2012, an Arkansas judge assessed more than $1.2 billion in penalties against Johnson & Johnson and one of its subsidiaries for nearly 239,000 violations of the state’s false claims act through allegedly deceptive drug marketing.[24]  The attorneys general of multiple states are pursuing similar actions.[25]
• In early 2012, courts unsealed two whistleblowers’ complaints against certain insurance companies for allegedly failing to turn over unclaimed life insurance proceeds to the states of Minnesota and Illinois.[26]  The Illinois action seeks more than $1.5 billion under the Illinois False Claims Whistleblower Reward and Protection Act.[27]  And with multiple jurisdictions possibly auditing insurance companies for compliance with unclaimed property laws,[28] future false claims lawsuits are almost certain to emerge.  Notably, in April 2012, the nation’s largest life insurance provider agreed to make a $40 million multi-state examination payment to settle allegations that it failed to make required payments under state escheatment laws.[29]
• In April 2012, the New York Attorney General filed a superseding complaint and took over a whistleblower action against a major telecommunications company in New York State Supreme Court seeking $300 million for alleged tax fraud.[30]  The complaint alleges that the company deliberately underpaid approximately $100 million in sales tax, and, pursuant to the New York False Claims Act, seeks treble damages plus penalties of up to $12,000 for each violation.[31]  Notably, the FCA expressly excludes tax fraud.[32]  And most state laws have similar exclusions.  New York’s Attorney General, however, will contend that a recent amendment to the state’s false claims statute allows tax fraud claims above a certain threshold.[33]  FCA practitioners will be watching this case closely.  A significant settlement or judgment in this case may cause lawmakers to revisit the tax fraud exclusion.

II.   Noteworthy Settlements Announced During the First Half of 2012

As mentioned above, 2012 is shaping up to be a record-breaking recovery year for the federal government. While health care continues to be the largest sector for recovery, mortgage and financial fraud investigations are starting to provide significant recoveries for the government as well.

A.   Health Care

Over the last three years, the DOJ has recovered more than $10.2 billion in settlements, judgments, fines, restitution, and forfeiture in health care fraud matters pursued under the FCA and the Food, Drug, and Cosmetic Act.[34]  And this may just be the tip of the iceberg.  According to the FBI, health care fraud is estimated between 3% and 10% percent of total health care expenditures and that percentage is expected to rise along with total health care expenditures, which are expected to exceed $4.14 trillion by 2016.[35]  The FBI, DOJ, CMS, and HHS-OIG are coordinating efforts like never before to pursue civil and criminal fraud remedies.  Indeed, the HHS and DOJ report that in fiscal year 2011, the DOJ opened 977 new civil health care fraud investigations and had 1,069 civil health care fraud matters pending at the end of the fiscal year.[36]  The FBI reports that 2,690 health care fraud investigations were pending at the end of 2011,[37] a substantial number of which may give rise to civil FCA claims.  Notable settlements in this area include:

• In February 2012, a large pharmaceutical company agreed to pay $57 million to settle claims that it caused the federal government and the state of California to overpay for certain drugs.[38]  The relator, Ven-A-Care of the Florida Keys Inc., has settled more than 20 state and federal FCA actions since 2000 and has collected more than $400 million in relator share awards.  Among other matters, Ven-a-Care initiated cases consolidated in In re Pharmaceutical Average Wholesale Price Litigation, MDL No. 1456 (D. Mass.).  According to one source, “Ven-A-Care’s legal team expended in excess of $75 million in attorneys’ time, and advanced more than $15 million in litigation costs,” associated with Ven-a-Care’s various qui tam actions.[39]  Ven-A-Care will receive $8.5 million as its share of the most recent settlement, which represents the conclusion of its cases in the multidistrict litigation.[40]
• In February 2012, 14 hospitals agreed to pay $12 million to settle FCA allegations that they chose to conduct kyphoplasty spinal fracture treatment as an inpatient instead of outpatient procedure, which allegedly generated larger and unnecessary bills to Medicare.  To date, the DOJ has settled kyphoplasty-related FCA claims with 40 hospitals for more than $39 million in total.[41]  In this regard, the American Hospital Association and others question whether qui tam plaintiffs and government prosecutors are attempting to supplant physicians’ and hospitals’ judgments regarding appropriate treatments and settings, and whether the threat of FCA actions are influencing those judgments by second-guessing the decisions of medical professionals.[42]
• In April 2012, a large drug wholesaler agreed to pay more than $190 million to resolve claims that it violated the FCA by reporting inflated pricing information related to the Average Wholesale Price (AWP) for a several prescription drugs, resulting in false claims for Medicaid coverage.  Notably, the federal and state governments jointly fund the Medicaid program, and the settlement resolves the federal claims only.  In announcing the settlement, the DOJ emphasized that state governments are free to separately negotiate a resolution of claims based on the states’ shares of the Medicaid overpayments.  As of the date of the settlement, federal and state governments had recovered more than $2 billion from drug manufacturers alleged to have reported inflated AWP information.[43]
• In April 2012, Wellcare Health Plans, a large Florida-based healthcare provider, agreed to pay nearly $140 million to settle FCA allegations of overbilling Medicare and Medicaid. The government alleged that the company inflated expenses, falsified patient records, and operated sham departments all with intent to defraud the government.  The DOJ has brought several criminal and civil fraud charges against the company and a number of its former employees; the April 2012 settlement brings total recoveries from Wellcare to $217.5 million, an amount that may rise if a contingency payment provision is triggered.  A whistleblower in one of the four qui tam lawsuits that led to the recent settlement will receive more than $20 million, and another three relators will split an additional share award of approximately $4.7 million.[44]
• In May 2012, Abbott Laboratories, Inc. pleaded guilty to criminal and civil charges of unlawful marketing and promotion of a prescription drug for uses not approved by the FDA (off-label promotion).  The total settlement was $1.5 billion, of which $800 million represented civil damages ($560.85 million to the federal government and $239.15 million to states that opt to participate in the agreement).  Four whistleblowers will receive a total of $84 million from the federal settlement, and they stand to receive more from the states.  Notably, the DOJ insisted on numerous non-monetary penalties as well:  Among other things, Abbott entered into a CIA with HHS OIG, Abbott will be subject to probation for five years, the company’s chief executive and board of directors must make certain certifications of compliance, and the company agreed not to compensate sales representatives for off-label sales.[45]
• In June 2012, a medical device manufacturer settled allegations of paying illegal kickbacks to doctors in return for prescribing medically unnecessary devices and misstating costs generating Medicare overpayments. The government will recover $42 million (more than $34 million attributable to FCA claims) from the company to resolve civil FCA and criminal allegations.[46]
• As noted above, on July 2, 2012, the DOJ announced that GlaxoSmithKline LLC agreed to plead guilty and to pay a total of $3 billion to settle allegations that the company provided unlawful kickbacks and promoted certain prescription drugs off-label, failed to report drug safety data, and falsely reported drug prices.[47]  Of the $3 billion, the federal government will receive approximately $1.5 billion and participating states will receive approximately $500 million to resolve civil FCA allegations.  The whistleblowers who initiated claims against GSK stand to receive hundreds of millions of dollars (typically 15% to 30% of government recoveries) as their share of the government’s recoveries.  According to one source, four whistleblowers will share a $250 million award.[48]

  Notably, as with the Abbott settlement (discussed above), the DOJ also insisted on numerous non-monetary penalties, including a CIA with HHS OIG and compliance and strict reporting requirements:  “for the next five years, the plea agreement requires GSK to report to the Department of Justice any probable violations of the Federal Food, Drug, and Cosmetic Act concerning promotional activities and reporting obligations.   And GSK’s U.S. President and Board of Directors must personally certify the company’s compliance with the law every year.  And for every day that one of these reports or certifications is late, or one of these policies is not maintained, GSK agrees to pay the government $20,000 in stipulated damages.”[49]  In addition, GSK must change its executive compensation program to permit the company to recoup or withhold annual bonuses and long-term incentives from certain current (or former) executives if they, or their subordinates, engage or engaged in significant misconduct, and sales agents will be compensated for “quality of service rather than sales targets.”[50]  This settlement foretells a future (discussed further below) in which monetary settlements under the FCA alone likely will not satisfy the DOJ.

B.   Mortgage and Financial Services

Few lenders at the time of the 2008 financial crisis likely anticipated any FCA liability when originating mortgage loans under federally insured programs.  But the DOJ, U.S. Attorneys’ offices and whistleblowers recently have focused their attention on this industry.  Among other things, on January 27, 2012, Attorney General Holder announced the formation of a new Residential Mortgage-Backed Securities (RMBS) Working Group to investigate misconduct in the market for mortgage-backed securities that contributed to our nation’s recent economic crisis.[51]  In fact, the RMBS Working Group recently launched a website where putative whistleblowers can report mortgage fraud.[52]  The website encourages whistleblowers to come forward (“We are particularly interested in information from corporate insiders — that is, people who worked with RMBS in the financial industry and witnessed the misconduct”) and informs them that “[s]ubstantial financial rewards may be available if you provide specific information that leads to a monetary recovery by the government.”[53]  In announcing the $25 billion mortgage settlement (noted above), the DOJ publicly stated that the settlement “preserves extensive claims related to mortgage securitization activities, including the claims that will be the focus of the new Residential Mortgage-Backed Securities Working Group,”[54] signaling that such conduct is likely to give rise to increased FCA activity.

As noted above, the DOJ also has requested a $55 million increase for the fiscal year beginning in October 2012 to “support additional FBI agents, criminal prosecutors, civil litigators, in-house investigators, forensic accountants, paralegals, and other support positions to ultimately improve the Department’s capacity to investigate and prosecute allegations of financial and mortgage fraud.”[55]  “This increase will enable the Division to vigorously pursue perpetrators of mortgage, procurement and other financial fraud that have robbed the treasury of hundreds of millions of dollars.”[56]  $7 million is to be allocated to the DOJ civil division to pursue recoveries from those who have defrauded the federal government or “robbed the treasury” through mortgage, procurement and financial fraud.[57]  Further, in fiscal year 2011, the FBI had more than 1,500 pending financial fraud cases and more than 2,900 pending mortgage fraud cases.[58]  These and other circumstances lead us to believe that we will continue to see numerous mortgage and financial based FCA claims in the future.

In addition to the $25 billion global settlement noted above, other notable settlements in this area include:

• On February 12, 2012, the United States Attorney’s Office for the Eastern District of New York announced that it entered into a $1 billion settlement with two mortgage companies to resolve allegations that they inflated home appraisals on government-backed loans and falsely certified that ultimately defaulting borrowers met Federal Housing Administration (FHA) eligibility criteria.[59]  Half of the $1 billion will go to directly to the FHA and the other half will be used to revamp the loan program.
• The United States Attorney’s Office for the Southern District of New York’s Civil Frauds Unit brought four FCA actions against several major lenders alleging reckless residential mortgage lending practices.  Three of the four cases settled in 2012 for a combined total of nearly half of a billion dollars.  The fourth (and possibly the largest) action remains pending:[60]
  • In February 2012, one major lender, a participant the FHA’s Direct Endorsement Lender Program, agreed to pay nearly $160 million to settle FCA mortgage fraud allegations.[61]  Under the program banks had the authority to originate, underwrite, and endorse FHA mortgages without government review so long as they followed proper procedures.  Many lenders allegedly failed to comply with these policies leading to widespread mortgage defaults and government payout on the loans.[62]
  • In February 2012, one of the largest savings banks and loan originators in the country settled a whistleblower FCA mortgage fraud suit for $132.8 million.  The bank accepted responsibility for improperly approving federally-insured home loans that resulted in default.[63]
  • In May 2012, yet another major bank settled FCA claims of mortgage fraud for more $202 million.[64]  The government alleged that the bank and its wholly-owned subsidiary made false certifications to HUD in connection with residential mortgage origination practices on FHA-backed loans, thousands of which defaulted.  As part of the settlement, the defendants admitted to and accepted responsibility for certain misconduct, including failure to conform fully to HUD-FHA rules and regulations.[65]

C.   Procurement and Defense

In the most traditional form of fraud, relating to the government’s procurement of goods, the DOJ recovered approximately $1.6 billion under the FCA since January 2009.  Notable 2012 settlements include:

• In January 2012, a shipping company agreed to pay $31.9 million to settle a whistleblower lawsuit accusing the company of fraudulently billing the government for the cost of services in supplying U.S. troops in Iraq and Afghanistan.  The relator, a former industry insider, will receive $3.6 million for blowing the whistle.[66]  Notably, the same individual received $5.19 million from a $26.3 million settlement in 2009 reached between the DOJ and his former employer.[67]
• In March 2012, one of the world’s largest defense contractors settled FCA allegations of inflating the cost of tools for use on military aircraft.  The former President of a subcontractor was sentenced to seven years in prison for his role in the matter, but the government only held the prime contractor civilly liable for the fraudulent billing.  The government recovered $15.85 million.[68]
• In March 2012, after seventeen years in negotiations, the government settled its claims against Harbert Companies for $47 million.  The claims against Harbert were first raised in a qui tam whistleblower action filed in 1995, and alleged that the company improperly colluded with other contractors to ensure a winning bid on a USAID sewer system project in Cairo, Egypt.[69]  “This case demonstrates our endurance in the fight against corporations that attempt to defraud the government,” said Vincent H. Cohen, Jr., Principal Assistant U.S. Attorney of the District of Columbia, “Two decades after a bid-rigging conspiracy corrupted a massive construction project in Egypt, we have obtained a $47 million settlement on behalf of the American taxpayer.  Our resolve in this matter should serve as a warning to other contractors who are thinking about abusing the contracting process.”

D.   Other

As noted above, the government and qui tam relators use the FCA to combat fraud in virtually every government program.  Other notable settlements during the first half of 2012 include:

• In February and March 2012, several oil and gas companies settled FCA claims for a total of $18.5 million.[70]  These settlement stems from claims first asserted in a qui tam lawsuit filed by Harrold Wright alleging that these and other companies underpaid royalties owed on natural gas produced from federal and Indian leases (discussed in our 2011 FCA Alert).  Settlements in the qui tam action to date now exceed $300 million.  Notably, because Mr. Wright is deceased, his heirs have received millions of dollars in relator share awards.
• In February 2012, the government, for the first time, challenged an anticompetitive bidding agreement for mineral rights leases in Western Colorado.  The Department of Interior used the FCA to penalize two major natural gas developers over half a million dollars for breaching antitrust laws and misrepresenting their relationship in the bidding process.[71]

III.   Case Law Developments and Judicial Trends

A.   Limitations on Damages and Penalties 

Companies facing FCA allegations know that potential damages—penalties between $5,000 and $11,000 per false claim and treble damages—can be crippling.  And in recent years, the DOJ and whistleblowers have pursued aggressive theories of damages in which they argue that every invoice or “claim” submitted under a contract allegedly procured or tainted by fraud is “false,” and, thus, the government is entitled to three times the total amount paid by the government, regardless of whether or not the government received any value.

In our 2010 Year-End Update, for example, we discussed United States v. Sci. Applications Int’l Corp., 626 F.3d 1257, 1279 (D.C. Cir. 2010) (“SAIC“), a case in which the government contended that the defendant’s alleged noncompliance with conflict-of-interest obligations rendered the company’s facially accurate claims for payment impliedly false in violation of the FCA.  As such, the government argued, it was entitled to recover three times the total amount of all money paid by the government, regardless of whether or not the government sustained any actual economic injury.  The trial court accepted the government’s theory and, based on its instructions, a jury awarded the government three times the full amount it paid under the contracts at issue.  The D.C. Circuit, however, rejected this argument.  Id. at 1278 (“This automatic equation of the government’s payments with its damages is mistaken.”).  The court held, “[t]o establish damages the government must show not only that the defendant’s false claims caused the government to make payments that it would have otherwise withheld, but also that the performance the government received was worth less than what it believed it had purchased.”  Id. at 1279.  In U.S. ex rel. Davis v. Dist. of Columbia, 679 F.3d 832 (D.C. Cir. 2012), the D. C. Circuit buttressed its holding in SAIC and similarly rejected an expansive damages theory.  As discussed below, the court rejected the relator’s argument that the government would have paid “nothing” had it known that the defendant allegedly did not retain adequate documentation supporting services that were actually provided.

Davis and the second case discussed below represent two courts’ efforts to rein in FCA damage theories seeking awards that are grossly disproportional to any actual economic harm caused by the allegedly offending conduct.  But it remains to be seen whether other courts will follow suit. 

          1.   U.S. ex rel. Davis v. Dist. of Columbia, 679 F.3d 832 (D.C. Cir. 2012).  

In Davis, the relator alleged that the D.C. Public Schools violated the FCA by submitting claims for Medicaid reimbursement without proper supporting documentation.   679 F. 3d at 5.  Applying SAIC, the court concluded that the relator failed to allege that the government received less than it paid for, and that “the maintenance of documents to prove that [the services were actually rendered] has no monetary value.  Id. at 7.  As a useful analogy, the court offered that “[a] server’s failure to bring a receipt after dinner causes no harm when you know you’ve been properly charged.”  Id.  The court did note, however, that if the relator proved his claims, the defendant might be subject to statutory penalties, which may be awarded in the absence of any economic injury to the government.

          2.   United States ex rel. Bunk v. Birkart Globistics GmbH & Co., No. 1:02cv1168, 2012 U.S. Dist. LEXIS 18445 (E.D. Va. Feb. 14, 2012).             

In a potentially seminal case, a District Court in Virginia held that statutorily-mandated, minimum FCA penalties levied against a government contractor were unconstitutionally excessive under the Eighth Amendment.  In Bunk, three government contractors providing goods for military households stationed in Europe agreed amongst themselves to prices they would charge and territories they would control.  Id. at *5-6.  Following a jury trial at which the defendants were found liable, the relators, apparently unable to obtain information about actual damages from the government, only sought to obtain a civil penalty under the FCA as to 9,136 invoices submitted to the government.  Id. at *10-11.  The result was a penalty range between approximately $50 million and $100 million.  Seeking to determine whether that fine was disproportional to the offense, the court weighed “(1) the extent of the harm caused; (2) the gravity of the offense relative to the fine; (3) whether the violation was related to other illegal activity, and the nature and extent of that activity; and (4) the availability of other penalties and the maximum penalties which could have been imposed.”  Id. at *15.  The court first called into question relators’ failure to adequately demonstrate the economic harm to the government, as well as the damage to the adequacy of the services performed or the integrity of the contracting process.  Id. at *18-35.  Noting that the defendant likely realized a profit of approximately $150,000 on the contract, the court further stated that “[t]here is nothing about this level of gain that would justify the minimum mandated civil penalty of over $50 million.”  Id. at *38.  Ultimately, citing a lack of authority to fashion an appropriate penalty, the court refused to award any civil penalty.  Id. at *49.

Reading Davis and Bunk together makes for an interesting argument:  Statutory penalties may be awarded in the absence of a proven governmental loss, but if the government has suffered no economic harm, than significant penalties might be unconstitutionally disproportional and excessive.

Bunk is on appeal to the Fourth Circuit.  On June 7, 2012, the United States sought leave to intervene and file a separate brief to defend the constitutionality of the FCA’s penalty provision.  In light of the appeal, it is unclear whether this case will influence future decisions.  Gibson Dunn will continue to monitor developments for future alerts.

B.   Less Freedom to Settle with the Government

Though the government retains broad discretion to dismiss and settle cases brought by qui tam relators, relators may have scored a procedural victory in a recent case out of the D.C. Circuit.  In United States ex rel. Schweizer v. Océ N.V., 671 F.3d 1228, 1231 (D.C. Cir. 2012), the government declined to intervene, but nevertheless participated in settlement discussions — which is quite a common scenario in FCA actions.  When the government and the defendants agreed to settle the case (without participation by the relator), they moved to dismiss the case over her objection.  Id. at 1231-32.  At issue was a provision in the FCA that allows the government to “settle [a qui tam] action . . . notwithstanding the objections of the person initiating the action if the court determines, after a hearing, that the proposed settlement is fair, adequate, and reasonable under all the circumstances.”  31 U.S.C. § 3720(c)(2)(B).  The DOJ and defendants argued that judicial approval of the settlement was not required because the government has unfettered power to dismiss a qui tam complaint under 31 U.S.C. § 3730(c)(2)(A), and the lower court agreed.  Id. at 1232, 1234.  But the D.C. Circuit held that the government cannot settle a qui tam action over a relator’s objection without a judicial finding that the proposed settlement is fair, adequate, and reasonable under the circumstances.  Id. at 1237.  This decision may complicate efforts by the government and defendants to resolve FCA cases in the future, particularly in cases where the government and the relator disagree over the merits of claims and the potential recovery of damages.

C.   Heightened Pleading Requirements

Federal Rule of Civil Procedure (“Rule”) 9(b) provides the pleading standard for an FCA complaint and requires the relator to “state with particularity the circumstances constituting fraud or mistake.”  Courts often grapple with the degree of particularity required, but most courts continue to insist that a relator identify at least some specific “false claims” in his or her complaint.

          1.   Personal Knowledge:  It’s Not Just Relevant to the Public Disclosure Bar

In two opinions, released just one day apart, the Eleventh Circuit upheld dismissal of one FCA action but reversed the dismissal of another FCA action under Rule 9(b).  See United States ex rel. Matheny v. Medco Health Solutions, Inc., 671 F.3d 1217 (11th Cir. 2012); United States ex rel. Klusmeier v. Bell Constructors, Inc., No. 10-156757, 2012 U.S. App. LEXIS 3370 (11th Cir. Feb. 21, 2012).  To be sure, as the Eleventh Circuit noted, courts evaluate whether complaints satisfy Rule 9(b) pleading requirements on a “case-by-case basis.”  Klusmeier at *8.  But in these cases, the distinguishing factor seemed to be the degree of personal knowledge of the relators.

In Matheny, relators alleged that the defendants violated the FCA by engaging in reverse false claims under 31 U.S.C. § 3729(a)(7).  A reverse false claim is established where a defendant retains an overpayment or fails to pay money that it owes to the government.  In this case, the relators allegedly became aware that the defendants were attempting to conceal $69 million in overpayments made by the federal government, which the defendants were obligated to return in accordance with a CIA with the HHS OIG.  Id. at 1220-21.  The Eleventh Circuit held that even though the complaint only provided information about a portion of the accounts alleged to contain overpayments, “Rule 9(b) does not mandate all of that information for each alleged claim.”  Id. at 1227 (citing United States ex rel. Atkins v. McInteer, 470 F.3d 1350, 1358-59 (11th Cir. 2006)).  Thus, the case was sent back to the district court for further consideration.

In Klusmeier, relators alleged a government contractor violated the FCA in connection with two Army Corps of Engineers contracts for the construction of a pump station and levees.  2012 U.S. App. LEXIS 3370, at *2-3.  The defendant, Bell, was required to perform work according to certain specifications and follow the payment procedures of the Federal Acquisition Regulations (“FAR”), which, among other things, required monthly certifications that payment requested was for work performed according to the contracts’ specifications.  Id. at *3-4.  Relators, who worked for a Bell subcontractor, alleged that Bell billed the government for noncompliant work and falsely certified that the payment requested was for compliant work.  Id. at *3.  The Eleventh Circuit upheld dismissal under Rule 9(b) because “Relators’ allegations fail to show that Bell’s monthly invoices actually included a false or fraudulent request for payment. Although Relators allege details as to how Bell violated its contracts, and allege some details as to when the monthly invoices were submitted, Relators fail to establish that the contract violations actually resulted in the submission of false claims.”  Id. at *9.  The court refused to speculate that simply “because Bell violated the contract in some instances, and because Bell submitted some invoices, false claims ‘must have been submitted, were likely submitted or should have been submitted.'”  Id.

In Klusmeier, the relator worked for a subcontractor and did not have access to the defendant’s billing information; his detailed knowledge of the defendant’s alleged breach of contract was not enough because he could not state with particularity that defendant had submitted an actual false claim.  In Matheny, however, the relators were employed by named defendants, and were present at meetings and had access to data and documents that supported their allegation of the knowing retention of government overpayments.  Despite proclaiming that “the same pleading standard applies regardless of a relator’s status,” the Eleventh Circuit confirmed, “we are more tolerant towards complaints that leave out some particularities of the submissions of a false claim if the complaint also alleges personal knowledge of participation in the fraudulent conduct.”  Matheny, 671 F.3d at 1230.

          2.   The District of Massachusetts Adheres to Strict Pleading Requirements

                 a.   United States ex rel. Tessitore v. Infomedics, Inc., No. 08-11775-NMG, 2012 U.S. Dist. LEXIS 32300 (D. Mass. Mar. 12, 2012)

Alleged non-compliance with health care rules and regulations continues to be a frequent source of FCA complaints, but it also continues to prove difficult for relators to state an adequate claim to survive the pleading stage.  This is especially true where relators fail to identify any specific false claims.  In Tessitore, the relator alleged that, during her time as a call center supervisor for GlaskoSmithKline’s Paxil Marketing Program, she learned GSK was paying kickbacks to doctors for prescribing Paxil and failing to report adverse events to the FDA as required.  2012 U.S. Dist. LEXIS 32300, at *3-7.  With regard to the alleged kickbacks, the court held that the relator had failed to provide any information about whether a false claim was filed.  Id. at 18.  With regard to the relator’s argument that GSK’s failure to report adverse events led the FDA to approve new indications for Paxil, the court stated that the “argument [was] dissipated by its breadth.”  Id. at *20.  By failing to identify any actual false claims, the relator’s complaint could not survive the pleading stage.

b.   U.S. ex rel. Provuncher v. AngioScore, Inc., No. 09-12176-RGS, 2012 U.S. Dist. LEXIS 60390 (D. Mass. May 1, 2012).

In Provuncher, another district judge in Massachusetts dismissed a relator’s claims under the FCA for failure to plead fraud with the requisite particularity.  In this case, the relator, a medical device sales professional formerly employed by defendant, alleged defendant violated the FCA by concealing information from the FDA regarding adverse events resulting from alleged defects in a medical device that would have been material to the government’s decision to pay claims for the device.  2012 U.S. Dist. LEXIS 60390, at * 3-4.  The court dismissed the action under Rule 9(b) (with leave to amend) because the relator failed to show “that a false claim was actually presented to the government,” and failed “to establish a tangible connection between the purported false [marketing] statements and the making of false or fraudulent claims.”  Id. at *9-12.

                 c.   United States ex rel. Banignan v. Organon USA Inc., No. 07-12153-RWZ, 2012 U.S. Dist. LEXIS 76130 (D. Mass. June 1, 2012). 

As we have noted in our past updates, FCA claims often come by way of allegations of violations of Anti-Kickback Statute. In yet another case in the U.S. District Court for Massachusetts, the court dismissed certain FCA claims premised on alleged violations of the Anti-Kickback Statute.  In Banignan, the relators alleged that the defendants engaged in a scheme under which market-share discounts, rebates, and indirect inducements were exchanged for successfully converting care providers to use a new form of a drug upon the expiration of its predecessor’s patent.  2012 U.S. Dist. LEXIS 76130, at *18-30.  The court held that the relators satisfied their burden under § 3729(a)(1) by providing the “who, what, and when” of the alleged kickback scheme, but otherwise failed to plead with sufficient particularity under Rule 9(b): “That Organon budgeted for payments to Omnicare does not confirm that such payments were actually made, that Omnicare solicited them, or that the payments were inducements to participate in the conversion or therapeutic interchange scheme alleged.”  Id. at *53.

D.    The First to File Bar

1.   United States ex rel. Banignan v. Organon USA Inc., No. 07-12153-RWZ, 2012 U.S. Dist. LEXIS 76130 (D. Mass. June 1, 2012).

In our 2011 Year-End Update, we discussed the first-to-file bar of the FCA and a 2011 D.C. Circuit opinion — United States ex rel. Batiste v. SLM Corp., 659 F.3d 1204 (D.C. Cir. 2011) — that perpetuated a circuit split over the issue.  Briefly, the first-to-file bar provides that a relator cannot maintain a qui tam action if a different relator already has filed a qui tam complaint.  31 U.S.C. § 3730(b)(5).  Circuits disagree, however, whether a deficient complaint bars a later complaint, with the D.C. Circuit recently holding that it would.  In Banigan (also discussed above), the district court in Massachusetts followed the D.C. Circuit.  First, the court declined to hold that the first-to-file bar required a showing that the original complaint was sufficient under Rule 9(b), as “[i]mposing this additional requirement would frustrate the purpose of the first-to-file bar by raising the threshold for it to apply.”  2012 U.S. Dist. LEXIS 76130, at *20 n.1.  In another interesting turn, the court held that the original complaint barred some elements of the subsequent relators’ complaint even though the original complaint did not name Organon as a defendant.  Id. at *24-25.  Because the earlier complaint named one of Organon’s drugs, it was sufficient to “put the government on the trail of the alleged fraud against” the defendants.  Id. at *26.

          2.   United States ex rel. Sandager v. Dell Mktg., L.P., No. 08-4805, 2012 U.S. Dist. LEXIS 59714, at *26-27 (D. Minn. Apr. 25, 2012) 

As in Banigan, a District Court in Minnesota relied in part on the D.C. Circuit’s opinion in Batiste in its analysis of whether the first-to-file bar precluded a qui tam action where a prior complaint was dismissed under Rule 9(b).  For the court, “[t]he ultimate question is whether the Government had a basis on which to investigate the fraudulent scheme.  That standard may be met even if the first-filed complaint is technically deficient.”  Sandager, 2012 U.S. Dist. LEXIS 59714, at *26-27.

          3.   United States ex rel. Wickliffe v. EMC Corp., Nos. 09-4082 and 10-4174, 2012 U.S. App. LEXIS 6705 (10th Cir. Apr. 4, 2012). 

Finally, the Tenth Circuit may have tipped its hand on how it would rule if properly presented with the issue.  In Wickliffe, the government sought to dismiss the relators’ complaint both under the first-to-file rule and under 31 § U.S.C. 3730(c)(2)(A).  The relators argued that the previously filed complaint was insufficient under Rule 9(b) and, thus, could not operate to preclude their complaint.  2012 U.S. App. LEXIS 6705, at *2-3.  In an unpublished opinion, the Tenth Circuit panel sidestepped the issue by deciding the case under § 3730(c)(2)(A), but not before “admit[ing] to being uneasy with the parties’ suggestion that Rule 9(b)’s particularity requirement should be applied to the first-to-file bar.”  Id. at *6.  The panel cited Batiste for the concern that such a rule might require district courts to evaluate complaints filed in other courts, with the consequence that they might disagree.  Id. at *6-7 (citing Batiste, 659 F.3d at 1210).  Ultimately, the court cited the government’s “valid interest in ending duplicative litigation involving resolved claims” and the fact that the government had become aware of the claims prior to the relator’s complaint as sufficient justification for dismissing the relator’s claim.  Id. at *12-13.

E.   The Public Disclosure Bar

The FCA generally does not permit private individuals to repackage as qui tam complaints allegations that already have surfaced in the public domain.  31 U.S.C. § 3730(e)(4)(A).  As we discussed in our 2011 Mid-Year Update, the PPACA significantly weakened the public disclosure bar.  Still, relators, defendants, and courts have plenty over which to grapple when it comes to fleshing out the meaning of the statute.

                 1.   SEC Filings Constitute a Public Disclosure

In one recent, unpublished decision, the Fourth Circuit considered relators’ allegations that Collegiate Funding Services, Inc., a provider of federal student loan products and services, had violated federal regulations and laws in its practices, which led to the federal government guaranteeing loans.  United States ex rel. Jones v. Collegiate Funding Servs., No. 11-1103, 2012 U.S. App. LEXIS 5574, at *2-4 (4th Cir. Mar. 14, 2012).  Among the exhibits offered by the defendant were the company’s publicly filed documents with the Securities and Exchange Commission (“SEC”), which they argued were “administrative reports” for the purposes of the public disclosure bar.  Id. at *11, 34-35.  Though the court noted that documents received by an agency cannot alone comprise administrative reports, the documents here (Forms 8-K and S-1) “were reasonably determined to be administrative reports because they were submitted under the SEC’s administrative regulatory requirements of the company. . . .  While these documents were not authored by the SEC or created under their supervision, they were produced at the request of and were made public by the SEC in the course of carrying out its activities as a federal agency.”  Id. at *36.  The filings thus sufficed as public disclosures for the purposes of the FCA.

                 2.   When Must an “Original Source” Provide Information to the Government? 

Still remaining as a point of disagreement is whether a relator who would otherwise qualify as an “original source” must provide his or her allegations to the government before filing suit or, more restrictively, before any public disclosure is made.  In what could potentially be an influential decision, the D.C. Circuit recently held that a relator must only provide information to the government prior to filing.  U.S. ex rel. Davis v. Dist. of Columbia, 679 F.3d 832 (D.C. Cir. 2012).  In so doing, the court rejected the argument that a relator’s value is lost once information makes its way into the public domain: “Importantly, the relator’s information can be different and more valuable to the government than the information underlying the public disclosure, which might be nothing more than speculation or rumors.  The relator may have an eyewitness account or important documents supporting the public allegation, but not available from any other source, which could aid the government.”  Id. at 5 (citation omitted).  It remains to be seen whether the D.C. Circuit will influence other courts to view the statute in the same way.  The Sixth Circuit, for example, repeatedly has held that an “original source” must provide information to the government before the public disclosures.  See, e.g., U.S. ex rel. Bledsoe v. Cmty. Health Sys., Inc., 342 F.3d 634, 646 (6th Cir. 2003).

IV.   Conclusion:  A Glance into the Future

Acting Assistant Attorney General Stuart F. Delery recently gave us a “quick glance into the future,”[72] which presages increased FCA activity in the coming months due to increased spending, increased oversight, and enhanced enforcement authority.  More specifically:

• Increased Spending:  “Retiree rolls are swelling,” which will increase demand for government-funded healthcare programs such as Medicare.[73]  Medicare spending totaled nearly $560 billion in 2011, and the Congressional Budget Office (CBO) projects that Medicare spending will continue to rise rapidly over the next decade.[74]  In addition, the downturn in the economy and the PPACA have resulted in significant increases in Medicaid enrollment and spending.  The National Association of State Budget Officers’ December 13, 2011 State Expenditure Report concluded that “total state expenditures grew each of the past three years reaching . . . an estimated $1.69 trillion in fiscal 2011.”[75]
• Increased Oversight:  The economic crisis has resulted in “public outrage” and increased “emphasis on identifying and punishing waste fraud and abuse.”[76]  At the outset of this year, Attorney General Eric Holder announced, “Particularly in these challenging economic times — when resources are scarce, government budgets are on the chopping block, and so many of us have been asked to do more with less — the need to act as sound stewards of every taxpayer dollar — and to aggressively pursue those who would take advantage of their fellow citizens — has never been more clear or more urgent.”[77]  And lawmakers are demanding accountability not only from those who receive federal funds but from oversight agencies such as inspector generals and the DOJ, entrusted with overseeing disbursement of federal funds and enforcing the FCA.
• Enhanced Enforcement Capabilities:  Over the past few years, fighting fraud has been a “cabinet-level priority.”[78]  Never before have we seen so many task forces created to leverage resources among government agencies.  In addition, recent statutory amendments resulted in U.S. Attorneys having the authority to issue civil investigative demands (CIDs), a powerful FCA pre-filing investigative device.  In the last fiscal year, the DOJ “authorized the issuance of 888 CIDs — more than 10 times the number of CIDs issued during the two years before re-delegation combined.”[79]

Acting Assistant Attorney General Stuart F. Delery and others at the DOJ also forecast a future in which monetary settlements alone will not suffice to remedy FCA violations.  The DOJ has suggested that non-monetary, preventative measures, such as corporate integrity agreements, probation, monitoring, and reporting requirements may be required to “adequately address the wrong,” even if “seeking non-monetary relief may prolong or prevent settlement discussions.”[80]  In the recent GSK and Abbott settlements, for example, the companies had to agree to change certain compensation structures.  And the DOJ has been insisting that corporate executives accept personal responsibility.

So how can companies and persons who do business with the government protect themselves?  As always, we suggest that companies receiving government funds remain vigilant, and implement and periodically reevaluate their FCA-specific compliance efforts.  Comprehensive compliance programs and billing policies should help companies detect and deter most FCA violations.  Further, robust compliance programs and procedures help defeat allegations of intentional or “knowing” violations if mistakes are discovered.

Finally, qui tam suits are increasing exponentially.  And there is a growing concern that the FCA’s whistleblower incentives encourage whistleblowers to report externally rather than help their employers prevent or correct errors.   But in reality, this may not be so.  Studies repeatedly show that most whistleblowers first report their concerns internally.  A recent survey conducted by the Ethics Resource Center, for example, found that 82% of initial misconduct reports were directed to a supervisor or more senior manager within the company.[81]  According to the survey “the least motivating reason” for an employee to report misconduct outside of his or her company “is the possibility of monetary rewards.”[82]  Companies, therefore, should have appropriate internal reporting procedures and protections, and should take seriously employee complaints.  And if companies discover potentially fraudulent conduct or false billing, prompt, efficient, and effective remediation must ensue.

In sum, FCA enforcement efforts have never been stronger or more effective.  Federal and state lawmakers, the courts, the DOJ, U.S. Attorneys’ offices, and the qui tam plaintiffs’ bar have sent an unmistakable message — that they stand armed and ready to unleash the power of the FCA weapon whenever evidence suggests that companies or persons have falsely billed the government or failed to comply with contract terms, rules, or regulations material to the government’s decision to disburse funds.  By all accounts, we expect the remainder of 2012 to be as interesting as the first half of the year.  We’ll keep you posted.